(TMA International Headquarters)
Barely a year after completion of the organic reform of Italy’s bankruptcy
law in July 2006, new and important amendments were introduced in September 2007
and went into full effect as of January 1 of this year.
The amendments and a few novelties provided by legislative
decree 169/2007 had the important advantage over prior modifications of being
able to consider the uncertainties, objections, and proposals that have emerged
from the early practice under the new law. Therefore, far from being a
counter-reform, these amendments can be regarded as a “tune-up” of the prior
changes.
Some have criticized reforming an area as important as
commercial law in “installments,” especially in light of the limited
opportunities for debate on the new law within Parliament. However, several
notable commentators have expressed substantially positive opinions on the
resulting framework.
Restructuring practitioners, banking executives, and
entrepreneurs widely understood that the preceding pre-war regime — and indeed
the matching bankruptcy practice — required substantial modernization. Special
regimes for “large” and “very large” enterprises already had provided some
innovations — the so called Prodi-bis Law and Marzano Law [1] — and effectively
served as forerunners of legal frameworks favoring restructurings rather than
liquidations. However, newer tools were needed for the larger population of
Italian distressed enterprises that were salvageable.
With this in mind, the “debt restructuring agreement” [2] procedure under the
new law now includes a stay period of 60 days designed to allow debtors to
better negotiate with creditors. There is evidence that this procedure,
introduced in 2005, had little practical application until the most recent
modifications. With the addition of the 60-day stay, that law will be better
positioned for use in situations for which an essentially out-of-court [3]
agreement with financial creditors is sought, but in which grounds remain for
individual creditors to consider unilateral acts.
Similarly, the newly introduced option to propose plans under
the “preventive scheme of arrangement” [4] that pay secured creditors less than
in full, albeit under specific circumstances and tests, allows more resources to
be directed to unsecured creditors. Indeed, this procedure can be applied to the
debtor as well if there are insufficient resources to pay secured creditors in
full.
In some instances some deviation from the absolute priority rule
is required to make a restructuring plan acceptable to the majority of creditor
classes. Such deviations are economically justifiable in creating appropriate
incentives to prevent the value destruction that usually occurs in a
liquidation.
Not all companies can or should be saved, of course. In any
event, the liquidation plan to be prepared by the court-appointed receiver now
must comply with a given timeline and must include appropriate details regarding
the approach selected to realize the assets. This approach indirectly helps any
creditor or third party to evaluate and propose alternative solutions that may
entail keeping or restoring part of business operations.
A final element in the new amendments worth mentioning is the
refinement in the role of the creditor committee, which has finally moved away
from the purely consultative status it had under the pre-reform regime. The new
law also reduced the civil and criminal responsibilities of its components,
which previously equaled the very strict standards in force for statutory
auditors. As a result, it was often difficult under the prior regime to form a
representative creditor committee. Indeed, some leading banking groups indicated
to Bankruptcy Courts their general unwillingness to place representatives on
those committees.
It should be noted as well that debtor-supported compensation
for creditor committees also has been introduced. However, these payments are
capped at 10 percent of receiver fees, making the role financially unattractive
to professional advisors unless the creditor is prepared to support their costs
independently.
New Thinking
Thus, Italy’s legal framework finally is moving from “bankruptcy law” to the
“law of corporate reorganizations.” Certainly, legislation cannot be the sole
factor for change and indeed it is often more a reflection of an already
different environment. In Italy an important thrust in finally bringing about
change — discussions of reform started in the 1970s — comes from less visible
but important modifications that have occurred in the financial and business
community. These include:
- The appearance of domestic and foreign investors focused on turnaround
situations
- The combined impact of International Financial Reporting Standards (IFRS)
and Basel II regulations that are helping to show the true cost of
nonperforming loans on banks’ balance sheets
- A change in mentality, in that failed businesses no longer are expelled
from the business community but are considered a source of experience. After
all, many successful entrepreneurs have failures in their backgrounds. The
European Commission’s “fresh start” initiative certainly had an impact in this
regard.
The availability of capital and — even if more scarce —
management for troubled situations is opening opportunities for those able to
overcome the proverbial reluctance of local Italian banks in starting
discussions on specific cases and conducting fact-based negotiations. This is
especially true since the clawback risk has been reduced and confined, and it’s
indeed possible to break the deadlocks that often characterized these
negotiations in the past.
The anticipated growth in these opportunities — fueled in part
by the adverse climate in the financial markets — are key developments for
turnaround practitioners, a profession that until recently was unknown to the
Italian business environment. A turnaround professional’s ability to complement
accounting and law professionals with general management, cash management in
financial distress, and corporate restructuring is instrumental in resolving
many situations, preserving value, and allowing for more rational behaviors to
occur.
In terms of general awareness, Cirio and Parmalat proved to the
public that, even in cases in which fraud severely hindered the chances of
recovery, there may be value in keeping a company operating and proceeding in an
orderly restructuring of claims versus simply liquidating its assets.
Making Inroads
Credentials, price, experience, reputation, and industry presence are the
main criteria in selecting professional advice, and turnaround management is no
exception. However, because turnaround management is an emerging practice in
Italy, price is often a barrier, given that the services are not always
well-understood and objectively compared with alternative outcomes.
As a result, some turnaround management firms base their fees on
achieving certain tangible results, such as debt renegotiation in a financial
restructuring, cash release in a working capital reduction program, or
shareholder wealth restored in certain situations.
With the aim of making the approaches, tools, and culture of
corporate renewal more widely known in Italy, a number of professionals
currently are promoting the formation of a local TMA chapter. The information to
be provided by TMA Italy through its members should be a factor in improving
overall market efficiency, more clearly segmenting demand and offerings of
services.
Certainly, some cultural barriers remain to be overcome. But
with the latest changes in Italy’s bankruptcy law, it’s now up to practitioners,
bankruptcy judges, entrepreneurs, banks, and other specialized investors to
change the outcome of many situations and achieve better results for key
stakeholders.
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[1] Respectively regulating, among others, the Cirio and
Parmalat cases, both procedures set minimum size requirements that, considered
with regard to average size of Italian companies, restrict significantly their
applicability.
[2] “Accordo di ristrutturazione dei debiti,
” Section 182bis of the Royal Decree 267/1942.
[3] The agreement is subject to certain formalities,
including publication on the Company House register
[4] “ Concordato Preventivo,
” Section 160 of the R.D. 267/1942.