Contribution by Giampaolo Provaggi – Certified Public Accountant in Milan and Genoa – Founding Partner of Gemma Provaggi De André.

The article was published in IPSOA Quotidiano.

The new institute of the simplified composition agreement for asset liquidation, governed by Legislative Decree No. 118 of 2021, promotes the achievement of enterprise liquidation results in a faster and less costly manner compared to bankruptcy. Indeed, a simplified procedure is provided that does not include either the “filter” phase of admission or the creditor voting phase. Another significant element is the absence of the minimum satisfaction percentage of 20% of unsecured creditors, as provided by the Bankruptcy Law, replaced by the condition that the proposal does not prejudice creditors compared to the alternative of bankruptcy liquidation, while ensuring utility to each creditor. With regard to tax relations, no obligation or possibility has been provided for the simplified composition agreement to access the tax settlement institute.

Legislative Decree No. 118/2021, containing urgent measures regarding enterprise crisis and business recovery, introduces the institute of the simplified composition agreement for asset liquidation as a possible outcome and, in any case, exclusively activable as an exit from the new out-of-court procedure of negotiated composition for resolving enterprise crisis.

Conditions for Activating the Simplified Composition Agreement

This provision has as its prerequisite that the expert referred to in Articles 2 et seq. of Legislative Decree No. 118/2021, who assists the entrepreneur in seeking a solution to resolve problems of asset or economic-financial imbalance, declares in their final report that negotiations have not been successful and that the different solutions provided by Article 11, paragraphs 1 and 2, are not practicable.

Access to this option is not possible, however, in the event that the expert has determined, pursuant to Article 5, paragraph 5 of Legislative Decree No. 118/2021, that concrete recovery prospects do not exist, resulting in the dismissal of the negotiated composition request.

Simplified Composition Agreement Proposal

From an operational standpoint, the simplified composition agreement proposal may be submitted by the commercial or agricultural entrepreneur of any size (and therefore also below the thresholds referred to in Article 1 of the Bankruptcy Law, as stated in Article 17 of Legislative Decree No. 118/2021), even if belonging to a group pursuant to Article 13, paragraph 10, to the competent court based on the main seat of the enterprise.

The proposal must be submitted within 60 days following the communication of the expert’s final report, accompanied by a liquidation plan and the documents indicated by Article 161, paragraph 2, letters a), b), c) and d) of the Bankruptcy Law.

It should be noted that Legislative Decree No. 118/2021 does not provide that the proposal be accompanied by the plan certified by the professional referred to in Article 161, paragraph 2, letter e) of the Bankruptcy Law.

From the publication, by the court clerk (who also communicates it to the public prosecutor), of the petition for approval of the simplified composition agreement proposal, the typical effects of the preventive composition agreement are produced, as referred to in Articles 111, 167, 168 and 169 of the Bankruptcy Law.

Characteristics of the Simplified Composition Agreement

The simplified composition agreement does not provide for:

Another significant element is the absence of the minimum satisfaction percentage of 20% of unsecured creditors, as instead provided by Article 160, paragraph 4 of the Bankruptcy Law, replaced by the condition that the proposal does not cause “… prejudice to creditors compared to the alternative of bankruptcy liquidation and in any case assur(es) utility to each creditor”.

It is evident how these simplifications favor the possible achievement of enterprise liquidation results in a faster manner (and therefore with a company still “alive”) and less costly compared to bankruptcy.

Creditors (and any interested party) may object to the procedure by appearing within the peremptory term of 10 days before the approval hearing, just as the parties are permitted to file an appeal to the court of appeal against the approval decree.

Court Activities

Regarding court activities, the court conducts an evaluation:

• – on the formality of the proposal and acquires the final report of the expert and a further opinion rendered by the same (for which the timing in which it must be rendered and the subject that determines it are not clear);
• – on the presumed results of liquidation (and therefore, it would seem logical, on the feasibility of the plan and on its truthfulness);
• – on the guarantees offered.

Contents of the Decree of Admission to the Procedure

The time periods that the decree must provide for the various activities are not immediately identifiable, considering that the same:

• – provides for the appointment of the auxiliary, who has 3 days to accept and who must proceed with the drafting of the opinion, as discussed below, within a deadline whose expiration must be determined by the text;
• – sets the date of the approval hearing, with respect to which communication to creditors must occur at least 30 days before, plus the time necessary for the opinion mentioned above.

The auxiliary must draft an opinion, pursuant to Article 18, paragraph 4 of Legislative Decree No. 118/2021 which, presumably, although the content appears plausible to be specified at appointment, could contain a judgment on the feasibility of the proposal and of the liquidation plan (for purposes of interest it appears inevitable that the truthfulness of the data is also evaluated), although, conversely, the Report specifies that the appointment of the judicial commissioner is not provided for to control the truthfulness of accounting data and the preliminary verifications to the judgment of admissibility and to the report referred to in Article 172 of the Bankruptcy Law”.

The risk is clear that, if this is the content, the opinion of the auxiliary may differ from that of the expert on the same subject; which would originate a problem, even if the two documents are rendered in different phases. In this regard, it should be remembered that creditors must receive the opinion of the auxiliary, but not that of the expert.

The court’s decree may, also considering the wording of Article 18, paragraph 5 of Legislative Decree No. 118/2021, assign to the auxiliary the task of evaluating the absence of prejudice to the creditor class of the composition agreement solution in place of judicial liquidation and the respect of priority causes. Furthermore, the same person must report to the court if they identify any of the conduct referred to in Article 173 of the Bankruptcy Law and supervise the performance of the composition agreement once approved, pursuant to Article 185 of the Bankruptcy Law.

Duties of the Debtor

The debtor has the duty to communicate to creditors:

• – the proposal;
• – the opinion of the auxiliary;
• – the final report of the expert (in this regard, the phrase in paragraph 4 of Article 18 is not immediately clear: “specifying where the data for its evaluation can be found” – (i.e., of the proposal)).

Appointment of the Judicial Liquidator and Creditors’ Committee

If the court, at the conclusion of the specific hearing, having carried out the verifications incumbent upon it, pursuant to paragraph 5 of Article 18, with a reasoned decree immediately enforceable, approves the simplified composition agreement, it appoints, pursuant to Article 19 of Legislative Decree No. 118/2021, the judicial liquidator and, applying Article 182 of the Bankruptcy Law, a creditors’ committee.

The provision (Article 19, paragraph 2) also addresses the case in which the liquidation plan already considers an offer to purchase the enterprise, one or more branches or specific assets, from a specific party. In this case, the liquidator (if post-approval) or the auxiliary (if pre-approval; in this case with court authorization), having verified the absence of better solutions on the market, may proceed with the transfer. It seems plausible that the person responsible for the transfer, although no reference to Article 163 bis of the Bankruptcy Law is provided, may refer to such provision.

In substantive terms, it should be emphasized that, for purposes of the simplified composition agreement, credits originating in the negotiated composition phase appear to be subject to ordinary insolvency rules, with the exception of those authorized pursuant to Article 10 of Legislative Decree No. 118/2021, as established by the subsequent Article 12 and the compensation of the expert, pursuant to Article 16, paragraph 11, which will be pre-deductible pursuant to Article 111 of the Bankruptcy Law.

Tax Relations: Aspects to Clarify

With regard to tax relations, it should be specified that no obligation or possibility has been provided for the simplified composition agreement to access the tax settlement institute, from which the entrepreneur will be free to identify the relative offer, always in compliance with priority causes. From this point of view, it should be clarified whether or not the relative priority rule applies.

Another aspect that the provision does not clarify is the applicability or not to this new instrument
of Article 88, paragraph 4-ter of the TUIR, Article 101, paragraph 5 of the TUIR and, for VAT, Article 26 of Presidential Decree No. 633/1972, considering that although it is a composition agreement it is not governed by Royal Decree No. 267/1942, it is not defined as an insolvency procedure and Article 14 of Legislative Decree No. 118/2021 limits its effects to negotiated composition.