Deed of arrangement (concordato preventivo)
As indicated in the premise herein, the deed of arrangement is the most common reorganization procedure. This proceeding is initiated with a petition.
The comissioner for this proceeding is appointed at the discretion of the judge and is ususally an accountant, or a lawyer, chosen from lists of recognized experts. He has the powers of a public official.
The commissioner's duties are :
1. To draft a schedule of the debtor's assets;
2. To review the schedule of liabilities and of creditors attached to the debtor's petition for a deed of arrangements;
3.To give notice to the creditors of any debtor's proposals and of the date and place set by the court for the creditors' meeting; and,
4. To give a full report on the debtor's petition at the meeting of creditors.
The commissioner has the power to borrow funds from banks or major credit brokers to complete contracts in progress and to continue the debtor's business, if it is in the interests of the creditors to do so. The commissioner is not personally liable for such loans, while the lender has a preferential claim over secured creditors.
Once a deed of arrangement has been accepted by all parties the commissioner's duties become mainly supervisory.
Debtor's Petition and Petition Requirements.
The debtor must file a petition with the court to register a deed of arrangement. This petition must be supported by the following documents:
1. a description of the business together with an explaination of the reasons for its failure.
2. a statement of the assets and liabilities of the debtor;
3. a schedule of the amounts due and a list of thecreditors with their names and addresses;
4. financial statements relating to the debtor's business for previous accounting periods; and,
5. evidence of the existence of assets sufficient to guarantee the repayment of at least 40% of the amounts owed to unsecured creditors and 100% of the amounts due to secured and priviveged creditors.
If the debtor is a partnership the petition must be authorised by an absolute majority of its capital. If the debtor is a corporation, the petition must be accepted by an absolute majority of the votes at an extraordinary meeting of the shareholders. In the case of a limited company, a two-thirds majority of members present at an extraordinary meeting is required.
The court must check that the following conditions are fufilled:
1. the business must have been registered in the Register of Companies for at least two years, or since its incorporation if the business was formed less than two years prior to the petition;
2. the accounting records of the business must have been properly kept;
3. the debtor, or any of its directors if the debtor is a company, was not convicted of a criminal offence in connection with bankruptcy or composition proceedings within the preceeding five years; and,
4. the debtor, or any of its directors if the debtor is a company has not been convicted of a criminal offence in connection with bankruptcy or insolvency.
The debtor must also secure, by way of tangible assets, at least 40% of unsecured claims within six months of the registration of the deed of arrangement. In addition, he must guarantee the payment of accrued interest if payment of the claims is to be postponed for more than six months. Alternatively, he may assign all of his assets to his creditors provided the value of the assets exceeds 40% of the unsecured claims.
In the event that these conditions are not met, the deed of arrangement connot be registered and the court directs that bankruptcy proceedings be initiated.
In addition, within eight days of the date of registration of the deed, the debtor must lodge sufficient funds to cover the total cost of the procedings with the court. Should the debtor fail to do so, the court will issue an order of bankruptcy against him.
Order of the court
If the court decides to allow the registration of a deed of arrangement it will issue an order appointing a deputy judge to supervise the proceeding, as well as a judicial commissioner (commissario giudiziale) to administer the proceedings. The order of the court will also provide that a meeting of the creditors should be convened, which will review aand evaluate the proposed arrangement, and which will direct the debtor to lodge funds sufficient to cover the costs of the proceeding.
End of the Deed of Arrangement Proceeding.
If the creditors reject the deed of arrangement, or if, after registration of the deed, the debtor fails to meet its conditions, the comissioner will report such circumstances to the court which may, as a result, issue an order of bankruptcy.
Moratorium (amministrazione controllata)
This procedure is only available to debtors who, despite having sufficient assets, have liquidity problems which are expected to be resolved with in a relatively short period of time. Indeed, the moritorium has a duration of up to 14 months and applies to debts incurred before the filing of the petition for the initiation of the procedure. In this case, the debtor retains responsibility for the management of his day-to-day activities, but under the supervision of the court.
Initiation of a Moritorium.
In order to obtain a moritorium over his assets, the debtor must file a petition with the court. The petition must be supported by:(i) A statement of the debtor's assets and liabilities; (ii) a schedule of the debtor's creditors, and (iii) a detailed proposal for the order of payment to creditors.
Requirements for Eligibility.
A debtor may apply for a moritorium if he meets the same relevant conditions required for the filing of a deed of arrangement, provided that the court are satisfied that the problems affecting the debtor are only temporary.
Judicial Commissioner and Creditors Meeting.
In the case of a moritorium proceeding, notice must be sent by to all creditors of the repayment proposal. The effects of the court order in such a proceeding are the same as in the case of a deed of arrangement. However, interest continues to accrue on amounts due and must be paid at the end of the proceeding, unless a petition for a deed of arrangement is filed or the bankruptcy of the debtor is declared.
The provisions relating to the appointment of a commissioner are the same as for a deed ofarrangement.
The duties of the commissioner are:
- to draft a schedule of the debtor's assets;
- to review the list of debts and creditors attached to the debtor's petition;
- to notify creditors of the debtor's proposal and of the creditors' meeting scheduled by the court;
- to report at the creditors' meeting on the debtor's financial position;
- to report, every two months, on the debtor's business progress;
- to advise the court in the event that, in his opinion, continuation of the proceeding may be futile, so that the court may declare the debtor in bankruptcy, unless the debtor can submit a compromise proposal;
- to supervise the debtor's business in conjunction with a committee consisting of between three and five creditors appointed by the court.
End of the Moritorium proceeding
The court may end the proceeding at any time upon the commissioner's report that the proceeding is no longer in the creditors' interests. In that event, the debtor may still propose a compromise, however, the court may nevertheless declare him bankrupt.
Should the debtor's financial position improve, he may apply to the court to lift the restrictions of the proceeding, in which case his debts and all accrued interest will immediately fall due and payable. (In addition, the court may declare the debtor bankrupt when, at the end of the moritorium, the debtor cannot pay his debts. However, the moritorium may be extended to two years, provided the debtor can submit an acceptable compromise).
Liquidation (liquidazione coatta amministrativa)
Compulsory liquidation is an administrative procedure controlled by state officials instead of courts. This procedure is used when the debtor's business is deemed to be of public interest, ie: insurance companies, banks, and cooperative, non -profit earning entities which are subject to a number of government controls.
As regards banks, this procedure is compulsory. In the case of other public interest entities, the procedure is an alternative to bankruptcy.
The purpose of this procedure is to achieve recovery of the business through a compromise or an arrangement plan.
The debtor, the directors of a debtor company, or one or more creditors may apply to the court. The court must seek the advice of the government agency responsible for supervising the debtor's enterprise. The judge may initiate the proceeding by declaring the insolvency of the debtor and appointing a liquidator. All legal actions by creditors against the debtor are then stayed, with the exception of those aiming to ascertain the amount of any claim.
The liquidator, in this case a public official, is assisted by a supervisory committee consisting of between two and five experts, who may or may not be creditors, with regard to the debtor's business. In the case of large businesses, up to three liquidators may be appointed. Unlike the other Insolvency proceedings, there is no requirement for a judge or a commissioner to be in charge.
The liquidator must review claims and consider whether a compromise is feasible, if so, he will arrange with the debtor that a plan of repayment should be drafted, to be voted on by the creditors. If a compromise does not appear to be feasible, provisions are made for the disposal of the debtor's assets and the proceeds are distributed amongst the creditors, according to the same order of priority as that of a normal bankruptcy.
Extraordinary Administration (amministrazione straordinaria)
In 1979, a statutory provision was introduced, providing a special procedure to deal with companies of national or regional economic importance. This statute provides for the transfer of activities of a company in financial difficuties, to another company as a going concern, rather than the mere provision for the winding-up of operations.
Eligibility for Extraordinary Liquidation.
To qualify for Extraordinary Liquidation a company must meet the following requirements:
- owe banks and social security institutions an amount greater than its paid-up capital, as shown in its most recent financial statement, and approved by the general meeting of shareholders;
- owe not less than 1 billion lire, but not more than 20 billion lire in the form of concessionary loans.
- be insolvent; that is, after the company has failed to pay three months' wages to its employees.
The court must verify the existence of such circumstances, and, usually after consultation with the Department of Trade and Industry, will issue an order declaring the company insolvent. This order transfers the responsibility for the liquidatiion of the debtor company to the Department of Trade and Industry, and stays all legal actions by creditors in respect of the company.
The court order may cover not only the debtor company, but also any direct, or indirect holding company, subsidiaries, or any affiliated subsidiaries of a common holding company, or any companies which are lenders to, or guarantors of, the debtor company, or any other company from amongst those categories listed above, where the amount involved exceeds one-third of the total value of the debtor's assets.
The court order may apply to such companies if they are insolvent, but they need not satisfy the three "qualifying" conditions already mentioned. Should any of the aforesaid companies have already been declared in bankruptcy, the order of the court will be formally revoked and the affairs of those companies will be handled as part of the administration of the main debtor company.
Special commissioners (commissari straordinari)
The Department of Trade and Industry appoints up to three commissioners to act as public officials, who will supervise the proceeding for a term of less than three years. During this period, the commissioners must devise a plan to restore the company's business. In the event that such recovery is not possible, the company may be sold to a purchaser whom the commissioners deem to be in a position to maintain it as a going concern. Alternatively, the commissioners may propose a plan of composition to be managed according to the procedure set forth for a deed of arrangement to avoid bankruptcy ("concordato preventivo").
ROLE OF DIRECTORS
Liability to the company.
According to the provisions laid down in the Italian Civil Code, the directors must fulfil the duties imposed on them by law and by the articles of association with due diligence. They are liable "in solido" to the company for damages deriving from the non-observance of such duties, except for functions vested solely in the executive committee or in one or more directors.
In all cases, the directors are liable "in solido" if they failed to supervise the general conduct of company affairs or if, being aware of prejudicial acts, they did not do what they could to prevent their performance or to eliminate or reduce their harmful consequences.
Liability for acts or omissions of directors does not extend to a director who, being without fault, has had his dissent entered without delay in the minute book of the meetings and resolutions of the board of directors and has immediately given written notice to the chairman of the board of auditors.
Liability to Company Creditors
Again according to the Italian Civil Code, the directors are liable to company creditors for non-observance of their duties concerning preservation of the company's assets.
The action can be brought by the creditors when company assets prove insufficient for the satisfaction of their claims.
In case of bankruptcy or forced administrative liquidation the action can be brought by the receiver in bankruptcy or by the liquidating commissioner.
A waiver of the action by the company does not prevent the company's creditors from exercising it. A compromise can be attacked only through an action for revocation when the necessary conditions prevail.