On 10 January 2019, the Italian Government enacted the Legislative Decree No. 14 of 2019, also known as “Code for Distressed Companies and Insolvency” (the “Code”). The Code aims to allow early detection of a financial “crisis” and prevent future insolvency. When such prevention fails, the Code also aims to handle insolvency with the goal of overcoming distress and return to profitability. The Code’s provisions will take effect 18 months after its publication in the Italian Official Journal (Gazzetta Ufficiale) occurred last 14 February 2019.
The following main innovations are introduced by the Code (regarding both Italian joint stock companies (Società per Azioni) and limited liability companies (Società a responsabilità Limitata):
(1) Composition with Creditors (Concordato Preventivo):
a. Approval: the composition’s plan is approved if voted by the creditors representing the majority of the claims admitted to vote and the majority of classes. The court must assess the economic feasibility of the plan, in addition to its compliance to the formalities set forth by current the bankruptcy law.
b. Alternative proposals: one or more creditors holding at least 10% of the overall claims are now entitled to submit an alternative proposal. Such proposal cannot be submitted if the debtor’s proposal provides for the payment of at least (i) 30% of unsecured creditors; or (ii) 20% of the unsecured creditors, if the debtor has implemented any early warning mechanisms provided by the Code.
c. The Code did not introduce a maximum duration of the composition with creditors. However, it should be however noted that any protective measure of the debtor set forth in the Code cannot exceed 12 months, and if the composition procedure is with going concern, the Code clarifies that any extension for payment of secured and priority creditors cannot exceed two years.
(2) Debt Restructuring Agreements (accordi di ristrutturazione dei debiti): Under the current legislation, a debt restructuring agreement is entered into between the debtor and creditors representing at least 60% of all claims. The Code adds the option of a Debt Restructuring Agreement with at least 30% of the overall claims, provided that the debtor does not request (i) an extension for the payment of creditors not adhering to such Agreement and (ii) the implementation of temporary creditors’ protective measures.
(3) Agreements with non-financial Creditors: the Code now allows the debtor to enter into an agreement with non-financial creditors (i.e. creditors which are not banks or financial intermediaries) in order to regulate the relationship with them during the crisis. Terms of such agreements may cover dissenting creditors of the same class, as long as (i) they have been duly informed and invited to participate to the negotiation process, (ii) the claims of the agreeing creditors represent at least 75% of the claims of their specific class, and (iii) it is likely that the dissenting creditors of the same class will be repaid in a manner no less satisfactory than they would be through a liquidation procedure.
(4) Crisis of Group Companies: A unified procedure for all companies of the same group is provided by the Code with goal of simplifying and increasing efficiency of the group’s crisis.
(5) Aided Crisis Composition of Crisis: an out-of-court procedure may be activated by the distressed company and will be handled by a special body to be established within the local Chamber of Commerce. The Code provides several rules regarding such procedure, and specifically, the exchange of information between such special body and certain other entities that may be involved in the crisis (such as statutory or external auditors, Italian Tax Authority (Agenzia delle Entrate), Italian Social Insurance Agency (Istituto Nazionale della Previdenza Sociale), and its duration (i.e. a three-month term, extendable for an additional three-month term in the event of positive negotiation progresses).
(6) Early Warning Mechanisms: several early warning mechanisms aimed to efficiently handle a financial distress are established by the Code. One of the most important is the provision that mandates debtor’s statutory or external auditors to inform company’s directors when a symptom of the crisis has occurred, as well as the Italian Tax Authority and the Italian Social Insurance Agency in the event a company fails to pay taxes or social security contributions for an amount exceeding the thresholds provided set forth in the Code. Also, some crisis responsiveness incentives are provided: (i) a reduction of the fiscal sanctions and tax debt interests accrued during the procedure; (ii) longer term extension for the filing for composition with creditors or any debt restructuring agreement; and (iii) the exclusion or reduction of criminal sanctions for certain bankruptcy crimes (if any).
Compliments of AEM Carnelutti, a member of the EACCNY