Italy’s new Insolvency Code

On January 10, 2019, the Italian Government enacted the Business Distress and Insolvency Code (the Code). The Code was drafted taking into account the then existing draft of the recently adopted EU Directive on preventive restructuring frameworks (the Directive). Further amendments to Italian laws are likely to be required in light of the final version of the Directive.

Below is a brief summary of the key changes to the Italian restructuring and insolvency legal framework brought about by the Code.

I. Alert measures  

The Code introduces a system of 'alert measures' intended to detect a situation of distress at a time when corporate insolvency could still be avoided. The alert measures will not apply to listed companies, 'large undertakings' (as defined under the EU Directive 2013/34) or financial institutions.

By the time the Code enters into force (August 2020), a crisis composition organization (CCO) will be established within each local Chamber of Commerce to assist the debtor in working out a consensual arrangement with its creditors. Pending such workout the debtor may petition the court to impose a moratorium.

Further, if the debtor’s board of statutory auditors or its outside auditors believe that the company is in distress, they must inform the board of directors of it and, if the board of directors fails to follow up with appropriate initiatives, the auditors must inform the CCO directly of the distress. Likewise, certain public creditors (e.g., tax creditors) must notify the debtor when its exposure towards them exceeds certain thresholds set forth in the Code, and are required to inform the debtor’s auditors and the CCO if the debtor fails to address the situation of distress following such notice. The CCO shall then convene the debtor to work out a consensual arrangement.

If no agreement is reached between the distressed debtor and its creditors with the assistance of the CCO within 6 months of the first meeting between debtor and CCO, the debtor will be required to file for court-supervised restructuring proceedings (failing which the court may open an involuntary proceeding). Likewise, if the debtor does not attend the meeting convened by the CCO upon notification of the debtor’s auditors or public creditors, or the debtor does not take suitable initiatives thereafter, the CCO shall inform the public prosecutor, which may request the court to open an involuntary proceeding.

II. Corporate group restructuring

Corporate group insolvency proceedings may now be started through a single petition to the same court and will be supervised by the same judicial officers.

In case of a court-supervised composition with creditors (concordato preventivo; see also section III, below), the debtor may propose a single restructuring plan for the group. However, the plan must continue to reflect the separate assets and liabilities of each group member (i.e., no consolidation) and is voted on by the creditors of each group member on a standalone basis.

III. Changes to concordato preventivo

Although the automatic stay on enforcement actions by creditors will continue to be imposed upon the initial filing of the debtor, the court must now confirm it or revoke it at the first hearing of the proceedings scheduled after the initial filing. The court may subsequently revoke the stay (which in no event can last longer than 12 months from the initial filing).

Concordato proceedings contemplating full liquidation of the debtor’s assets will not be permitted, unless third parties contribute additional funds for the benefit of the creditors. Also, the restructuring plans envisaging the continuation of the debtor’s business as a going concern will be permissible only if the plan envisages the preservation of certain employment levels (e.g., the debtor – or the buyer of the debtor’s business – for at least 1 year after the court confirmation of the plan may not dismiss a number of employees equal to at least 50% of the average number of employees employed over the 2 years prior to the initial filing).

Secured claims may be rescheduled for up to 2 years, and these creditors may vote on the concordato in value based on their deemed impairment under the restructuring plan.

Separate voting classes must be formed for certain categories of claims (e.g., tax or social security claims; claims secured on third parties’ assets; claims to be satisfied in kind).  

IV. Court-ratified Restructuring Agreements

Prior to the entry into force of the Code, the effects of certain court-ratified restructuring agreements may be imposed upon dissenting creditors of a specific class by a qualified majority (75%) of consenting creditors of such class, on the condition that, among other things, the creditors of such class are banks or financial institutions.

Under the Code, such cram-down mechanics may now be extended to any dissenting creditor of a given class regardless of its identity, provided that the restructuring plan underlying the agreement either entails the debtor’s continuity as a going concern, or that at least 50% of its debt is owed to financial creditors (as defined under the Code).

The full version of this article is available here.

Carlo de Vito Piscicelli is a partner at Cleary Gottlieb Steen & Hamilton.

Francesco Iodice is an associate at Cleary Gottlieb Steen & Hamilton.