Bankruptcy agreements: proponent creditors' right to vote

Bankruptcy agreement procedure
Voting rights under Article 127
Supreme Court decision on proponent creditors' right to vote


Bankruptcy agreement procedure

Bankruptcy agreements are governed by Articles 124 to 141 of the Bankruptcy Law and aim to speed up bankruptcy proceedings. Bankruptcy proceedings are closed either on the liquidation of assets and distribution of the proceeds or as a result of a bankruptcy agreement.

Under Article 124, a bankruptcy agreement can be proposed during the course of a bankruptcy by:

• any creditor;
• a third party; or
• the debtor one year from the adjudication of the bankruptcy, provided that less than two years has passed from the date of issuance of the decree which approved the final creditors' list.

The proposal for a bankruptcy agreement can include:

• the division of creditors into different classes according to their legal position and economic interest;
• differentiated treatment between creditors of different classes indicating the reason for this treatment; and
• the restructuring of debts and the satisfaction of claims in any way, including by the sale of assets, assumption of debts or other extraordinary transactions.

Further, the proposal may provide, among other things, that the secured and preferred creditors will not be satisfied in full, on the condition that satisfaction is fixed at an amount not lower than the best possible price which may be obtained for the security on the market.

When a bankruptcy agreement proposal is filed with the bankruptcy court, the delegated judge seeks the receiver's opinion and the approval of the creditors' committee.

For a proposal to be approved, it must obtain a favourable vote (counted according to the amount of claims, not per capita) of a majority of the creditors admitted to vote by Article 127.

According to Article 129, after the vote, the bankruptcy receiver presents a report to the delegated judge informing them of the outcome. If the proposal is approved, the delegated judge orders the receiver to immediately notify the proponent of the approval in order to allow it to seek homologation of the plan and notify the debtor and any dissenting creditors. The receiver sets a term of between 15 and 30 days for the filing of possible oppositions. Within the same term, the receiver must file a report detailing its final opinion on the proposal.

If any opposition is filed, the bankruptcy court homologates the bankruptcy agreement (after having verified the procedure and the outcome of the vote) through a decree which is final and not subject to appeal. Instead, if oppositions are filed, the bankruptcy court conducts a hearing to examine the evidence requested by the parties or ex officio. The bankruptcy court takes a decision by means of a motivated decree. The decision may be appealed before the Court of Appeal within 30 days of the date of service of the motivated decree on the relevant parties. However, the original decree is immediately enforceable even if subsequently appealed.

Voting rights under Article 127

The right to vote on a proposed bankruptcy agreement is governed by Article 127 as follows:

• If a proposal is made before a creditors' list has been finalised, the creditors on the provisional list proposed by the trustee and approved by the presiding judge have the right to vote.
• If a proposal is made after a creditors' list has been finalised, the creditors indicated in the list (made effective pursuant to Article 97) have the right to vote. In this case, the creditors that have been provisionally admitted or with exception also have the right to vote.
• Even if a guarantee is contested, privileged creditors (eg, lien or mortgage) for whom the proposed agreement provides payment in full will not have the right to vote if they fail to renounce their pre-emptive right (the renunciation may be partial, as long as it is not less than one-third of the entire credit as made between capital and property). The renunciation has effect only within the ambit of the agreement.

Further, Paragraphs 5 and 6 of Article 127 provide two hypotheses for conflicts of interest:

5. The spouse, relatives up to the fourth grade of relation of the debtor and those that are transferees or judicial creditors of these individuals for less than one year from the bankruptcy decree are excluded from the right to vote and the computation of the majority.

6. The same rules apply to credits of an entity controlling or controlled or under common control.

Supreme Court decision on proponent creditors' right to vote

Article 127 contains no specific provisions regarding the right to vote of proponent creditors or their controlling, controlled or under common control entities.

Given the lack of legislative provisions concerning proponent creditors' voting rights, a previous approach to this issue maintained that proponent creditors could vote on proposed agreements without any restrictions.

The Supreme Court set out this interpretation in Judgment 3274 (10 February 2011), in which it stated that the conflict of interest hypotheses provided by Article 127(5) and (6) are peremptory and that Article 127 has "an exhaustive nature and it cannot be applicated by analogy".

The need to clarify any conflicts of interest in a bankruptcy agreement and fill the corresponding legislative gap motivated the First Chamber of the Supreme Court to seek the Joint Chamber's assistance.

With Judgment 17186 (28 June 2018), the Joint Chamber deviated from the previous interpretation of Article 127, stating that in a bankruptcy agreement neither the proponent creditor nor the entities controlling, controlled or under common control correlated to the proponent creditor have the right to vote on the proposal.

The court supported its decision with the following arguments:

• The hypotheses of conflicts of interest provided by Article 127(5) and (6) are not exhaustive.
• Due to the principle of party autonomy, it is important to neutralise any conflict of interest in a procedure such as a bankruptcy agreement, in which the private interests of the parties have a fundamental role.
• The conflict of interest between a proponent creditor and other creditors that can vote on a proposal is evident. The proponent creditor will seek to close the agreement with the least expense possible, whereas the other creditors will seek to maximise the satisfaction of their credit.

According to the developed interpretation, the court stated that Article 127(6) should be extended to cover other hypotheses of conflicts of interest to include conflicts involving proponent creditors in an attempt to avoid entities controlling, controlled or under common control from being influenced by the party that has a conflict of interest.

For further information on this topic please contact PierDanilo Beltrami at Lombardi Segni e Associati by telephone (+39 02 896 221) or email (p.beltrami@lsalaw.it). The Lombardi Segni e Associati website can be accessed at www.lsalaw.it.