Creditor rights in Italian bankruptcies are set to
improve next month, with parliament expected to approve the
introduction of local schemes of arrangement and competing
plans in restructuring proceedings.
Local lawyers hope lenders’ positions
could be further strengthened through last-minute
The reforms are part of a suite of government
proposals designed to fine-tune concordato preventivo –
the Chapter 11-style proceedings introduced in 2012
– which many complained went too far in
"Some creditors that were used to calling the shots
saw [the 2012 changes] as a disastrous reform," said Roberto Bonsignore, partner at Cleary Gottlieb Steen
& Hamilton in Milan. "And even some judges saw it as
too drastic, as it took a lot of power away from the
The judiciary’s gripe was that it
further reduced their discretion. Historically, courts have
played an important role in Italian bankruptcies by ensuring
transparency and compliance. A decree in 2005 removed the
morality test imposed on companies looking to file; the 2012
reforms further transformed the merit-based process into one
centred on procedure.
Lenders’ problem with concordato preventivo is their limited ability to
negotiate with distressed borrowers. They can vote down a
debtor’s plan, but if the proposal is not
acceptable, they have few alternatives other than risking the
This is where last month’s decree is
of most benefit. "This reform rebalances power a little, it
empowers creditors to react to an unacceptable plan by the
debtor by filing their own plan," said Bonsignore.
- An Italian government decree to be approved by
parliament before the end next month gives creditors more say
- It allows them to propose competing restructuring
plans as part of concordato preventive proceedings.
Until now they have had to either agree with the
debtor’s plan or risk its
- But local lawyers have criticised the
prerequisite; that the debtor’s plan proposes
payment of less than 40% of unsecured creditor
- The decree’s other changes include a
local version of the UK’s scheme of arrangement,
auction processes for stalking horse bids, and simplified
Lawyers involved in the introduction of concordato
preventivo in 2012 had, at the time, urged the government
to permit creditors to file competing plans, as in US Chapter
11 proceedings. Last month’s decree is intended to
address this, but it still suffers some shortcomings.
"What I think is missing, the one thing I think needs to
change, is the filter for creditors’ competing
plans," said Bonsignore.
Under the decree, a creditor cannot propose a competing plan
if the debtor’s plan contemplates payment of at
least 40% of unsecured creditor claims. According to
Bonsignore, the court should be in charge of deciding whether
allowing creditors to file a competing plan is in the interest
of all creditors and of the procedure, given the specific
"This discretionary filter is not there yet. Instead, the
rules now set forth a rigid threshold to bar competing plans in
specific circumstances. That rigid threshold, I think, should
go," he said.
The one thing I think
needs to change is the filter for
creditors’ competing plans… That
rigid threshold should go
It’s rare for a debtor to propose such a
generous plan. But if they do, it doesn’t
necessarily mean it is fair. Sources note that
it’s possible for this threshold to be removed or
changed as part of the parliamentary vote needed to convert the
decree into law.
Giulia Battaglia, partner at Chiomenti in Milan said creditor plans are a
major innovation in Italian bankruptcy, but queried how certain
aspects would work in practice; especially the need for any
competing plan to be certified by an independent expert.
"It would be very difficult for a third party, which works
outside of the company without having all the necessary
information, to be able to draw up a plan that is really
feasible," she said. This is despite the decree permitting
creditors to request supporting information from the
Beyond concordato preventive changes, the decree
also introduces cramdown proceedings.
This will see Italy join the likes of Spain and Germany in introducing local versions
of UK schemes of arrangement; a restructuring process so
popular that debtors relocate to bring themselves within
English courts’ jurisdiction.
Italy’s cramdown proposal is, essentially,
identical to the UK scheme of arrangement. There are two
notable differences: the process can only be used for
restructures, and it relates only to financial debt.
Given the similarities and relative costs, sources believe
Italian debtors would opt for a local – rather than UK
– scheme of arrangement. Momentum behind local schemes
could help improve the culture and perception of restructurings
While in jurisdictions like the UK and US financial
restructurings are the ordinary course of business, in Italy
the process is synonymous with failure or mismanagement. These
negative connotations are not always fair, and collaborative
processes that improve going-concerns could help remove this
Other concordato preventive changes
On top of creditor restructuring plans, the decree makes a
number of other improvements to concordato preventive
which could greatly enhance foreign lenders’
Today, debtor restructuring plans can be based on a binding
stalking horse offer, similar to a UK pre-pack. But there are
no checks on whether that valuation is accurate.
It’s a flaw many judges have been attune to.
This reform rebalances
power a little, it empowers creditors to react to an
unacceptable plan by the debtor by filing their own
"Under the old law, many courts – including the
Milan court – have requested the debtor to carry out a
competitive procedure, even if they had a binding offer from a
third party to purchase the assets," said Battaglia. The decree
imbeds this practice into law, by requiring any valuation based
on a third-party offer to be validated via a competitive
A related change permits a stalking horse bidder to be
partially indemnified for its costs if it doesn’t
win the auction. Bonsignore said this may seem like a small
point, but in the dynamic of these proceedings it is very
"I have seen US investors willing to make an offer, but when
they realise that, unlike in the US, if they lose they receive
no compensation, they become more reluctant to make the offer,"
he said. "So unless there are exceptional circumstances, people
will not come forward to make an initial bid."
The decree also shortens and simplifies attachment
procedures, and facilitates super senior interim financing
during restructuring proceedings.
The government’s overall goal is to encourage
debtors to propose fair plans, protect creditors and
incentivise lending to distressed but viable companies.
Regardless of how each amendment works at a technical level,
the most significant change could be more holistic.
"The hope is that it will force people to open up and
approach this as they do in other jurisdictions; to sit down
with creditors, negotiate a plan whereby there is no need for a
competing plan as the major creditors have agreed and will vote
in favour, and to resolve things reasonably quickly," said
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