Preventive Agreement (Concordato Preventivo) for restructuring companies in Italy

Continuity Agreement plan proposed by company in crisis to court which appoints judicial commissioner

Preventive Agreement in business continuity (Concordato Preventivo in continuità aziendale)

The Preventive Agreement (Concordato Preventivo) is aimed at achieving the satisfaction of creditors to an extent no less than that achievable through judicial liquidation.

The CCII code regulates two types of Preventive Agreement:

1) Preventive Agreement in business continuity;

2) Preventive Agreement in liquidation.

Preventive Agreement in business continuity exists when the satisfaction of creditors is achieved to an extent, "even if not prevalent", with the proceeds deriving from the continuation - direct or indirect - of the business activity; this is because it is a procedure that also aims to preserve jobs of employees.

A) Direct Continuity occurs when the business continues under the same entrepreneur who submitted the application for Preventive Agreement.

B) Indirect Continuity occurs when the plan provides for the management of the operating company or the resumption of the business by a different person, also by virtue of transfer, lease, usufruct, transfer of the company to one or more companies, even newly established or any other form (art. 84 paragraphs 2 and 3 CCII).

Indirect continuity also includes the cases of:

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- usufruct and lease;

- acquisition of rental fees;

- liquidation of some non-functional asset.

The Mixed Agreement (Concordato Misto) is a continuity Agreement in which the there is the continuity of the business activity and the transfer of assets that are not essential to the operation of the company.

2 Submission of the application for Agreement

The application for Preventive Agreement can be proposed:

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- by the entrepreneur, spontaneously;

- by the entrepreneur, pending a proceeding for the declaration of judicial liquidation initiated by others against him.

Creditors representing at least 10% of the unsecured credits may subsequently submit competing proposals within the proceeding initiated by the company in crisis, up to 30 days before the vote on the Agreement.

Documents:

- appeal;

- documentation required by art. 39 CCII;

- Agreement proposal;

- business plan;

- expert report.

The entrepreneur may file such documentation later, within a period granted by the Court, between 30 and 60 days, extendable by no more than 60 days in the presence of justified reasons.

The main effect of the Preventive Agreement is the "attenuated dispossession" (spossessamento attenuato), whereby:

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- the entrepreneur keeps the management of the business and the administration of its assets;

- under the control of the procedural bodies (appointed by the court).

The court then issues the decree opening the procedure.

The filing of the application does not automatically suspend the creditors' enforcement and precautionary actions on the entrepreneur's assets, if any; to this end, the entrepreneur must make an express request for suspension in the Agreement application; if the suspension is granted by the court, it lasts a maximum of 12 months.

From the moment of filing the application, creditors cannot unilaterally refuse to fulfill contracts, especially essential ones regarding supplies, in the process of being performed or cause their termination, nor anticipate their expiry or modify them to the detriment of the entrepreneur; any agreements to the contrary are ineffective.

The entrepreneur may request the Court to give authorization to sign contracts of financing necessary for the business activity or for the execution of the Agreement itself.

3 Contents of the Continuity Agreement Plan (Contenuti del Piano di Concordato in Continuità)

The Continuity Agreement Plan must contain:

- indication of the entrepreneur and the parties involved;

- description of the economic-financial situation of the company and the position of the workers;

- description of the causes and extent of the state of crisis or insolvency ;

- indication of the intervention strategies;

- liquidation value of the assets;

- the methods of restructuring the debts and satisfying the creditors;

- analytical description of the methods and times for fulfilling the Agreement plan;

- contributions of new finance (if foreseen) and indication of how they will be used;

- compensation and recovery actions that can be taken in the event of the opening of the judicial liquidation procedure;

- initiatives to be adopted in the event of a deviation from the planned objectives;

- parties affected by the plan (especially creditors) with their credits and interests;

- classes into which the interested parties have been divided;

- any parties not affected by the plan;

- methods of informing and consulting workers' representatives;

- effects of the restructuring on employment relationships, their organization or the methods of carrying out services;

- indication of the judicial commissioner appointed by the court.

The continuity agreement plan must also contain:

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- industrial plan with an indication of the effects on the financial plan;

- indication of the time needed to ensure the rebalancing of the financial situation;

- analytical identification of the expected costs and revenues, of the financial requirement and of the related methods of coverage;

- indication about each creditor of the benefit that he will be able to obtain.

4 Stage in Court

With the decree opening the procedure, the Court:

- appoints the delegated judge and the judicial commissioner;

- establishes the initial and final date for the vote of the creditors;

- sets a deadline of no more than 15 days for the deposit of 50% of the procedural costs.

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In the event that the Court does not accept the Preventive Agreement proposal,

- after hearing the entrepreneur,

- after hearing the creditors who have submitted an application for the opening of the judicial liquidation and

- after hearing the public prosecutor,

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declares by decree the inadmissibility of the Preventive Agreement and, if an appeal has been submitted by one of the legitimate parties, orders the opening of the judicial liquidation.

The Court may grant the entrepreneur a deadline of no more than 15 days to make additions to the plan and produce new documents.

After the appointment, the judicial commissioner (commissario giudiziale) communicates:

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- to the creditors the plan and the initial and final date of the vote established by the Court;

- the entrepreneur's proposal;

- the decree opening the procedure.

If such communication is not possible due to the excessive number of creditors, the Court may authorize notification in national or local newspapers.

At least 45 days before the deadline set for the start of the vote, the judicial commissioner files a report on the causes of the insolvency in the registry and transmits it to the public prosecutor.

At least 15 days before the start of the vote, the commissioner illustrates the report and the final proposals of the entrepreneur, and any proposals presented by the creditors, filing them in the registry of the delegated judge. Ten days before the vote, the entrepreneur and creditors may make observations and objections to the judicial commissioner. At least 7 days before, the judicial commissioner files and communicates the final report to the interested parties.

5 Classes of creditors

Creditors are divided into classes; it is possible to provide for differentiated treatment between creditors belonging to different classes, in order to facilitate reaching the majorities necessary for the approval of the Agreement.

Classes of creditors include:

- smaller companies holding unsecured credits deriving from relationships for the supply of goods and services;

- companies with privilege, pledge and mortgage.

6 Liquidation value and value exceeding the liquidation value

The law distinguishes between:

- the liquidation value (the one identifiable in the event of judicial liquidation) and

- the value exceeding the liquidation value (so-called continuity surplus).

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The liquidation value must be distributed in compliance with the order of the pre-emption causes, so that, the lower-ranking classes cannot be satisfied if the higher-ranking classes have not been paid in full.

If the value is exceeding the liquidation value: the lower-ranking classes may be satisfied provided that the higher-ranking classes are guaranteed treatment at least equal to that of the classes of the same rank and higher than that of the lower-ranking classes.

This distinction does not apply to credits claimed by subordinate workers, for whom the rule of absolute priority always applies.

The Preventive Areement is approved if all classes vote in favor. To this end, a majority of the credits admitted to the vote must be reached in each class.

Alternatively, the Agreement is considered approved by the class when at least 2/3 of the credits of the voting creditors have voted in favor, provided that at least 1/2 of the total credits of the same class have voted.

The following are excluded from voting:

- the spouse, the de facto cohabitant or the civil union partner;

- relatives, in-laws up to the fourth degree of the entrepreneur;

- controlling companies, controlled companies and those subject to joint control;

- assignees and successful bidders of credits less than one year prior to the application for Agreement;

- creditors in conflict of interest.

Creditors with privileges, pledges or mortgages are excluded from voting only if the proposal provides for the full satisfaction of their credit, in money, within 180 days of approval of the plan (for workers supported by privileges the term is reduced to 30 days) and provided that their guarantee remains available until the liquidation of the assets.

The judicial commissioner draws up a report with the results of the vote, which must be filed with the registry the day after the closing of the voting operations.

If the Preventive Agreement has been approved by the creditors, the Court sets a hearing in chambers for the appearance of the parties and the judicial commissioner.

Dissenting creditors and any interested party may object within the peremptory term of at least 10 days before the hearing.

In the approval stage, the Court verifies:

- the regularity of the procedure;

- the outcome of the vote;

- the admissibility of the proposal;

- the correct formation of the classes of creditors;

- equal treatment within each class;

- that all classes have voted in favor;

- that the plan contains indications to prevent or overcome insolvency;

- that any new financing is necessary for the implementation of the plan and does not prejudice the creditors.

Upon request of the entrepreneur, the Court may approve the plan with binding effects for all creditors, even if the Agreement has not been approved by all classes of creditors, provided that:

- no creditor receives more than the amount of his credit;

- the proposal is approved by the majority of the classes, of which at least one is made up of creditors holding pre-emptive rights.

Any dissenting creditor has the right to file an objection against the proposal; when this occurs, the Court proceeds with the approval if it considers that the credit can be satisfied by the Agreement to an extent no less than that of judicial liquidation.

The Preventive Agreement is approved by a judgement that can be appealed to the Court of Appeal, which can confirm the approval judgement and award compensation to the claimant for damages suffered.

The approval must occur within 12 months of the submission of the application for access to the procedure.

If the Court, however, does not approve the Preventive Agreement, upon appeal by one of the legitimate parties, it declares the judicial liquidation open, having ascertained the insolvency of the entrepreneur.

Once approved, it becomes enforceable, the judicial commissioner supervises the execution procedure of the Preventive Agreement, who must report to the delegated judge any fact that could prejudice the creditors.

In the event of inertia or delay in completing the acts necessary for the execution, the Court may assign the necessary powers to the judicial commissioner.

If the Preventive Agreement plan provides for an increase in the share capital of the debtor company or other resolutions within the competence of the shareholders' meeting, the appointed judicial administrator is granted the power to call the shareholders' meeting and to participate in it by voting on behalf of the shares or quotas of the majority shareholders.

The Preventive Agreement can be terminated:

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- if the entrepreneur is liquidated by the court, or

- if the state of insolvency occurred after the opening of the Preventive Agreement.

The judicial commissioner is entitled to request the resolution of the Agreement.

In the context of the Preventive Agreement, the tax and social security transaction is applicable, which allows for a reduced payment of tax and social security debts for disability and old age or a deferral of the same.

Local authority taxes (IMU, TARI, TOSAP/COSAP etc.) and credits relating to the recovery of state aid are excluded from the tax transaction.

With the Preventive Agreement plan, the debtor can propose the payment, partial or even deferred, of the aforementioned taxes/contributions.

At the same time as the filing with the court, a copy of the tax returns must be submitted to the competent collection agent, then the collection agent within 30 days sends the debtor a certification attesting the amount of the debt registered in the register, expired or suspended.

The court has the power to approve the Preventive Agreement with tax transaction even in the absence of adhesion by the Revenue Agency or social security or assistance bodies (INPS, INAIL, other bodies).

In the case of a continuity Preventive Agreement, the treatment of tax and contribution credits must not be less than that which they would receive in the case of judicial liquidation, while, in the case of a liquidation Agreement, the treatment of public body creditors must be convenient compared to that which they would receive in the case of judicial liquidation.