Debt restructuring procedures for a closed-ended real estate investment fund

Is it admissible for an investment fund to benefit from debt restructuring procedures as set out by the Italian Bankruptcy Law?

Background

The Management Committee (ManCo) of a closed-ended real estate investment fund (the Fund) applied to the Bankruptcy Court of Milan to seek the admission of the Fund into the debt restructuring procedure pursuant to Section 182-bis of the Bankruptcy Law and hence to benefit from the provisions which would automatically prevent the Fund’s creditors from attaching or seizing the Fund’s assets.

The basis for the petition was a financial crisis within the Fund which entitled the ManCo to file the application.

Issues

Under Italian law ManCos and investment funds are not subject to ordinary insolvency proceedings but to special liquidation in accordance with Section 57 of the Consolidated Financial Act.

As a consequence, the first issue for the Court to consider was whether ManCos can benefit from debt restructuring proceedings, provided that they are not subject to insolvency. The Court held that these kind of proceedings are not insolvency-driven and hence ManCos can also apply for the relevant remedy.

The second and most important question was to assess whether debt restructuring procedures could be requested for the investment fund when the financial crisis directly involves the fund itself and only indirectly involves the ManCo (eg as a consequence of the fund’s financial position).

The principles established by the court

The Court answered the second question in the affirmative. As a result, a double track scenario is possible when it comes to financial crises within Mancos and investment funds:

  • in the case of a financial crisis affecting the ManCo directly (eg breach/inability of a ManCo to meet financial covenants in favour of lending banks) the application for debt restructuring must be made with respect to the creditors of the ManCo (eg the banks) and with regard to all legal relationships from which the financial crisis arose, and
  • on the other hand, in the case of inability of the fund, or any portfolio(s) within the fund, to meet its obligations, the application has to be made by the ManCo on behalf of the fund against the creditors of the latter.

The judgment is the first ever issued on this topic and its quite innovative in that funds are now allowed to benefit from debt restructuring arrangements notwithstanding the fact that funds are not legal entities but just an aggregation of managed assets. This is quite an achievement from a practical standpoint, given that following the admission of a fund into debt restructuring proceedings, the creditors of the fund are prevented from initiating or continuing any attachment or seizure of the fund’s assets.

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