Newsletter Restructuring - 3/2012 EN

1.Restructuring plans and criteria for the third party expert

As to the restructuring plans pursuant to article 67 para. 3 (d) of the Italian Bankruptcy Law, the Reform introduced a new and more specific set of rules about the criteria for, and duties of, the third party expert, as well as the possibility of publishing the restructuring plan in the competent Companies’ Register upon the request of the debtor, in order for it to benefit from the tax exemption more particularly described under para. 7 below.
As to the first point, it should be stressed that, after the Reform, the scope of work of the expert’s certification will no longer be the reasonableness of the plan but, rather, the “truthfulness of the accounting data (“dati aziendali”) and the feasibility” of the plan, in line with the provisions governing the pre-insolvency workout agreements.
New article 67 para. 3 (d), moreover, expressly states that the expert shall be appointed by the debtor (thus sorting out the debate on the competence of such an appointment) and that his independence shall be assessed pursuant to the following criteria:

(i)absence of any professional or personal relationship with the company or with those bearing an interest in the restructuring, which may affect the independence of his/her judgment;

(ii)holding of the criteria provided by the Italian Civil Code for his/her eligibility as an internal auditor (sindaco) (see article 2399 of the Italian Civil Code);

(iii)absence, during the last five years, of any job relationship (whether as an employee or as a consultant, or through professionals with whom the expert is associated) in favour of the debtor, as well as absence of any participation in the governing or auditing bodies of the debtor.

By virtue of the cross-references contained in the Italian Bankruptcy Law, the aforementioned criteria shall apply also in the context of pre-insolvency workout agreements and restructuring agreements.

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2.Restructuring plans pursuant to article 182-bis of the Italian Bankruptcy Law: repayment in full of the creditors that are not parties to the agreement

Article 182-bis, as amended by the Reform, now provides - in line with article 67 para. 3 (d) - that the expert shall certify not only the feasibility (attuabilità) of the restructuring agreement, but also the truthfulness of the accounting data (dati aziendali). Moreover, article 182-bis now states that the debtor shall ensure repayment in full (thus not just “regularly” as provided by the previous wording) of the creditors who are not parties to the restructuring agreement and that such full repayment shall be made in accordance with the following terms:

(i)within 120 days from the date of the Court’s approval (omologazione), in respect of any receivables due and payable on such a date; and

(ii)within 120 days from their respective due date, in respect of any receivables not yet due and payable on the date of the Court’s approval (omologazione).

Such provision seems to be in line with the most recent case law, according to which a restructuring agreement can be approved by the Court only provided that, as of the date on which the request for approval of the restructuring agreement is filed with the competent Court, financial resources are actually available so as to ensure the repayment of the creditors not joining the restructuring agreement.
Article 182-bis also provides that starting from the date on which the restructuring agreement is published and for the following 60 days, not only the creditors whose rights and claims are outstanding prior to such date, as already provided, cannot exercise any enforcement or preservation actions (azioni cautelari o esecutive) over the debtor’s assets, but also they cannot obtain any pre-emption rights (except if it was so agreed).
Finally, new article 182-bis allows the debtor who has timely filed a proposal of restructuring agreement pursuant to article 182-bis para. 6 of the Italian Bankruptcy Law (i.e. in order to benefit from the stay of actions while negotiating the agreement), to file a request for a pre-insolvency workout agreement within the terms stated by the Court for the filing of the restructuring agreement itself. In such a case, the debtor’s assets will continue to benefit from the protective effects granted by the Italian Bankruptcy Law.

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3.The new pre-insolvency workout agreements

Provisions regulating pre-insolvency workout agreements have been significantly amended by the Reform.

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3.1 Filing for admission to a pre-insolvency workout agreement

Significant changes have been made, starting from the very first phase of the procedure leading to a pre-insolvency workout agreement, i.e. the filing for admission to the procedure.
Article 161 of the Italian Bankruptcy Law, as amended by the Reform, now states that – along with the documents already provided - a “plan containing an analytical description of the modalities and the timing for the performance of the proposal” shall be attached to the request (which, in contrast from before, shall now be published by the Court's clerk in the competent Companies’ Register within one day from its filing). In addition to that, a relevant innovation has been provided for the debtor, who can file with the competent Court just a simple request for admission to the pre-insolvency workout agreement, provided that the debtor shall file the proposal, the plan and the other necessary documents within a time-frame established by the Judge and which shall be included within 60 to 120 days from the date of filing of such request. In case of reasonable grounds, such a term can be extended for a maximum of 60 days (please note that in case a procedure of bankruptcy declaration is pending, the Judge could only establish a 60 days maximum term, extendible for no more than 60 days).
As an alternative, and within the aforementioned time-frame, the debtor will also be entitled to file a request for approval of a restructuring agreement. In either case, the debtor’s assets will benefit from the protective effects granted by the Italian Bankruptcy Law from the date on which the relevant request is published in the Companies' Register until the date on which the pre-insolvency workout agreement or the restructuring agreement is approved.
In case the debtor does not file the proposal, the plan and the other documents within the established time-frame, the Court will not admit the debtor’s request and, in the event that the conditions provided by the Italian Bankruptcy Law are met, the Court could declare the debtor bankrupt upon request from a creditor or the Public Prosecutor. Until the expiry of the term set by the Court, moreover, the debtor shall comply with the information undertakings set by the Court itself: otherwise, the Court will not admit the debtor’s request and could declare it bankrupt. It is worth noting that, according to article 161 of the Italian Bankruptcy Law, this “simplified” request cannot be filed if, during the last two years, the debtor has already filed the same kind of petition without being admitted to the pre-insolvency workout agreement (or without the restructuring agreement being approved). Furthermore, in the period between the date of filing of the request and the date of the decree of admission to the pre-insolvency workout agreement, the debtor can execute only acts of ordinary management and also urgent acts outside the ordinary course of business provided that, in the latter case, it has been duly authorized by the Court. All the third-party claims arising from acts legally executed by the debtor will be deemed super-senior (prededucibili).
Finally, it is worth noting that the rules introduced by the Reform expressly provide for the possibility to make (even substantial) changes to the plan or the proposal: in such a case, the expert will have to release a new certification.

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3.2 Non effectiveness of judicial mortgages and rules governing pending contracts

The Reform modified the date starting from which the creditors cannot exercise enforcement and preservation actions (azioni esecutive e cautelari) against the debtor’s assets: instead of the date of filing of the request, such a date will be the one on which the request is published in the Companies’ Register. It should be noted that any judicial mortgages registered in the 90 day period preceding such date will not be effective against creditors whose claims arose before the pre-insolvency workout agreement.
The Reform also introduced a significant innovation as to the rules governing pending contracts. Newly introduced article 169-bis of the Italian Bankruptcy Law provides that the debtor, through the request for admission to the pre-insolvency workout procedure, is entitled to ask the Court - or, subsequent to the decree of admission, the delegated judge (giudice delegato) - for authorization to withdraw from pending contracts or to suspend their execution for no more than 60 days. In both cases, the counterparty will be indemnified against damages suffered because of such a withdrawal and such counterparty’s credit will be satisfied as a claim arisen prior to the pre-insolvency workout agreement.
Article 169-bis does not apply, inter alia, to employment contracts, real estate lease agreements, financing agreements pursuant to article 2447-bis of the Italian Civil Code, or to preliminary agreements for the sale of a real estate property designated to be the main house of the buyer or of his/her relatives (parenti e affini) within the extended family or to be its corporate headquarters, provided that, in each case, they have been registered in accordance with the Italian Civil Code.

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3.3 The creditors' meeting and the approval of the pre-insolvency workout agreement

Relevant changes have been made to the rules governing the creditors' meeting (adunanza) and the process of approval of the pre-insolvency workout agreement.
First of all, article 178 of the Italian Bankruptcy Law now states that the names of the non-voting creditors shall be specifically indicated in the creditors' meeting resolution, together with the amount of their credits. Within twenty days from the date of such resolution, the non-voting creditors can express their denial: otherwise, they will be treated as if they consented to the pre-insolvency workout agreement and, as such, they will be taken into account in the calculation of the credits' majority.
Moreover, article 178 of the Italian Bankruptcy Law states that those creditors who did not attend the creditors' meeting shall be notified of any postponement of the voting operations.
Finally, it is worth noting that according to article 179 of the Italian Bankruptcy Law in the event that, after the approval of the pre-insolvency workout agreement, there is a change in its feasibility-conditions, the creditors (upon specific notice sent by the commissario giudiziale) could file a Court petition in order to modify their votes.

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3.4 Pre-insolvency workout agreements with going concern

The Reform has also introduced into the Italian Bankruptcy Law a newly established specific provision (article 186-bis) dealing with the scenario in which the pre-insolvency workout plan provides for the continuation of business activity, or the sale or transfer of an active business-concern to one or more companies. This is the scenario of the so-called “pre-insolvency workout agreement with going concern”.
In such a case, and considering that the plan may also provide for the liquidation of non-instrumental assets, the following conditions should be satisfied:

(i) the documents to be attached to the request for admission to the pre-insolvency workout procedure should contain a detailed forecast of the costs and proceeds arising from the continuation of the business activity provided by the plan, together with a specific indication of the financial resources and of their respective coverage; and

(ii)the expert shall certify, in his/her certification, that the continuation of the business activity is instrumental in providing the best resolution for the creditors (il miglior soddisfacimento dei creditori).

Furthermore, provided that the creditors’ ranking according to article 160 of the Italian Bankruptcy Law is not altered, the plan may provide for a standstill of payments to preferred creditors (creditori privilegiati) for up to one year from the approval (omologazione) of the pre-insolvency workout agreement, with an exception made in the case of a liquidation of assets or rights in respect of which a right of pre-emption exists. Such preferred creditors will not have the right to vote.
The rules governing the pre-insolvency workout agreement with going concern contain specific provisions regarding (i) the agreements which are pending as of the date on which the request for admission is filed - and which will not be automatically terminated as a consequence of the procedure - and (ii) the contracts entered into with public entities.
Such public contracts may continue to be effective provided that the expert certifies that they are in conformity with the plan and that the debtor has a reasonable ability to perform the contracts.
Finally, the newly introduced article 186-bis provides that a company admitted to a pre-insolvency workout agreement with going concern may take part in public procurement contracts, provided that, in the tender, it will exhibit the following documents:

(i)a report of an expert certifying the conformity with the plan and the debtor’s reasonable ability to perform the contract;

(ii)a declaration made by a different operator, which satisfies the general, financial, technical and economic criteria, along with the certifications, requested for the award of the contract and which has undertaken to the competitor and the contracting authority (stazione appaltante) to provide the resources necessary for the execution of the contract available for the total duration of the contract and to replace the company in case it goes bankrupt during the tender or after the signing of the contract, or in case it becomes unable to duly execute the contract for any reason whatsoever. Rules contained in the Italian Code of Public Contracts governing the so called “avvalimento” will be applicable.

The company will also be entitled to compete by means of a temporary joint-venture with other companies, provided that such companies are not experiencing any insolvency proceedings and that the company itself does not act as agent.

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3.5 Pre-insolvency workout agreement and declaration of bankruptcy

The Reform amended the rules governing the calculation of certain procedural terms under article 64, 65, 66, 67 para. 1 and para. 2 and 69 of the Italian Bankruptcy Law. The Italian Bankruptcy Law now states that in case the debtor is declared bankrupt after the filing of a request for a pre-insolvency workout agreement, said terms shall be calculated as starting from the date on which the relevant petition has been published in the Companies' Register.

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4.Provisions common to pre-insolvency workout agreements and restructuring agreements

The Reform introduced in the Italian Bankruptcy Law articles 182-quinquies and article 182-sexies, which apply both to restructuring agreements and pre-insolvency workout agreements, as well as amended article 182-quater.

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4.1 Super-seniority of new financial resources

Article 182-quater of the Italian Bankruptcy Law has been significantly amended by the Reform. This article governs the granting and ranking of new financial resources, provided that: (i) they are granted within the implementation of a pre-insolvency workout agreement or a restructuring agreement pursuant to article 182-bis; or (ii) they are instrumental to the filing of the pre-insolvency workout agreement petition (or to the request of approval of a restructuring agreement).
According to the new wording of article 182-quater, differently from the past provisions there is no need for such financial resources to be granted by a bank or a financial institution: said article now states that they will rank super-senior, regardless of who is the lender. Shareholder-loans will rank super-senior only for a portion equal to 80% of their amount.
Finally, it is worth noting that article 182-quater now states that such a super-seniority regime is applicable also to those lenders who became shareholders as a result of the performance of the pre-insolvency workout agreement or the restructuring agreement.

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4.2 Granting of new financial resources and going concern

Article 182-quinquies contains provisions regarding the granting of new financial resources and the so-called “going concern”.
As to the first point, this article provides that the debtor, when making a request for admission to the pre-insolvency workout procedure or for the approval of a restructuring agreement (or of a proposal of restructuring agreement) may ask the Court for the authorization to execute new super-senior facility agreements provided that an expert (holding certain requirements), once it has verified the company’s financial needs up until the approval from the Court (omologazione), certifies that such facilities are aimed at the best settlement for the creditors (la migliore soddisfazione dei creditori).
Such authorization may also concern facilities identified only by type and amount, the terms of which have not yet even been agreed upon, as well as the granting of a pledge or mortgage in order to secure the facilities themselves.
As to the second point, article 182-quinquies provides that:

(i)a debtor that has filed a request for admission to the pre-insolvency workout agreement with going concern is entitled to ask the Court to be authorized to pay credits for the supply of goods or services which have arisen prior to the pre-insolvency workout procedure, provided that it submits a specific certification made by an expert in possession of the criteria provided by the Italian Bankruptcy Law. Such a certification will not be necessary in case of payments made up to an amount equal to the one granted to the debtor as new financial resources, and which (i) are not to be repaid or (ii) are subordinated to the other creditors’ claims;

(ii)a debtor that has filed for an approval of a restructuring agreement or a proposal of restructuring agreement pursuant to the Italian Bankruptcy Law is entitled to ask the Court to be authorized, provided that the conditions listed under para (i) above are satisfied, to pay credits for supply of goods or services that have arisen prior to filing. In such a case, these payments will not be subject to claw-back action pursuant to the Italian Bankruptcy Law.

According to article 217-bis of the Italian Bankruptcy Law, payments and financings authorized by the Court pursuant to article 182-quinquies will be exempted from the application of the criminal law provisions governing simple bankruptcy (“bancarotta semplice”) and preferential bankruptcy (“bancarotta preferenziale”).

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4.3 Non applicability of rules governing the reduction and loss of share capital

According to the newly introduced article 182-sexies, the rules governing the loss and reduction of the share capital set forth in the Italian Civil Code do not apply to Italian companies during the period from the date of filing of the request for admission to the pre-insolvency workout agreement or for the approval of the restructuring agreement (or proposal of a restructuring agreement) to the date of their respective approval (omologazione). During such period, moreover, the rule according to which a company shall be wound up in case of reduction or loss of the share capital, will not apply.
Nevertheless, during the period preceding the filing of the aforementioned requests or of the proposal of a restructuring plan, article 2486 of the Italian Civil Code – providing for the powers and duties of the directors after the company's winding up - will be applicable.

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5.Criminal liability of the expert

The Reform also introduced a specific provision concerning the criminal liability of the expert in case of false certification and reports. Article 236-bis of the Italian Bankruptcy Law states that the expert who, in a report or certification to be provided in the context of a restructuring plan, pre-insolvency workout agreement or restructuring agreement, certifies false information or leaves out relevant information shall be punished by imprisonment for a term of two to five years and by payment of a fine for an amount included between Euro 50,000 and Euro 100,000. The punishment shall be increased in case the expert acted in order to procure an unfair profit to himself/herself or someone else. If the creditors suffer damages because of such conduct by the expert, the punishment will be increased by half.

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6.Further amendments to the Italian Bankruptcy Law: acts exempted from bankruptcy claw-back action

In addition to the amendments already outlined above, it should be noted that the reform also broadened the list of acts exempted from bankruptcy claw-back action. Article 67 para. 3 (e) of the Italian Bankruptcy Law, as amended by the Reform, provides that in addition to any act, payment and guarantee executed pursuant to a pre-insolvency workout agreement or a restructuring agreement, any act, payment or guarantee legally executed after the filing of the request for admission to the pre-insolvency workout procedure shall be exempted from such an action. Article 67 para. 3 (c) provides that agreements and preliminary agreements (registered pursuant to the Italian Civil Code) for the sale of a real estate property designated to be the headquarters of the buyer are exempted from the bankruptcy claw-back action as well, provided that on the date of the declaration of bankruptcy such business activity is effectively conducted or that investments were made in order to set it up. In line with said provision, article 72 of the Italian Bankruptcy Law now provides that its provisions regarding the contracts which are pending during the bankruptcy procedure shall not apply, in addition to the registered preliminary agreements for the sale of a real estate property designated to be the main house of the buyer or of his/her extended family, also to the ones for the sale of a real estate property designated to be the headquarter of the buyer.

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7.Tax provisions

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7.1 Taxation of extraordinary income (“sopravvenienze attive”)

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Article 33 para. 4 of the Development Decree, as converted into law, modifies the rules governing the taxation of extraordinary income by amending article 88 para. 4 of Presidential Decree n. 917/1986 (“Tuir”) (the Italian taxation act). Such an article now provides that in case of a restructuring agreement approved pursuant to article 182-bis of the Italian Bankruptcy Law or of a restructuring plan published in the competent Companies’ Register pursuant to article 67 para. 3 (d) of the Italian Bankruptcy Law, the extraordinary income arising from a company’s debt-reduction does not amount to taxable income for the portion exceeding the tax losses available to the company pursuant to article 84 of the Tuir (i.e., tax losses accrued in the relevant tax period and/or rolled-over from previous tax periods which can be used by the company to offset its taxable income).

Such new exemption applicable to extraordinary income shall be added to the ones already provided for by article 88 para. 4 of the Tuir prior to the reform, i.e. the ones relating to sinking-fund contributions or capital contributions made by the shareholders to the companies, as well as to their waiver to the respective receivables and to the company’s debt-reduction in the context of a post-insolvency workout agreement (“concordato fallimentare”) or of a pre-insolvency workout agreement.

These amendments are significantly relevant for the debtor because they allow it to benefit from the tax exemption on extraordinary income and also in case of any company’s debt-reduction deriving from the application of the aforementioned restructuring procedures (which do not represent proper bankruptcy proceedings).

It should be noted that the wording of the amended article 88 para. 4 of the Tuir provides that in case of a restructuring agreement pursuant to article 182-bis of the Italian Bankruptcy Law the debtor will be granted with the said tax exemption only after the restructuring agreement has been approved by the Court. In case of a restructuring plan pursuant to article 67 para. 3 (d), instead, the granting of the tax exemption is conditional upon the publication of the restructuring plan in the competent Companies’ Register.

It should also be noted that such new tax-exemption cases do not apply in respect of the entire amount of the extraordinary income, but only in respect of the portion of such income exceeding the pre-existing tax-losses of the debtor. As a consequence, the only effect of the new provisions is that the debtor may suffer a reduction or offsetting of the available tax losses regulated by article 84 of the Tuir.

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7.2 Deductibiltiy of the credit losses

Article 33 para. 5 of the Development Decree, as converted into law, also modifies the rules regarding the tax position of the creditors of a company facing a financial crisis, by amending article 101 para. 5 of the Tuir in respect of the deductibility of the credit losses. Article 101 para. 5 of the Tuir, as amended, provides that the credit losses are deductible in the event that they result from clear and objective circumstances and, in any case, provided that the debtor is subject to any bankruptcy proceedings or that it executed a court-ratified restructuring agreement pursuant to article 182-bis of the Italian Bankruptcy Law. According to said Article, there are “clear and objective circumstances” (“elementi certi e precisi”) when the credit amount is a small sum (i.e. less than Euro 5,000 for large companies and Euro 2,500 for others), provided that six months have already elapsed since its due date. Further, such “clear and objective circumstances” also exist: (i) when the right of collection of such credit is statute-barred (prescritto); and (ii) as for the companies whose financial statements are drafted pursuant to the international accounting standards provided for by EU Regulation 1606/2002 of 19 July 2002, also in case of a credits’ write-off from the financial statement because of their extinction.

The most relevant amendment, long-awaited by the relevant operators, provides for the automatic deductibility of the credit losses – which prior to this reform was applicable only in case of certain bankruptcy proceedings (e.g. bankruptcy and “liquidazione coatta amministrativa”) – also in the context of a restructuring agreement pursuant to article 182-bis. This rule seems to be in line with the position already expressed by the Italian tax authorities in respect of the interpretation and applicability of article 101 para. 5 of the Tuir in the context of a restructuring agreement pursuant to the Italian Bankruptcy Law.

According to the new wording of article 101 para. 5 of the Tuir, therefore, any creditor accepting the reduction of its credit as a consequence of a restructuring agreement will be entitled to automatically deduct the corresponding loss once the restructuring agreement has been approved.

Finally, it should be noted that, according to the amendments made by the Reform to article 88 and article 101 of the Tuir, the debtor and its respective creditors do not share the same position: while the tax exemption granted to the debtor on extraordinary income applies to both restructuring agreements and restructuring plans pursuant to the Italian Bankruptcy Law, the automatic deductibility of the credit losses applies only in case of a restructuring agreement.

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