The negotiated composition: a new restructuring tool for Italian entrepreneurs

This tool is the new negotiated composition proceeding (composizione negoziata della crisi) (the Negotiated Composition), provided by Law Decree No. 118 of 24 August 2021, as converted into law pursuant to Law No. 147 of 21 October 2021 (Decree 118/2021).

Decree 118/2021 is intended to implement (at least in part) the principles set out in the Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks. Notably, one of the main goals pursued by the Directive is the introduction of national tools to enable an effective and early restructuring, thus avoiding the insolvency and winding-up of viable enterprises, with the ultimate goal of minimising job losses and losses of value for creditors.

Who can start the Negotiated Composition?

The Negotiated Composition is available to commercial or agricultural businesses (including corporate groups), regardless of size.

When and why may this restructuring tool be used?

The Negotiated Composition is intended to be used, on a voluntary basis, to face situations of economic or financial imbalance at an early stage (i.e. when it is likely that a crisis or insolvency may occur), when, however, the recovery of the business is reasonably achievable. 

The Negotiated Composition is aimed at allowing the entrepreneur to run fair negotiations with the parties with an interest at stake (financial creditors, suppliers, shareholders etc.), thanks to the intervention of the Expert, who is an independent professional with specific expertise in debt restructuring processes. Moreover, the Negotiated Composition allows the distressed entrepreneur to benefit from (i) certain reliefs in terms of the mitigation of management responsibilities (usually emerging during the “twilight zone” preceding formal access to any insolvency proceedings) and (ii) rewarding measures such as a moratorium on recapitalisation obligations and tax benefits. 

How does a distressed entrepreneur commence the Negotiated Composition?

The entrepreneur must file, on an online platform provided by the Companies’ Register, a petition for the appointment of the Expert along with a detailed set of documents aiming at explaining – among other things – the entrepreneur’s current and projected economic and financial situation. 

Is the court involved?

The Negotiated Composition is an out-of-court proceeding that cannot be commenced on the request of third parties (although the board of statutory auditors may urge the board of directors to commence the Negotiated Composition if the relevant conditions are met). The entrepreneur remains in control, since it keeps managing its business, albeit under the Expert’s supervision (notably, in relation to any act exceeding the ordinary course of business). 

The court is involved “on demand” for any of the following:

• confirming the stay (if requested by the entrepreneur) against foreclosure actions on the entrepreneur’s assets to safeguard them during negotiations (so-called protective measures);
• authorising certain acts, namely, sale of business (or branch of business) and granting of super-senior financings; and
• imposing the amendment of the terms and conditions of certain pending contracts (other than employment contracts) when, as a consequence of the Covid-19 pandemic, such contracts pose an excessive burden on the entrepreneur with the effect of mining any possibility to recover the business.

How is the Negotiated Composition carried out?

• The appointed Expert scrutinises the economic and financial situation of the entrepreneur. 
• The Expert – if the business reasonably appears to be recoverable – starts discussions with the interested parties to ascertain on what terms and conditions an agreement can be reached. 
• If the Expert considers that there are no concrete chances of recovery, it dismisses the Negotiated Composition.
• At the end of its appointment, the Expert issues a final report by uploading it on the Companies’ Register (the Final Report).

How long does the Negotiated Composition last?

The Negotiated Composition lasts up to 180 days from the Expert’s appointment and, upon the occurrence of certain conditions, can continue for a further 180 days.

Which are the main effects of the Negotiated Composition on creditors’ rights?

• Creditor duties during negotiations

All parties must collaborate with fairness and in good faith and in a timely manner with the entrepreneur and the Expert, and treat as confidential all matters discussed; requests and proposals made during negotiations must receive timely and reasoned responses. Decree 118/2021 poses a specific duty on banks and financial intermediaries, as well as on their agents or assignees, to participate in negotiations in an active and informed manner.

• Protective measures 

If the entrepreneur files a petition for the application of protective measures against all or part of its creditors, foreclosure actions are stayed from the date of publication of such petition in the Companies’ Register. However, the entrepreneur shall immediately submit the petition to the court, which can confirm, amend or revoke the protective measures. 

Creditors whose rights are affected by the protective measures cannot unilaterally refuse to perform their obligations under the contracts in place with the entrepreneur, nor terminate such contracts, nor anticipate their expiration date, nor amend these in a way that harms the entrepreneur, solely due to missed payments of claims arisen prior to the publication of the petition for application of the protective measures.

• Petitions for bankruptcy

Petitions for declaration of bankruptcy are frozen pending the Negotiated Composition. 

• Contractual amendment powers

During negotiations, the Expert can invite the parties to renegotiate in good faith the conditions of contracts for deferred or periodic performance (other than employment contracts), if, as a consequence of the Covid-19 pandemic, such contracts pose an excessive burden on the entrepreneur with the effect of jeopardising any possibility to recover the business. If the parties do not renegotiate voluntarily, upon the entrepreneur’s request the court can unilaterally amend the conditions of such contracts (if necessary providing for the payment of an indemnity).

How does the Negotiated Composition end?

The Negotiated Composition can end with:

• an agreement with one or more creditors (if the agreement is also signed by the Expert, payments and/or acts carried out, and/or security interest granted, are not subject to claw-back actions and are exempted from the application of certain criminal sanctions); 
• the commencement of one of the restructuring or insolvency proceedings provided under Italian insolvency law; [or]
• the filing of a petition for admission to a brand-new simplified court-supervised pre-bankruptcy composition agreement with liquidation purposes (concordato semplificato per la liquidazione del patrimonio) (the Simplified Composition), if the Expert, in its Final Report, states that negotiations were carried out with fairness and in good faith, that these did not have a positive outcome, and that other options are not feasible. The court sanctions the Simplified Composition when it finds, among other things, that creditors are not treated worse than how they would be treated in the event of a pure insolvent liquidation process of the entrepreneur’s estate. Creditors do not vote on the Simplified Composition but they are notified of the court’s sanctioning decree and are allowed to object to it.