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F. Condò; A. Coppola
19 apr 2023Tempo di lettura: 3 min

THE NEW INSOLVENCY CODE: WHAT TO EXPECT

Introduction

On July 15, 2022, the new crisis and insolvency code (Codice della crisi d’impresa e dell’insolvenza) (the “Crisis and Insolvency Code” or the “Code”) came into force, repealing the 1942 Bankruptcy Law. This Code is the culmination of an almost 15-year process that has shifted the focus from bankruptcy to business restructuring in order to make insolvency more modern. The forthcoming paragraphs will provide an overview of the major changes under the Code and how they have worked so far.


Early warnings

Firstly, the Code introduces measures to enable the company to detect a distress situation at an early stage so as to be able to address it as quickly as possible. To prevent a financial crisis or total insolvency, it requires that companies have governance systems that issue signals of pressing problems prior to them becoming crises or insolvencies. There are a number of red flags, such as salaries unpaid for more than 30 days that exceed 50% of the company's total salary. Furthermore, it is the responsibility of certain “qualified creditors”- such as banks and public agencies - to inform the company and its internal auditors of circumstances that may indicate a possible state of distress so the company may take immediate action.


Voluntary negotiated settlement proceedings

Secondly, the new legal framework provides voluntary negotiated settlement proceedings (“composizione negoziata della crisi”) designed to assist a company in addressing its financial difficulties at a very early stage. Summarizing this innovative instrument’s salient points, any entrepreneur can request to his own Chamber of Commerce to remedy situations of “patrimonial or economic-financial imbalance that make a crisis or insolvency probable”. As part of this process, the entrepreneur can ask for the appointment of an “expert,” who will act as the principal protagonist, interfacing with both the instant entrepreneur and creditors of the company. If the outcome is positive, it determines the share of the rebalancing measures with the creditors which could then be formalized using any of the instruments available to the legal system (for example, a certified plan, such as the PRO, or an arrangement with creditors) or by signing real contracts with creditors. Contrarily, if the settlement is not successful, the company may still access traditional, more invasive insolvency tools as, for example, the debt restructuring agreement sanctioned by the insolvency court.


Voluntary creditor arrangements

One of the procedures that has undergone the most changes is undoubtedly the arrangement with creditors (“concordato preventivo”), a judicial tool for resolving a company’s crisis, under the protection of the Court. Under Art. 84 CIC, the primary objective of such a procedure is to “protect the interests of creditors and preserving, as far as possible, jobs”. This provision effectively indicates that the priority of the procedure is the protection of creditors, with the effect that safeguarding employment is now a secondary objective. Furthermore, the new framework clarifies the role of the judge in assessing restructuring plans. In this respect, the Court must verify not only the admissibility of the proposal, but also the feasibility of plan, understood as not being manifestly unsuitable to achieve the proclaimed goals.



Group Insolvency

Last but not least, the Code recognizes that group insolvency exists and provides tools to deal with it more efficiently. For example, in order to obtain debt restructuring deals or voluntary creditor arrangements, group companies may submit a joint application. Similarly, in case of insolvency, group companies may begin insolvency liquidation proceedings jointly.



Slow start for the innovative tools

Last November 16th, a study from Unioncamere[1] showed that the use and impact of these new instruments is somewhat limited. The situation has not changed significantly by today. At this time, the vast majority of applications for voluntary negotiation proceedings are still pending. Additionally, out of the 143 of those concluded, only eight ended up positively, meaning that the business has been restructured with a negotiated agreement. One of the most plausible explanations of this occurrence is that entrepreneurs did not understand fully the new legislation and its potentiality. In fact, they are oftentimes unable to acknowledge the “early warnings” and so they don’t take immediate measures to rectify the issue. Nonetheless, the data collected discounts the problems of starting a new procedure which will have to be further tested in years to come.


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