Creditors win under Italian bankruptcy reforms

Author: Danielle Myles | Published: 14 Jul 2015
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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 amendments.

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 debtors’ favour.

"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 courts."

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 company’s liquidation.

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.

KEY TAKEAWAYS

  • An Italian government decree to be approved by parliament before the end next month gives creditors more say in restructurings;
  • 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 bankruptcy;
  • But local lawyers have criticised the prerequisite; that the debtor’s plan proposes payment of less than 40% of unsecured creditor claims;
  • The decree’s other changes include a local version of the UK’s scheme of arrangement, auction processes for stalking horse bids, and simplified attachment procedures.

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 circumstances.

"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 company.

Schemes and stigma

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 in Italy.

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 stigma.

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’ certainty.

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 plan


"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 process.

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 important.

"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 Bonsignore.

See also
2015 Insolvency and corporate reorganisation survey: Italy
Italy’s new pre-insolvency creditor arrangements
Italy’s NPL solution