The relationships between the company in negotiated settlement and bank creditors after the corrective decree of 2024
Summary:
- The duties of financial intermediaries in negotiations.
- The continuation or termination of the banking relationship.
1. The duties of financial intermediaries in negotiations
Within the framework of negotiated settlement rules, there are some important provisions regarding the relationships between the troubled company and its bank creditors, recently significantly enhanced following the issuance of the corrective decree no. 136 of September 13, 2024 (published in G.U. on September 27, 2024). This brief article mainly focuses on these changes, while also touching on some more general issues.
Starting with the duties of the parties involved in the negotiations, the first part of Article 16, paragraph 5, continues to establish that banks and financial intermediaries, as well as the agents and assignees of their credits, are required to participate in the negotiations “actively and informed.” This is clearly the explicit reference, specifically addressed to the banking sector, of the duty of good faith and fairness established in general by Article 4, paragraph 1 (now expressly referring also to “any other interested party”), also linked to the duty of fair and prompt cooperation mentioned in paragraph 6 of the same Article 16, which at the same time dictates the obligation for the parties involved in the negotiations to respond to proposals and requests in a timely and reasoned manner.
The purpose of paragraph 5 is notably to discourage an approach by the banking sector characterized by little interest in the fate of the financed company, as would happen in the undesirable case of merely passive attitudes (rather than appropriately proactive) and failure to acquire the information needed to make an informed decision. In other words, banks, at least on par with other creditors, must face the situation with a genuinely dialogical and constructive spirit, free from preconceived notions and prejudices that would improperly affect the clarity of analysis and the subsequent decision-making process: a process that can only be carried out profitably if the debtor simultaneously observes the provisions of Article 16, paragraph 4, aimed primarily at putting both the expert and the interested parties (starting with the bank creditors) in a position to verify the feasibility of the hypothesized recovery, assess the proportionality of the sacrifice required and avoid that the composition is driven by purely dilatory purposes.
Unfortunately, in practice, especially in the initial “running-in” phase of the negotiated settlement institution, there have been “inertial” attitudes by some creditor banks, which have elicited a strong reaction from the judiciary. In particular, an interesting judgement from the Tribunal of Naples[1] highlighted that these obligations stop at a prescriptive level, not being adequately sanctioned, so their non-compliance risks harming the proposing party if creditors invited to negotiations take radically inertial behaviors; and the practical conclusion drawn is that the only remedy to such behavior is the extension of protective measures, intended as an indirect “persuasion” tool to effectively and correctly pursue negotiations.
At the application level, it is mostly observed, following access to the negotiated settlement, a “crystallization” of banking positions: the company continues to operate on active current accounts and, as a rule, can use credit lines until their expiration, while it normally fails to obtain new financing, hence the appropriate creation by the debtor of a “dedicated” and unsecured current account to efficiently manage liquidity generated from ongoing operations.
It can therefore likely be agreed that the novelty of the negotiated settlement has, at the moment, also surprised the banking system, which over time will find a practice compatible with the regulatory elements and especially with the real advantages that business continuity can offer to protect their credit reasons.
It should also be noted the “sensitivity” of some important courts to the needs underlying business recovery, particularly achievable through the use of precautionary measures pursuant to Article 19 CCII. In this regard, it has recently been recognized that the risk (periculum) for the grant of these measures is concretely present in the risk that “the enforcement of MCC guarantees may prejudice the successful outcome of the settlement – therefore the functional link between the requested measures and the successful outcome of the negotiations exists – to the detriment of the possibility of a concrete business recovery: the precautionary request is aimed at preventing that, in the meantime, the company is forced to consider a different and greater “super-priority” before the first degree of MCC, no longer being able to allocate the same financial resources to the proposed satisfaction to the banks themselves[2].”
2. The continuation or termination of the banking relationship
Regarding the crucial aspect of whether to continue the existing contractual relationship between the troubled company and the bank, the latter can decide, under certain conditions, to maintain it despite the emerging difficulties. The corrective decree has clarified that this is not in itself a reason for the financial intermediary’s liability. This formulation of the rule does not exclude – it is understood – that the bank can be held responsible for abusive credit granting if there are conditions of such a “pathology,” but it serves to clarify that the mere continuation of the relationship cannot be – precisely “in itself” – a source of liability.
The principle remains, based on doctrine and jurisprudence, that abusive credit granting is found whenever it has been done with intent or negligence to the benefit of a company that was in serious and objective economic and financial difficulty and appeared to lack concrete prospects of overcoming the crisis.
Returning to Article 16, paragraph 5, it also specifies the situations that do not themselves constitute grounds for suspension or revocation of credit lines previously granted to the company, namely (i) the notice of access to the negotiated settlement and (ii) the involvement of banks in the negotiations.
According to some, this provision is appropriate but insufficient, as there is no obligation imposed on banks to maintain the previously granted credit lines. Such an obligation would likely have been in contrast with prudential supervision rules on financing troubled (if not already insolvent) companies, so the legislator’s choice, although apparently not very “bold,” can reasonably be considered correct.
Regarding the banks’ decision to revoke or suspend credit lines, it must stem from the application of prudential supervision regulations, so it cannot be legitimately adopted outside of this normative framework; the decision taken must then be communicated to the company’s administrative and control bodies, with an explanation of the specific reasons underlying the choice made.
The situations that do not themselves constitute grounds for suspension or revocation of credit lines – the rule adds – also do not in themselves provide a reason to classify the credit differently. A brief digression on so-called deteriorated loans is necessary here, i.e., loans held by banks towards entities unable to fulfill their repayment obligations. In Italy, these loans have long exceeded the remarkable threshold of 170 billion euros overall, due to prolonged recessive phases that have cyclically marked the economy in recent decades (recently aggravated by the COVID-19 pandemic and its “long wave”), as well as the considerable duration of credit recovery procedures.
According to the classifications adopted by the Bank of Italy, harmonized with the provisions of the European Banking Authority (EBA) in light of EU Regulation no. 575/2013 and subsequent guidelines adopted by the same authority at the Union level, deteriorated loans are divided, following an increasing order of severity of the debtors’ conditions, into three subcategories: a) expired and/or overdue exposures, i.e., those past due or exceeding credit limits for over 90 days; b) unlikely to pay (UTP) exposures, for which the bank, based on a series of elements, considers timely fulfillment unlikely without recourse to actions such as enforcement of guarantees; c) non-performing loans (NPL), i.e., loans to insolvent entities or those in substantially equivalent conditions.
With the provision of Article 16, paragraph 5 (introduced by the corrective decree), the law codifies in the insolvency framework the need for banks to carefully evaluate, on a case-by-case basis, whether the situation of the troubled company that has resorted to negotiated settlement allows for its recovery prospectively. The negotiated settlement represents – as reiterated in the Explanatory Report to the decree – “a tool usable even in a pre-crisis situation and only in cases where the full recovery of the economic and patrimonial balance of the business activity is actually possible, with the consequence that the company using it must be evaluated carefully considering these prospects.”
Thus, the newly inserted provision states that during the negotiated settlement, the classification of credit is determined considering what is provided for in the plan presented to creditors and the prudential supervision regulations.
Ultimately, while the rule clarifies that the continuation of the banking relationship during the negotiated settlement is not in itself a source of liability (with understandable “attention” towards credit institutions involved in the recovery process and often essential to its success), it also subordinates the cessation (temporary or permanent) of the relationship to what is provided for in the prudential supervision regulations, thereby increasing the possibility that the bank may be held responsible for abrupt credit termination in the absence of conditions set by such regulations.
The newly introduced provisions should theoretically contribute to balancing the objective of recovering, through the granting of appropriate liquidity, troubled but viable companies with the indispensable rule of sound and prudent management by financial intermediaries, which represents the common thread linking many of the newest provisions, although it is illustrated in paragraph 4 why these provisions are useful but often concretely insufficient for the objective of recovery.
[1] Trib. Napoli Nord, 4 June 2024, in ristrutturazioniaziendali.ilcaso.it.
[2] Trib. Milano, 4 September 2024, in ristrutturazioniaziendali.ilcaso.it.