The previous Italian bankruptcy regime was known for being extremely time consuming (taking on average around 2-3 years) and tended to be court-led and run by the debtors. The new regime looks to tighten up the timeframe to a maximum of 12 months for any process. It also looks to provide more preventative tools for debtors as well as allow creditors to negotiate with companies out of court.

Paolo Manganelli, partner and leader of restructuring, insolvency and special situations at Ashurst said: “The new rules are strongly aimed at providing debtors with a second chance, leaving liquidation as a last resort”.

“In this new regulatory context, the role of the negotiation of the parties and of negotiating autonomy becomes essential in order to deflate disputes and reduce the workload of the courts,” said Stanislao Chimenti, partner in business reorganisation & restructuring at Willkie Farr & Gallagher.

However, it remains a debtor-led process and mostly court-orientated, with restructuring proposals mainly being put forward by the companies. Under certain circumstances creditors who hold at least 10% of the overall claims can file a competing proposal (under Concordato Preventivo). Debtors are also now able to cram down all types of creditors as well as shareholders.

Gleaming reviews

This was a long-overdue change for the bankruptcy act, which dated back to 1942, said Bruno Cova partner and European co-chair restructuring & insolvency at Greenberg Traurig.

“After 70 years finally the country has given itself a new law", said Cova. “The main benefit to me is the consolidation of various stratifications of changes that have occurred over the years to modernise the old bankruptcy act.”

Listen to Cloud9fin’s podcast with Cova here.

Chimenti agreed that this consolidation would make things easier. “We have had several laws dealing with different insolvency scenarios. Now we have a coordinated law which makes it easier to understand,” said Chimenti. “We have more tools which gives flexibility to creditors.”

Ugo Molinari, who founded law firm Molinari Agostinelli concurred, saying: “It simplifies things [and] will encourage creditors to take an active role in restructurings.”

“It’s a good law with a global vision, which we will see the results from in the next 2-3 years,” said Mauritzio Cimetti, another partner in debt restructuring and insolvency at Willkie.

Carlo Bosco, co-head of Capital Solutions at investment firm Muzinich said the new laws enabled the fund to provide rescue financing to firms in distress.

“We launched with Azimut (a fund) on the back of the new laws because they provide an effective framework to do rescue financing,” said Bosco.

On 12 May 2023, Azimut acquired 100% of DOpla, a producer of disposable plates and cups, for €20m. The group’s revenue went from €100m to €40m to €50m due to rising energy costs. Bosco said this transaction was relatively quick due to the new law.

Muzinich did a prededucibile financing (super senior financing) in a Composizione Negoziata (explained below). The company ended up did not delivering on its plan and entered a Concordato Semplificato (simplified composition - explained below) to sell the assets of the “GoodCo”. Muzinich acquired it with a “NewCo” through a credit bid with the super senior financing.

On the downside

Bosco caveated the benefits of the rescue financing saying: “The new law is still to be fully tested and likely will need tinkering in the coming years. More use of it will create a market.”

Matteo Pasculli, restructuring partner at law firm DWF, agreed that the law needs “fine-tuning”. He added that the way the law is written is not very “systematic” and that “it’s not very simple for judges or practitioners to understand why lawmakers say certain things”.

Cova said that despite the consolidation of the laws there is still some fragmentation. “It was a bit of a lost opportunity because the new code in fact doesn’t address all insolvency situations, there are still situations which are governed by different statutes,” he said.

He said this “creates uncertainty among creditors in terms of what rules apply.” He added that “there has been a shift towards giving more power to tribunals (courts), so in that respect it was a a bit of a step back compared to the previous regime, which doesn’t help in some situations.”

Molinari said another downside is that the initiative to start a restructuring process is still limited to the debtor. “There can’t be a creditor-led process. It gives the owner a grip over proceedings even when the equity is out of the money.”

Molinari added that: “What is still missing and differs Italy from the UK & US is there is still no Chapter. 11 equivalent”.

On the contrary, Chimenti said the new law is modelled too much like Chapter. 11. “A criticism would be that it has copied Chp. 11 in an attempt to move to something similar but the organisation of the judiciary is different in Italy so the context needs to be adapted,” he said.

One financial advisor in Milan pointed out that cramming down on dissenting creditors under the new law is still only possible under a court-led process, and not possible out-of-court.

“The reform introduced a lot of changes that are more form than substance,” they said. “In reality the process remains the same.”

Some advisors were also feeling cautious about using the new tools. “The market is not ready for this. It’s a cultural issue for advisors,” said Cimetti. “They are used to the old instruments and it will take time to adjust.”

Manganelli agreed that advisors would need time to get familiar with the changes. As a result, a second financial advisor said that some lawyers may continue to fall back to using the older tools like Concordato (explained further below).

So what’s changed?

Quite a lot!

The main changes are (some notable changes mentioned in Allen & Overy's note). 

• Safeguard obligations: entrepreneurs (individual and collective) are obligated to take suitable measures or set up a structure to detect a state of crisis in a timely manner.
• Procedure for the new out-of-court negotiated settlement procedure (composizione negoziata per la soluzione della crisi d'impresa). This was first introduced in November 2021 but the full process has been laid out in the new code
• Amendments to court or judicial procedures
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• A timeframe set for the total duration of the protective measures (under any process) to a maximum of 12-months
• Rules concerning shareholders in restructuring proceedings and their relationship with management
• Rules allowing corporate groups in crisis or insolvency to be jointly managed

Thoughts on changes?

Going through the key issues one-by-one, we asked the practitioners for their views.

• Safeguarding obligations

Advisors generally saw the safeguarding obligations as a positive thing.

“There are quite strong instruments to draw the attention of the board of directors to the situation of the company.” said Bruno Cova. “This should and hopefully will help the emergence from a situation of crisis in a more accelerated way compared to the past which means there is going to be more time and more flexibility to address the restructuring of a company.”

Luca Jeantet, restructuring partner at Gianni & Origoni, however criticised this saying that “the new law is aimed at preventing a crisis but it’s being used for companies that are insolvent”.

• Wrap it up in 12 months

“One striking novelty is the stay on enforcement can now be no longer than 12 months,” said Manganelli. “This applies even if you change the process type. Therefore, either one manages to complete the restructuring before the 12-month term, or the only way around this is to convince the creditors to not enforce.”

Manganelli clarified that the stay would previously last as long as the process went on for.

Cova pointed out that if this rule existed during the Italian engineering group Maccaferri’s restructuring it would have “failed because the company would have been subject to aggression by creditors so that particular rule is a rule that I believe should be reassessed.”

Molinari agreed that the 12 month duration is “too short”.

“It’s impossible to complete the procedure in 12 months if you have to amend a proposal more than once,” said Molinari. “There could be opposition to sanctioning a plan,” said Molinari. He expects this aspect of the new law will be amended or “right-sized to the appropriate time frame.”

Jeantet however argues that the benefit of a shorter timeframe is that “it obliges the debtor and creditor to know where they want to go”.

Chimenti agrees that the new deadline “helps concentrate peoples’ minds”. In the past it would take 10-15 years, which eventually shortened to 3-5 years, he said.

In a client note Ashurst said that given that a stay is no longer "automatic" and can be revoked at any time by the courts, debtors are prevented from seeking protections without having a credible proposed restructuring plan.

• New Certified Restructuring Plan tool

Jeantet said he likes the new certified restructuring plan because it’s more flexible than the composition of creditors. He explained that the ability to derogate the absolute priority rule means the debtor can distribute the proceeds amongst creditors however they want to.

• Cram-down mechanism

“The rules for the approval of concordato have changed in terms of how creditors are classed and vote,” said Manganelli. He explained that if shareholder rights are affected they would also be required to vote.

“The thresholds [for consent] used to be more than 50% of the credits admitted to vote plus the majority of classes. In each class the thresholds for consent was more than 50% of the relevant credits,” said Manganelli.

“Now, under certain circumstances, it is sufficient that a class in the money has voted in favour to have the homologation of the concordato with the cram-down of all other classes based on the no-worse-off principle. And in each class, to vote in favour of the proposal, it is sufficient that at least half of the relevant credits has voted and two thirds were in favour,” he said.

The new code allows debtors to cram-down on the remaining 25% of non-adhering creditors if at least 75% in value of the claims vote in favour of a restructuring plan. Previously, the law only permitted cram downs on financial creditors but now it can be applied to any kind of creditor as well as shareholders, he clarified.

• SACE loan treatment

Several advisors were discussing the treatment of government backed loans in an insolvency scenario. SACE, an Italian export credit agency, agreed to provide up to €200bn of loan guarantees between April 2020 and 31 December 2021 to help companies impacted by the Covid-19 pandemic, according to note by White & Case.

According to the new law they would receive priority over other debt. It would only rank second to tax and employees’ salaries. Therefore these loans cannot be impaired.

“How this will be managed in a bankruptcy procedure is crucial," said Pasculli.

The first financial advisor said that the inability to impair the loans caused uncertainty. The second financial advisor also cautioned that the Covid loans will be difficult to refinance given they were issued cheaply.

“The treatment of the receivables held by SACE in a pre-emptive agreement with creditors in the event of enforcement of the guarantee granted to the banks also needs to be tested,” said Molinari.

Molinari explained that if the guarantee is enforced on a SACE loan, “SACE may decide to pay the banks in one instalment or according to the original amortisation schedule and the receivables of the banks towards the debtor will still be considered unsecured until fully replaced by SACE”.

Molinari added that an extension of a SACE loan cannot go over eight-years, except in the case of a pre-emptive agreement with creditors.

Italian restructuring tools

There are six key tools available to companies in distress under the new Insolvency Code. The new tools and amendments to existing tools are highlighted in orange (some references made to a note by Dentons):

Out of court:

1. A negotiated settlement under articles 12–25 (composizione negoziata) — a voluntary out-of-court settlement wherein the Chamber of Commerce appoints an independent expert to support the negotiations between the company and its creditors.
2. An agreement in execution of a certified recovery plan under article 56 (accordo in esecuzione di piano attestato di risanamento) — out-of-court instrument wherein the plan for recovery of the business must be in writing and bear a date. An independent professional must certify the truthfulness of the company data and the economic feasibility of the plan.

In Court:

1. A debt restructuring agreement under article 57 (accordo di ristrutturazione dei debiti) — a debt restructuring agreement is reached between a debtor company and creditors representing at least 60% of the company’s total indebtedness. The agreement must also be approved by the court. The Insolvency Code introduced two specific forms of debt restructuring agreement:
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2. A moratorium agreement under article 62 (convenzione di moratoria) — which regulates the relations between the company and its creditors or lenders to avoid recovery initiatives or enforcement actions during negotiations that could jeopardise an already-commenced restructuring process.
3. Certified restructuring plan under article 64 (piano di ristrutturazione soggetto a omologazione) — characterised by increased flexibility, while safeguarding creditors’ interests. It allows the debtor to derogate from the absolute priority rule, which means the general rules on payments/distribution to creditors are not applicable.
4. A composition of debt with creditors under articles 84–120 (concordato preventivo) — a judicial proceeding that involves a judicial intervention by the competent court and allows financially distressed or insolvent companies to propose a plan requiring creditors’ approval. There are two types of concordato:
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White & Case explain in a briefing note that the certified restructuring plan is similar to the composition with creditors (concordato), both from a substantial and a procedural standpoint, but with a few significant differences:

(a) the certified restructuring plan can provide for the satisfaction of creditors through the proceeds generated in implementation of the restructuring plan in derogation of the absolute priority rule and the provisions governing the ranking among receivables

(b) payments of receivables accrued prior to the filing of the petition and transactions outside the ordinary course of business are not subject to the prior authorisation of the court

(c) the creditors must be grouped into “classes” and the proposal must be approved by all classes of creditor

(d) secured receivables owned by employees cannot be rescheduled or written-off and must be repaid in full within 30 days from the date of court "approval (omologazione)"

Hogan Lovells’ note explains that it is also possible to partially derogate from the absolute priority rule under concordato on a going concern basis process. Under a liquidation scenario, the value deriving from asset liquidation must be allocated to creditors according to the absolute priority rule. However the surplus stemming from the business going concern may be allocated to creditors according to the relative priority rule. The applicability of the relative priority rule means that it is sufficient to satisfy the claims included in a class with a treatment at least equal to that of the classes of the same rank and more favourable than that of the classes of a lower rank.

Below is a summary by Clifford Chance of the application of these remedies to different levels of stress a company may be under: