bankruptcy

The Unlawful Filing of an Application for an "Incomplete" Composition with Creditors and the Liability of Managers.

articolo 11_12.jpg

It is increasingly common for companies in a state of crisis to file incomplete applications for the composition with creditors (also known as "uncomplete" composition).

Italian Bankruptcy Law allows entrepreneurs in a state of crisis to file an appeal containing the request for a composition with creditors, while reserving the right to submit the exact proposal, 8containing the plan and the specific documentation required by the Bankruptcy Law) within a specific time limit set by the judge. Within this deadline, which by law is between 60 and 120 days and may be extended for a period not exceeding 60 days for justified reasons, the company may alternatively file a proposal for debt restructuring or a composition with creditors. If, however, the deadline expires the debtor loses the associated benefits and may be declared bankrupt.

The benefits associated with this procedure are known. In fact, it allows the debtor to immediately obtain the benefit of the protection of its assets, by impeding the enforcement or precautionary actions on the debtor's assets.

However, the purposes underlying the filing of an application for an “uncomplete” composition with creditors are not always truly genuine and are aimed at illegally postponing the moment of the company’s bankruptcy. This modus operandi, if it is verified, may however cause the liability of the company's management body.

A recent judgment of the Court of Milan, (published on 1st  June 2020), has examined the liability of the managers, clarifying that the conduct of the director who submits an application for composition with creditors in the presence of the assumption of the state of insolvency of the company cannot be considered in itself and automatically generating liability for damages, even if the proposal for composition is, in theory, declared inadmissible or admission is subsequently revoked (articles 162 and 173 of the Bankruptcy Act). However, the directors' liability in this sense can only be incurred when the application is to be considered abusive, i.e. solely aimed, with reasonable probability, at fraudulently postponing the company's bankruptcy to the detriment of the creditors.

The damage connected with this case may, for example, be derived from the costs "unnecessarily" incurred by the company following the filing of the application for composition with creditors, filed at a specific time when, since the conditions for access to composition with creditors did not exist, the directors would have had to apply for the bankruptcy of the managed company on their own.

A previous ruling of the Court of Milan, (published on 30 October 2019) had also clarified that the adoption of delaying tactics - including the filing of an “uncomplete” appeal for composition without the production of the plan - may entail a specific liability of the liquidator for the aggravation of the company’s  bankruptcy state. In such a case, the resulting damage could be derived from the otherwise avoidable increase in the company's debt situation.

It should be noted that the early designation of the Creditors’ Trustee in the bankruptcy procedure - recently introduced into the Bankruptcy Law - has helped to reduce the number of appeals filed by those companies which, by abusing the institution and taking advantage of the suspension of any executive actions, had the sole purpose of trying to postpone the declaration of bankruptcy and thus prevent creditors from satisfying their claims on the remaining assets.