Italy: European Perspective: Italian Supreme Court Recognizes That Judiciary Has Limited Powers To Review Arrangements With Creditors

To read Business Restructuring Review in full, please click here.

During the last few years, Italian bankruptcy law has been shifting from a traditional "procedural/judicial" model, based on the central role of courts called upon to safeguard the "public interest" involved in bankruptcy by actively directing the procedure and making the most important decisions, to a model that recognizes the private interests of creditors. Under the new paradigm, creditors are conferred with decisional powers, while courts maintain a principally supervisory role.

The turning point was in 2005, when the Italian legislature significantly reformed the fundamental statute on bankruptcy (Royal Decree No. 267 of March 16, 1942; the "Bankruptcy Law"), in an effort to achieve a more modern and flexible insolvency-law system based on private rather than judicial initiative (sometimes referred to as "deregulation" or "privatization" of the bankruptcy law), with creditors as the real engine of the insolvency proceedings. The reform, in particular, brought new life to "agreed" insolvency procedures as an alternative to bankruptcy. Previously, bankruptcy proceedings had been heavily regulated, burdened with strict legal requirements, and subject to the pervasive direction of the courts—and thus were rarely attractive and seldom used in comparison with other legal systems. The existing insolvency-procedure alternative to bankruptcy (an arrangement with creditors, or concordato preventivo) was revised beginning in 2005, and a new procedure (the restructuring agreement, or accordo di ristrutturazione dei debiti) was introduced, all in accordance with the principles of freedom of contract and private initiative.

Courts, however, have been reluctant to cede center stage to creditors. Since the reform, several decisions have been issued by lower courts in which the law has been interpreted to extend the authority of the judiciary to review private actions. The rationale underlying these rulings (i.e., allowing courts to prevent abuse that "strong" creditors may commit) was to a certain extent appropriate. However, the reviewing authority of the judiciary in the wake of the reforms has, in the opinion of many, overstepped the intentions of legislators in enacting the reforms.

This "attitude" of the judiciary, however, may change, thanks to a recent decision of the Italian Supreme Court concerning concordato preventivo procedures. In Industrial Lift Technology (Decision No. 21860 of October 25, 2010), the Supreme Court recognized the predominance of private interests and limited the authority of the judiciary to review arrangements with creditors.

ARRANGEMENTS WITH CREDITORS IN ITALY

To better explain the significance and possible consequences of Industrial Lift Technology, it may be useful to summarize the main features of the Italian concordato preventivo.

The concordato preventivo is one of the insolvency procedures made available to entrepreneurs in a state of financial crisis or insolvency by the Bankruptcy Law. The aim of the procedure is to avoid a declaration of bankruptcy, which may be detrimental to both the debtor and its creditors, by permitting the parties to reach an agreement on the rescue or liquidation of the business, with limited court supervision.

In summary, the procedure is structured as follows:

  • A draft arrangement with creditors is prepared by the debtor. The draft has the form of a "take it or leave it" contractual proposal addressed to creditors. In practice, the terms of the proposal are informally negotiated with, at a minimum, the most important creditors (and may also be amended following requests made by the court or creditors after the original proposal has been filed). Unlike in a U.S. chapter 11 case, where the debtor has exclusivity for a limited time period, only the debtor is entitled to propose an arrangement.
  • The proposed arrangement is based on a "plan" that may provide for any of the following: (i) restructuring of indebtedness and settlement of creditor claims by any means, including the sale of goods, the assumption of debt, or the transfer of stock, bonds, or other financial instruments to creditors; (ii) sale of the business to a third party; (iii) division of creditors with similar legal positions and economic interests into classes; and (iv) different treatment among classes.
  • The feasibility of the arrangement plan is certified in a report by a professional (such as a chartered accountant) enrolled in the auditors' register.
  • A request for admission to the concordato preventivo procedure, accompanied by supporting documentation (including the professional's report on feasibility), is then submitted to the local court of first instance (Tribunale). The court reviews the documentation and, if all the requirements are met, admits the proposed arrangement and declares the procedure open.
  • During the pendency of the procedure, precautionary or enforcement actions of creditors are stayed. The business is still managed by the debtor, but under the supervision of a court-appointed official and the superintendence of a delegated judge.
  • Thereafter, the provisionally approved arrangement is submitted to creditors for approval. At a creditors' meeting, the arrangement is approved with a favorable vote by creditors representing the majority of the claims eligible to vote (and, if divided into classes, with a favorable vote by the majority of the classes). Dissenting creditors may file an objection with the court under limited circumstances.
  • After having certified the voting procedures and ruled on objections by dissenting creditors, the court will approve the arrangement. At this juncture, the arrangement becomes effective and final and therefore binding upon the debtor and all creditors.

Beginning in 2005, the Italian legislature reformed the concordato preventivo with the intention of creating a flexible instrument that the parties involved may adapt to the actual circumstances of the case in order to safeguard their interests. The law, however, has reserved a supervisory role for the courts. In addition, as discussed below, a debate among judges and scholars has been growing during the last few years on the extent and significance of the courts' role.

REVIEWING POWERS OF THE COURTS: INTERPRETATION ISSUES

Since the 2005 reforms, one of the hot topics has been the extent of the reviewing powers of the courts with respect to the merits of a proposed arrangement plan certified by a professional and submitted by the debtor to the Tribunale, together with a request for admission to the concordato preventivo procedure.

The reformed Bankruptcy Law does not expressly grant the Tribunale the power to deny admission to the procedure if the arrangement (notwithstanding being certified by a professional) is deemed unfeasible by the court. The statutory provisions defining the court's reviewing powers, however, are rather obscure and open to different interpretations. Before Industrial Lift Technology, two conflicting interpretations had emerged.

Under the first interpretation, the court would be entitled to review the feasibility—and therefore the merits—of the arrangement plan proposed by the debtor, and to deny admission to the procedure, if the court deemed the plan infeasible. This interpretation has been endorsed by most of the lower courts and by certain commentators. It is premised upon the rationale that the courts are entrusted by law with the role of independent protectors of the "public interests" involved in insolvency procedures and, as such, must ensure that an arrangement plan is not used as an instrument by majority creditors, possibly in collusion with the debtor, to commit abuses against minority creditors, who may receive less in a concordato preventivo than in an "ordinary" bankruptcy.

Under the second interpretation, which is cited with approval by the majority of legal scholars, any evaluation of the feasibility of an arrangement is to be undertaken solely by creditors, and courts should limit their review to formal and procedural aspects. This approach emphasizes that the feasibility of an arrangement is certified by a professional expert who has extensively investigated the affairs of the business, whereas the judge, at that stage of the procedure, lacks necessary knowledge of the background to assess the feasibility of the plan. This approach is also consistent with the spirit of deregulation that inspired the 2005 reforms.

In this context of conflicting approaches, Industrial Lift Technology strongly rejected the first interpretation and embraced the second.

INDUSTRIAL LIFT TECHNOLOGY: FACTS AND FIRST-INSTANCE DECISION

Industrial Lift Technology, an Italian limited liability company, filed an application for admission to a concordato preventivo procedure with the Tribunale of Macerata in May 2009. The arrangement plan, duly certified by a professional, provided for the sale to third parties of the company's assets (including receivables and inventories).

The court rejected the application, having reviewed the plan and the expert report and concluded that the arrangement, as proposed, was not feasible. The ruling was based on the court's view that, notwithstanding the certification of the feasibility of the arrangement plan, the report of the professional had failed to consider issues such as the actual existence of receivables, the degree of difficulty in collecting them, and the difficulty in liquidating the inventories in the market.

INDUSTRIAL LIFT TECHNOLOGY: THE SUPREME COURT'S DECISION

Industrial Lift Technology appealed the decision of the Tribunale directly, as provided by the Bankruptcy Law, to the Corte di Cassazione (Italian Supreme Court), arguing that by performing an assessment of the feasibility and merits of the plan, the Tribunale exceeded its statutory authority insofar as its duties were limited to verifying the correctness of the application.

Called upon for the first time to decide the issue, the Supreme Court reversed the decision of the Tribunale, holding that courts are not allowed to assess the feasibility of an arrangement plan submitted by the debtor and duly certified by a qualified professional.

In its opinion, the Supreme Court emphasized that the legislature in 2005 clearly intended to make the concordato preventivo a contractual and private procedure. The amended law, the Court explained, is clear that any decision concerning the appropriateness of convening a concordato preventivo is reserved for creditors, who express their views by voting for or against a proposed arrangement at the creditors' meeting. Because the law does not allow the court to undertake such a review, it cannot be entitled to evaluate the feasibility of the plan (which in any case is independently certified by a professional) when deciding on admission to the procedure. Should the court be permitted to deny admission to the procedure on the basis of the nonfeasibility of the plan, the Supreme Court explained, creditors would be de facto deprived of the opportunity to decide whether to accept or refuse the debtor's proposal.

INDUSTRIAL LIFT TECHNOLOGY: EXPECTED CONSEQUENCES

Industrial Lift Technology limits the power of the courts to review the contents of arrangements with creditors. Given the Supreme Court precedent (and despite the absence of stare decisis in Italian civil-law jurisprudence), lower courts called upon to decide on applications for concordato preventivo procedures will almost certainly be more careful in deciding whether to extend their review to matters that pertain to the merits of the arrangement. On the basis of Industrial Lift Technology, courts are now expected to be more inclined to limit their scrutiny to a principally formal review of the requirements for the commencement of the procedure, such as verification of the debtor's state of distress and the completeness of the filing documentation.

The decision will likely be welcomed by parties who have more to fear from any pervasive reviewing authority of the courts, such as "strong" creditors with large claims, and by parties more likely to exercise significant influence regarding the terms of a proposed arrangement plan, such as banks.

In addition to making progress toward a solution to the dispute over the extent of court scrutiny regarding a debtor's admission to a concordato preventivo procedure, Industrial Lift Technology is significant because the Supreme Court effectively endorses the philosophy underlying the Bankruptcy Law, which prioritizes private interests and grants a pivotal role in the procedure to the private parties involved. It is difficult to predict whether this decision will be followed by other courts (if not overruled, in a legal system where it is not uncommon to find different solutions to the same issues by different chambers of the Supreme Court). In any case, Industrial Lift Technology has moved the Italian bankruptcy system—at least temporarily—a little closer to "Anglo-Saxon" systems based on the predominance of private initiative.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions