A comprehensive reform of insolvency law has been enacted in Italy. This includes inter alia provisions on early warning mechanisms, pre-insolvency and insolvency out-of-court procedures and plan proceedings, moratoria, liquidation proceedings, group insolvencies and debtors’ over-indebtedness.
On 12th January 2019, the Italian Government issued Decree No 14 containing the ‘Code on business crisis and insolvency implementing Act 19 October 2017, No 155’ (Codice della crisi d’impresa e dell’insolvenza in attuazione della legge 19 ottobre 2017, n. 155), henceforth ‘Code’. This Code replaces the 1942 Insolvency law statute, accommodates EU Regulation 2015/848 on insolvency proceedings (Recast), follows the guidelines of EU Commission Recommendation of 12 March 2014 on a new approach to business failure and insolvency, anticipates the transposition of the forthcoming EU Directive on preventive restructuring frameworks and incorporates rules on debtors’ over-indebtedness.
The Code reforms various aspects of the existing Italian framework. Just a few of these can be mentioned here.
First, the Code removes the stigma related to insolvency by changing the name of liquidation proceedings from ‘fallimento’ into ‘liquidazione giudiziale’ (Article 121 ss.). In the same vein, the Code expands the scope of discharge to non-individual debtors (Article 278).
Second, the Code introduces a system of incentives, disincentives and financial indicators that aims at encouraging distressed debtors to overcome their financial difficulties as early as possible by means of a new form of settlement (Articles 12-25). Along the lines of the French procédure d’alerte (Art. L. 234–1 ss. Code de Commerce) – which, however, does not rely on financial indicators – and the procédure de conciliation (Art. L. 611-4 ss.), the Code lays down that the internal and external auditors have a duty both to report to the company’s directors about every accounting irregularity predicting the risk of insolvency, and to invite them to apply for a settlement with their creditors. The compliance with the latter duty is incentivised by a provision that immunises auditors against co-liability with the company’s directors for damage caused to the company’s creditors (Article 14). Similar duties are imposed on revenue and social security authorities, who will have to invite any debtors who have significantly delayed the fulfilment of their claims either to fulfil these claims or to apply for a settlement. This duty is sanctioned by a threat that, if these creditors are non-compliant with this duty, their claims will become unsecured (Artcile 15).
Moreover, the Code introduces a partial reform of out-of-court procedures. As regards the basic model, Article 57 lays down that a distressed, but not necessarily insolvent, debtor may propose an arrangement to his/her creditors and apply to a court for approval. For this purpose Article 57 requires that this arrangement should involve a number of creditors who make up at least 60% of all the claims; the debtor should be expected to be able to pay in full those creditors who have not accepted this arrangement; and a chartered accountant should certify the truthfulness of the accounting and financial data, the feasibility of the arrangement and especially the high probability that the debtor will pay in full those creditors who have not accepted the arrangement.
Articles 60, 61 and 63 lay down three different variations of this regime. Article 60 contains a facilitation for a situation where the debtor does not apply for a moratorium. If this is the case, the prerequisite of 60% of all the claims required by Article 57 will be reduced to 30%. Article 61 contains an expansion of the basic regime in the sense that the debtor who has reached an agreement with his/her creditors according to the basic regime may apply to the court in order to bind also those creditors who have not participated in the agreement but have claims that are legally and economically homogeneous to the claims belonging to the creditors who have participated in the agreement. In particular, Article 61, which appears to be influenced by the idea that out-of-court arrangements are mere contracts, requires that the debtor should have informed these creditors about the arrangement when it was in progress, and given them the possibility of participating in it. Article 61 further requires that within each class, the claims belonging to the creditors that have participated in the agreement, should constitute 75% of the total number of the claims of this class, and that these creditors will receive at least as much as they would receive in liquidation proceedings. Finally, Article 63 contains a special regime for out-of-court procedures concerning debts owed to revenue authorities.
Furthermore, the Code contains some reforms regarding plan proceedings. A distressed, but not necessarily insolvent, debtor may propose to his/her creditors a plan; claims could be sorted into different classes (Article 85); separate classes are mandatory as regards claims secured by third parties, claims belonging to revenue and social security authorities that will be affected by the plan, claims to be fulfilled in kind and creditors having proposed competitive plans (Article 85); the debtor remains in possession, even with some restrictions, and a supervisor is appointed (Article 94); the plan must obtain the acceptance of those creditors having the majority of claims and, if the claims have been sorted into classes, this majority should be reached in the majority of the classes (Article 109); the court must confirm the plan; and creditors can be crammed down (Article 112). Moreover, the Code facilitates the debtor both in terminating executory contracts (Article 97) and in finding new and interim financing – if plan proceedings do not succeed, such financing will be protected from preferences and transaction avoidances, and the financiers will be paid as preferential creditors (Articles 99 and 101).
Finally, the Code contains regulations on domestic group insolvencies which introduce some form of procedural consolidation as regards liquidation proceedings, plan proceedings and out-of-court procedures. Moreover, the Code provides special regimes on preferences and avoidances of intra-group transactions (Article 290), on the liability of the holding company which has abused its influence on subsidiaries (according to Article 2497 of the Civil Code) and on the liabilities of companies’ directors (Article 291).
The Code will enter into force on 15th August 2020, with the exception of a few regulations which entered into force on 16th March 2019.
Renato Mangano is Professor of Commercial Law, University of Palermo, Palermo, Italy.