The Restructuring Review: Italy
Overview of restructuring and insolvency activity
i Liquidity and state of the financial markets
The macroeconomic performance of the Italian market witnessed a fragile recovery in the early months of 2021. The traditional very high public debt, which grew further during the lockdown period, remains a heavy burden on the Italian economy and a major source of vulnerability, especially in a protracted weak growth situation seriously impacted by the lockdown. As a result of a rigorous national vaccination campaign, the covid-19 emergency is rapidly reducing and economic activities have restarted.
The macroeconomic forecast presented in Italy's Stability Programme of 2021, endorsed by Parliament on 22 April 2021, indicates that the annual GDP growth forecast for 2021 is 4.1 per cent, assuming a positive trend in the second and third quarter, caused by the gradual reopening of Italian businesses and by the recovery measures financed by the national budget.
ii Market trends in restructuring procedures and techniques employed during this period
The latest figures related to insolvency and bankruptcy procedures published by Bankitalia, the Italian central bank, showed that the significant GDP contraction registered in 2020 will lead to a sharp increase of roughly 2,800 bankruptcy procedures by 2022. Further, corporate restructuring will become an increasing priority for large numbers of businesses, who will particularly focus on defensive activity, reducing costs and protecting their core operations. This is mainly due to uncertainty, high levels of risk in the market and consumers' reluctance to resume their pre-pandemic spending patterns. The results published in a recent report of SS&C Intralinks, a global provider of financial services software and software-enabled services, indicate that businesses have been proactive about restructuring and, hence, promptly initiated the process as soon as signs of stress emerged, instead of waiting for serious distress to come forth. Corporate restructuring is rarely proving straightforward as a result of highly volatile market conditions, which are increasingly causing restructuring activities to take longer than expected to unravel.
iii The impact of the covid-19 emergency
Starting from February 2020, the covid-19 emergency has had significant implications for the Italian economy, and, more specifically, on its business system. Although it is still not possible to predict its future developments, it will certainly have serious impacts on the financial structure of companies. The effects of the emergency will be heterogeneous, depending on the size of the company and the sector in which it operates. Many companies will increase debt levels to finance their day-to-day operations and, therefore, the debt ratio (net financial indebtedness/net equity) will be a focus.
The analysis conducted by the Cerved Rating Agency, an Italian rating agency, in March 2020, has provided a series of hypotheses aimed at estimating the short- and medium–long-term impact of the covid-19 emergency on Italian companies. Two scenarios have been considered, depending on the severity of the impact of the covid-19 emergency and the probability of occurrence. The soft scenario assumes that the global emergency will disappear in about three to six months, thus having a limited impact on the Italian economy. The hard scenario considers the evolution of the disease under extreme conditions and the global emergency is expected to be under control in no less than six months, with a significant impact on the Italian economy.
In the soft scenario, the main impact will be on revenues and margins, with limited change in the companies' financial structure. Under the hard scenario, a significant slowdown in economic growth in the long term is expected. This could further weaken the Italian economy. In particular, a sharp contraction in exports and industrial production could cause a severe fall in GDP and an increase in debt service costs. Sectors with significant exposure to international trade will be the first to experience such suffering, and ultimately the whole economy could be seriously damaged. As a result, more and more companies are likely to issue new debts, with a significant weakening of their financial structure.
General introduction to the restructuring and insolvency legal framework
The Italian insolvency law is mainly regulated by:
- the Royal Decree 16 March 1942, No. 267, as significantly amended and integrated from time to time (the Insolvency Act);
- the Legislative Decree 8 July 1999, No. 270 (the Prodi-bis Law), which provides for a special insolvency proceeding for insolvent companies having certain size requirements and chances of recovery;
- the Law 18 February 2004, No. 39 (the Marzano Law), providing for a special insolvency proceeding for very big insolvent companies; and
- the Law of 18 December 2020, No. 176, providing a special discipline to cure the over-indebtedness of physical persons and to companies which are not eligible for bankruptcy.
The Insolvency Act shall be replaced by the Code of the Business Crisis and Insolvency (the Insolvency Code) substantially reviewing the business crises and insolvency procedures. The Insolvency Code was introduced with Legislative Decree 12 January 2019, No. 14, but only a few provisions of the Insolvency Code have already entered into force. The main body of the text should have entered into force in August 2020, but it was put on hold by the covid-19 emergency. The Insolvency Code was expected to become effective on 1 September 2021, but the press has recently reported that the ministerial commission established by the Italian Minister of Justice has recently proposed to postpone the entry into force of the Insolvency Code until the spring of 2022 and to further postpone the entry into force of the alert procedures to 2024. Moreover, the ministerial commission has also anticipated that significant amendments will be enacted in order to consider the changed post-pandemic economic context and indications coming from the EU Directive 2019/1023. The Code will not supersede the rules applying to the insolvency of large companies regulated by the Prodi-bis Law and the Marzano Law.
i Legal procedures
Bankruptcy is the main insolvency procedure. It provides for the mandatory liquidation of the debtor's assets and repayment of the liabilities according to the equal treatment of creditors rules (i.e., par condicio creditorum).
The bankruptcy procedure applies to commercial companies or commercial individual entrepreneurs. Other debtors (such as big companies, banks, insurance companies, consumers, professionals, agrarian entrepreneurs, public bodies, innovative start-ups, small commercial companies or small individual entrepreneurs) are excluded from bankruptcy, but may be eligible for alternative insolvency procedures such as extraordinary administration procedures, compulsory liquidation or over-indebtedness procedures.
The bankruptcy procedure starts with the assessment of the insolvency by the bankruptcy court. A debtor is declared insolvent when it is no longer able to regularly meet its payment obligations through ordinary means. Insolvency differs from crisis, which is a broader notion including various financial imbalances and insolvency as well. Bankruptcy is declared upon a petition of the debtor, its creditors or the public prosecutor (the ex officio bankruptcy declaration is no longer possible), by the bankruptcy section of the competent court.
The bankruptcy procedure is carried out by a court-appointed receiver, supervised by both a delegated judge and a court-appointed creditors' committee. From the bankruptcy declaration date, the debtor is dispossessed of its assets and ceases to manage its business. All individual legal actions by the creditors against the debtor and its assets are interrupted.
The receiver is a public officer having a number of tasks, such as, inter alia, managing the debtor's assets and operating its business on an interim basis in the interest of all creditors until such assets are liquidated, liquidating the debtor's assets according to specific procedures, dissolving pending agreements, listing the creditors and owners of assets in possession of the debtor (the relevant claims are assessed by the delegated judge according to a specific procedure aimed at forming the list of liabilities of the bankruptcy estate), distributing to creditors the proceeds of the assets liquidation according to specific rules and complying with the order of priorities (e.g., pledges, mortgages, privileges, which are general or specific on certain assets; all of them ranking in a specific order provided by the law), assessing the causes of the insolvency, referring to the public prosecutor on possible crimes, lodging legal claims against those responsible (e.g., the entrepreneur, directors, statutory auditors, etc.) or starting a clawback action to recover assets, filing the request for closure of the bankruptcy procedures once the distributions to creditors are completed (and in other cases such as where there are no assets to repay creditors at all).
The delegated judge and the creditors' committee oversee the activities of the receiver. The delegated judge, inter alia, refers the bankruptcy court when requested by the law, decides claims in first instance, assess the creditors and third parties' rights. Certain activities of the receiver are to be previously authorised by the delegated judge or the creditors' committee.
Bankruptcy settlement with creditors
The Insolvency Act allows creditors and, under certain circumstances, the debtor to propose a settlement to the creditors during the bankruptcy procedure. A settlement proposal can be submitted to the court, provided that the proposed settlement guarantees a greater or faster recovery than that envisaged under the bankruptcy distribution. If the settlement proposal is in the best interests of the creditors, the court orders notification of the proposal to all creditors for their approval.
The bankruptcy settlement with creditors proposal is voted by the majority of creditors admitted to the voting process and, should classes of creditors be proposed, of the majority of the classes formed by the voting creditors as well. The opt-out rule governs the voting process (non-voting is equivalent to voting in favour). The approved bankruptcy settlement with creditors must be validated by the bankruptcy court to become effective. Once effective, it binds all creditors including the dissenting ones. The validated bankruptcy settlement may be terminated if not performed according to its terms and conditions.
Pre-bankruptcy composition with creditors procedure
The Insolvency Act allows the debtor in crisis (not just the insolvent debtor) eligible for bankruptcy to avoid bankruptcy proposing a composition to its creditors, to be voted on by the majority of its ordinary creditors and validated by the bankruptcy court, allowing it to write off its debt, liquidate its business or, alternatively, continue the business activity.
The composition with creditors proceedings is an in-court insolvency procedure during which the debtor remains in possession of its assets and, should the activities not already be interrupted, continues running the ordinary course of its business under the control of the bankruptcy court or its delegated judge and a court-appointed commissioner or panel of commissioners, while extraordinary administration activities are to be previously authorised by the bankruptcy court or its delegated judge.
The debtor may start the procedure in two ways. The first way is filing with the competent bankruptcy court either a full request, together with a composition proposal, financial and business plan, expertise drafted by an independent third-party expert certifying the correctness of the company's accounting data and the feasibility of the plan, and other ancillary documentation. The second way is to file a request in-blank reserving the right to file the proposal, plan and expertise within the term granted by the court (between 60 and 90 days, unless a bankruptcy petition is filed, in which case the 60 days are not granted; such term may be postponed for an additional 60 days in case of justified reasons and an extension has been granted by the covid-19 emergency provisions). Both filings grant the debtor something similar to automatic stay effects, protecting it from enforcement and interim claims as well as from bankruptcy pending the pre-bankruptcy composition procedure and suspending the provisions of law imposing the reintegration of corporate capital in the event of losses.
The debtor is requested to provide in the proposal and the plan, inter alia, how, when and to what percentage ordinary creditors will be repaid (ordinary creditors are unsecured, unprivileged and non-priority ones). The priority and privileged creditors are repaid in full within one year from the validation date and the crisis is resolved.
The commissioner, inter alia, expresses his or her opinion on the feasibility of the plan and compares it with the possible alternatives (mainly bankruptcy), providing creditors with the information needed to vote upon the proposal. The proposal is voted on by ordinary creditors during the creditors' hearing scheduled by the delegated judge and the following 20 days. The opt-in rule governs the voting process (non-voting is equivalent to voting against). The Insolvency Act requires that debtor filing composition proposals providing for the liquidation of the company offer at least 20 per cent repayment to ordinary creditors, while composition proposals providing for the continuation of the business offer even lower repayment ratios (but not non-existent ones), provided that in any event priority and privileged claims are repaid in full.
The Insolvency Act also provides that the procedure has to be interrupted in case of fraud, unauthorised activities or lacking the conditions for the procedure to continue; allows the debtor to terminate unprofitable or excessively burdensome unperformed contracts with the prior authorisation of the bankruptcy court; entitles creditors owning at least 10 per cent of the total debt to file a challenging proposal to be voted on alongside the debtor's proposal (unless the debtor's proposal already provides at least 40 per cent of the ordinary claims or 30 per cent if the proposal provides for business continuity); sets forth that a compulsory tender must be started if the proposal provides for the transfer of the company, a going concern, a branch of it or of specific assets; and provides specific rules governing debtor-in-possession financing and early repayment of key pre-petition creditors.
The approved proposal must be validated by the court in order to be effective. Once effective it binds all creditors, including the dissenting ones. The validated composition may be terminated if not performed according to its terms and conditions.
Debt-restructuring agreements and certified restructuring plans
The debtor in crisis entitled to be admitted to the pre-bankruptcy composition with creditors procedure may alternatively opt to solve its crisis by entering with creditors into one or more validated debt-restructuring agreements regulated by Article 182 bis of the Insolvency Act or approving a restructuring plan to be certified by a third-party expert governed by Article 67, Paragraph 3, Letter d, of the Insolvency Act.
Debt-restructuring agreements under Article 182 bis of the Insolvency Act are private agreements entered into by the debtor in crisis with creditors owing at least the 60 per cent of its overall debt, assessed by a third-party independent expert (the expertise concerns the accounting data of the debtor and the feasibility of the plan) and validated by the competent bankruptcy court. Non-adherent creditors are to be repaid in full within 120 days of the validation date or, if longer, from the date when the relevant debts fall due. The debtor may submit an application to the court to obtain new debtor-in-possession financing and to pay key creditors. The transactions carried out under the validated debt restructuring agreements are not subject to clawback action, nor liability claims and criminal complaints in the event of subsequent bankruptcy of the debtor. The provisions of law imposing the reintegration of corporate capital in the event of losses are not applicable during the validation process period.
The Insolvency Act also provides specific rules in case of financial debt restructurings under Article 182 septies of the Insolvency Act, stating that in the event the majority of the total debt is against banks and financial intermediaries, the debtor may ask the court to have the effects of the debt restructuring agreements extended to the non-approving creditors of the same class (of the creditors having homogenous legal positions and economic interests). This is provided that all creditors have been duly informed of the restructuring negotiations, put in the position to participate in them in good faith, the restructuring agreement is entered into with creditors owning at least the 75 per cent of the overall debt and the repayment to them is not less than what would be provided in the practicable alternatives. Additional rules are provided to extend standstill agreements to non-approving creditors.
The certified restructuring plan under Article 67, Paragraph 3, Letter d, of the Insolvency Act is a further alternative to pre-bankruptcy composition with creditors and debt restructuring agreements aimed at solving the debtor's crisis. The Insolvency Act leaves the debtor fully free to draw its restructuring process, provided that it is provided by a plan and a third-party expert certifies the accounting data on which it is based and its feasibility, and takes criminal and civil responsibility for its assessment. The certified restructuring plan normally provides agreements with creditors and third parties and may be published in the Companies Register (in which case it has tax advantages) or kept secret. The transactions carried out under the certified restructuring plan are not subject to clawback action, nor liability claims and criminal complaints in the event of subsequent bankruptcy of the debtor. The main difference between a certified restructuring plan and a debt restructuring agreement is the validation needed for the latter only, while the judicial assessment of the validity of a certified restructuring plan is ex post facto during the possible subsequent clawback and liability litigations.
Settlements with the tax authority
The debtor in crisis is granted a specific tool to address its tax and contribution indebtedness under Article 182 ter of the Insolvency Act. Such provision exclusively regulates the treatment of tax and contribution credits and aims to achieve, in the relationships between the financial administration and taxpayers, the achievement of negotiated agreements, within the regulation of the business crisis under the pre-bankruptcy composition with creditors procedures or the debt restructuring agreements. It's an out-of-court procedure aimed at regulating, exclusively, the treatment of tax credits and social security and assistance contributions, as well as the procedural modalities to enable the debtors requesting notification of their will to satisfy tax and social security credits in a partial or deferred manner, and the recipients of the request to quantify their credit. The consent of the tax authorities and social security bodies is deliberated and expressed signing of the deed by the director of the office and the collection agent.
The condition for partial or deferred payment of privileged tax or social security credits (including VAT and withholding taxes) is the objective inability to realise the value attributable to the assets or rights on which the privilege exists, as quantified and certified by a third party in possession of the requirements for assessing the certified restructuring plan. In particular, in order to allow the partial payment of the tax debt, Article 182 ter of the Insolvency Act requires the third-party expert to issue a certificate which establishes, at the outcome of the comparison between the payment proposed with the request for composition and the satisfaction obtainable in the bankruptcy alternative, that the proposal for composition is more satisfactory for tax and social security credits.
Compulsory administrative liquidation
The compulsory administrative liquidation procedure is an insolvency administrative procedure governed and controlled by state officers instead of the courts. The procedure is applicable to the insolvency of specific businesses of public interest, such as insurance companies, banks, cooperatives and non-profit entities, which are subject to a number of governmental controls. The purpose of this procedure is to achieve recovery of the business through a settlement or an arrangement plan.
The debtor, the directors of the debtor company and any of the creditors are entitled to apply to the court to start the procedure. The court is obliged to seek the advice of the governmental agency responsible for supervising the debtor's enterprise. The bankruptcy court initiates the proceedings by declaring the insolvency of the debtor and appointing a liquidator. All legal actions by creditors against the debtor are then suspended, with the exception of those aimed at ascertaining the amount of the claim. The liquidator, who also acts as a public officer, is assisted by a supervisory committee consisting of a number of experts, whose number can vary from three to five and who are not required to be creditors of the debtor (even if this might be preferable). Unlike in other insolvency proceedings, there is no requirement for a judge or a commissioner to be in charge. The liquidator must review the claims and evaluate whether the settlement plan is feasible.
The extraordinary administration procedure is a further insolvency procedure for large companies falling within certain specific size requirements. The procedure applies to companies employing no fewer than 200 employees for at least one year, and having an overall amount of debt the value of which is no lower than two-thirds of the aggregate value of both assets and revenues. The debtor is eligible for the extraordinary administration provided that it has 'concrete chances for the recovery of its financial stability'. After consultation with the Ministry of Economic Development and the Ministry of Economy, the bankruptcy court will declare the insolvency of the company. The Ministry of Economy appoints an extraordinary commissioner, who proposes a plan for the disposal of the assets or a recovery plan within 60 days. All legal actions initiated by creditors against the company are suspended during the procedure. Special variances of the extraordinary administration procedure apply to very large companies employing no fewer than 500 employees in the year preceding the filing of the relevant petition and having a total amount of debts amounting to, or exceeding, € 300 million, as well as large companies operating in strategic public services.
ii Duties of directors of companies in financial difficulties
The Italian Civil Code provides that directors of a company must act with a duty of care, avoid conflicts of interest and comply with the law and the company's by-laws in the day-to-day management of the company. Directors are jointly liable if they fail to adequately supervise the general conduct of the company's affairs or if, once aware of damaging acts, they do not act to prevent any harmful activities, or to eliminate or reduce the harmful consequences of such activities. Liability for acts or omissions of directors does not extend to those directors who, acting without fault, express their dissent without delay, such dissent being registered in the minute book of the meetings and resolutions of the board of directors, with written notice also to the chair of the board of auditors. Directors are held liable to the company's creditors for non-compliance with their duties concerning preservation of the company's assets. The action can be brought by creditors when the company's assets prove to be insufficient to satisfy their claims. In the event of bankruptcy or compulsory administrative liquidation, the action against the directors can be brought by the receiver in bankruptcy or by the commissioner. A waiver of the action by the company does not prevent the company's creditors from exercising their legal rights against the directors.
iii Bankruptcy clawback actions
The Insolvency Act provides that transactions damaging the creditors carried out in a period (two years, one year or six months, depending on the nature and characteristics of the action) prior to the bankruptcy date or the publication date of the pre-bankruptcy composition with creditors filing may be subject to clawback upon certain conditions by the bankruptcy receiver.
In particular, the following transactions are subject to clawback:
- transactions for consideration carried out within the previous one-year period if the obligations assumed by the insolvent party exceed by more than one-quarter the paid or agreed consideration;
- transactions extinguishing payable monetary debts carried out within the previous one-year period if the debt repayment was not made in cash or by other normal payment methods;
- pledges, voluntary mortgages and other guarantees on the debtor's assets for past claims due within the previous one-year period to secure prior debts that were not overdue at the time when the security interest was perfected; and
- payment of debts, other onerous acts, pledges, mortgages and other guarantees on the debtor or third party's assets within the previous six-month period, provided that the bankruptcy receiver shows evidence that the counterparty was aware of the debtor's insolvency at the date of the transaction.
The Insolvency Act also provides exemptions to the clawback, in the event, inter alia, that a transaction occurred at ordinary terms, payments to employees, payments to have access to insolvency procedures and payments made under insolvency procedures or certified restructuring plans.
Recent legal developments
Law Decree 8 April 2020, No. 23
Law Decree 8 April 2020, No. 23 introduced certain provisions aimed at regulating the management of the business crisis and insolvency during the covid-19 crisis, including specific measures concerning bankruptcy procedures, pre-bankruptcy composition with creditors and debt restructuring agreements, such as the following (limited to those still available):
- the implementation of procedures already approved by creditors scheduled between 23 February 2020 and 31 December 2021 has been given a six-month extension;
- if the debtor intends to modify only the time limits for fulfilment, it may file a statement of defence up to the hearing set for the approval, indicating the new time limits and the documentation proving the necessity for such modification (deferment in such cases may not be for more than six months after the original deadlines); and
- the debtor who filed the request in blank for admission to the pre-bankruptcy composition with creditors procedure may, before the expiration of the term granted by the court, file an application for a further extension (up to 90 days). The same application may be filed in the case of debt restructuring agreements.
Significant transactions, key developments and most active industries
The covid-19 pandemic produced new economic scenarios. A large percentage of companies reported implementing more frequent reviews of their strategies and product portfolios and, notwithstanding government subsidies and the freezing in the labour market, several entered into financial crisis that led or will lead them to undertake a corporate restructuring process.
In the past year, a popular restructuring method has been the transfer of a company's assets or business to newly formed companies mainly owned by third parties (often acting as 'white knights'). In return for reducing their debt claims, financial creditors will often accept to exchange debt in the company for debt in the new company, equity in the new company or both, often vested in special financial instruments. A further restructuring technique, though less popular, is a debt for equity swap, whereby creditors receive equity in the restructured company in exchange for reducing their debt claims. Since creditors accepting debt-equity swaps are often vested with preferential rights on dividends once there are sufficient distributable reserves, this restructuring method, which reduces companies' balance sheet liabilities, enables them to benefit from most of the advantages following the restructuring procedure once the company returns to profit in their capacity as equity holders.
According to restructuring experts the transportation, healthcare, real estate and, depending on the results of the summer season reopening, tourism sectors are likely to see a significant increase in restructurings in Italy. It is expected that the second half of 2021 (and particularly from September 2021) will be a period of critical decision-making for distressed businesses in these industries, whose aim is to preserve roles, ensure continuity and allow them to keep their pre-covid-19 emergency ratings.
i Regulation (EU) 2015/848
Regulation (EU) 2015/848 (the 2015/848 Regulation), applicable from 26 June 2017 with a few exceptions among Member States, applies to 'public collective proceedings, including interim proceedings', aiming at rescue, completion of a debt restructuring agreement, company reorganisation or company assets liquidation and regulates the applicable jurisdiction and the centre of main interests, suspending or refusing secondary insolvency proceedings in the event of contrast with a connected insolvency procedure dealt by another Member State. An international network for insolvency databases has been created and a duty of cooperation between different Member State courts has been introduced for insolvency proceedings regarding two or more companies that are part of the same group.
ii Directive (EU) 2019/1023
On 20 June 2019, Directive (EU) 2019/1023 of the European Parliament and of the Council (the 2019/1023 Directive) was enacted, which deals with preventive restructuring frameworks, discharge of debt and disqualifications, and measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt. The 2019/1023 Directive will enter into force on 17 July 2021. By that date, the Member States of the European Union will have to adopt all the provisions necessary to comply with its provisions, except those for which a longer transposition period is foreseen. The general objective of the 2019/1023 Directive is to ensure a minimal harmonisation of the restructuring and insolvency rules in EU territory to promote the full accomplishment of the internal market and to affirm the culture of protection and rescue of companies in crisis at a European level, as well as to grant a second chance to debtors in financial difficulties, allowing their businesses to continue. The 2019/1023 Directive is complementary to and does not replace the 2015/848 Regulation, rather aiming to be being fully compatible with it, obliging Member States to provide for preventive restructuring procedures that respect certain minimum principles of effectiveness.
A broad and innovative reform shall be introduced by the Insolvency Code, even though no certainty currently exists on when and what part of the Insolvency Code will actually enter into force, least of all what actual impact the new rules (or the part of the new rules that will come into force) will have on the Italian business environment in the current post-covid-19 emergency situation.
The fundamental goal of the Insolvency Code is the early emergence of the crisis through warning systems, alert procedures and professional bodies facilitating the composition of corporate crisis (Organismo di Composizione della Crisi e dell'Insolvenza (OCRI)) to which the control bodies of the companies and qualified public creditors (such as the Revenue Agency, National Social Security Institute and Collection Agent) will have a duty to report anomalous situations considering certain indicators of crisis (e.g., imbalances of an income, equity or financial nature) related to the specific characteristics of the kind of company and business activity of the debtor.
The Insolvency Code will also provide a more coherent regulation of the crisis and insolvency of any kind of debtor, including consumers, professionals and entrepreneurs of any size and nature, agricultural entrepreneurs, operating as a natural or legal person or other collective body, group of companies or public companies, with the exclusion of public bodies and big companies. Additionally, the Insolvency Code aims to focus on the restructuring in continuation of the business activities, trying to overcome the traditional cultural Italian aversion to bankruptcy by replacing it with a judicial liquidation procedure as an extreme measure to initiate in the event that no business recovery is feasible.
1 Stefano Lombrassa is a partner and Paola Rossi is of counsel at Grimaldi Studio Legale.