Italy: Negotiated Crisis Resolution: Is It Possible To Initiate A Simplified Composition With Creditors If A Debt Restructuring Agreement With Tax Settlement Is Feasible?

The Court of Bergamo recently rejected a proposal for a simplified liquidation composition with creditors submitted by a company following the negotiations carried out within the framework of the negotiated crisis resolution procedure. The Court's well-argued decision helps to clarify the eligibility requirements of the application to access this new instrument.

By decree of September 21^st, 2022, the Court of Bergamo declared inadmissible a proposal for a simplified composition with creditors for the liquidation of the assets submitted by a company pursuant to Article 25-sexies of the Code of Business Crisis and Insolvency in force since July 15^th, 2022, due to the lack of a minimum requirement provided by the law to access the procedure; such requirement concerns, in particular, the fact that the simplified composition with creditors can only be requested as a residual measure if other crisis regulation instruments are unworkable.

The decree is particularly relevant because in its reasoning, the Court of Bergamo retraces the prerequisites of the application for simplified composition with creditors, provides useful indications on the extent of the examination entrusted to the Court in respect of the validity of the application, and clarifies when the application can be admitted, specifying that the instrument invoked is not admittable unless all the other specific instruments provided by the new Code as possible outcomes of the negotiated crisis resolution procedure have been proved as effectively unworkable.

It is worth recalling, first of all, that in the context of a negotiated crisis resolution procedure, pursuant to paragraph 1 of Article 25-sexies of the new Code “when the expert declares in his final report that the negotiations were carried out fairly and in good faith, that they were unsuccessful and that the instruments identified pursuant to Article 23, paragraphs 1 and 2, letter b) are not feasible, the entrepreneur may submit, within 60 days following the communication pursuant to Article 17, paragraph 8 [editor's note: the final report drawn up by the expert at the end of his mandate], a proposal of composition with creditors by sale of assets together with the liquidation plan and the documents indicated in Article 39 […]”. Paragraphs 3 and 4 of the same article further provide that “The court, after assessing the validity of the proposal, having acquired the final report referred to in paragraph 1 and the expert's opinion with specific reference to the likely outcome of the liquidation and the guarantees offered, shall appoint an auxiliary pursuant to Article 68 of the Code of Civil Procedure, assigning the same a term for filing the opinion referred to in paragraph 4 […]”  and that “by the same decree, the Court orders that the proposal, together with the auxiliary's opinion and the final report and the expert's opinion, shall be communicated by the debtor to the creditors indicated in the filed list […] and sets the hearing date for the approval”.

For the purposes hereof, it should be recalled that, as a prerequisite to access the simplified composition with creditors, at the end of the negotiations, the debtor shall give evidence of the fact that the other available instruments were explored and are unworkable: (i) the so-called business continuity agreement (Article 23, para. 1, letter a); (ii) the so-called moratorium agreement (Article 23, para. 1, letter b); (iii) the agreement entered into by and between creditors and entrepreneur and signed by the expert which has the same effects as the agreement in execution of a certified restructuring plan (Art. 23, para. 1, letter c); (iv) the application of approval of a debt restructuring agreement (Art. 23, para. 2, letter b).

As already stated, according to the aforementioned Article 25-sexies of the new Code, the Court, before verifying whether the conditions for approving the proposal for the simplified composition with creditors are met, shall examine the validity of the application, verifying the existence of the minimum legal requirements to access the procedure, such as competence, the timeliness of the application and the existence of the prerequisites described in the provision, including the actual unfeasibility of all the instruments listed above.

In the case submitted to the Court of Bergamo, the plaintiff had timely filed the application before the competent Judge, representing that the indebtedness is related almost entirely to debts owed to the Italian Revenue Agency and social security institutions. It is important to point out that in his final report, the expert had concluded that, although the negotiations had been conducted fairly and in good faith, the instruments identified pursuant to Article 23, para. 1 and 2, letter b) of the Code had not been workable, although it appeared that “the tax and social security settlement or, alternatively, the proposal for a simplified composition with creditors appeared feasible”.

In light of the latter circumstance, the Court of Bergamo held that the proposal for a simplified composition with creditors was not idoneous for passing the scrutiny of rituality because it lacked one of the prerequisites that necessarily have to be met together for the granting of the application.

Contrary to the expert's assertion, it had emerged that not all of the instruments (other than the simplified composition with creditors) listed in Article 23 of the Crisis Code were actually unworkable: it appeared to be possible to apply for approval of a restructuring agreement in the context of which the tax settlement referred to by the same expert in his final report could have found a place.

In their report, in particular, the expert had reported that the Italian Revenue Agency and the social security institutions had merely indicated that they were not able to actively participate in the negotiations and that the filing of a tax settlement proposal was considered “feasible for them”.

The Court, therefore, drew the conclusion that recourse to the simplified composition with creditors could not be considered an “extrema ratio” (as the legislator had conceived it in the drafting of the Code and, in particular, of the rules on the negotiated crisis resolution), given that the instrument set forth in Article 23, para. 2, letter b) of the new Code (under which the debtor could pursue the road to recovery through recourse to a tax settlement) was still applicable.

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.