Update: Italy’s new restructuring and insolvency law

Introduction

In our Q3 2021 issue of the International Restructuring Newswire, we provided an overview of the main features of Italy's New Code of the Business Crisis and Insolvency (the New Code). We noted that the unpredictability of the evolution of the COVID-19 pandemic caused the Italian Government to postpone for one year (from August 2020 to September 2021) the effective date of the New Code and the implementation of the New Code. The effective date of the New Code has been further postponed by the Italian Government.

In August 2021, the Italian Government passed Law Decree n. 118/2021 (Law Decree 118/2021), providing for the postponement until May 16, 2022 of the entry into force of the New Code and until December 31, 2023 for the hotly-debated new out-of-court early warning procedures. This prolonged delay of the implementation of the out-of-court early warning procedures is indicative of the fact that this feature of the New Code received a negative response from both the restructuring legal community and big business. We expect that the early warning procedures will continue to be the subject of debate and amendment.

What has become clear over the past summer to all market observers is that when it comes to the long-awaited reform of restructuring and insolvency laws in Italy, the Italian legislators have decided that gradual implementation is preferable to a one-shot overhaul of the relevant legal and regulatory framework.

In addition to providing the above-mentioned postponements, Law Decree 118/2021 adds a new and interesting feature to the New Code, a quasi-private settlement procedure, which is the focus of this brief article.

The new Settlement Procedure

Law Decree 118/2021 introduces a procedure to resolve distressed company situations, a quasi-private settlement option that is in line with EU Directive no. 1023/2019 (the Settlement Procedure). The Settlement Procedure option will become effective and a reality in November 2021. It is a break-through turning point in Italian restructuring and insolvency law because it provides, for the first time in history, a procedure for potential business crisis solutions that do not require major intervention by the courts.

The Settlement Procedure will be an option for any company that is in a distressed situation, but is able to continue conducting business. It is designed to allow a company to overcome temporary distress and resume active and healthy business activities.

Three essential aspects characterize the new Settlement Procedure.

First, it is an out-of-court procedure. The distressed company does not have to file any papers or requests with a court to initiate the process. Instead, starting from November 15, 2021, a company will be able to use a single national telematics platform (the Platform) to request the appointment of an independent expert (the Expert), a third party professional selected within five working days by an ad hoc committee organized by the relevant local Chamber of Commerce. The Expert will have the responsibility to examine the restructuring plan submitted by the company and facilitate the relationship, and eventual negotiations, between the company and its creditors.

Second, it is a confidential procedure. All interested parties to the distressed situation must keep confidential all the information relating to the company, as well as any actions taken or planned by the company. To protect confidentiality, except in certain cases identified below, the submission of a request by a company for an Expert via the Platform will not be disclosed to anyone.

Third, it is a voluntary procedure. It is activated only upon request of the distressed company. In addition, although a company's supervisory body has a duty to inform the company's management body when a distressed situation arises, so that the latter may seek recourse to any of the possible available procedures, the company is under no obligation ever to select or to start the Settlement Procedure.

The Expert

One of the most important features of the Settlement Procedure is the introduction of a new figure, the Expert, who will have a critical role in helping the distressed company find solutions that will enable it to emerge from distress and crisis.

Law Decree 118/2021 provides that all Chambers of Commerce across Italy will keep lists of persons who may be appointed as an Expert. These persons will have experience in corporate crisis and restructuring and may include accountants, lawyers and other types of business advisors and consultants. They must meet strict requirements relating to independence, professionalism, impartiality and confidentiality.

Once selected to assist a distressed company, the Expert will meet with the relevant managers of the company and evaluate whether a solid, concrete prospect for a corporate restructuring exists. The Expert has 180 days to gather the required information and reach a conclusion. This period may be extended, for example, upon request of all parties involved (including the Expert), or when the distressed company requires more time because simultaneously it has filed for certain protective or precautionary measures with a court and more time is needed to get the court's protective order.

At the conclusion of the evaluation period, whether 180 days or longer, the Expert may determine that a restructuring is reasonably foreseeable and a solid, concrete possibility. On the other hand, the Expert may determine that this is not the case (an example of a failed settlement), but no immediate consequences for the distressed company or for the creditors follow from this negative conclusion.

The role of the Expert is different from the role of a Judicial Commissioner. The latter is appointed by a bankruptcy court to collaborate with the court in the context of the classic Composition with Creditors' Procedure (the concordato preventivo). The Judicial Commissioner advises the court on specific matters and prepares a report for the court that addresses the reasons for the crisis, the behavior of the distressed company during the procedure, and the details (and evaluation) of the restructuring plan and of the guarantees that the distressed company has offered to its creditors.

By comparison, the Expert is not appointed by the court and, at least in the first stage, operates entirely outside of the court. The Expert interacts with the distressed company and its creditors, facilitating negotiations and serving as a sort of guarantor for the fairness of the proposal that the distressed company presents to the creditors. A court may step in only after it is presented with a request to issue a protective or precautionary measure. At that point, but not before, the Expert will begin to interact with the court, which can ask the Expert for certain opinions or clarifications.

The role of the Expert is also different from the role of an independent professional (the attestatore), who is appointed by a company to evaluate and confirm the truthfulness of financial and accounting statements and reports, as well as the feasibility of a proposed restructuring plan in the context of the classic Composition with Creditors' Procedure and Debt Restructuring Agreements (the accordi di ristrutturazione dei debiti). As stated above, the Expert's work involves interacting with the distressed company and its creditors, whereas the attestatore's work does not involve discussing anything with creditors or interfering in any way with the business activities carried out by the distressed company.

Court intervention

A court will get involved in the new Settlement Procedure only if and when the distressed company requests that a court grant protective or precautionary measures relating to the assets of the distressed company, such as freezing the enforcement actions of one or more creditors. To have recourse to these types of protective or precautionary measures, the distressed company must file a specific request with a court. Since this request must be registered at the Register of Companies (a public database), the confidentiality of the distressed company's situation is lost when the company takes this step. Nevertheless, protective and precautionary measures are often necessary to enable the distressed company to conduct successful negotiations with its creditors.

Moreover, during the Settlement Procedure, the ordinary and extraordinary actions of the distressed company remains in the hands of management of the distressed company. For any extraordinary action, however, the distressed company must inform the Expert, who, if in disagreement with the action, must register a dissenting opinion at the Register of Companies. In this case, not only will the confidentiality of the distressed company's situation be lost, but the extraordinary action (and related consequences) will not be protected from a possible future claw-back action.

A court may also intervene to authorize certain financings, giving the creditors of these financings a super-senior priority over the other creditors in the event the distressed company is the subject of a bankruptcy procedure. And, a court may intervene to authorize the distressed company to transfer all or substantially all of its assets and business as a going concern, or certain of its assets and business, and exempt the buyer from having joint liability for the debts resulting from the accounting books of the seller/distressed company. This feature is in contrast to a basic principle of Italian law that provides that a buyer of a going concern is always jointly liable with the seller for the debts resulting from the accounting books of the seller. While the exemption from joint liability does not apply to the distressed company's obligations to employees, it still constitutes a significant change in Italian law and is an attractive aspect for buyers of and investors in a distressed company.

Overall, the acquisition of a going concern or assets from a distressed company that has initiated the Settlement Procedure may proceed with very limited involvement of the court, which must only determine that the offer is the best solution for the creditors.

The outcomes of the Settlement Procedure

Extra-judicial outcomes of the Settlement Procedure include:

1. An agreement between the distressed company and one or more creditors that ensures the continuity of the business for a period of no less than two years; 
2. A moratorium agreement, according to which the creditors agree not to pursue any enforcement action for a certain period of time;
3. A more general agreement between the distressed company and the creditors and ratified by the Expert (any action executed in the context of such agreement will be protected by the claw-back action).

Judicial outcomes of the Settlement Procedure include:

1. Request for the homologation (i.e, court approval) of a debt restructuring arrangement pursuant to art. 182 bis of the Bankruptcy Act;
2. Request for the access to one of the other insolvency procedures regulated by the bankruptcy law.

The Simplified Composition with Creditors' Procedure

In the event that the Expert's final report indicates that the Settlement Procedure has failed (i.e., that the distressed company and the creditors have not reached an agreement), then Law Decree 118/2021 introduces the ability to start a Simplified Composition with Creditors Procedure (the Simplified Procedure). The Simplified Procedure entails the assignment of the assets of the distressed company to the creditors, a type of liquidation.

The Simplified Procedure is another significant novelty in the new Italian restructuring and insolvency legal and regulatory framework. No vote is required by the creditors for the Simplified Procedure to be initiated, but creditors have the right to file an opposition if they believe that the liquidation plan creates prejudice to their interests.

The court will authorize the Simplified Procedure to proceed after it verifies the regularity of the relevant proceedings, the respect of the priority of the creditors, and the feasibility of the liquidation plan. Even if one or more creditors oppose, the court may still approve the liquidation plan as long as it determines that no better solution is available for the creditors as compared to a bankruptcy liquidation plan.

In the Simplified Procedure, a Judicial Commissioner is not appointed; instead, the court appoints a collaborator, who has a limited advisory role and a liquidator, who will manage the liquidation of the assets of the distressed company. The liquidator may be a person indicated by the distressed company.

With the Simplified Procedure, the distressed company is not bound to guarantee a 20 percent return to the creditors, which is currently the requirement in the concordato preventivo procedure aimed at liquidating the assets (in fact, it should be remembered that the 20 percent return to the creditors is not applied in the concordato preventivo procedure aimed at preservation of going concern values). The court will determine only if the liquidation plan gives creditors a "sufficient return", no worse than what the creditors would get in a bankruptcy scenario.

It is important to note that the distressed company cannot start the Settlement Procedure if a concordato preventivo procedure is pending relating to the distressed company, or if another procedure is pending concerning the homologation of a debt of the distressed company.

Conclusions

The new Settlement Procedure is a significant development in Italy's restructuring and insolvency legal and regulatory regime that is geared to enabling distressed companies and their creditors to achieve a restructuring with little to light touch from the court system and formal bankruptcy officials. By making the effective date relatively soon (November 2021), the Italian legislator is sending numerous messages:

• Distressed companies need viable out-of-court options to reach settlements with creditors, continue to do business and avoid bankruptcy.
• Courts should intervene in distressed company situations only in specific cases and for certain tasks (for example, to order protective and precautionary measures that will help in negotiating a settlement between the distressed company and its creditors).
• Public prosecutors should remain completely absent from the distressed company scenario.
• Confidentiality, which is a key and attractive feature of the new Settlement Procedure option, can provide the platform to reach a consensual restructuring.
• Business and legal professionals can play an important role in helping distressed companies to avoid bankruptcy and maintain good relations with creditors and are encouraged to use their experience to propose innovative and creative solutions for all the parties involved.