Prepared by Cristian Sgaramella, Maria Progida e Alessandra Ghisio
On 30 September 2021, it has been published the Document attached to the Ministry of Justice’s Executive Decree of 28 September 2021 (hereinafter, the “Document“). The Document provides for the practical guidelines for the “ Settlement agreement procedure to solve Business Crisis” procedure (hereinafter, the “Settlement Agreement Procedure”) introduced by Law Decree no. 118 of 24 August 2021 regarding “Urgent measures concerning business crises and business reorganization, as well as further measures on justice“.
The new Settlement Agreement Procedure, aimed at avoiding the effects of the post-pandemic crisis, can be applied starting from 15 November 2021 and can be accessed by commercial and agricultural entrepreneurs registered in the Companies’ Register who are in a situation of economic-financial imbalance for which the recovery of the company is reasonably pursuable.
The application for the appointment of an independent expert to facilitate the negotiations between the entrepreneur, the creditors and any other interested party is submitted to the competent Chamber of Commerce (through a special IT platform).
The Document is composed of five sections that reflect the best practices in the field of Settlement Agreement Procedure in which are defined the operational protocols and contents related to:
- practical test for the evaluation of the reasonable possibility of debt restructuring;
- detailed check-list for the drafting of the recovery plan and the analysis of its consistency;
- protocol for the Settlement Agreement Procedure ure;
- training of experts;
- protocols for the operation of the IT platform.
More precisely, the practical test for verifying the reasonable possibility of debt restructuring will be aimed at allowing a preliminary assessment of the complexity of the restructuring process through the analysis of the ratio between the debt to be restructured and the free cash flows that can be used to repay it.
As stated in the Document “The test should not be considered in the same way as the crisis indexes, but it is useful to make clear the difficulty that the entrepreneur will have to face and how much the recovery will depend on the ability to adopt discontinuity initiatives and on the strength of them“.
The test can be carried out on the web, even without having a ready-made business plan, but only by examining the debt and current economic performance data, excluding non-recurring events such as the effects of the lockdown, the consequential extraordinary contributions, or non-recurring losses.
If, from at least the second year onwards, the company be prospectively in financial balance with annual cash flows exceeding zero and expected to be replicated over time, the degree of difficulty of the restructuring process will be determined by the result of the ratio between the debt to be restructured and the annual amount of cash flows to repay the debt (the “Ratio“).
The result of the Ratio will provide an initial rough indication of (i) the number of years to pay off the debt position, (ii) the volume of debt exposures requiring a restructuring procedure, and (iii) the extent of any debt write-offs or conversion into equity.
Depending on the outcome of the Ratio, the following scenarios may arise:
- Ratio below 2: the current performance of the company may be sufficient to identify the turnaround roadmap;
- Ratio above 3: the recovery depends on the effectiveness and outcome of the industrial initiatives to be adopted;
- Ratio above 5-6: the presence of a positive gross operating margin is not sufficient to allow the recovery of the company and it may be necessary to sell the company;
- if the company is in a state of economic imbalance when fully operational, it will be necessary to take initiatives that are not in line with normal business operations (e.g. work on production processes, changes to the business model, sale or closure of company branches, mergers with other companies).
As for the detailed checklist for the drafting of the recovery plan and the analysis of its consistency (the “Check-list“), the Document specifies that the answers to the questions contained therein will constitute the operational indications for the drafting of the plan, but should be understood as “implementation of the best practices for the drafting of business plans and not as absolute principles” since the actual contents of the individual plan will necessarily depend on a number of unavoidable variables, such as the type of company and the activity carried out, the size and complexity of the company, as well as the available information.
In any case, the content of the Check-list should allow the entrepreneur who intends to access the Settlement Agreement Procedure to draw up a reliable recovery plan.
The Check-list will then be used by the expert for the coherence analysis of the plan.
The questions contained in the Check-list are divided into the following macro – topics:
- organization of the company
- accounting situation and current performance;
- identification of intervention strategies to remove the causes of the crisis;
- projection of cash flows;
- debt restructuring;
- specific questions in the case of a group of companies.
Finally, about the protocol for the Settlement Agreement Procedure (the “Protocol“), the Document provides the operational implementation of the regulatory provisions contained in Decree-Law No. 118/2021. Also in this case it is specified that the indications contained therein represent best practices for an agreed composition of the business crisis “to be understood, therefore, as good practices and not as absolute principles“.
As can be seen from the Protocol, the Settlement Agreement Procedure is divided into the following main stages.
- Submission of the application for appointment
When submitting the application, the entrepreneur shall file with the IT platform the following documentation:
- financial statements pertaining to the last three financial years, if not already filed, or, where not applicable, income and VAT returns for the last three tax periods, as well as a statement of assets and liabilities and financial position updated no later than 60 days prior to the submission of the application;
- a clear and synthetic report on the activity currently carried out, including a financial plan for the next 6 months, as well as the industrial measures that the entrepreneur intends to adopt;
- a list of creditors with an indication of the respective claims that have expired and are about to expire, as well as a specification of real and personal security rights;
- a statement on the pending appeals for the declaration of bankruptcy;
- the single certificate of tax debts pursuant to article 364, paragraph 1, of Legislative Decree no. 14 of 12 January 2019;
- the overall debt situation requested to the Agenzia delle Entrate-Riscossione;
- the certificate of contributory debts and insurance premiums pursuant to Article 363, paragraph 1, of Legislative Decree no. 14 of 12 January 2019, or, if not available, the single document of contributory regularity;
- an extract of the information contained in the “Centrale Rischi” managed by the Bank of Italy not earlier than 3 months from the submission of the application.
- Acceptance of the assignment and preliminary verification of the possibility of debt restructuring
Once the expert has accepted the assignment and ascertained his independence, he carries out the preliminary verification of the feasibility of the reorganization process also on the basis of the test available on the web, if necessary also correcting it.
Even if the expert, unlike the entrepreneur, identifies a state of insolvency, this does not necessarily prevent him from initiating the Settlement Agreement Procedure. However, it is necessary that the expert recognizes concrete prospects of recovery that require the opening of negotiations to be considered feasible.
- Analysis of the recovery plan
The next stage of the Settlement Agreement Procedure involves the expert’s analysis of the recovery plan, drawn up by the entrepreneur before or during the Settlement Agreement Procedure, which is subject to a consistency analysis on the basis of the Check-list.
In particular, the expert will examine the overall rationality of the free cash flows to repay the debt, taking into account the indications contained in the Check-list.
The expert will then examine the appropriateness of the industrial strategies and initiatives in the light of the recovery plan and the Check-list.
If the expert considers that the prospects for reorganizing the company, in whatever form, including indirectly, are concrete, he will -together with the entrepreneur – identify the parties with whom negotiations should be undertaken, facilitating them and encouraging the formulation of concrete proposals by the entrepreneur and the parties concerned.
Pending the Settlement Agreement Procedure, the ordinary and extraordinary management of the enterprise remains the responsibility of the entrepreneur.
- End of negotiations
The conclusion of the negotiations may take place after the elapse of 180 days from the acceptance of the expert, which may be extended at the request of all parties, or if the postponement of the final deadline has become necessary for access to protective or precautionary measures, or for other requests for authorization addressed to the Court.
The outcomes of the negotiations are the typical ones provided by the bankruptcy law: the certified reorganization plan, the restructuring or standstill agreement, the arrangement with creditors and the bankruptcy petition itself. In addition to these scenarios, there are three further ones:
- the signing of an agreement with one or more creditors, suitable to ensure business continuity for a period of not less than two years according to the final expert’s report;
- an agreement signed by all parties involved in the negotiation, including the expert, which produces the effects of the certified plan pursuant to Article 67, paragraph 3, letter d), of the Bankruptcy Law, without the need for certification;
- the new institution of the simplified liquidation composition with creditors.
At the end of the negotiations with the creditors, the expert draws up a report to be entered in the IT platform, without the need to inform either the court or the public prosecutor, except in the case of a request for protective or precautionary measures.
For a deeper discussion, please contact:
PwC TLS Avvocati e Commercialisti
PwC TLS Avvocati e Commercialisti