Procedural consequences of mutual funds liquidation

By the recent decision n. 3042/2016 of 8 March 2016 and decision n. 4333/2016 of 6 April 2016, here attached, the Court of Milan has confirmed the trend in legal literature and case law according to which, if the mutual fund is liquidated by the Court:

  1.  the SGR (i.e., the management company) loses its right to join the proceeding in the name and on behalf of the Fund due to the fact that other bodies authorized to liquidate the Fund (the liquidator/s appointed by the Bank of Italy), will replace it;
  2. no legal proceeding can be initiated or continued against the Fund in liquidation.

A few hints on mutual funds and Management Companies (SGRs)

A mutual fund is defined as a Collective Investment Undertaking (OICR), established in the form of a separate estate, divided into shares.

It is an entity without independent legal personality that acts through a management company (which can either be the company that has set up the mutual fund or the company that has replaced it in the relevant management, the so-called SGR) authorized by the law to carry out its external activity of management and administration.

As Art. 36, paragraph 4, of Legislative Decree 58/98 (the Italian Finance Act, hereinafter, “TUF“) clearly indicates, the assets of the Mutual Fund are in any case separated from the assets of the SGR in charge of its management.  According to such article in fact:

each mutual fund … constitutes an autonomous pool of assets, separated to all effects and purposes from the assets of the management company … the management company shall satisfy the liabilities incurred on behalf of the fund exclusively with the assets of the fund itself”.

Liquidation of the mutual fund and applicable legislation

Mutual funds, like any other (autonomous) pool of assets, i.e., a set of assets destined to secure a number of liabilities, may prove to be insolvent.

The declaration of bankruptcy (if any) can be issued at the end of a procedure to be carried out in chambers. During the procedure, the Court, after having heard the opinion of the Bank of Italy and of the legal representatives of the SGR, arranges, by means of a decision, the liquidation of the mutual fund.

The Bank of Italy appoints one or more liquidators which will replace the SGR. Upon replacement, the SGR shall be no longer entitled to manage the mutual fund

According to the vast majority of scholars, the reference made, in relation to the liquidation of mutual funds, in paragraph VI-bis of art. 57 of TUF to paragraph 3-bis of the same article (governing the SGR’s liquidation) should be construed in such a way as to mean not only that

the liquidators shall look after the liquidation [or the transfer] of the funds managed by the SGR and the relevant compartments, exercising in so doing their management powers in relation to the same

but also that to such liquidation procedure, art. 83, art. 86 (except for paragraphs 6 and 7), paragraphs 2, 3 and 4 of art. 87, articles 88, 89, 90, 91 (except for paragraph 2 and 3), 92, 93 and 94 of Legislative Decree 385/93 (“TUB“) as well as paragraphs 4 and 5 of art. 57 of TUF governing financial institutions’ forced administrative liquidation , shall apply.

What happens to pending litigation

The liquidation of the mutual fund entails first of all the interruption of the legal proceeding because the  management of the Fund is no longer entrusted to the SGR.

Secondly, also in the event that the proceeding is resumed or is not interrupted, any claim that is still pending against the Fund at the time in which the Fund is liquidated, shall be declared unenforceable by the judge due to the supervened liquidation (as a result of the liquidation, no new claim can be brought forward and no existing claim can be continued against the Fund in the form of a summary proceeding (processo sommario) or of an action requiring adjudication of substantive rights (processo ordinario di cognizione), because such claims, pursuant to and for the purposes of art. 57, paragraph III-bis, of Legislative Decree (TUF), must be filed as a proof of claim in the Fund’s bankruptcy (in accordance with the modalities and subject to the terms set forth in art. 86 et seq. of TUB).

According to the case law, which has (so far) unanimously agreed with the above, it must be

declared unenforceable any claim filed against the management company (especially claims brought forward for termination for default of the Fund and for compensation for the damages) pursuant to the combined provisions of article 83 of Legislative Decree 385/93 and article 57, paragraph 3, of Legislative Decree 58/1998, from the date on which the liquidators accept their appointment and, in any case, from the third day subsequent to the date on which the decision to arrange for the forced administrative liquidation against the Fund is taken” (Court of Rome, 30 March 2015 in www.ilcaso.it) since “Mutual funds (especially, closed-end real estate investment funds), governed by Legislative Decree n. 58 of 1998, have no independent legal personality but constitute assets that are separated from the management company, it must be pointed out that art. 57, paragraph 6-bis, of Legislative Decree n. 58 of 1998 sets out that in the event that the Fund is liquidated by the Court, the liquidators appointed by the Bank of Italy shall act in accordance with the provisions of paragraph 3-bis above, according to which to the liquidation it is possible to apply some articles of Legislative Decree n. 385 of 1993 like, inter alia, art. 83 according to which against the liquidated entity no judicial action can be initiated or continued” (Court of Rome, 10 June 2015).

It is also obvious that the SGR:

  1. as a result of the liquidation of the Fund, becomes a party not involved in the dispute, due to the fact that it has no longer the power to manage it, pursuant to the law provisions recalled above;
  2. is not in a position to fulfill the obligations assumed by (rectius, on behalf of the) Fund, since, pursuant to the provisions of art. 36, paragraph IV, of TUF, “the SGR shall satisfy the obligations assumed on behalf of the Fund exclusively with the assets of the same Fund.

By decision n. 4333/2016, recalled above, issued on 6 April 2016 and attached hereto, the Court of Milan has pointed out

that as a result of the liquidation the management of the Mutual Fund  [omissis] is no longer entrusted to defendant, which following the order of forced administrative liquidation, is no longer entitled to join the proceeding in the name and on behalf of the Fund, but to the bodies in charge of liquidating the same Fund.

namely, the liquidator/s.

The specific case of a proceeding initiated to oppose an injunction

The attached decision n. 3042/2016 issued by the Court of Milan on 8 March 2016, addresses an even more specific aspect: what happens to the amounts (temporarily, given the interim nature of the opposed order) received by virtue of a claim which has become unenforceable due to the fact that the mutual fund was subsequently put into liquidation.

The Court of Milan points out in particular that

the occurrence of the liquidation of the Fund and the start of the relevant insolvency procedure have resulted in the claim brought forward by[omissis] be no longer assessable before this Court, according to the most recent trend of the Italian Supreme Court’s case law, contained in decision n. 3401/2013 issued by the First Civil Section of the latter, the impossibility to go ahead with the opposition and to oppose the injunction against the body of creditors deprives the payment, regardless of the assessment of whether or not the relevant claim exists, of the justification on which such payment was based, with the consequent obligation to return the amounts disbursed and restore the previous situation…which is the necessary consequence, pursuant to art. 336 of the Italian Code of Civil Procedure, of the elimination from the juridical reality of the settlement act put in place, it must be deemed implied in the request for revocation of the injunction (decision n. 23260 issued on 3 November 2009 by the Italian Supreme Court; meaning that the restitution may be even ordered ex officio see decisions n. 16170 and n. 15220 issued by the Italian Supreme Court respectively on 21 December 2001 and 19 July 2005).

Having clarified the impossibility to proceed with the plaintiff’s claim, the decision very correctly applies the principle (shared also by the case law) according to which the amounts received (only temporarily, given the interim nature of the injunction) by virtue of a claim in relation to which it is no longer possible to proceed (before the ordinary courts, but it is still possible to resort to the bankruptcy court, in compliance with the par condicio creditorum) must be returned to the bodies in charge of the judicial liquidation. And that therefore the Fund was entitled to take back the amounts that it had previously disbursed given the “interim nature” of the granted injunction.

The above appears to be consistent with the interpretation of the prevailing case law according to which, as provided for by articles 52 and 95 of the Italian Bankruptcy Law, in the event that a declaration of bankruptcy is made while the proceeding initiated in order to oppose an injunction by the relevant debtor, who went subsequently bankrupt, is still pending, the creditor shall take part in the insolvency procedure together with the other creditors after a petition to be admitted to such procedure has been duly filed by such creditor, being it impossible for the latter to oppose to the bankruptcy an order the nature of which is only temporary and that, as such, cannot be treated as an “enforceable decision”, i.e., something explicitly required by article 95, paragraph 3, of the Italian Bankruptcy Law, i.e., an exceptional rule to which no application by analogy is possible (see, among the others, decision n. 21565 issued on 13 August 2008 by the Italian Supreme Court).

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