Why South Africa should emulate Italy’s adoption of the new Italian Insolvency Code

The new Italian Insolvency Code came into effect on 15 July 2022, effectively changing the status quo by attempting to resolve the financial distress of companies and minimise damage through restructuring outstanding debt. The code makes restructuring frameworks the first measure to help debtors restructure their debt to prevent further insolvency and liquidation. More importantly, it is a break from the status quo in insolvency law whereby maximising a creditor’s return is of the utmost importance. Instead, preserving the company as a going concern becomes a protected value. However, this must be harmonised with creditors’ rights.

A code such as this would be a welcome addition to South African insolvency law, especially as our economy and local businesses are still trying to recover from the harmful effects of COVID-19 and the various lockdowns. It is also better for both creditors and the company itself to be able to find peaceful solutions to the financial distress rather than cutting ties and the company going into liquidation. This will benefit debtors and creditors without abandoning the interests of shareholders and other stakeholders.

The essential remedies available under the Italian Code are:

A negotiated settlement

This comprises a voluntary settlement that an entrepreneur can apply for when facing financial distress that could lead to insolvency. Once the confidential settlement has been filed, the Chamber of Commerce then appoints an independent expert to support negotiations between the company and the creditors.

An agreement in execution of a certified recovery plan

This provides that the business's recovery plan must be in writing and dated. The simplest form is to give the reasons for the financial distress and the possible appropriate measures that could be used to restructure the company, which could:

rebalance the business’s assets,
rein in the company’s expenses,
remove technological or market obstacles, or
restore the profitability of the company’s business.

The plan must be supported by a report certifying the company data and the plan’s suitability to allow for the reorganisation of the company’s debt exposure and ensure the rebalancing of the company’s financial situation.

A debt restructuring agreement

This type of agreement is reached between a debtor company and creditors, representing a minimum of 60% of the company’s total indebtedness. This contractual remedy aims to restructure the debtor company’s liabilities. Thus, as a result, there are no binding effects on creditors not part of this group (the non-adherent creditors), who will be repaid on contractual or by-law terms. If the creditors have approved the agreement, there is a possibility for the debtor to be granted a moratorium of up to 120 days.

After the agreement is published in the business register, it will protect the companies’ assets. The debtor must also apply to the court for approval of the agreement, the business plan and a certificate of its feasibility.

The Code also launched two specific types of debt restructuring agreements—a simplified restructuring agreement (provided there is a minimum of 30% adherence by creditors) and the extended effectiveness restructuring agreement (which can be extended to also apply to non-adhering creditors).

A moratorium agreement

The purpose of the moratorium agreement is to regulate the company’s relations with its creditors or lenders in an attempt to avoid enforcement actions during negotiations that could threaten the restructuring process. For an entrepreneur, a moratorium agreement is intended to temporarily regulate the effects of their financial crisis.

The agreement could involve:

a postponement of the repayment terms of loans;
a waiver of deeds; or
a suspension of enforcement and precautionary actions.

A composition of debt with creditors

This involves a court's judicial intervention, allowing financially distressed companies to propose a plan that requires creditors’ approval.

The composition must achieve the same or better satisfaction of creditors than would have been achieved in a liquidation through one of the following methods:

Business continuity on a going-concern basis;
A liquidation of the assets;
An allocation of the assets to an assignee; or
In any other form.

South Africa will watch this space to see how the new Insolvency Code unfolds in Italy. If it is a success, it might be worth considering adopting a similar code in South Africa to promote much-needed economic growth and build long-lasting economic relationships.

Reviewed by Manchadi Kekana, an Executive in ENS' Insolvency practice.

Caitlin Turok

Candidate Legal Practitioner

cturok@ENSafrica.com