New law on pre-deductible finance for a company in financial distress and pending the negotiation of restructuring agreements with creditors

New law on pre-deductible finance for a company in financial distress and pending the negotiation of restructuring agreements with creditors

New law provisions on finance and business continuity in the composition with creditors and debt restructuring agreements.
Cash injections to block the bankruptcy of the company, without waiting for the completion of the composition proceedings: this is the rationale of the Law n. 132/2015, which redesigns the key steps of the procedure aimed at resolving the business financial crisis.
In particular, the Government amended Article 182-quinquies of the Italian Bankruptcy Law that now allows a company to receive (with the purpose of safeguarding the assets of the company) pre-deductible financial assistance pending the negotiation of restructuring agreements with creditors, in light of the principle that waiting further for new finance may be too late for the company in financial distress.
The philosophy of this early action is the principle underlying all the changes introduced by the latest developments to the Bankruptcy Law. Below is a short guideline on how to obtain new interim finance for a company in financial distress pending the negotiation of restructuring agreements with creditors.
The proceedings for the composition with creditors may begin, in fact, with the filing of a “preliminary” application to the Tribunal highlighting the need for a (presumably limited) cash injection to support the day to day running of the company, in order allow the company some stability while it prepares its request to the banks for temporary financing; presumably for much larger amounts. In case of delay in receiving such pre-deductible financial assistance, pending the negotiation of the composition with creditors, the ability to restructure the company may be compromised.
With the afore-mentioned change to the first paragraph of Article 182-quinques it now becomes clear that the Tribunal has the power to authorize the company to take on pre-deductible debts in the phase which begins with the filing of the “preliminary” application for the composition with creditors (Article 161, paragraph six , of the Bankruptcy Law) .
This means that a company can receive a cash injection before finalizing the restructuring plan and the proposed composition with its creditors. Indeed, the new available funds should be used in a manner that allows the company enough time to finalize the proposed restructuring plan and the proposed composition with its creditors.
In procedural terms, it is not necessary for the company to file with the Tribunal all the documentation required for the admission to the composition procedure with its creditors; it is expected, however, that the company encloses with the “preliminary” filing a declaration from a chartered accountant highlighting the fact that any new pre-deductible debts shall be used for the best satisfaction of creditors by giving the company time to finalize a restructuring plan and allowing the company to negotiate suitable agreements with its creditors.
The new third paragraph of Article 182-quinquies enables, therefore, the company to request the Tribunal to allow interim measures authorizing the company immediately to take on pre-deductible debts to support the business activity for the period necessary to prepare the application for authorization of the actual interim financing (whose function is instead of supporting business activity during the composition with creditors proceedings and then for greater amounts).
In detail, the debtor may ask the Tribunal to be allowed to urgently take on pre-deductible debts functional to the immediate day to day running of the business and having one of the following expiration dates: (i) the time limit set by the Tribunal for the presentation of the proposed restructuring plan and the documentation required for approval of the composition with its creditors, (ii) the hearing fixed by the Tribunal for the approval of the of the composition with the creditors or (iii) the term set by the Tribunal (in any case, not more than 60 days) for the filing of the restructuring agreement and, therefore, the time in which the Tribunal orders the ban on any new or outstanding executive actions brought forward by the creditors of the company.
In order to obtain the court approval for contracting pre-deductible debts, the company shall (i) declare to the Tribunal that it is not otherwise able to find the necessary financial resources, (ii) indicate specifically the allocation of these funds and (iii) demonstrate the periculum, or that, in the absence of such funding, the company may suffer imminent and irreparable damages.
The Tribunal may decide to hear, with no formalities and despite the time constraints of this procedure, the major creditors of the company. Although limited, therefore, an adversarial hearing is guaranteed, which may give the court more elements in order to consider the request of authorization to take on pre-deductible debts. The final decision on such request is left to the sole responsibility of the Tribunal, which decides in closed session with motivated decree, within 10 days of the filing of the application for authorization.
The request may involve also the maintenance of loans outstanding at the time of filing the application. The judge may grant the authorization, providing the relevant conditions for such authorization, or refuse it if the judge finds that the company’s intent is elusive, abusive or fraudulent.
The Law n. 132/2015 changes, finally, the third paragraph of Article 182-quinques of the Bankruptcy Law. The court can now grant the assignment of claims in addition to a pledge or mortgage as guarantee for the mentioned pre-deductible debts.