Alternative Bankruptcy Proceedings Are a Failure
What is the impact of the recent reform of bankruptcy laws on the state of the Italian economy and the financial conditions of its businesses? The question seems more than justified when you consider the steady increase in the number of bankruptcies recorded after 2008, the annus horribilis when the economic and financial crisis began, a crisis which is still affecting, albeit with varying intensity, all the economies of the world.
A study recently published by the Civil Court of Milan found that, in 2012-13, bankruptcies rulings increased by as much as 24 % compared to the previous two-year period, revealing how the weakness of the economy, rather than regulatory intervention, is the main factor driving the process.
Even more significant is the increase in alternatives to bankruptcy proceedings, especially pre-emptive agreement with creditors, which, according to the Court of Milan, was chosen by 76% more firms in crisis with respect to the previous two-year period. However, the trust operators and companies have placed in this legal device - which the Italian legislator has recently revised with Legislative Decree 69/2013 - has often revealed itself an illusion. Companies in fact resort to this measure when it is too late, filing for alternative insolvency proceedings when it's too late to solve the crisis, and the business is inevitably compromised. Not to mention those cases when agreement with creditors was sought as a procrastination technique, to delay liquidation of assets and bankruptcy, and stave off an inquiry into the responsibility of statutory bodies.
In practice, some of the recent insolvency legislation – such as the possibility of courts grating a conditional admission to an agreement with creditors – has been "bent" to improper aims, a fact which has prompted an immediate review of recently passed legislation, in order to curb misapplication or malfunction of the legal process.
This is why the recent period of legal reform, even if it has changed the philosophy of bankruptcy legislation making it less oriented to the punishment of insolvents and more favorable to the orderly management of insolvency, has proved unable to address the main factors of the crisis that are worsening the financial situation of Italian firms. In fact, there are no legal tools for a timely ascertainment of the risk of insolvency, which would put firms in the condition of being able to find actual alternatives to going bankrupt. On the other hand, if one of the objectives of reform was to encourage non-bankruptcy solutions to business crises, it goes without saying that the tool to pursue this objective should favor crisis management when the company still has productive capacity.
From this perspective, it would be useful to assign powers of crisis warning to companies' supervisory boards – which would have to immediately report any financial emergency to decision-making corporate bodies and, in absence of appropriate action, to courts, in order to initiate legal actions and ensure business continuity. It must be said that in the absence of such prerogatives in Italian current bankruptcy laws, courts have acted as useful surrogates, by taking interim measures during the pre-bankruptcy investigation process, sometimes going to the extent of appointing a legal supervisor of the company, or even a judicial administrator with negotiating powers.