Insolvency Reform a kick start for the Italian Non Performing Loans market and a lifeline for businesses in financial distress

Significant innovations have been introduced in Italy by Law Decree no. 83 of 27 June 2015 (entitled Urgent Measures on Insolvency, Civil and Procedural Matters and the Organization and Functioning of Judicial Commissioners (the "Decree").

Insolvency Reform a kick start for the Italian Non Performing Loans market and a lifeline for businesses in financial distress

The recently enacted provisions are the result of engagement between various institutions and organisations, with the noteworthy contribution of Ernesto Apuzzo, the partner leading the Business Restructuring and Insolvency practice at Hogan Lovells, who participated in the work of the organizing committee coordinated by the Italian Ministry of Economy for devising the several elements of the reform.

What are these new measures aiming to achieve?

The primary aim is to stimulate and sustain domestic supply and demand for Non-Performing Loans (NPLs), a market that has grown significantly over the last few years in many Eurozone countries, with the notable exception of Italy where operators have struggled with staggered tax deductions for debt write-offs and lengthy, inefficient, debt recovery proceedings.

The Decree ushers in new measures for the restructuring of debt, an accelerated programme for tax deductions and streamlined procedures for debt enforcement, with the intention of affording banks and other financial intermediaries the opportunity to write-down debt and improve their solvency margins, in preparation for new financings.

Completing the picture are measures aimed at improving the ability of distressed businesses in Italy to access financing, and limiting the ripple effect of business failure during the prolonged economic downturn.

A kick start for the Italian NPL market

The package of measures aimed at putting the Italian NPL market in a position to compete with its European counterparts combine provisions: 

• introducing a new form of debt restructuring agreement, which may be concluded swiftly with the approval of the majority of financial creditors, rather than their unanimous consent often sought in practice 

• encouraging financial institutions to recognize NPLs on a more timely basis by accelerating the tax deductions into a single fiscal year (instead of the five year period previously available), restoring a level playing-field with competitors elsewhere in Europe 

• improving the transparency and efficiency of bankruptcy proceedings, with the intention of salvaging of otherwise viable businesses which could be destroyed by the length of time currently taken to conclude such. procedures, but also streamlining debt enforcement by creditors.

New form of debt restructuring agreement

Drawing also on the experience of operators in other jurisdictions (such as with Schemes of Arrangement in the United Kingdom), the Decree introduces a new form of debt restructuring agreement for creditor banks and financial intermediaries.  


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Acceleration of tax deductions

The tax deductibility of bad debts has been accelerated for financial institutions from the current five year timetable, thus aligning Italian tax rules to those applicable in other EU countries and removing the competitive disadvantage from which the Italian financial operators have suffered to date.  Accordingly, depreciation and losses arising from bad debts registered in banks and insurance companies' accounts will now be fully deductible for the purposes of both corporate income tax (IRES) and regional tax on productive activities (IRAP) under the accrual principle in the year in which they arise.

While the enhanced right to tax deductions takes effect immediately, the effect is staggered in the first year (fiscal year 2015) with the amount of the deduction limited to 75% of the amounts recorded in the creditor's financial statements with the remaining 25% deductible in equal instalments over the subsequent 10 fiscal years, attenuating the immediate impact, for the Italian Revenue Service (IRS), of the expected significant write-offs by financial institutions this year.


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Greater transparency and efficiency in bankruptcy proceedings

With a view to expediting bankruptcy proceedings and improving transparency, as well as enhancing the accessibility and circulation of information regarding insolvencies, the Decree: 

• establishes for the first time a National Public Registry of Insolvency Practitioners, in which all persons acting as bankruptcy trustees, judicial commissioners or liquidators must be registered 

• introduces provisions to address potential conflicts of interest between the position of judicial commissioner and trustee in bankruptcy 

• imposes deadlines within which the bankruptcy trustee must complete its inventory of the insolvent company's assets and implement the asset liquidation plan, with the real threat of removal for failure to comply 

• removes pending litigation as an obstacle to the payment of distributions to creditors.

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Streamlined debt enforcement 

The Decree aims to accelerate and simplify enforcement processes and encourage the circulation of goods by expediting judicial sales and facilitating access to the relevant information, while at the same time affording reasonable protections to the debtor.  Taken together, these measures should render NPLs more marketable, as recovery prospects (and timelines) improve.


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A financial lifeline for businesses in distress


Admittance to creditor arrangement procedure and interim loans

Several measures have been introduced to enhance the prospects of fresh financing even in the initial phases of creditor arrangement proceedings and to increase the likelihood of successful business restructurings. Indeed, based on experience, in the past banks - taking a highly prudent and conservative view - have generally proved reluctant to grant new financing (or the continued use of existing credit lines) during this initial procedural phase in the absence of a court order to this effect. At the same time, the expert certification that the loan was necessary and urgent, was onerous and unduly time-consuming in a context where business continuity was crucial.

A distressed company will now be able, when presenting a petition for an arrangement with its creditors or proposing a debt restructuring agreement, to request and obtain the Court's authorization for the assumption of new financing – enjoying super priority – provided the loan is essential, and needed urgently, for the carrying on of the company's business.


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Bridge financing claw back exemptions

New measures have been enacted to incentivize bridging loans, which currently do not enjoy any priority, and are at risk of claw back action if the creditor arrangement is declared inadmissible or if the debt restructuring agreement is not successfully certified.

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Introduction of competition in creditor arrangements

Drawing on the US Code Chapter 11 model, the Decree seeks to enhance the role of creditors by encouraging multiple solutions so as to optimize the treatment of creditors and improve the prospects for the injection of fresh funds into distressed companies (encouraging financing by lenders and the intervention of white knight investors to save viable businesses) and ensure a proper appreciation and realization of their assets.  In particular, the scope for creditors to propose alternative arrangements with creditors has been broadened, while judicial commissioners have been given greater leeway to introduce competition into the process by imposing controlled auctions.


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Creditor arrangements and pending pre-petition contracts

Drawing on best practice in creditor arrangement scenarios, the Decree prescribes that a distressed company seeking a creditor arrangement may seek court authorization for a stay or termination of pending pre-petition contracts with third parties even after submitting the petition for creditor arrangement. The new rules also render it mandatory for the court to hear the third party before deciding on the stay or termination of the pending contract.


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