The European Commission proposal for the directive published on 7 December 2022 (the “Proposed Directive”) seeks to increase harmonisation of insolvency legislation of EU member states, providing common rules on: (a) avoidance actions; (b) the tracing of assets belonging to the insolvency estate; (c) pre-pack proceedings; (d) the duty of directors to submit a request for the opening of insolvency proceedings; (e) simplified winding-up proceedings for microenterprises; (f) creditors’ committees; (g) the drawing-up of a key information factsheet by member states on certain elements of their national law on insolvency proceedings.
Italy had previously implemented most of the measures requested at the EU level with Regulation 2015/848 and Directive 2019/1023 through several structural changes to the insolvency law, which dated back to 1942 and is now completely re-organised on the basis of terminological amendments aimed at “rebranding” insolvency law. This “Code of Crisis and Insolvency” (CCI) actually addresses some of the matters in the Proposed Directive.
The reform has not introduced specific rules on pre-pack sales though, which are supposed to be structured as the sale of the debtor’s business (or part thereof) as a going concern, negotiated before the formal opening of insolvency proceedings and implemented quickly afterwards, although certain provisions under the CCI and past practices already contemplate and allow the use of similar instruments.
According to the Proposed Directive, in the pre-pack proceedings, the debtor’s business or part thereof is sold as a going concern under a contract that is negotiated confidentially prior to the commencement of an insolvency proceeding under the supervision of a monitor appointed by a court and followed by a brief insolvency proceeding in which the pre-negotiated sale is formally authorised and executed.
The pre-pack procedure is structured in two different stages: (i) an out-of-court preparation phase under the supervision of the monitor; and (ii) a court liquidation phase, expressly qualified by the Proposed Directive as an insolvency procedure.
Essentially, it contemplates (i) the organisation of the restructuring of the indebtedness prior to the opening of the procedure; (ii) financial support to the continuity of the debtor’s business; and (iii) the competitive sale of the business to a third parties through a system aimed at ensuring achievement of the best possible market value as envisaged by the Proposed Directive.
The Italian CCI expressly provides for a mechanism that is comparable to pre-pack proceedings and can be applied in the composizione negoziata della crisi impresa (negotiated settlement procedure) and the concordato semplificato (simplified composition with creditor) procedures.
The composizione negoziata is an out-of-court procedure aimed at the early managing of the unbalance situation of a distressed company that will not be dispossessed of its management.
The scope of this procedure is the fast restoration of the company's full business continuity, which may be achieved through the accelerated sale of the business (or specific business units) to be carried out in compliance with specific rules to ensure the fairness and competitiveness of the sale under the supervision of an expert not appointed by the court.
The sale normally occurs under the sanction of the Court (if the company has asked for protective measures such as moratoria, prohibition for suppliers to terminate supply contracts, etc.) since in this case ordinary Italian rules do not apply, which are applicable to the sale of business as a going concern (article 2560 of the Civil Code) and oblige the buyer to succeed in all existing debts attached to the transferred business. It is debated whether such an exemption applies also to tax debts. The sale, however, cannot prejudice the position of the workforce that as a general rule must be maintained within the transferred business.
An important difference compared to the pre-pack procedure set out under the Proposed Directive is that the distressed company may also dispose of its business without the Court’s approval if it has not applied for protective measures. In this case, the exemption from article 2560 of the Civil Code does not apply to the effect that the transferred business will not be free from existing debts.
Similarly to the pre-pack procedure set out under the Proposed Directive, during the composizione negoziata, the debtor is not dispossessed from the business and, as mentioned above, the Court may request protective measures if they are deemed necessary to protect business continuity.
Also, concordato semplificato, which is a liquidation procedure to which the company may resort only if it has firstly applied for composizione negoziata, provides that, if contemplated by the liquidation plan, the Court may authorise the sale of the business or a business unit to a pre-identified buyer, but only after having verified the absence of more favorable options and upon the Court homologation of the concordato semplificato plan.
Of note, some forms of pre-pack procedures were and are still used in insolvency practices even if not expressly regulated. They are, however, used outside the specific cases described above.
For example, it still common that a company in distress leases its business (or a part thereof) to a third party (a competitor or even a big client) in order to preserve its business continuity providing for a purchase option at a pre-determined price. The company may eventually resort to pre-insolvency procedures like a composition with creditors, which include concordato preventivo, a composition with creditors procedure different from the concordato semplificato mentioned above, or the ristrutturazione del debito procedure, which is more often settled out-of-court than a concordato. Or the company may go bankrupt, in which case the lease may survive but the purchase option is normally not enforceable and the relevant purchase price is taken as mere reference for a competitive sale to which any interested buyer can participate (and the option holder has no pre-emption right). In this case, except as otherwise provided for in the bidding rules, the selected bidder will buy the business free of any existing debts that will be paid out under the relevant insolvency or pre-insolvency procedure according to their ranking.
Given the above, the Italian legislator will likely make slight amendments to the current legislation to properly regulate the out-of-court preparation phase. However, it is not foreseeable whether for the sale process to be implemented in the court liquidation phase the amended legislation will opt for a high standard to “ensure that the sale process carried out during the preparation phase is competitive, transparent, fair and meets market standards” or whether the amendment will decide to opt for the public auction in the liquidation phase.
For more information on Italy's Code of Crisis and Insolvency and expended amendments to Italian law, contact your CMS client partner or local CMS experts: Paolo Bonolis, Gianfabio Florio
This article is part of our Law-Now blog series "Harmonisation of Insolvency Laws in the EU", which will provide an overview of the EU Commission's draft directive, including the most important objectives and planned measures. The series itself will deal with the two exciting topics of the draft directive, "pre-pack proceedings" and "insolvency avoidance actions" and show how these topics are being discussed in the Member States and what the situation is like in individual non-Member States.