Early stage creditors composition in Italy:  Where are we two years on?

Two years ago in Italy, a new instrument came into force providing new opportunities to distressed debtors trying to find a way out from their troubles at an early stage. It was called the Negotiated Composition Plan (NCP).

The rules are easy. Should a company face financial troubles, it may request the local business register for the protected path of a negotiated composition with expert professional support. This allows the company to come to an agreement with creditors with terms and conditions suitable for restarting plan, assuming difficulties can be sorted out and the company is not yet finally insolvent. 

During the completely confidential negotiations (and with very limited public disclosure), the entrepreneur keeps company management duties, and a standstill may be requested if individual legal actions filed by one or more creditors could affect negotiations and agreement discussion— for example, bringing limited advantage to some individually proceeding parties, and severe damage to the global restart project. 

The point of the negotiated composition approach is to facilitate a restart plan, hopefully reliable, to get out from under debt issues; filed together with the request for an appointed expert, and a standstill, this plan has a strong chance of being effective. The expert has two days from the request notice to accept or deny the engagement. They must immediately call for a meeting with the debtor and advisors to determine the following: i) is a restart plan doable; ii) how great are the financial needs; and iii) what are the legal terms of a creditors’ proposal. Should the meeting succeed, negotiations start; otherwise the expert declares the composition attempt not workable and requests the business register to close the procedure.

A couple of years after negotiated composition came into being, some figures are now available. How does the new instrument work? Globally, one thousand companies have chosen the process, and approximately 450 have come to a conclusion, whatever the results may be. 

Globally, only 15% of companies were able to come to an agreement, and 85% did not. This may sound like a disastrous failure, but if so-called Dead On Arrivals (DOAs) are taken out from the count, the percentage of succeeding companies increases to 30%, which is not bad, when compared to Chapter 11 results in the United State, after several years of experience and rock solid tradition. There is a lot of work to do to improve, but one thing already seems clear – to successfully negotiate a composition plan, debtors must prepare in advance, and be able to enter the process with a clear plan so that negotiation can proceed smoothly and quickly. Without forethought, the path would be tricky, and success will depend only on luck. 

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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.