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Business Purchases from Italian Insolvency Proceedings

By Riccardo Roversi
Posted: 9th June 2017 08:38
Purchasing a distressed business in Italy from insolvency proceedings presents its own unique deal elements. However, if such transactions are executed properly, they can be quite valuable because a distressed business can often be purchased on terms and conditions more favorable than those that would have been applied under normal circumstances. In particular, in case of business purchase from any form of insolvency proceeding available under Italian law, the purchaser, according to Italian law, acquires the business free and clear of all pre-existing liabilities.

When a company is involved in insolvency proceedings while its business is ongoing,  the issue of preserving the going concern and the business activities of the company (including the goodwill and the employment levels) for the time necessary to identify the best way to manage the insolvency immediately becomes of the utmost importance. The decision and the management of the issues deriving therefrom generally remains with the body entrusted with the management by the Court having jurisdiction over the applicable insolvency proceedings.

Under these circumstances, and especially in order to keep all the assets of the company together and to ensure business continuity, the sale of the business (or of a branch thereof) is often considered as a suitable option.

However, legal requirements to which all Italian insolvency proceedings are subject do not allow the sale to be completed in an expedited way.

For this reason, the purchase of businesses from insolvency proceedings does not usually work as a typical purchase of business as they are usually preceded by a period during which the business is leased to the potential future owner[1].

In fact, save  for some rare cases in which there is a temporary carrying-on of the businesses by the insolvent company, the most common solution adopted is to lease the business pending the completion of all the necessary formalities for the actual sale of business.

In light of such deal structure, it appears clear that the lease of business is indeed instrumental to its subsequent transfer to a third party purchaser in the context of the winding-up of the insolvent company.
For the sake of clarity, and by way of example, it may be useful to outline the usual steps in the plan carried out between the purchaser and the insolvent company in the context of a composition with creditors’ procedure pursuant to article 160 et seq. of the Bankruptcy Law, which is currently one the most widely utilized insolvency proceedings in Italy:

(i)    before the filing with the relevant Court of the instance for the admission to the composition procedure, the parties enter into a lease of business agreement in which the lessee sets out its commitment to purchase the business after the court decree authorizing the composition with creditors has become final and binding (please note that the commitment to purchase does not constitute a binding purchase clause but only an irrevocable proposal, as explained below);

(ii)   the lease of business, the rent and the potential cash-in deriving from the sale of the business to the lessee in accordance with the binding offer are indeed a part of the composition with creditors’ proposal that the debtor company must file with the Court[2];

(iii)  during the lease the lessee usually purchases a part of the debtor company’s inventory on the basis of its actual needs and periodically pays the rental costs;

(iv)  after the approval of the composition with creditors on the part of the creditors and after the Court Decree approving this  has become final and binding, the lessee  purchases the business and pays the fixed price (from which the rent previously paid throughout the term  could be deducted, if such a provision was contemplated by the binding offer).

This particular procedure, through which the business is subject to a lease preceding the purchase, is extremely delicate as the parties must draft a lease contract that, on one hand, protects the company from any potential abusive conduct of the lessee and, on the other hand, protects the value of the business throughout the duration  of the lease.

Clearly, poor management by the lessee may result in adverse consequences that the lease of business itself aimed at avoiding, such as the depletion of the company’s assets, the misuse of the existing assets or the lack of the due maintenance activities etc.

Moreover, there is a major downside to this kind of contractual structure that needs to be taken into account: in the leasing contract the final purchase clause is simply expressed as an irrevocable offer to buy and not as an actual binding clause. Therefore, when the conditions precedent are satisfied, the bankruptcy bodies appointed will necessarily start an auction procedure in order to identify the final actual purchaser. Therefore, the biggest risk that the lessee will face is represented by the fact that it may carefully manage a company with a view to its purchase that may, however, never occur as there  is a real possibility that the company will be sold to a different entity that will, then, take advantage of the lessee’s management[3].

Nevertheless, the lease of business has some positive effects as it allows the avoidance of the dispersion of the company’s activities, the exodus of workers, the loss of goodwill and thus the loss of the value of the company as a going concern which represents the value upon which the sale price will be determined. The lease of business is not a mere rental of the individual assets of the company but, on the contrary, it represents the actual continuation of the commercial activity.

Finally one more issue merits note: in all the insolvency proceedings, the business being sold is  exempt from any warranty relating to the potential defects in the sold item. Therefore, an information asymmetry may arise between the entrepreneur, who is aware of all the details of his business, and the purchaser that in the best case, can only rely on an expert evaluation and, as mentioned, cannot rely on any warranty in case a defect is discovered after the purchase.

To this end, whomsoever has the intention of purchasing a business from an insolvency proceeding would be well advised  to carry out a very thorough and detailed evaluation of all the assets constituting the business in order to fully appreciate the value of the transaction.

In conclusion, although the purchase of businesses from insolvency proceedings may have the advantage of costing less than it would under normal circumstances, while the assets maintain the same value, and the business is free and clear of any previous liabilities there are some tricky aspects that the potential purchaser must take into consideration, such as the structure of the leasing agreement that may not actually result in the purchase of the assets as well as the exemption from any warranties relating to the potential defects.

Riccardo Roversi is an expert in corporate and commercial law and head of the transactions team for Osborne Clarke's Italian offices. His is a wide-ranging corporate practice, covering both transactional and advisory. He regularly advises on domestic and cross-border M&A work,  growth and venture transactions, acting for institutions, management teams and corporates.

As an experienced transaction manager, Riccardo knows how to efficiently work with cross-border teams and is appreciated for his pragmatic and business oriented approach. He believes that a firm's reputation in this sector owes much to its ability to offer sector-sensitive solutions in a rapid, creative and efficient manner.  
In addition to his work as a business and commercial lawyer, Riccardo is a serious vintage car enthusiast and has acted for international clients in delicate transactions for the purchase and sale of vintage cars.

Riccardo can be contacted on +39 02 5413 1722 or by email at

[1]The aim of the lease is clearly to preserve the goodwill and the activity of the business and, generally, the lease of business is accompanied by an irrevocable offer to purchase the business provided that certain terms and conditions are satisfied, at  a determined price. This irrevocable offer is generally used as  the base for an auction procedure (mandatory under Italian law) at the end of which the body managing the insolvency proceedings will decide whether or not to accept the irrevocable offer.
[2] Since the lease and the binding offer are part of the composition with creditors’ proposal, both the rent and the price offered for the purchase of the business are secured by a bank guarantee, in order to give the insolvency proceedings and the creditors sufficient confidence that the promised payments will timely be made.
[3] However, as mentioned above, even if the purchase offer of the lessee is taken as a basis for the public auction, the lessee is in any case in a favourable position since it has the actual possession of the business and it very rarely happens that the business is actually sold to a different party. In such a case, the lessee is protected by Italian law on business transfers, since it will have the right to receive the payment of any differences in the value of the business from the effective date of the lease and the date on which it is forced to transfer the business to the actual purchaser.  As a consequence, if the lessee increased the actual value of the business during the term of the lease, it will be entitled  to obtain  payment in cash of said increase.

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