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Welcome / Blog Archive / English / 2016-04-doc5 Does a tax rule bend for a rescue arrangement?

2016-04-doc5 Does a tax rule bend for a rescue arrangement?


A VAT matter (to which the VAT Directive 2006/112/EC is applicable) in the context of an arrangement presented to creditors by the insolvent debtor has been decided upon by CJEU 7 April 2016, Case C 546/14 (Degano Trasporti Sas di Ferruccio Degano & C., in liquidation, v Pubblico Ministero presso il Tribunale di Udine). At the judges’ desk is a provision of Italian insolvency law containing the possibility for a debtor to file for a procedure for an arrangement with creditors, seeking to avoid a declaration of bankruptcy. In such a case a trader in critical difficulties or a state of insolvency proposes to its creditors to make its assets available in order to pay back in full the preferential creditors and partially pay back unsecured creditors. The arrangement may however provide for a partial repayment of certain categories of preferential creditors if an independent expert states that those creditors would not receive better treatment if the trader went bankrupt.

The CJEU explains how this proceeding works. The procedure for the arrangement with creditors, in which the Public Prosecutor participates, starts with the trader’s application before the competent court. That court rules (i) on the admissibility of the application, after having determined that the legal conditions for the arrangement are satisfied. Then (ii) the creditors to whom the debtor does not offer full repayment are called upon to vote on the proposal, which must be approved by the creditors admitted to vote who represent the majority of the total amount of their claims. Finally (iii) if that majority is reached, the court validates the arrangement after ruling on any opposition by dissenting creditors to the arrangement and determines again that the legal conditions are satisfied. The arrangement accordingly validated is binding on all the creditors.

In addition, the Italian insolvency law provides that in this planproceeding the debtor may propose the payment, partial and/or delayed, of taxes and ancillary claims of the tax authorities, as well as contributions and ancillary claims made by the compulsory social security institutions, as regards the part of the debt which is unsecured, even if they are not entered in the register, with the exception of taxes constituting the European Union’s own resources.

The CJEU observes that as regards VAT and tax retained but unpaid, the proposal made by the debtor may solely provide for deferred payment. On 22 May 2014 the insolvent debtor, Degano Transport, applied to the District Court in Udine to be admitted to this procedure for an arrangement with its creditors. Indicating that it was in financial crisis, it seeks to liquidate its assets in order to pay certain preferential creditors in full and to pay a percentage of its debts to unsecured creditors and some lower-ranking preferential creditors which, in its view, could not, in any event, recover the entirety of their claims if a bankruptcy procedure were initiated. Included in those latter claims is a VAT debt which Degano Trasporti proposes to pay in part, without linking that proposal to the conclusion of a tax settlement.

The referring District Court of Udine, however, rules that the applicable insolvency legislation prohibits, in the context of a tax settlement, to agree on partial payment of State claims to VAT (‘… considered to be privileged claims of the 19th rank’), and only allows for staggered payment of such claims. It backed its decision with CJEU judgments, but then refers to the CJEU the question whether that prohibition withing the scope of tax settlements, applies in all cases and cannot be derogated from, even in the context of a proposal for an arrangement with creditors.

So it refers the question: does the obligation on Member States to take all legislative and administrative measures appropriate for the full recovery of VAT, laid down by EU law, in fact prevents the use of collective proceedings other than insolvency liquidation, under which the insolvent trader liquidates all of its assets to satisfy its creditors and envisages settling its VAT debt in an amount which is no less than what that trader would pay in the event of bankruptcy.

The CJEU, first, makes a formal point by deciding that, where the referring court states that it is making the reference for a preliminary ruling at the stage of examining the admissibility of the application before it. However, whereas the strictly contentious stage of the arrangement procedure begins only after the approval of such an arrangement with creditors, when the minority creditors may raise an objection, these elements do not preclude the Court’s jurisdiction to hear the request for a preliminary ruling.

On the substantive matter the CJEU rules that Article 4(3) TEU (sincere cooperation between Member States) and certain specified articles of Directive 2006/112/EC on the common system of value added tax do not preclude that national legislation, such as that at issue in the main proceedings, must be interpreted as meaning that an insolvent trader may apply to a court to open a procedure for an arrangement with creditors for the purpose of settling its debts by liquidating its assets, in which that trader offers only partial payment of a VAT debt and establishes by an independent expert’s report that that debt would not be repaid more fully in the event of that trader’s bankruptcy.

So, in this case, the result is that tax rules should not be applied rigidly; an ‘hold-out’ obstacle less for business rescue proceedings.