Author: Dr. Francesca Bichiri, Research Fellow at the Department of Law, UniTo.
Insolvency procedures are arousing increasingly more interest among third party litigation funding companies. It is, no doubt, a particularly appealing area of business for foreign funders and many companies, such as Burford Capital, Omni Bridgeaway, Therium Group Holdings, operate in this sector.
In addition to being a potentially “fruitful” sector for funders interested in the Italian market, it is also a particularly advantageous solution for insolvency procedures. Considering that the risk and costs of litigation are assumed by a third party, on one hand the procedures involving illiquid assets could be included in the legal remedy as a way of reintegrating the estate and, on the other hand, procedures involving liquid assets would not have to detract from the bankruptcy estate to finance the costs of litigation, to the advantage of the procedure and creditors.
An interesting aspect for litigation funders who are drawn to insolvency procedures is surely the assignment of claims. It is important to specify that the assignment of claims differs from the traditional Third Party Litigation Funding model in that, in this case, the assignee does not simply provide the funds to finance the litigation but acquires from the assignor the right subject to dispute.
In any case, it is a means to liquidate assets, as the bankruptcy trustee is tasked with satisfying creditors. Choosing this route brings undeniable advantages to the procedure, because even if the price of the assignment will surely be less than the right acquired in court, the time necessary to liquidate the bankruptcy estate can be slightly reduced, and no part of the resources will have to be spent in litigation costs. Furthermore, the opportunity to complete liquidation procedures quickly will be an incentive for the trustee to prefer the bulk assignment of credits. The advantage for creditors is obvious: this option guarantees the recovery of at least part of their credit in a shorter period of time.
In bankruptcy proceedings, the reference rules authorising such a transaction are Art. 106 (so-called autonomous assignment) and Art. 124(4) (so-called “concordatory” assignment), which, respectively, refer to the assignment of “revocatory actions” and “actions pertaining to the estate”.
The object of the assignment agreement is defined by these rules.
The term “revocatory actions” refers not just to revocatory actions in bankruptcy proceedings pursuant to Art. 67 of the bankruptcy law, but also the “ordinary” revocatory actions envisaged by the Italian Civil Code to which Art. 66 of the bankruptcy law refers, and the actions to obtain a declaration of ineffectiveness referred to in Articles 64 and 65 of the same law. The prevailing opinion is that the assignment would not result in the asset being acquired in the assignee’s estate but only in the right of the assignee to pursue it with an enforcement action, because the revocatory action only leads to the ineffectiveness of the transaction towards creditors, not to the return of the asset in the bankruptcy estate.
On the other hand, the “actions pertaining to the estate” are those that aim to reintegrate the debtor’s assets intended as a generic guarantee for all creditors; therefore, they include not just the revocatory actions but also contractual and extra-contractual liability and damage compensation actions.
The two assignments are different also in terms of procedure.
In the case of “autonomous” assignments, to avoid speculations, the trustee can assign revocatory actions that are part of the bankruptcy proceedings only if judgement is already pending. This condition is met once the defendant has been summoned to appear in relation to a revocatory action.
From a procedural point of view, the fact that proceedings are pending means that following the subrogation in the disputed right as a consequence of the assignment, pursuant to art. 111 of the Italian Code of Civil Procedure, proceedings involving the original parties can continue and the trustee can remain part of the proceedings unless excluded by the intervention of the assignee. In any case, the sentence will have effect on the assignee. Furthermore, the end of the bankruptcy does not preclude claims, as this is prevented by the assignee’s subrogation in the disputed right. However, an interruption pursuant to Art. 300 of the Italian Code of Civil Procedure is possible if the assignee did not take part in the proceedings.
An “agreed” assignment can take place in the event of a liquidation of assets via bankruptcy composition. It requires one or more creditors or a third party to present a proposal for an agreement, which must include the assignment of the action and the specific indication of the object and of the basis of the claim. In this case, it is sufficient for the action to be authorised by the presiding judge at the time of the presentation of the proposal. The proponent may limit the obligations to the creditors admitted to the list of creditors, and to those who have proposed modifications of the list of creditors or made late requests to be admitted to the list.
As this is also a case of subrogation in a disputed right, if proceedings are already pending, the effects on the parties are the same. However, in this case, problems could be caused by the rescission of the agreement pursuant to Art. 137 of the bankruptcy law, or the annulment of the agreement pursuant to Art. 138 of the same law, leading to the reopening of the bankruptcy. The opinion that, also in this case, the trustee subrogates the assignee in the disputed right and the proceedings continue with the involvement of the original parties, until the trustee intervenes to exclude the assignee, seems preferable.
“Autonomous” assignments and “concordatory” assignments are used not only in bankruptcy proceedings but also as part of compulsory administrative liquidation procedures, pursuant to Art. 194 et seq. of the bankruptcy law.
However, while Art. 124 of the bankruptcy law that governs assignments proposed by creditors is expressly recalled by Art. 214 of the same law, the main opinion is that assignments initiated by the trustee are admissible only by means of interpretation, and both require adaptations due to the differences between this procedure and bankruptcy.
Finally, the assignment of claims is also conceivable in the context of the extraordinary administration procedure governed by Legislative Decree No. 270 of 8 July 1999, which refers to Art. 214 of the aforementioned bankruptcy law and to the rules on compulsory liquidation for all matters not provided for.
To conclude, it is worth noting that the review of the Code of Business Crisis and Insolvency will not bring substantial changes to the discipline above, because the rules mentioned herein remain essentially the same as those in Legislative Decree 14/2019.