One of the main duties that a bankruptcy trustee has to fulfill under Italian Bankruptcy Law (which is the royal decree no. 267/1942, the “IBL“) once appointed, is to recover the assets dispelled by the bankrupt company in the period preceding the opening of the insolvency procedure. This is achieved through the commencement of a special lawsuit aimed thereto, which is named either avoidance action, claw back action or pauliana action.
With regard to applicable law to avoidance actions undertaken within European cross-border insolvency proceedings, the matter is governed by article 4 of EC Regulation no. 1346/2000, which has been recently replaced by EU Regulation no. 848/2015, although the latter has not yet come into effect.
Article 4 sets forth the general principle whereby the applicable law to insolvency proceedings shall be that of the Member State within the territory of which such proceedings are opened.
Such applicable law shall determine in particular, according to Article 4(2)(m), “the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors“.
Accordingly, claw back actions are normally governed by the law of the Member State within the territory of which the main insolvency proceedings are opened.
However, article 13 of EC Regulation no. 1346/2000 provides an exception to the above principle. In particular, it states that “Article 4(2)(m) shall not apply where the person who benefited from an act detrimental to all the creditors provides proof that:
– the said act is subject to the law of a Member State other than that of the State of the opening of proceedings, and
– that law does not allow any means of challenging that act in the relevant case“.
The literal reference to the “relevant case” provided by article 13, seems to mean that the act must actually be capable of being challenged in fact in the particular case concerned, and not just as a matter of principle.
In addition, the reference to “any means” of challenge seems to mean that the act shall be unchallengeable not only under the specific bankruptcy provisions of the law governing the relevant contract, but also by the general law thereof.
Such provision, in its simplicity, offers an actual instrument in order to shield possible transactions carried out with distressed companies from risks related to claw back actions.
This is particularly relevant nowadays in the Italian jurisdiction, where many companies are facing financial troubles, and potential investors are discouraged to execute any agreement with Italian distressed companies (e.g. buying assets, financing, undertaking guarantees) because of the relative claw back risks.
The shielding mechanism provided by article 13, however, might prima facie appear less useful than announced. In this regard, actually, scholars have argued that, when it comes to apply Italian law to the concerned transaction in order to determine whether or not the latter is exposed to claw back, the effectiveness of pauliana action has been already dramatically reduced. According to the mainstream opinion, indeed, the operative margins of the Italian avoidance action have been definitively minimized.
In fact, on one hand, the so called suspect periods were significantly reduced by the 2006 insolvency reform and, on the other hand, different cases of exemption were introduced. Moreover, another rule that affects the wide and effective use of such institute in the Italian jurisdiction is the principle pursuant to which the so called suspect period does not accrue, going backwards, from the date of the filing of the petition for the bankruptcy declaration. It does accrue, on the contrary, from the issuance of the relative decision that declares the opening of the bankruptcy (or better, from the date such decision is given legal publicity pursuant to the relative IBL provisions). Thus, provided that the time needed to ascertain whether or not a company is insolvent (after the relative petition is filed with the court) might event last more than 6 months, it appears plain to argue that the claw back effectiveness is largely limited.
However, with regard to the effective use of avoidance actions within Italian jurisdiction, many interpreters underrate the importance of the rule set forth in article 69-bis(2) IBL. According to such provision, if a company files with the territorial court a petition to undergo a judicial reorganization proceeding that goes by the name of concordato preventivo, and the latter gives rise to an ordinary bankruptcy, the suspect period with regard to avoidance actions will accrue (going backwards) from the date the concerned company filed for the concordato preventivo (more precisely, from the date such an event was given legal publicity on the companies’ registrar) instead of the date the relative bankruptcy declaration was issued, as it normally happens.
Now therefore, it is worth to draw the attention to the significant number of companies facing financial troubles in Italy nowadays and to the wide use of the concordato preventivo in the past two years, especially in a version of such proceeding that is commonly called concordato preventivo prenotativo, which anticipates some effects of the so called “full” procedure. In brief, it is a judicial reorganization procedure that allows the debtor to file with the competent court only certain accounting documents, and to file by the following 120 days (extensible up to 180 days) a full plan aimed at either reorganizing or winding-up the company, paying reduced amounts to pre-filing creditors (so called haircut effect). Such a procedure might basically lead either to the opening of the full judicial reorganization procedure (concordato preventivo) or to the opening of an ordinary bankruptcy procedure.
Bearing in mind the above, it is reasonable to draw the conclusion that there is an actual risk that after entering into a deal with an Italian distressed company, the latter might file for the judicial reorganization within the following six months (especially, filing for the concordato preventivo prenotativo, which is everything but burdensome), and will be declared bankrupt subsequently. In this case, as pointed out above, the suspect period will accrue starting backwards from the date of the filing for the judicial reorganization, and the relative deal will be attackable though avoidance action.
For such reason, entrepreneurs interested in acquiring assets from Italian distressed companies, must be aware that claw back risks can be mitigated when certain conditions occur.
Article 13 of EC Regulation 1346/2000, therefore, seems to be made to provide a shield to protect fair transactions from avoidance actions possibly arising from the subsequent insolvency of the counterpart.
This might lead to the displeasing result that a contract that jeopardizes the general body of creditors be not challengeable simply by introducing therewith a choice of law clause, which is basically free under 1980 Rome Convention on the Law Applicable to Contractual Obligations.
However, some limits are put forward by the European regulation provision itself.
First of all, as pointed out above, it is clear that the reference to “any means” of challenge signifies that the relative transaction shall be unchallengeable not only under the specific bankruptcy provisions of the relative applicable Member State law, but also by the general law thereof.
This represents an important limit, since the applicable laws of European Member States share similar principles as long as general invalidity is concerned. In this regard, it does not seem that some Member States provide conditions that are generally and significantly more favourable and effective at protecting transactions made with distressed companies from claw back concerns. What is more realistic, on the contrary, is that slight differences contemplated by various European jurisdictions, might result in being important for the particular transaction that is meant to be entered into in the relevant case. This should guide entrepreneurs to choose on a case-by-case basis the applicable law that appears to be most protective against avoidance actions potentially arising from the insolvency of the vendor.
This article has been written with Alberto Angeloni.