Prevention is Better than Cure: Re-Organizing the Bankruptcy Reorganization in Italy
Diritto fallimentare e delle società commerciali, Vol. 85, p. 73, 2010
34 Pages Posted: 11 Sep 2009 Last revised: 27 Feb 2010
Date Written: September 9, 2009
The reform of Italian bankruptcy law passed in 2006 aimed to encourage reorganization and pre-packaged bankruptcy so that the high number of slow, inefficient and costly bankruptcy liquidations could decrease. Survey-based statistics show, however, that this goal has not been achieved yet; nor is next. Relevant causes for failure are identified as follows: a) while creditors may compel bankruptcy liquidation, only the debtor is entitled to file a petition for a reorganization procedure (unlike American law); b) the debtor, however, must file for a reorganization plan at the time of the petition (pre-packaged), so no room for negotiation is left; c) Courts issue an order for relief only having verified that the debtor is truly insolvent or in a zone of insolvency; Courts often scrutinize the feasibility of the reorganization plan; hence, protection against creditors may be too late and ineffective; d) above all, there are no incentives to negotiate a plan under the protection of a bankruptcy procedure that avoids opportunism of individuals at an earlier stage when the financial or economic distress may be not yet dramatically irreversible. Given this situation, in this article I propose two interpretational tools which help to efficiently enforce existing bankruptcy law; also, I make the case for some amendments to the bankruptcy code. First, the Italian bankruptcy code permits to file for reorganization when the firm is in the zone of insolvency (faces a “crisis),” rather than after insolvency has wholly surfaced. Legal scholars, however, do not differentiate and Courts do not issue an order for relief unless prospective insolvency occurs. This article suggests that a crisis of a solvent firm occurs when a financial or economic distress may be cured by simply bargaining reorganization of the firm’s liabilities, not being necessary to increase its assets. This would allow earlier and predictably more effective prevention of the insolvency, rather than the cure. Also, the article claims that Courts should not question the existence of a crisis unless creditors complain its failure (as similarly under American law). Second, “game theory” reasoning satisfactorily explains the failures of the Italian bankruptcy code and sheds light on how it should be amended. Solutions are taken from American, German and Spanish law. The article concludes proposing amendments to the Italian Parliament to pass. a) Asymmetry in the ability of creditors and debtors to file for bankruptcy protection under a reorganization procedure should be avoided; b) if a case is commenced by creditors, the debtor should be given the opportunity to show his or her solvency; c) the debtor should be granted an exclusivity period during which he or she only may file for a reorganization plan; this would provide adequate room for negotiations under bankruptcy protection; d) conversely, creditors should be granted the right to file for a reorganization plan if the exclusivity period is uselessly expired; e) to avoid opportunism, the voting mechanism should be simplified, and a proposal should be considered approved unless a majority of creditors votes against it; f) if negotiations fail, creditors should be liquidated either voluntary by the debtor, or by a governmental trustee; g) such settlement is made by the debtor unless he is found to be insolvent, and any of the creditors seeks for the appointment of a trustee under the bankruptcy liquidation procedure; h) the existing two forms of reorganization (pre-bankruptcy and during a bankruptcy procedure) should be merged.
Note: Downloadable document is in Italian.
Keywords: Bankruptcy, Reorganization, Italy
JEL Classification: G33
Suggested Citation: Suggested Citation