Italy: End of the improper insolvency settlements?

In Italy, insolvencies can be settled through composition proceedings between the insolvency debtor and its creditors, the so-called Concordato Preventivo. So far, the assessment of economic feasibility has been the sole responsibility of the creditors concerned. For some years now, however, the courts have been of the opinion that both the legal and the economic and actual feasibility of Concordato Preventivo must be subject to judicial review in order to prevent abuse.

The ruling of the Court of Cassation
By order of 20/04/2018, the Italian Court of Cassation has now confirmed the pre-judicial decisions which, based solely on the assessments of the Court Commissioner, refused the admission of the insolvency settlement and at the same time established the bankruptcy of the common debtor.

In the present case, the debtor had filed an application for approval of the insolvency proceedings, subject to the submission of the concrete plan. After examining the subsequent documents, the Commissioner concluded, however, that serious misjudgements had been made in assessing the available assets and also the total debt, so that the concrete feasibility and in particular the paying off of the unsecured creditors in the planned amount was not at all possible. With this justification, the opening of proceedings was refused and instead the bankruptcy of the debtor was declared.

With this decision, the Court of Cassation has for the first time clearly confirmed the opinion of the courts that the control of the economic and thus the concrete feasibility of the insolvency settlement also falls within the jurisdiction of the courts and is not solely incumbent on the creditors concerned.

Following this decision, the Insolvency Court now has to examine both the legal feasibility in terms of compatibility of the plan with mandatory legal norms and the economic feasibility, in particular to the extent that the paying off of the creditors is at all realistically possible in the planned amount.

The Supreme Court emphasised the importance of the Court Commissioner in the early stages of the proceedings. The Court considers that the Commissioner has a qualified duty to report, in particular, on those circumstances which may lead to a refusal to open proceedings and a corresponding declaration of bankruptcy.

The decision is to be seen in the context of the already initiated reform of Italian Insolvency Law, for which the corresponding legislative implementation acts are now pending. Art. 6 of the Reform Act expressly mentions the examination of economic feasibility as the desired content of the regulation.

As a result, the Court of Cassation anticipated the legislative measure and confirmed it in advance. On the one hand, this removes the existing uncertainties about the judicial power of scrutiny and, on the other hand, by strengthening the role of the court and the Commissioner, prevents the insolvency debtor from submitting unrealistic plans at an early stage for reasons of delay alone.

Authors: Valentina Montanari & Alice Dossi