Focus Abroad: Latest Developments in Italian Bankruptcy Law

After a number of unsuccessful attempts, Italy managed to enact comprehensive reforms of its bankruptcy laws in 2005 and 2006. Among other things, the new legislation: (a) redefined the basic focus of bankruptcy proceedings toward satisfaction of creditor claims and away from penalizing debtors for their inability to pay their debts; (b) expanded the role and scope of creditors’ committees; (c) allowed for the continuation of a debtor’s business operations during a bankruptcy proceeding; (d) introduced the concept of a discharge from indebtedness for individual debtors; and (e) simplified the procedures for liquidating a debtor’s assets and distributing the proceeds among creditors.

These enactments were complemented on September 12, 2007, by the Italian government’s approval of Legislative Decree No. 169 (the "Corrective Decree"). Effective January 1, 2008, the Corrective Decree further amended Italy’s bankruptcy laws to provide for more effective and efficient procedures governing the liquidation and/or reorganization of distressed companies. Notably, the Corrective Decree introduced more flexible pre-insolvency procedures, including the possibility for arrangements between debtors and creditors similar in substance to "pre-packaged" reorganizations under U.S. bankruptcy law.

Prominent among the pre-insolvency reorganization procedures that were amended, simplified, or clarified by the Corrective Decree are the following:

Creditor Compositions

The rules and procedures governing creditor compositions were significantly reformed by the 2005–06 amendments. As part of a creditor composition, the debtor company may propose: (1) debt restructuring and satisfaction of creditor claims by any means, including asset transfers, assumption of liabilities, or other transactions; (2) a transfer of some or all of the company’s assets to an assuntore, or contractual assignee; (3) classification of creditors into separate classes differentiated by legal status or priority; or (4) different treatment between and among creditors of different classes.

Under the 2005–06 reforms, a composition with creditors may be approved only if creditors representing the majority by value of all "admitted" claims vote in favor of the composition. The list of "admitted" claims is compiled by a judicial officer based on the company’s financial records. When more than a single class of creditors exists, a majority of each class by value must vote to accept the composition. Even so, the court acts as the final arbiter of any proposed composition and retains the power to withhold approval of a fully consensual composition. In addition, the court may approve a composition despite the existence of one or more dissenting classes, so long as the composition satisfies certain statutory requirements similar in substance to the chapter 11 "cram-down" standards contained in the U.S. Bankruptcy Code.

The Corrective Decree implemented a number of important changes to these creditor composition rules:

  • In a significant departure from previous practice, secured creditor claims need not necessarily be paid in full under certain circumstances.
  • Cram-down of dissenting classes of creditors under the conditions specified in the legislation is no longer within the insolvency court’s discretion, but automatic.
  • A proposed composition involving several classes of creditors will be deemed approved by creditors despite the absence of unanimous class approval so long as a majority of all classes by value votes to accept it.


Debt-Restructuring Agreements

Under Italian law, a distressed company can seek court authority to implement a debt-restructuring agreement, provided it has been approved by creditors holding at least 60 percent of the company’s liabilities. When petitioning the insolvency court for approval, the debtor is required to file a report certified by an expert that sets forth the terms of the agreement and specifies how the claims of dissenting creditors will be treated.

This procedure is more expedited than a creditor composition and enables the distressed company to avoid the more elaborate voting requirements governing compositions. Should the company subsequently become a debtor in an insolvency proceeding, payments and other transfers or dispositions effectuated as part of the debt restructuring (including liens or security interests) are not subject to avoidance or recovery.

After implementation of the Corrective Decree:

  • Debt-restructuring agreements are binding only on accepting creditors. Dissenting minority creditors are not bound by the agreement.
  • Once a debt-restructuring agreement has been filed with the insolvency court and published in the Register of Companies, the debtor company may benefit from an automatic stay of any enforcement proceedings against its assets for a period of 60 days.
  • A debt-restructuring agreement may include a settlement between the debtor and taxing authorities concerning the debtor’s tax liabilities.

Thus, with the enactment of the Corrective Decree, distressed Italian companies have greater flexibility in attempting to address their financial problems by means of court-approved creditor compositions or debt-restructuring agreements that, if successful, can ward off commencement of insolvency proceedings.