New Restructuring EU Directive
By Dr Claudio Ceradini, SLT Strategy Legal Tax
Something new is on the horizon from the European Commission concerning restructuring plans. One of the most interesting pieces of news, but not the only one, from EU Directive 2019/1023 published in the Offcial Journal of the European Union on 26 June 2019, is that absolute priority rule does not seem to be an unbreakable taboo any longer.
The golden rule across the EU says that creditors’ payment flowing from debtor properties’ liquidation, or even from going concern surplus, must be compliant with their seniority ranking. In other words, only the complete satisfaction of “higher ranked” obligations allows lower- ranked creditors to benefit from any payment. Seniority downgrade is possible only when the market value of debtor properties or viable future cash flow is not expected to generate enough cash flow to fulfil senior creditors’ obligations in full. In this situation, a creditor composition plan can provide senior creditors reduction, together with non-senior creditors even limited satisfaction, only if external funds are expected to be collected, consistent enough for non-senior payment requirements. The issue is, honestly, that it is not crystal clear at all, in Italy, whether funds can be legally considered external. No legal definition is provided, and according to the more authoritative judicial interpretation, funds can be considered legally external only if they don’t provide the debtor any reimbursement obligation, and can’t be traced back to the debtor’s assets, present or future, becoming part of debtor properties.
It is due to the “absolute priority rule” that tax transaction in creditor composition plans is almost impossible in Italy. Tax and social security credits, legally secured according to Paragraph 2752 and 2778 of the Italian Civil Code, can’t be reduced if the market value of debtor properties globally exceeds senior credits, so that any possible reduction wouldn’t leave almost anything for non-seniors, which consequently could be paid only with external funds.
Article 11, first paragraph, letter c) of the EU Directive 2019/1023 opens a different possible approach. It would become possible to assign limited satisfaction to secured creditors, provided that the lower ranked creditors are assigned a lower offer. Plans would become more flexible, with the same framework and funds availability. EU Directive 2019/1023 just gives members a new opportunity, so that to modify the absolute priority rule, which honestly in the first 2016 draft was not even mentioned, is not mandatory, every single member is in the position to consider whether or not to enter this new world.
Especially in Italy, where a completely new Insolvency Code is expected to come into force on 15 August 2020, it would be appropriate to consider this new option, even before the deadline for the adoption of the EU Directive 2019/1023, established for 17 July 2021.
Something new from EU Directive 2019/1023 also comes for debtor protection, due to creditors’ stay from individual enforcement actions. It doesn’t seem that protection can benefit early stage procedures (as it will happen in Italy from 2020). On the other hand, protection wouldn’t affect individual actions of certain categories of loans or creditors. The stay of individual executive enforcement actions, which can last from four to twelve months, including any possible postponement, does not apply to workers’ rights, unless they have the same protection from the legal restructuring solution selected and adopted by the debtor.
Dr Claudio CeradiniGGI member firm
SLT Strategy Legal Tax
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SLT Strategy Legal Tax is a Veronabased firm that provides both legal and accounting services to national and international clientele. The firm can count on the experience of over 40 professionals whose experience covers many areas of expertise, ranging from commercial, insolvency and banking law to criminal, family, and labour law.
Dr Claudio Ceradini is Senior Partner of SLT Strategy Legal Tax, working in the Business and Tax department as an auditor and a business and tax advisor. He is also an adjunct professor in economics at Verona University. He has over 15 years’ experience in business restructuring and M&A for both large and small companies, and has authored many articles on the above subjects which have been published in dedicated magazines.
Published: Debt Collection, Restructuring & Insolvency Newsletter, No. 11, Autumn 2019 l Photo: Colourbox.de - Kavalenkava Volha