Italy: Declaration Of Bankruptcy Without Prior Termination Of An Unfulfilled Concordato Preventivo

Last Updated: 4 November 2018
Article by Fabio Marelli
Most Read Contributor in Italy, September 2019

The Tribunal of Arezzo (3 May 2018) followed on the precedents of the Court of Cassation (11 December 2017, No. 29632 and 17 July 2017, No. 17703) and confirmed that creditors which were not paid under a concordato proposal are entitled to apply for the declaration of bankruptcy without a need for the concordato to be terminated for breach.

The case

A company in liquidation was in breach of its obligations to pay the creditors under a concordato preventivo proposal, due to the fact that part of the assets had to be devoted to meet costs of environmental remediation pursuant to an order issued by the Provincial Authority of Arezzo.

The Public Prosecutor lodged then the request for the declaration of bankruptcy of the company.

The company objected that the proposal was fulfilled by releasing all its assets to the judicial liquidator for the benefit of the creditors and that no benefit to the creditors could follow from the declaration of bankruptcy.

The issue

Art. 186 IBL provides for a one-year term, from the last due date under the concordato proposal, for asking the Tribunal to terminate the concordato, to which only the creditors are entitled.

Once the term has expired, it is disputed whether the debtor can still be declared bankrupt for unpaid debts subject to the concordato proposal, or this is barred due to the fact that the concordato can no longer be terminated.

The decision of the Tribunal

The Tribunal declared the company bankrupt, recalling recent decisions of the Court of Cassation, as well as decision of the Constitutional Court No. 106/2004 which (with respect to the law then in force) ruled that the rules of the IBL are not contrary to the Constitution, whereby they allow a declaration of bankruptcy for concordato debts, without a need to terminate the concordato for breach.

Commentary

There is no doubt that the termination of the concordato is not required for the declaration of bankruptcy when debts are not subject to the concordato proposal.

As far as concordato debts are concerned, the issue was addressed by the Court of Cassation with two decisions Nos. 17703/2017 and 29632/2017, whereby the Court ruled that provisions barring the termination of the concordato cannot limit more general provisions (such as Articles 6 and 7 IBL) which entitle the creditors and the Public Prosecutor to apply for the declaration of bankruptcy, when the relevant conditions exist, namely the state of insolvency of the debtor.

The Court notes, on the one side, that the debtor can always avoid the declaration of bankruptcy by showing that the performance of the concordato proposal is undergoing and, on the other side, that the creditors will concur in the following bankruptcy liquidation for the concordato amount of their claims, as they failed to timely apply for the termination of the concordato. Case law, therefore, considers as the basis of these rulings that the concordato liquidation has been concluded and there is, therefore, no further chance that the concordato proposal could be fulfilled.

A decision to the contrary was issued by the Tribunal of Pistoia (20 December 2017), on the grounds that the debtor does fulfil its concordato obligation (when it provides for the assignment of all its assets to the creditors) by releasing its estate to the judicial liquidator, so that its concordato debts, based on such a kind of concordato proposal, are finally discharged and a declaration of bankruptcy could only follow to the termination of the concordato, or to a subsequent insolvency due to further debts. This interpretation, however, is not in line with the current rule, according to which any concordato proposal (including those based on the release of all the debtor's assets to the creditors) need to provide for a specific obligation to pay a certain amount within a certain time to the creditors.

The issue which is still unsettled is, instead, whether a second concordato proposal is allowed, pending the term to fulfill a previous one. In such a case, there are certain differences with respect to the issues examined above: (i) the term for termination of the concordato has not expired as yet and, therefore, the concordato discharge is not finally set; (ii) the initiative is taken by the same debtor, who could anticipate that of the creditors for the termination of the concordato and, at the same time, seek a further haircut to be imposed on the concordato creditors. This latter effect cannot be allowed and, therefore, either the first concordato is considered as terminated automatically by the subsequent concordato proposal, or the creditors should be allowed to run the termination proceeding aside the new concordato procedure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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