The Court of Milan recently rejected a request for the extension of the protective measures previously confirmed in favour of a company within a negotiated settlement procedure, with a very well-reasoned ruling that helps to clarify what the debtor's behaviour should be during the settlement and what the role of the appointed expert should be.

By order of 14 May 2022, the Court of Milan, following the hearing for the possible extension of the protective measures of the company's assets previously requested by a company pursuant to Articles 6 and 7 of the new Law Decree. 118/2021 (converted into Law 147/2021) and confirmed by the Court for the maximum term of 120 days, rejected the request for extension for various reasons, mainly concerning the incorrect way in which the entrepreneur had carried out negotiations with creditors, and the emergence of critical issues such as to exclude the instrumentality of the measures to the successful outcome of the negotiations and serious deficiencies in the information provided by the debtor in support of the request for extension.

The order is of particular interest because, in the articulated argumentation, the Court of Milan provides useful indications on the duties of the parties (and of the entrepreneur, in particular) during the negotiations, and on the essential role of the expert in the course of the procedure initiated, specifying to what extent properly conducted negotiations, and adequate information for the benefit of the expert, shall impact on whether or not the extension of the protective measures initially confirmed will be granted, and more generally, on the actual feasibility of the reorganisation envisaged at the beginning by the debtor.

It is useful to recall, preliminarily, that pursuant to article 4 of Decree No. 118 converted into Law No. 147 (art. 16 of the Crisis Code in force as from 15 July 2022), once a negotiated settlement procedure has been entered into, “During negotiations, the parties shall conduct themselves in good faith and fairness” and “The entrepreneur has the duty to represent his situation to the expert, creditors and other interested parties in a complete and transparent manner and manage the assets and the business without unfairly prejudicing the interests of creditors“. Moreover, it is worth mentioning that, in the same article, according to the wording that should have been adopted in the recent legislative decree on the amendments to the Crisis Code that will enter into force on 15 July 2022 (decree approved by the Council of Ministers on 15 June 2022), the expert, in performing the assignment, “shall verify the overall consistency of the information provided by the entrepreneur by asking him and the creditors for any further useful or necessary information“.

For the purposes hereof, with regard to the expert's specific duties, it should also be recalled , that the latter, having communicated his acceptance of the appointment, having obtained information from the supervisory body and the statutory auditor and having heard the entrepreneur, pursuant to Article 5 of Decree No. 118 converted into Law No. 147 (Article 17 of the Crisis Code in force as from 15 July 2022), must “assess the existence of a concrete prospect of reorganisation” and, failing to find any prospect whatsoever, “even at a later time” (it is a verification that, therefore, must be carried out both at the beginning and throughout the settlement), “shall notify the entrepreneur and the secretary of the chamber of commerce who shall order the dismissal” of the negotiated settlement.

In the case submitted to the attention of the Court of Milan, the petitioner had obtained the confirmation of the protective measures because, on the basis of what was initially represented, “an effective, concrete and reasonable pursuit of reorganisation” had been deemed to exist (also by the expert) and had “recognised the instrumentality of the protective measures to the success of the negotiations with the creditors“.

Subsequently, the entrepreneur had asked for the extension of the existing protective measures, representing, in a nutshell, that he was finalising the reorganisation plan, “planning” a business leasing operation and “exploring the possibility of reaching a settlement of the debt positions with the proposal of a partial payment of his creditors“. He even indicated that he had “proposed a settlement” to the banks and that he was “in negotiations to obtain an extension of the repayment plan“.

With regard to the application, the expert and creditors adopted a very strong negative position.

The former expressed an unfavourable opinion on the granting of the extension by the Court, pointing out serious criticalities, first of which was the circumstance of having been totally excluded from the above-mentioned discussions between the entrepreneur and the creditors, and therefore not having been able to verify and share, or participate in, any of the initiatives undertaken independently by the entrepreneur following the opening of the negotiated settlement. He also complained about a severely inadequate flow of information from the entrepreneur, who had belatedly provided few and deficient documents concerning the planned reorganisation, the envisaged extraordinary operation and the modalities of implementation of the desired write-offs. Finally, he expressed a negative opinion on the outcome of the analysis of the coherence of the plan, concluding that the extension of the existing protective measures was essentially useless.

All the creditors expressed doubts and some of them confirmed the entrepreneur's non-involvement of the expert in the conversations that had taken place and emphasised that they considered the petitioner's behaviour dilatory and did not see any concrete prospect of a successful outcome to the negotiations.

Well, in light of the expert's opinion and the creditors' representations, the Court of Milan ultimately rejected the application for the extension of the measures because it found that the entrepreneur had breached his duty of good faith, clarity, fairness and cooperation towards the expert and the creditors, having behaved in a manner contrary to the proper pursuit of the negotiated settlement. It also stigmatised the numerous critical aspects highlighted by the expert regarding the effective pursuit of the company's reorganisation goal. In addition to the inadequacies noted, it also considered the documents provided by the entrepreneur to be late only after the application for extension of the measures. Lastly, it expressed its support for the notion according to which, in the case of an extension (unlike in the case of confirmation of the measures), the debtor's petition should be supported by the generality of the creditors or, in any event, their non-opposition, even by implicit consent, which was not the case in this instance (six creditors had firmly disagreed with the granting of the extension).

In practice, in this case, there was no coherent industrial, financial and reorganisation plan, no real negotiations between the parties, no concrete evidence of the above-mentioned discussions with the party interested in leasing the business and no complete, reliable and up-to-date information enabling the expert to verify the continued existence of the concrete prospect of the company's recovery.

The Court of Milan, in reflecting upon the debtor's initiatives that differed from the rules governing the conduct to be adopted in the settlement procedure, also clearly recalled that this protected course of action, unlike what had occurred in this case, cannot take place without any third-party and impartial control and, above all, without the expert's necessary mediation and facilitation.

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.