Vol 11 (2014) - Issue 5

Article preview

The Preventive Arrangement with Creditors and Its Application and Critical Issues under Italian Bankruptcy Law

A previous article in this publication1 has outlined the steps by which the Italian bankruptcy regime has been progressively amended in order to introduce and develop the most appropriate instruments to facilitate the reorganisation of enterprises in distress, entrusting the choice of the most suitable solution – within the framework provided by the law – to the parties involved.
Among those tools, the Preventive Arrangement, governed by Articles 160 et seq. of Royal Decree No. 267, 16 March 1942 (the 'Bankruptcy Law'), and whose framework has been extensively modified by Law Decree No. 179, 18 October 2012, finally approved by Law No. 221, 17 December 2012 (the 'Development Decree'), has played a leading role.
Such recent modifications were aimed at making the protections granted by insolvency proceedings immediately effective even before the preparation of the plan for the reorganisation of the company, as well as facilitating financial support in connection with the filing of the application for the Preventive Arrangement. Now, the debtor has been given, among other things, the chance to file an application for a so-called 'blank proposal', or 'conditional proposal', without having to simultaneously file the plan containing terms and conditions of the proposed arrangement, which can then be filed at a later stage.
In this way, even in the absence of a plan detailing an outline for the reorganisation, the law has set up additional protection for the company and has put in place from the very beginning certain measures to deal with payments, supply of goods and services and the continuation of business. In fact, it is upon publication of the application in the companies’ register that the debtor may benefit form the moratorium of payments to creditors and therefore well in advance of the issuance of the decree opening the procedure and the approval by the Court of the Preventive Arrangement ('omologazione').
The changes described above have resulted in a huge success of Preventive Arrangements commenced by means of a 'blank proposal', and the requests of this nature have increased since the very early days of its application.
However, the negative outcomes of these proceedings have raised fears that such applications have been frequently filed by some debtors with the sole purpose of delaying the default, rather than – as the legislator intended – setting up an appropriate timeframe for the plan to be submitted to creditors and the Court for approval. Taking into account the (concrete) risk that the pre-arrangement phase is used as a dilatory purpose to the detriment of creditors rather than as an aid for the preservation of the value of a company in distress, the Bankruptcy Law has been further amended by the Law Decree No. 69, 21 June 2013, finally approved by Law No. 98, 9 August 2013 (the 'To Do Decree') and, most recently, by Law Decree No. 145, 23 December 2013, finally approved by Law No. 9, 21 February 2014 (the 'Destination Italy Decree').
The purpose of these reforms has been to possibly strike a better balance between the need to protect the company in distress or insolvency and that of diminishing abuses of the measure.

I. The modifications introduced by the 'To Do Decree'
The first amendment to the regulation of the Preventive Arrangement introduced by the 'To Do Decree' – with specific reference to the pre-arrangement phase – concerns the need for the debtor who files a so-called 'blank proposal' to attach to the petition a list of the creditors with an indication of their respective credits, in addition to the financial statements of the last three years, which were already required (see Article 161, para. 6, of the Bankruptcy Law).