Ep. 7: Strategic Playbook for Creditors Managing Debtors under Negotiated Composition

In the realm of business restructuring, creditors often face the dual challenge of protecting their interests while ensuring that debtors' restructuring efforts are genuine and viable. Italy's Negotiated Composition(i.e. "Composizione Negoziata") offers a framework for resolving financial distress, but it requires creditors to be proactive and strategic. This episode explores how creditors can navigate this process effectively to safeguard their interests.

Understanding the Negotiated Composition

The Negotiated Composition, introduced by Decree no. 118/2021 and incorporated into the new Insolvency Code (i.e. "Codice della Crisi e dell'Insolvenza"), is a voluntary, extrajudicial negotiation path aimed at enabling businesses in financial distress to recover without entering formal insolvency proceedings. It involves an Independent Expert facilitating negotiations between the debtor and creditors to find a solution that ensures business continuity and satisfies creditor claims (for further insights on Negotiated Composition, refer to Ep. 1 (1) Ep. 1: Negotiated Composition vs Traditional Extrajudicial Negotiations | LinkedIn and 5 (1) Ep. 5: Super-Priority Financing in Negotiated Composition: A New Frontier for Distressed Investments and Restructuring | LinkedIn of #RevitalizeRestructuring).

The negotiated composition does not provide an automatic stay. However, the debtor may request protective or interim measures to shield against creditor actions such as enforcement proceedings and the resolution of pending contracts. The application for these measures is published in the Business Registry and is effective upon publication. The Court must confirm these measures, which can last up to 120 days and be renewed for another 120 days. The protective measures may be directed at all creditors or specific categories.

The Role of the Expert:

1. Preliminary Assessment: The expert assesses the feasibility of the debtor's recovery prospects. If deemed unfeasible, the Expert may have the Negotiated Composition archived.
2. Facilitation: The Expert facilitates negotiations between the debtor and creditors.
3. Oversight: The Expert oversees the debtor's activities throughout the Negotiated Composition, ensuring proactive efforts to find a negotiated solution and overcome the financial crisis.
4. Final Report: The Expert elaborates a final report on the debtor's conduct during the Negotiated Composition. If the debtor is found to have conducted negotiations in good faith, they may appeal to access a simplified composition proceeding, which under certain conditions, allows for a liquidation plan without creditor approval.

It is important to note that the Expert does not take control and has no authorization power over the debtor, who retains full control over both ordinary and extraordinary business management, ensuring uninterrupted operational freedom.

Effects of Opening Negotiated Composition on Creditors:

Notification and Awareness: The process begins when the appointed Expert accepts the role, but this does not automatically notify creditors. Creditors may remain unaware unless protective measures or suspensions of recapitalization obligations are requested and published in the Business Register. It is crucial for creditors to stay informed and actively seek updates.

Effects Depend on Whether the Debtor Requested Protective Measures

A. No Protective Measures Requested:

1. Confidentiality Obligations: Creditors must maintain confidentiality about the debtor’s situation, initiatives, and information acquired during negotiations.
2. Timely Responses: Creditors are required to respond promptly and with justification to proposals and requests received during negotiations.
3. Good Faith and Collaboration: All parties, including creditors, must collaborate in good faith with the debtor and the expert, acting promptly and fairly during negotiations.
4. Restrictions for Bank and Financial Intermediary Obligations: Banks, financial intermediaries, their agents, and assignees must actively and informatively participate in the negotiations. The initiation of Negotiated Composition does not automatically lead to the suspension or revocation of credit facilities granted to the debtor. However, suspension or revocation may be imposed if required by prudential supervision regulations, with an explanation provided.

B. Protective Measures Requested:

1. Stay on Preferential Rights: From the publication of the application, creditors cannot acquire new preferential rights against the debtor's assets unless agreed with the debtor.
2. Prohibition of Enforcement Actions: Creditors cannot unilaterally terminate or modify existing contracts with the debtor based on non-payment of previous debts. This prevents creditors from exploiting their position to the detriment of the debtor’s recovery efforts.
3. additional limitations imposed by specific interim measures

Strategic Actions for Creditors

1. Immediate Engagement: Creditors should engage with the Expert as soon as the process begins, requesting participation in negotiations and access to all relevant documentation. Early involvement helps ensure that creditor interests are considered from the outset.
2. Verify the Independence of the Expert: Creditors can challenge the expert's independence by filing a request with the secretary-general of the Business Chamber within three days of receiving the notification to participate in negotiations with the debtor.
3. Understand Protective or Interim Measures: Recognize the presence of protective or interim measures that may affect the relationship with the debtor. Creditors can file a judicial petition to have them revoked if they do not ensure the success of negotiations or are disproportionate to the harm caused to creditors.
4. Demanding Transparency: Creditors should push for detailed records of meetings, including full disclosure of all documents exchanged.
5. Periodic Updates: Request the Expert to provide regular updates on the debtor's financial status and the progress of negotiations. This ensures ongoing transparency and allows creditors to respond to developments promptly.
6. Monitoring Compliance: Throughout the process, creditors should monitor the debtor's compliance with the agreed plan and address any deviations immediately. This includes verifying that the debtor's actions align with the goal of financial recovery without prejudicing creditor claims.

Addressing Potential Pitfalls:

• Avoiding Abusive Practices: Creditors should be vigilant against debtors who may use the Negotiated Composition as a stalling tactic. Continuous monitoring and challenging unjustified delays or preferential payments are essential.
• Preparation for Simplified Composition: If negotiations fail and the expert certifies that the debtor conducted the negotiations in good faith, the debtor may propose the Simplified Composition. Creditors must scrutinize this proposal thoroughly to ensure it offers a fair settlement compared to judicial liquidation. While the Simplified Composition may be approved by the Court without creditor votes, creditors still have the right to oppose its approval.

The Role of Legal Advisors

Legal advisors play a crucial role in guiding creditors through the Negotiated Composition. They help formulate strategic requests, interpret financial data, and ensure that creditor rights are upheld throughout the process. Advisors can also assist in challenging any proposals or actions that may not be in the best interest of creditors.

Conclusion

The Negotiated Composition offers a promising framework for resolving business distress while avoiding the complexities of formal insolvency proceedings. However, creditors must be proactive, strategic, and vigilant to ensure that their interests are protected. By demanding transparency, engaging actively in negotiations, and monitoring compliance, creditors can navigate this process effectively, contributing to successful restructuring outcomes.

Join us in exploring more about how creditors can strategically navigate debtor restructuring processes. Share your experiences and insights on ensuring fair negotiations in the comments below.

Stay tuned for more insights on mastering Italy’s restructuring and insolvency landscape.

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