The bankruptcy of a company in a composition with creditors procedure: the judgment of the Supreme Court of Cassation

Prepared by Cristian Sgaramella, Maria Progida e Alessandra Ghisio

On 14 February 2022, the Supreme Court of Cassation in joint sittings of all divisions (the “Supreme Court”) in the meaning of “Corte di Cassazione a Sezioni Unite”) ruled on the possibility for a company to be declared bankrupt in the event of non-compliance with the approved composition with creditors without the need for a prior declaration of termination of the same (judgement no. 4696). On this point, the Court stated the following statement: “under the Bankruptcy Law as amended by Legislative Decree no. 5 /2006 and Legislative Decree no. 169/2007, a debtor admitted to the approved composition with creditors procedure who proves to be insolvent in the payment of the debts under the agreed terms  may be declared bankrupt, at the request of creditors, the public prosecutor or his own, even before and independently of the termination of the composition with creditors under Article 186 of the Bankruptcy Law“.

In the case brought to the attention of the Supreme Court, the Court of Appeal of Campobasso had decided to revoke the declaration of bankruptcy of the company, which had failed to fulfil its obligations under an homologated composition with creditors procedure, since bankruptcy had been declared in the absence of prior termination of the composition with creditors with the consequent possible avoidance of the contractual effects of the latter.

The issue at hand is not new to the Supreme Court, which has already expressed itself in two decisions of the sixth section (Cass. nos. 17703/17 and 29632/17) stating that since the reform by the Legislative Decree no. 169/2007 of the Art. 186 of the Bankruptcy Law had eliminated any automatism between the termination of the composition with creditors and the declaration of bankruptcy, the latter could also take place regardless of the prior adoption of the former. This is at least in cases where the petitioning creditor asserts the claim not in the original amount, but in the amount reduced by the unexecuted proposal for a composition with creditors, but also at the request of the public prosecutor, of the debtor himself and, possibly, also of new creditors.

However, this decision was not fully acknowledged by an authoritative part of the doctrine, according to which the possibility of “fallimento omisso medio” would instead find an obstacle in the special nature of the composition with creditors rules, since the general and binding effect on all prior creditors would imply the impossibility of giving rise to a subsequent bankruptcy only after this effect had been eliminated through the termination of the procedure.

Notwithstanding the above, the Supreme Court, in its judgment herein, reiterated that there are no valid and convincing reasons to disregard the aforementioned interpretative view on the matter (Cass. nos. 17703/17 and 29632/17, but also Cass. nos. 26002/18 and 12085/20).

In fact, even the reference to the private and negotiated nature of the composition with creditors would not be sufficient, in the opinion of the Supreme Court, to justify the doctrinal theories referred to above.

On this point, the Italian Supreme Court observes that, although the reforms of the 2000s have accentuated the available nature of the composition with creditors procedure, there is no doubt that the prevalence of the negotiation element cannot fail to yield whenever it appears that the approved composition with creditors is not feasible because the debtor cannot fulfil it, and indeed finds himself in a situation that is entirely comparable to insolvency.

By referring to the statemen of the Supreme Court no. 9935 and 9936 of 2015, the same then focused on the issues concerning the removal of insolvency as a result of the homologation and the necessary consecutiveness of the composition and bankruptcy proceedings.

In these judgments, the Supreme Court had stated that the pending application for composition with creditors “temporarily prevents the declaration of bankruptcy until the occurrence of the events provided for by Articles 162, 173, 179 and 180 of the Bankruptcy Law (…)” and that, pending of a composition with creditors procedure (i.e. stages of admission, approval or homologation), “the entrepreneur’s bankruptcy, at the request of a creditor or at the request of the Public Prosecutor, can only be declared when the events envisaged by articles 162, 173, 179 and 180 of the Bankruptcy Law occur, i.e., respectively, when the application for composition with creditors has been declared inadmissible, when admission to the procedure has been revoked, when the proposal for composition has not been approved and when, at the outcome of the approval process, the composition has been rejected (…)“.

It should be noted that, in this case, the Supreme Court had faced the above-mentioned issues in the context of the pending composition with creditors procedure (therefore, until the homologation) and had resolved the problem by recognizing that:

  • during the performance of a composition with creditors procedure, bankruptcy is precluded, except in the cases peremptorily provided for by Articles 162, 173, 179 and 180 of the Bankruptcy Law;
  • the declaration of bankruptcy requires the negative outcome of the composition with creditors procedure and does not allow the submission of further applications for composition with creditors, whereas “the homologation of the composition with creditors invalidates the bankruptcy applications already submitted and removes the state of insolvency, making it possible to submit new applications only for facts that have arisen or for the termination or annulment of the composition with creditors“.

On the contrary, in the case at hand, the relationship between termination and bankruptcy would start from the different context of post-homologation, bearing in mind that, with the homologation decree, the composition with creditors procedure – simply – “closes” (see art. 181 of the Bankruptcy Law).

In this scenario, the Supreme Court therefore observes that if the composition with creditors has been homologated, has been terminated or the debtor had access to the purely executive phase of the latter (even if under supervision pursuant to Article 185 of the Bankruptcy Law) the general principles of liability must be applied with the consequent obligation to assess, also, whether elements of insolvency should be drawn from the non-execution of the agreement already approved and, therefore, a declaration of bankruptcy should be made..

Therefore, continues the Supreme Court, it is difficult to understand why, if the prior creditors regain full legitimacy to act against the debtor to obtain the execution of the composition with creditors agreement (since the prohibition of executive or precautionary actions on the debtor’s assets provided for by article 168 of the Bankruptcy Law lapses after the homologation decree becomes final), they cannot do the same with all the means allowed by law. In other words, “why can’t the individual executive protection – not necessarily conditioned by the petition for termination – be associated to the bankruptcy protection in the presence of the relative conditions and also in order to protect the equality of conditions in the cruciality of this phase“.

The Supreme Court judges therefore underline that, even if the bankruptcy initiative may sometimes appear useless and uneconomic, it is in any case necessary to evaluate the creditors’ interest in blocking the assumption of new obligations by the debtor destined to prededuction, pursuant to article 111 of the Bankruptcy Law, in the subsequent bankruptcy (ex multis Cass. no. 2656/21).

In other words, the impossibility of executing the agreement can be qualified as “a “second” insolvency, since the insolvency is the same one that initiated the composition with creditors and that, at the end of this procedure, is shown in a form that is even worsened by the inability to regularly satisfy the obligations even in the more favorable manner. This is especially relevant in view of the fact that homologation does not imply the novation of the prior obligation, but only the different and more limited effect of the partial non-recoverability of the receivable (Cass. no. 12085/20 cited above; see also Cass. no. 13477/11)“.

Finally, the Joint Sections have taken a position with regard to the idea of finding in the Code of Corporate Crisis and Insolvency (“CCII”) – and, specifically, in art. 119, paragraph 7 according to which the “Court declares the judicial liquidation open only after the termination of the composition with creditors, unless the state of insolvency results from debts arising after the filing of the application for the opening of the composition with creditors” – rules intended to represent a useful interpretative criteria of the institutions of the bankruptcy law still in force today.

As is known, the CCII has not yet come into force and, consequently, is not applicable. 

Having said this, the Supreme Court, recalling sentence no. 12476/20, reaffirmed the principle according to which recourse to the regulations of the CCII as an interpretative source may indeed be admitted, but “if (and only if) it is possible to configure – in the specific segment – a sphere of continuity between the current regime and the future one“, a circumstance that does not exist in the hypothesis under consideration.

On the basis of the above-mentioned arguments, the Supreme Court therefore arrives at the enunciation of the aforementioned principle of law according to which, in theory, the possibility of declaring bankruptcy even without termination or annulment is not subject to restrictions due to the heterogeneity and substantial atypicality of the offers of composition with creditors permitted by the system today.

Thus, not even recourse to an interpretation based on the provisions of the CCII would make it possible to introduce into the legal system a condition of bankruptcy-procedibility which, for the reasons indicated, is not presently available.

Let’s Talk

For a deeper discussion, please contact:

Cristian Sgaramella

PwC TLS Avvocati e Commercialisti


Maria Progida

PwC TLS Avvocati e Commercialisti

Senior Manager