The economic downturn caused by the pandemic led - through Law Decree no. 118 dated 24 August 2021 (later converted into Law no. 147 dated 21 October 2021) - to a postponement of the entry into force of the Code of corporate crisis to 16 May 2022.
Besides introducing amendments to some articles of the Bankruptcy Law currently in force, the Law Decree also postponed to 31 December 2023 the entry into force of the early warning procedures and assisted crisis resolution; this in order to avoid that the application of these mechanisms in the current downturn may further undermine the management of businesses. The Law Decree also introduced the new procedure of negotiated composition with creditors aimed at distressed companies.
This new procedure, entered into force on 15 November 2021, is a new tool, alternative to the current insolvency proceedings, available to distressed businesses which, in many respects, reflects the contents of EU Directive 2019/1023 on Insolvency dated 20 June 2019, whose provisions will have to be transposed by member States by 17 July 2022.
The procedure aims at bringing forward turnaround solutions, on a shorter timeframe compared to traditional insolvency proceedings, only when there are actual prospects of a direct turnaround or, if not possible, also through the disposal of a functioning business, i.e. as a going concern.
The negotiated composition is a voluntary, reserved and out-of-Court proceeding, which does not prelude to an arrangement with creditors under bankruptcy law and does not imply the divestment of assets and of the entrepreneur’s management, although it is necessarily non detrimental for creditors (in case of a probable insolvency).
It is worth underlining that the advantages for businesses are significant, first of all the envisaged prevention of insolvency and the subsequent access to an insolvency proceeding, through a sort of voluntary mediation managed by an independent expert and aimed at reaching re-negotiation agreements of the debt position with creditors, with the possibility to continue the business activity without being subject to enforcement actions (in this case the Law Decree provides that a dedicated application be filed to the competent Court).
All entrepreneurs, without distinctions (commercial or agricultural, either above or below specific thresholds).
From an operational point of view, the application for a negotiated composition is simple and quick, as per the legislator’s intention to actively prevent and manage corporate crises.
In order to make things easier for businesses, the application can be filed through a national electronic platform (i.e. Unioncamere); it will then be examined by a committee set up at the local Chamber of Commerce where the business is located and, in case of a positive outcome, an expert will be identified (chosen from a list of professionals with expertise in corporate crisis) who, upon acceptance, will work together with the entrepreneur to evaluate the turnaround strategies available and meet the parties involved.
With the appointment of the expert, the entrepreneur is supported by a “facilitator” who will be in charge of facilitating the negotiations between the entrepreneur and its creditors to identify a shared solution to the crisis. The expert does not replace the entrepreneur in the negotiations with creditors, but he offers support and makes his professional expertise and skills available, acting as a consultant to the debtor, as well as a guarantor to third parties.
For the entire duration of the procedure the entrepreneur will remain in charge of the ordinary and extraordinary management of the business and accountable accordingly. In case of extraordinary administration operations and payments not consistent with the turnaround prospects, the entrepreneur is required to inform the expert, who, should he deem them detrimental for the creditors or for the negotiations underway, will have to notify the entrepreneur and the supervisory body in writing.
The engagement is considered as terminated after 180 days from his appointment, should the parties have failed to find a suitable solution to overcome the crisis, with the exception of those cases in which its continuation is functional to the entrepreneur’s referral to the Court to obtain protective measures, to contract preferential claims or to transfer the business.
Should a solution to overcome the crisis be identified, then the parties can enter into an agreement with one or more creditors, i.e. an agreement undersigned by the entrepreneur and the creditors such as the turnaround plan ex art. 67 of Bankruptcy Law (without need to have the plan certified by an independent professional as concerns the truthfulness of corporate data and its feasibility), or ask for the validation of a debt restructuring agreement pursuant to art. 182-bis of Bankruptcy Law.
In case of failure of the negotiated composition, instead, the entrepreneur can access an insolvency proceeding. In particular, Law Decree no. 118/2021 allows entrepreneurs to access a new proceeding called “simplified” voluntary bankruptcy.
In this latter case, the entrepreneur, within 60 days from the negative conclusion of the negotiated composition, can file with the competent Court a proposal of bankruptcy agreement with assignment of assets and relevant liquidation plan. The proceeding introduced by the Law Decree is “simplified” compared to the proceeding regulated under bankruptcy law, since the creditors’ vote is not required, nor a minimum payment of unsecured creditors.
In this case the Court, after assessing the validity of the proceeding, the compliance with preferential rights order and the feasibility of the liquidation plan, approves the liquidation plan, provided that it is not detrimental to the creditors, but rather implies a benefit to each of them.
Besides being a new tool to prevent insolvency, the negotiated composition offers various advantages to both the debtor and possible investors. The debtor will actually be able to benefit from the negotiation leverage and from the expert’s advice, and have (should the procedure not have a positive conclusion) an additional protected timeframe before an insolvency proceeding, whereas the creditors will be able to acquire the business in a simpler way both during the negotiated composition and in case of a “simplified” voluntary bankruptcy.
Considering how this proceeding is structured, we believe that most probably it will be used by small and medium enterprises, whereas larger ones will keep on using the tools currently available under the bankruptcy law.
As mentioned above, the negotiated composition entered into force on 15 November 2021 and the first applications to access the procedure have been filed starting from mid-December 2021. Among the obstacles to its timely application are, on the one hand, the lack of experts (who, in order to qualify as such, need to attend a specific 55-hour course, which in some cases ended only in January 2022) and, on the other hand, the need to better understand how the new procedure works. Therefore, it came into full force only in February 2022.
In conclusion we can say that the efficiency and effectiveness of this new tool will depend on the coordination and attitude of all the subjects involved: entrepreneurs, who will have to pay more attention in advance to face and report corporate crises and creditors, who will have to cooperate with entrepreneurs to find solutions to avoid insolvency. A significant role will also be played by professionals, who will have to correctly advice and guide creditors and debtors as concerns the new procedure.
