Italian Bankruptcy Law Reform Emphasizes Flexibility For Borrowers, Active Role For Creditors

During the last few years, the section of Royal Decree No. 267 of March 16, 1942 (the "Italian Bankruptcy Law") dedicated to pre-insolvency proceedings has been reformed extensively by the Italian legislature. The purpose of the reform is to provide distressed Italian entities with a more modern and flexible insolvency law system based on private rather than judicial initiative. Notably, certain pre-insolvency proceedings—traditionally intended for business liquidations—have been reshaped and improved to provide distressed entities with the tools to manage entrepreneurial and financial crises quickly, thereby limiting the negative impact that such events have on the market.

As part of this reform process, the Italian Council of Ministers enacted Decree No. 83 of June 27, 2015, which, as amended, became law on August 5, 2015 (the "Decree"). The Decree introduces measures designed to, among other things: (i) give distressed Italian entities greater access to rescue financing; (ii) promote the active participation of creditors in pre-insolvency proceedings (e.g., by giving creditors the ability to propose alternative restructuring plans under certain circumstances); (iii) empower Italian courts to approve asset sales as part of a restructuring plan by means of competitive bidding; and (iv) introduce certain special rules applicable to debt restructuring agreements entered into by distressed entities with obligations principally to banks and/or financial intermediaries.

This Commentary summarizes the main terms of certain innovations introduced by the Decree to the Italian Bankruptcy Law.

New Rules Applicable to Arrangement with Creditors Proceedings

The Decree mandates that any proposal made by the debtor as part of an arrangement with creditors proceeding (concordato preventivo) must provide for the payment of at least 20 percent of the total amount of unsecured claims before the proposal can be submitted to the court for approval. This requirement does not apply to creditor arrangements proposed by entities that will continue to carry on business (concordato con continuità aziendale).

In addition, the debtor's proposal must point out the specific, economically quantifiable benefit that the debtor undertakes to provide to each creditor.

Interim Rescue Financings

The Decree broadens the scope of Italian Bankruptcy Law provisions governing interim rescue financings in the context of debt restructuring agreements (accordi di ristrutturazione dei...