Restructuring and insolvency in Italy: overview
A Q&A guide to restructuring and insolvency law in Italy.
The Q&A gives a high level overview of the most common forms of security granted over immovable and movable property; creditors' and shareholders' ranking on a company's insolvency; mechanisms to secure unpaid debts; mandatory set-off of mutual debts on insolvency; state support for distressed businesses; rescue and insolvency procedures; stakeholders' roles; liability for an insolvent company's debts; setting aside an insolvent company's pre-insolvency transactions; carrying on business during insolvency; additional finance; multinational cases; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Restructuring and Insolvency Country Q&A tool.
This Q&A is part of the global guide to restructuring and insolvency law. For a full list of jurisdictional Q&As visit www.practicallaw.com/restructure-guide.
Forms of security
All-asset security interests are not available in Italy, and separate security documents are needed for each security interest. With limited exceptions, security interests can only be created over existing and clearly identified assets.
Common forms of security and formalities. Security over real estate is taken as a mortgage. This gives a creditor the right to enforce the security through a court-supervised procedure and have the proceeds of the sale applied to satisfy the debt with preference and priority over other creditors. A mortgage does not transfer possession to the creditor, so the mortgagor can still occupy the real estate.
Formalities. To be validly created and enforceable, a mortgage must be executed before an Italian notary public and registered with the land register where the real estate is located.
Effects of non-compliance. A mortgage is void if it is not in writing. The security interest is not perfected and does not exist until registration of the mortgage with the land register.
Common forms of security and formalities. The most common forms of security over movable property are as follows:
Assignment of receivables/claims/contractual rights by way of security.
Financial collaterals agreements.
Special bank lien.
Mortgage. Mortgages can be granted as security over registered movable property (such as aircrafts and vessels, even if still under construction). Special liens over vehicles (such as cars and motor vehicles) are also treated as mortgages.
Formalities. The security document must be notarised and the mortgage must be registered in the relevant public register.
Effects of non-compliance. See above, Immovable property.
Pledge. Security over movable property (such as shares in a joint stock company, quotas in a limited liability company, bank accounts, receivables, intellectual property, promissory notes or chattel paper, animals, crops and timber) can be taken as a pledge. Each type of pledge has its own set of rules on creation, perfection, registration and enforcement, depending on the type of asset it covers.
Formalities. Some pledges (like those over intellectual property or quotas) must be executed before an Italian notary public. Others do not require it but it is useful to give a pledge a certified date, which is needed to be able to enforce it.
A pledge is perfected by delivering the asset to the creditor (or a custodian) or, for certain assets, effectively notifying, filing or registering it.
There are different formalities that exist depending on the type of pledge. For example, perfection of a pledge over intellectual property requires the registration of the pledge with the Italian Patent and Trade mark Office. Perfection of a pledge over quotas in a limited liability company requires the filing of the pledge agreement with the competent Enterprise Register.
An important reform enacted in July 2016 has introduced a form of pledge over movable assets of a business (other than assets registered in any public register) that does not require delivery of possession of the collateral to the secured creditor. This pledge can secure either existing or future claims (identified or identifiable) concerning a business registered in the Enterprise Register, provided that the security document must specify the maximum amount secured under it. This pledge is void if it is not in writing, and to be perfected it must be registered effectively with the special electronic register held by the Italian Tax Authority. The grantor is entitled to dispose of the assets subject to security provided that the pledge covers the proceeds of sale of such assets and the assets purchased with the proceeds. Non-judicial enforcement of this pledge is allowed and the methods to enforce it are more effective and less time consuming than those required for the enforcement of other types of pledge.
Effects of non-compliance. If the relevant formality particular to the type of pledge is not met, security over it will not be perfected.
Assignment of receivables/claims/contractual rights by way of security. An assignment must be perfected by either notifying it to, or having it acknowledged and accepted by, the debtor.
Financial collateral agreements. Certain kinds of claims (including a bank's monetary claim) can be secured by a pledge or other security over financial collateral, including cash and financial instruments (such as shares and bonds). The only formal requirement for creation is that the security document must be evidenced in writing. To achieve certainty of the date, the current market practice is that notice of the security is served by a bailiff. Non-judicial enforcement of financial collateral is allowed.
Special bank lien. It is not possible to take a floating charge over a business as a going concern. However, under section 46 of Legislative Decree No. 385/1993 (Banking Law), a special lien can be taken over certain movable assets of a borrower's business (including existing and future equipment, plant, machinery, concessions, raw materials, animals, work in progress, finished goods and inventory, proceeds of sale of the assets) that are not registered in any public register and are owned from time to time by the borrower. A special lien is only available in situations where both the:
Grantor is the borrower under a medium-long term loan or is the issuer of a note or other financial instruments.
Lender is a bank or financial institution authorised to carry out lending activities under the Banking Law (or the noteholders are qualified investors).
A special lien must be executed as a notarised deed. The document must specify the maximum amount secured under it, including a list of all the assets and claims subject to security, and be recorded in a register held by the competent court.
Effects of non-compliance. A special lien is void if it is not in writing. To be effective against third parties it must be registered effectively with the special register held by the competent court.
Creditor and contributory ranking
In bankruptcy proceedings, creditors and shareholders' claims are ranked as follows (section 111, Royal Decree No. 267/1942 (Bankruptcy Law)):
Administrative priority claims (crediti prededucibili). Administrative priority claims rank ahead of all other creditors, provided that secured creditors keep the right of preferential satisfaction over the proceeds of sale of their collateral. Administrative priority is, for example, given to claims:
for fees owed to insolvency practitioners, the administration costs of insolvency procedures and fees for the professionals involved in the procedures;
that have arisen either from certain pre- and post-commencement debtor-in-possession financing or in connection or for the purposes of certain insolvency procedures.
Secured claims (crediti privilegiati). Creditors with a mortgage, pledge or statutory priority claims (like employees, tax and social security authorities, professional providers of services) are secured creditors. If the proceeds of the sale of the collateral are not enough to satisfy a secured claim in full, the unsatisfied portion of the claim is treated as an unsecured claim ranking pari passu with all other unsecured claims. Among secured creditors, claims secured by a pledge rank ahead of claims with statutory priority over specific movable assets. Claims with statutory priority over specific real estate assets rank ahead of claims secured by a mortgage. If there are several security rights of the same nature (for example, several mortgages on the same piece of real estate), the rank is determined by the order of registration and, as between ranked classes, the principle of preferential satisfaction applies in full (nothing can be distributed to a lower class unless full satisfaction is obtained by the members of the higher class). Creditors with statutory priority (like salaried personnel) are paid in the order expressly set out by law according to the nature of their claim.
Unsecured claims (crediti chirografari). This category includes claims without security incurred before the debtor's bankruptcy. They are paid, after satisfaction of administrative priority and secured claims, pro rata with the amount of their claims from the funds available for distribution.
Subordinated claims (crediti postergati). Under the Italian Civil Code, repayment of a loan made by a quotaholder to a limited liability company is subject to certain limitations when, at the time the financing was granted there was:
an abnormal disproportion between the borrower's indebtedness and net equity; or
the borrower's financial situation required an equity contribution rather than a loan.
Claims arising from such financing arrangements are subordinated to the claims of any other ordinary creditor in the distribution of bankruptcy assets. Furthermore, if the loan was repaid within the year preceding the bankruptcy adjudication, the repayment will be ineffective at law and the amount must be returned to the bankruptcy estate.
The same subordination rules apply to intra-group loans made by a group entity (that, by virtue of its stakeholding or contractual relations, exercises a systematic and continuous influence and co-ordination on the overall management of another company in the same group) to the influenced company.
Contractual subordination of claims is largely accepted as a permissible exercise of freedom of contract that is not incompatible with basic mandatory principles of insolvency procedures.
Shareholders' contributions. Shareholders' contributions can be reimbursed only when all the creditors of the company have been paid in full.
Unpaid debts and recovery
Trade creditors, who have not been able to obtain security interests or personal guarantees from a debtor, can use the following mechanisms to secure unpaid debts or enhance their chances of recovery:
Enforcing third-party securities or guarantees. If a creditor has security from a third party (that is, from an individual or entity other than the bankrupt debtor), enforcing that security is not restricted by the debtor's bankruptcy. Enforcement will normally (but not necessarily) give rise to a subrogation of the third party payer into the position of the payee as creditor of the bankrupt.
Retention of title. Trade creditors can use a retention of title clause so that the buyer only acquires ownership of the goods on payment of the final instalment. Retention of title is enforceable against creditors only if the contract is in writing with a certified date on it. If the subject matter of the sale is machinery, retention of title is enforceable against third party purchasers of the asset, as long as it is filed with the clerk of the court of the place where the asset is located and (when acquired by the third party purchaser) the asset is still in that place.
Claim assignment. A claim assignment can be used either to settle a previous assignor's debt or as a security for payment obligations concerning a trade creditor.
Credit risk insurance. A trade creditor can take out an insurance policy against the debtor's insolvency or refusal to pay.
Creditors (either Italian or foreign) can invoke several procedures before insolvency proceeding start.
Summary payment order. Creditors of either cash or a determined quantity of fungible goods can apply to court requiring payment of the sum claimed or delivery of the goods. The claim must be liquid, due and supported by documentary evidence to obtain an ex parte summary order against the debtor. If certain requirements are met, an order can be provisionally enforceable. Otherwise, it becomes definitively enforceable at the end of 40 days from service of the payment order (or 50 days if the defendant resides in the EU and 60 days if he resides outside of the EU) unless the debtor either pays the full amount to the claimant or lodges a statement of opposition. If there is opposition, an ordinary proceeding starts and can last for several years.
Ordinary proceedings. Creditors can start ordinary proceedings to obtain a judgment against the debtor. Ordinary proceedings in Italy usually take a very long time.
Arbitral proceedings. Creditors can refer a dispute to arbitration provided that arbitral jurisdiction has been agreed on by the parties.
Enforcement outside insolvency proceedings. Once a creditor has obtained an enforceable payment order or money judgment, he can execute it. Execution requires the assets to be judicially seized, sold and the proceeds distributed not only to the originally seizing creditor, but also pari passu to any other creditors who joined in the execution proceeding.
Where at least one party is resident in an EU country different from the one where the action is brought, the following procedures apply to most civil and commercial matters:
European small claims procedure (ESCP). The European Regulation (EC) No. 861/2007 aims at simplifying and speeding up cross-border small claims litigation (for claims not exceeding EUR 2,000) in both civil and commercial matters. Subsequently, the judgments are recognised and enforceable in other EU countries without the need for a declaration of enforceability.
Set-off. In insolvency proceedings, creditors are entitled to set off debts they owe to the insolvent debtor against their claims, even though the claims and debts to be set off against each other are not yet due and payable when the insolvency proceeding starts. This applies even where the debts are not the same kind, provided that:
Both debts are liquid or can be made liquid promptly.
The facts from which the reciprocal claims arise occurred before the opening of the insolvency proceedings.
Set-off does not apply where the creditor purchased a claim against the insolvent debtor (that is not overdue on the date of the opening of the insolvency proceedings) either after or one year before the start of the insolvency proceedings.
The Italian state can guarantee (in whole or in part) debts incurred with financial institutions by large insolvent enterprises in extraordinary administration (see Question 6) to finance ongoing operations and re-open and complete plants, real estate and industrial equipment (section 2bis, Law Decree No. 26 of January 30, 1979 ( Law No. 94/1979)).
The overall amount of state-granted guarantees cannot exceed EUR550 million. When a rescue plan submitted in the course of extraordinary administration provides for recourse to state guarantee or other state support measures not authorised by the European Commission, it must comply with EU guidelines.
In 2016, the European Commission opened an in-depth inquiry to assess whether Italian state support for steel producer Ilva (in extraordinary administration) was in line with EU state aid rules. In particular, state-supported finance was granted totalling EUR2 billion, including state guarantees on loans. Exceptionally, a law was used to grant absolute priority of payment on loans granted to Ilva in case of bankruptcy, including priority over debts to public entities. The law was also used to allow Ilva access to funds seized during ongoing criminal proceedings against its shareholders and former management.
Rescue and insolvency procedures
In-court settlement with creditors (concordato preventivo)
Objective. The main objective of a settlement, that is an in-court and debtor in possession insolvency procedure, is to reach an agreement with the majority of creditors, that is also binding on the dissenting creditors. A court-appointed commissioner supervises the debtor, assists with restructuring and the court confirms the final arrangement (which the creditors vote on). The contents of the settlement proposal and the underlying restructuring plan vary from case to case but can include:
Debt restructuring through "haircuts" and/or rescheduling and/or implementing debt-to-equity swap mechanisms.
Assigning the debtor's assets (and often some of the related liabilities).
Typically the unsecured creditors will be allocated into different classes according to their legal position and uniform economic interests (with different rights and treatment if the offer is accepted).
In the past, settlement was seen as a liquidation procedure, but recent legal amendments have made it more of a reorganisation procedure, with the aim of continuing the business. It is now possible to arrange for business activity to continue on a standalone basis, or by selling (or contributing) the going concern to one or more companies.
In this scenario, known as "settlement with business continuity", certain methods apply to make it easy for business to continue, including:
Not allowing outstanding contracts to be terminated by creditors.
Not preventing the company from participating in public tenders.
Providing a one-year moratorium on paying secured creditors.
Selling the company as a going concern free from any liens.
Paying certain pre-petition debts towards critical suppliers/vendors subject to court's prior authorisation.
Other key features include the following:
The debtor can put forward a settlement proposal providing for less than 100% payment to secured/privileged creditors. The secured creditors must not be offered less than what they would presumably get from the sale at auction of the collateral, and the proposed treatment of the various classes of creditors under the debtor's proposal cannot disregard the legally established order of priority among the classes. If the proposal provides for full payment of secured/privileged creditors, the privileged creditors do not have the right to vote on it.
If the settlement is approved by the required majorities and confirmed by the court, the proposal is binding on dissenting creditors.
If the settlement provides for liquidation of the company's assets, it must ensure a payment of at least 20% for unsecured creditors. For settlement with business continuity there is no statutory minimum level of satisfaction for unsecured creditors.
Creditors holding in aggregate at least 10% of the unsecured claims against the debtor can propose a competing restructuring plan (unless the debtor's plan provides that unsecured creditors will be paid at least 40% of the face value of their claims in a liquidation scenario, or 30% in a settlement with business continuity, as certified by an expert).
Competing plans can also provide for a capital increase in the debtor company against consideration, excluding or limiting any applicable pre-emption rights in favour of the existing shareholders (with the effect that they may be diluted).
Initiation. The procedure is initiated by filing a petition with the court with a number of supporting documents (including the restructuring plan and an independent expert's opinion certifying the truthfulness of the debtor's figures and the feasibility of the plan).
It is also possible to file a straightforward petition for settlement while reserving the right to file the proposal to creditors, the plan and the other supporting documents within a term to be set by the court. This term is usually between 60 and 120 days with the possibility to extend to a maximum of 180 days.
Alternatively, within the same term it is possible to negotiate and file a debt restructuring agreement in lieu of a settlement (Article 182 bis, Bankruptcy Law).
Substantive tests. Insolvency (or at least a debtor's financial crisis, including a temporary illiquidity or inability to pay its debts) is needed to start settlement proceedings and only the debtor can initiate them.
Consent and approvals. At the settlement hearing, creditors with voting rights vote on the debtor's proposal. If there are competing proposals filed by creditors, they vote on all the proposals.
Any settlement proposal must be approved by creditors representing at least the majority (50% + 1) of the total outstanding claims. Where there are different classes of creditors, a majority must be reached in most of the classes.
When concurrent proposals are filed, the settlement with the highest majority of the total eligible votes prevails.
If the plan is approved by creditors and no opposition is filed, the court validates it by decree. When an opposition to the plan is filed either by a creditor belonging to a dissenting class or, in the absence of classes, by dissenting creditors representing 20% of claims with voting rights and the suitability of the plan is challenged, the court can validate the plan only after comparing it to other available alternatives and verifying that the proposal is more convenient for the creditor than alternative options.
Supervision and control. Debtor-in-possession management is allowed under the supervision of the commissioner from the filing of the petition for settlement until the final validation decree. See Question 11 for the carrying out of urgent transactions that are not in the ordinary course of business.
Protection from creditors. When a petition for settlement is filed with the court and registered on the Enterprises Register, the debtor is automatically granted a stay from individual actions by its creditors.
Subject to certain limitations, the debtor can petition the court to be authorised to terminate or suspend outstanding contracts provided that the court must hear the other party of the contract before authorising termination/suspension. In case of termination/suspension, the other party is only entitled to compensation for breach of contract but the relevant claim is treated as an unsecured pre-petition claim.
Length of procedure. The validation decree must be issued within nine months from when the proposal is filed. This term can be extended by the court only once for a maximum of 60 days.
Conclusion. The validation decree closes the procedure. After court confirmation, the plan is implemented by the debtor under the commissioner's supervision. If the settlement provides for liquidation of the company's assets, one or more liquidators are appointed to carry it out.
Any payments made, security interests granted and transactions carried out under a court-confirmed settlement are exempted from clawback actions. They are also shielded from the risk of civil liability and criminal charges if the debtor subsequently becomes insolvent.
The settlement can be terminated if the debtor fails to fulfil its obligations under it. If this happens, the court can provide the commissioner with the necessary powers to remedy the debtor's failure to perform, or appoint a judicial administrator to displace the debtor's management for a specified period.
On the fulfilment of its obligations under the settlement, the debtor is discharged from all the prepetition debts that have remained unpaid and can continue the business as normal.
Debt restructuring agreement (accordo di ristrutturazione del debito)
Objective. An out-of-court debt restructuring agreement (DRA) is entered into by the debtor with its creditors. It must then be validated by court decree. The objective is to permit debtors to first negotiate an out-of-court restructuring agreement with major creditors only, thus depriving any subsequent attempt by non-participating minority creditors to enter the bargaining process and disturb the already pre-packaged reorganisation deal.
Initiation. A DRA's main procedural steps include:
Filing and publication. The debtor must file a petition with the court, together with a number of documents (including the restructuring agreement and an expert's opinion), asking for validation of the agreement. The DRA must be filed with the Enterprises Register and published.
Opposition. Within 30 days from publication, dissenting creditors or any other interested party can file an opposition with the court.
Court confirmation. The court decides on the oppositions (if any) and validates the agreement. If no opposition is filed, the court's decision must be issued shortly after expiry of the 30-day term. The validation decree can be challenged within 15 days from publication.
Substantive tests. A DRA pre-supposes a "crisis status" (such as insolvency or at least a debtor's financial crisis, including a temporary illiquidity or inability to pay its debts).
Consent and approvals. A DRA implies that the debtor will reach an out-of-court agreement with its creditors for at least 60% of the value of the outstanding claims. The debtor is free to negotiate and offer different conditions to each creditor, and is not obliged to respect creditors' classes and the pari passu principle. The restructuring plan underlying the agreement must be certified by an independent expert, who validates the truthfulness of the company's figures and the feasibility of the plan (in particular as far as the entire payment of the "external creditors", who are not part of the agreement, is concerned).
External creditors must be paid within 120 days from the:
Validation decree for credits already due and payable at the date of validation.
Relevant expiry date for credits not due and payable at the validation date.
However, if the DRA involves debtors with obligations to banks or financial intermediaries amounting to no less than 50% of the debtor's aggregate indebtedness, the DRA can create one or more categories of bank or financial intermediary creditors with common economic interests. In this case, the terms of the restructuring agreement will be binding on all creditors in a class if:
Creditors holding at least 75% of the amount of claims in the class approve the restructuring proposal.
All creditors in the class have been duly and timely notified of the pending restructuring and have had an opportunity to participate in the negotiations.
The court must determine that these requirements have been met and that dissenting creditors will receive satisfaction under the proposal not lower than the satisfaction they would receive under any alternative option.
Supervision and control. During the procedure, the debtor can carry on business as normal. No commissioner is appointed.
Protection from creditors. For 60 days from publication of the DRA in the Enterprises Register, the creditors are prevented from starting or continuing precautionary or enforcement actions against the debtor. Trading parties are entitled to terminate their contracts with the debtor and/or any licences.
Length of procedure. Once the application has been made, the process generally takes (from initiation to conclusion) 30 to 60 days.
Conclusion. The validation decree closes the procedure. After validation, the debtor must implement the DRA with no further intervention by the court and can carry on business as normal in line with the provisions of the DRA. There is no risk of clawback for actions, transactions and payments carried out under and in performance of a DRA. The DRA can be terminated if the debtor fails to fulfil its obligations under it.
Certified recovery plan (piano di risanamento attestato)
Objective. Financially distressed companies can propose and implement an entirely out-of-court restructuring or reorganisation plan to ensure repayment of outstanding debt and financial re-balancing of the debtor to secure the continuity of business as a going concern.
Initiation. Directors of a debtor company have a duty to initiate a rescue or reorganisation procedure (either a settlement, debt restructuring agreement or out- of -court recovery plan) or a bankruptcy proceeding when the debtor is insolvent, to avoid criminal and civil liability. A criminal action aimed at the bankrupt debtor or its directors can be brought if they worsen the company's insolvency by abstaining from filing a petition.
It is uncertain whether, in the case of distressed (but not yet insolvent) companies, the directors have a duty to start in-court or out-of-court insolvency proceedings.
Substantive tests. A certified recovery plan presupposes a "crisis status" (such as insolvency or at least a debtor's financial crisis, including a temporary illiquidity or inability to pay its debts).
Consent and approvals. The recovery plan is a unilateral action taken by the debtor to rescue its business activity, therefore, no formal approval by creditors is required. Nevertheless, to ensure the achievement of the restructuring attempt the affected creditors (that is, banks, financial creditors or trading partners) consent is needed in connection with any moratorium and/or haircut and/or a debt refinancing or rescheduling provided in the plan.
The feasibility of the recovery plan must be certified by an independent expert who must be a chartered auditor appointed by the debtor. The expert must issue an opinion certifying the truthfulness of the debtor's figures and the reasonableness of the plan in terms of the debtor's ability to fulfil the payment obligations and assure continuity of the business as a going concern.
Supervision and control. The recovery plan can be run completely out of court and therefore be kept confidential (unless the debtor decides to register the plan in the Enterprises Register to gain certain tax benefits).
The recovery plan does not benefit from the many incentives that are available to a debtor and/or its creditors when using a settlement plan or DRA, including:
Acknowledgment of first priority rank to claims deriving from debtor-in-possession and bridge financing granted to the debtor during the restructuring process.
A debtor's entitlement to request the court's authorisation to terminate or suspend outstanding contracts or pay key suppliers and vendors with outstanding claims).
Protection from creditors. There is no automatic stay of actions by individual creditors against the debtor's assets during the drafting and implementation of the recovery plan. Trading parties are entitled to terminate their contracts with the debtor and/or any licences.
Conclusion. Once the plan has been certified by the expert, the debtor must implement it and can carry on business as normal.
Payments made, security interests granted and transactions carried out under a certified recovery plan are not subject to avoidance actions. They are shielded from the risk of criminal charges relating to preferential payments and simple bankruptcy crimes in the case of the debtor's subsequent insolvency proceedings. Exposure to the risk of civil liability for acts in compliance with a certified recovery plan is significantly reduced.
Since the court does not scrutinise or confirm the plan, it is possible that exemptions from clawback actions and liability risks may be jeopardised in a subsequent insolvency proceeding. This can occur if it turns out that the recovery plan, though certified as feasible by an expert, had no reasonable chance of succeeding based on a subsequent finding by the bankruptcy court at the time the plan was presented.
Extraordinary administration procedures for large insolvent enterprises (amministrazione straordinaria)
Objective. These two procedures are an administrative procedure coupled with judicial supervision of certain aspects, reserved for insolvent enterprises exceeding a certain size. Its main goal is to regulate insolvency and minimise its social consequences (typically, protection of the stability of employment) by preserving the integrity of any viable business branches or sectors of the enterprise.
Two different administration procedures are available:
A procedure for "ordinary cases", being businesses with at least 200 employees (in the last one year) and indebtedness exceeding two-thirds of both the total assets and the total turnover. The procedure is commenced by court order with subsequent heavy involvement from the government (Prodi procedure).
A procedure for "extraordinary cases" (used by, for example, Parmalat, Alitalia case and Ilva), for enterprises with more than 500 employees (in the previous year) and whose indebtedness exceeds EUR300 million. The procedure is started directly by the competent Ministry of Economic Development on application from the debtor with no preventive scrutiny by the court (Marzano procedure).
The rescue plan drafted by the extraordinary commissioner appointed by the Ministry (see below) can provide either the:
Initiation. Both procedures can be started as an alternative to straight bankruptcy proceedings as long as there are concrete prospects to rescue the business and achieve the restructuring. The Prodi procedure is divided into two stages:
Either on petition filed by the debtor, or by any creditor or by the public prosecutor or by issuing an ex officio decree, the competent court can declare the debtor insolvent. A supervising judge is appointed and one or more judicial commissioners are selected by the Ministry of Economic Development.
After receiving the judicial commissioner's report and the Ministry's comments, the court can declare the administration procedure open if the company's restructuring appears to be feasible. Then the Ministry appoints the extraordinary commissioner(s) and a surveillance committee.
In the Marzano procedure, only the debtor can apply directly to the Ministry for extraordinary administration and simultaneously petition the competent court to be declared insolvent. The Ministry declares the opening of the procedure and appoints the extraordinary commissioner.
Substantive tests. To initiate and carry on the procedures the debtor must be insolvent but able to demonstrate concrete prospects to rescue the business and achieve the restructuring.
Consent and approvals. The Ministry, after having received the surveillance committee's opinion, can authorise the implementation of the rescue plan submitted by the extraordinary commissioner.
The creditors do not participate in or vote on the rescue plan unless it contains a proposal to close the extraordinary administration by a settlement with creditors (concordato). If the procedure ends with a concordato, the debt restructuring and satisfaction of creditors' claims can be carried out using any technical or legal means, including assumption of debts, mergers or other corporate transactions. Creditors and shareholders can be forced to accept a debt-to-equity swap and any other mechanisms needed to rescue the business.
Supervision and control. In the Prodi procedure's first stage, the court can either allow debtor-in-possession management, with some limitations, or assign the entire management to the judicial commissioner.
After the start of the extraordinary administration (either in the Prodi procedure or in the Marzano procedure), the business activity is run by the extraordinary commissioner under the supervision of the Ministry and the surveillance committee.
Protection from creditors. After initiation of the procedures, creditors are prevented from starting or continuing enforcement actions against the debtor.
Exclusively the extraordinary commissioner is entitled to terminate outstanding contracts (but for employment agreements and lease agreement when the landlord has been admitted to the extraordinary administration).
If the debtor's business is transferred as a going concern, the commissioner, the buyer and the employees' representatives can agree on a partial transfer of the employees to the buyer. However, employee protection is high as the buyer must be chosen not only based on the price offered but also on the guarantee given with respect to the stability of employment. The buyer must then maintain the employment level established at the time of the acquisition for at least two years.
For debtors in the essential public utility services or running a plant of strategic national interest, the choice of the buyer or lessee of the debtor's assets/business is made directly by the extraordinary commissioner (without a bidding and auction process) on the basis of certain criteria set out in the law.
Length of procedure. The rescue plan providing for the transfer of the business as a going concern (or of a bundle of assets and contracts) can last no longer than one year, while the stand-alone reorganisation plan can last no longer than two years. Such terms can be extended by the Ministry.
For debtors in the essential public utility services or running a plant of strategic national interest, the duration of the rescue plan can be longer but not exceeding four years.
Conclusion. The two procedures are concluded either when the objectives of the rescue plan have been achieved (and, in case of the transfer of business/assets, the sale proceeds have been distributed pari passu among the creditors in proportion to their respective claims) or when the judgment validating the settlement with creditors becomes definitive.
If, at any time during the procedures, it turns out that the rescue plan has no chance to be implemented and the debtor is still insolvent, the extraordinary administration can be turned into bankruptcy.
Objective. Bankruptcy is a judicial procedure aimed at liquidating the insolvent debtor's assets and distributing the proceeds pari passu among the creditors in proportion to their respective claims. The application of the equal treatment rule has limited exceptions recognised in law that benefit secured and preferential creditors with statutory priority.
Certain kinds of enterprises (banks, insurance companies, co-operatives, public entities) are subject to different insolvency proceedings called compulsory administrative liquidation (liquidazione coatta amministrativa).
Initiation. The debtor must be an individual or an entity carrying out a commercial undertaking of a non-negligible size. A debtor must have at least one of the following to be eligible for bankruptcy:
More than EUR300,000 of assets in at least one of the three years before the bankruptcy adjudication.
More than EUR200,000 in annual gross revenues in at least one of the three years before the bankruptcy adjudication.
An overall debt (including non-overdue debts) of more than EUR500,000.
To participate in any distribution of assets, a creditor must submit a petition to the insolvency court 30 days before the hearing set by the court for the assessment of the debtor's liabilities. Late petitions can be submitted no later than 12 months (or 18 months) from the decree enforcing the debtor's statement of liabilities.
Within 60 days from carrying out the inventory of the debtor's assets (and no later than 180 days from the bankruptcy adjudication), the trustee must draft a liquidation plan for approval by the creditors' committee, containing the plan for and timing of the sale of the debtor's assets, either individually or as a going concern.
The sale proceeds are often distributed among creditors through periodic interim distributions that reflect the order of priority among the creditors.
Secured creditors can receive interim distributions even before completion of the forced sale of the collateral over which they are secured.
Substantive tests. Insolvency (a debtor's inability to regularly meet its obligations) is a requirement for bankruptcy proceedings.
Bankruptcy cannot be declared if a debtor has overdue debts of less than EUR30,000.
Consent and approvals. Bankruptcy can be declared by the competent court on petition from the debtor or any creditor or the public prosecutor. The creditors' approval of the procedure is not required. The liquidation plan drafted by the trustee is subject to creditors committee's approval.
Supervision and control. A bankruptcy adjudication means that the debtor is deprived of the power to manage and dispose of its assets and a trustee is appointed to administrate the estate with the power to bring clawback and other actions aimed at increasing the value of the estate. The trustee acts under the supervision of an insolvency judge and the creditors' committee, whose authorisation is required to carry out certain transactions outside the ordinary course of business.
Protection from creditors. As a general rule, creditors cannot bring individual (interim or enforcement) actions in relation to assets included in the bankruptcy estate once the insolvency has been declared, even in relation to debts arising during the insolvency proceeding. Secured creditors also are affected by this rule, apart from a limited number of exceptions (to the benefit of pledgees and banks holding mortgages in respect of certain financings).
Length of procedure. Since bankruptcy proceedings generally take a very long time, a provision has been enacted declaring that liquidation of the debtor's assets must be finalised within two years from the bankruptcy declaration.
Conclusion. Bankruptcy proceedings are closed either on liquidation of the assets and distribution of the sale proceeds, or as a result of a bankruptcy agreement (concordato fallimentare). The agreement can be an offer made by a creditor, a third party or the debtor. Bankruptcy agreements provide for restructuring of debts and payment of claims by any possible means. They can assign the debtor's assets in favour of an assignee, sub-divide the creditors into different classes and outline different treatment and rights for creditors belonging to different classes. The agreement must be accepted by the majority of the creditors entitled to vote on it.
When a bankruptcy is closed this way, the bankrupt debtor who has duly fulfilled its obligations under the agreement is released from any further liability in respect of the unpaid portion of the creditors' claims. When a bankruptcy is closed for other reasons, the unsatisfied creditors generally preserve their rights against the bankrupt debtor, subject to the ordinary rules on the statute of limitations. However, a debtor who is an individual can be discharged from the remaining debts under a specific discharge procedure set out in the Bankruptcy Law.
The stakeholders with the most significant role in the outcome of a restructuring procedure are:
Secured creditors (especially when new finance is needed).
Influence on outcome of procedure
The debtor usually plays a significant role in restructuring proceedings but recently enacted reforms have enhanced creditors' chances to be proactive. Creditors holding in aggregate at least 10% of the unsecured claims against a debtor can put forward a competing restructuring plan (and not just vote on the debtor's proposal) (see Question 6). This increases financing and investment opportunities for potential domestic and international lenders, and also investors through the implementation of loan-to-own strategies.
Without sufficient and sustainable pre- and/or post commencement financing, distressed but potentially viable debtors (given their severe liquidity problems) are often unable to restructure their affairs and continue as a going concern. Liquidation (sale of the business or piecemeal sale of the assets) becomes the only available option.
The reality that secured lenders cannot be forced to share their collateral with other secured lenders often enables them to block any financing from new lenders, making them the only viable debtor-in-possession source of financing and giving them disproportionate negotiation leverage.
In out-of-court restructurings, secured creditors also play a role in selecting the manager of the process, even though it is a major concern of Italian banks to avoid any involvement in the corporate governance of a troubled debtor and the related liability risks.
Employees also play a significant role. Where the business is transferred as a going concern, a consultation procedure must take place among the debtor, the buyer and the employees' representatives. The parties can agree on a partial transfer of some employees to a buyer and on amendments to the transferred employees' agreements. Discussions are often heated when dealing with trade unions, bumping rights and the criteria applied to select the employees to be transferred. These issues often lead to litigation.
Protecting employment stability is a policy issue that strongly influences the outcome of extraordinary administration of large insolvent enterprises (see Question 6).
A company's key vendors or suppliers can influence the restructuring attempt of a troubled debtor if they have significant bargaining power by:
Exercising their right to cancel credit terms before the debtor files for any restructuring/reorganisation procedure.
Ceasing to do business with the debtor and waiting for the debtor to submit a critical vendor motion after it has filed for a settlement procedure or a debt restructuring agreement.
In a settlement with business continuity and in a debt restructuring agreement, a debtor can ask the court for authorisation to pay pre-petition claims from its critical vendors/suppliers, provided that an independent third-party expert certifies that the goods supplied by the vendor are:
Essential to ensure the continuity of the business.
Instrumental to enhancing the recovery of all the creditors.
Directors, shareholders and parent entities of a joint stock company (società per azioni) (SpA), or a limited liability company (società a responsabilità limitata) (Srl) cannot be held liable for the insolvent debtor's debts (with limited exceptions). Their liability arises only for damage caused to the company or to third parties (including creditors) owing to breach of fiduciary duty or wrongful conduct.
Only members of partnerships can be held liable for the debts incurred by the insolvent partnership. They are also declared bankrupt if the partnership is declared bankrupt.
Directors can be held liable for damages with regard to:
The company for breach of their fiduciary duties and other duties set out in law or in the company's bye-laws.
The company's creditors for breach of their duty to preserve the company's assets when they are insufficient to repay the creditors.
The company, the shareholders, the company's creditors and third parties if there is a delay or omission when ascertaining an event that causes the dissolution of the company.
Shareholders and/or third parties who have been directly damaged as a result of an act performed by a director using fraud or negligence.
Generally in Italy, partners in a partnership are jointly and severally liable (with no limit and with all their personal assets) for the partnership's debts, with the exception of limited partners in a limited partnership. Limited partners are not allowed to take part in the management of the partnership and are liable only within the limits of their capital contribution.
Parent entity (domestic or foreign)
A parent entity (domestic or foreign) cannot normally be held liable for the debts of an insolvent subsidiary incorporated in the form of a SpA or a Srl because the liability of a shareholder for any obligation of the company is capped at the value of its contribution. However, the sole shareholder of a SpA or a Srl is liable, without limit, for the obligations of the bankrupt company incurred while it held 100% of the company, only as long as the issued and subscribed capital has not been fully paid-in or certain specific filing requirements (aimed at disclosing the sole shareholder's details) have not been complied with.
Certain disclosure duties and liabilities (which give rise to an obligation to compensate damage) apply to a parent company if considered to be a directing entity. A "directing entity" exercises systematic and continuous influence and co-ordination on the overall management of another entity (the "influenced company").
Specifically, a directing entity can be held liable to minority shareholders (if any) and creditors of the influenced company whenever its influence causes a breach of the principles of fair and correct management of the influenced company, resulting in:
A decrease in the value of its shares.
Prejudice to the company's equity to the detriment of creditors.
Liability is not triggered if the directing entity can prove that overall; any damage to the influenced company has been offset by other benefits arising from opportunities or other particular courses of action taken by the directing entity.
Third parties, like lenders and banks, carry a risk of tortious liability for fraudulent or imprudent extension of credit to an insolvent debtor when a lender knew (or ought to have known) that the debtor was insolvent or was likely to become insolvent. When lenders are found to be liable, their liability covers losses suffered by:
Individual creditors owing to delay in commencing insolvency proceedings.
New creditors who relied on the debtor's apparent creditworthiness as the basis for extending credit.
Setting aside transactions
Certain transactions can be set aside if the debtor is declared bankrupt and they were carried out during a specific period before the bankruptcy adjudication or before publication of the petition to be admitted to the settlement procedure (suspect period). These include:
Gratuitous acts or payment of debts not yet due and payable when bankruptcy is declared if carried out in the two-year period before the bankruptcy adjudication. These will be ineffective with regard to creditors by operation of law.
Acts that will be set aside on simple demand by the trustee, unless the third party defendant can prove he entered into the transaction without any knowledge of the debtor's insolvency, including:
onerous transactions whose terms and conditions are significantly disadvantageous for the bankrupt debtor (for example, where the value received by the third party is at least 25% higher than either the consideration actually paid to the debtor, or the value of the benefit actually received by the debtor), if carried out in the year before the bankruptcy declaration;
payment of debts using non-customary means (such as repayments by transferring assets or assigning claims if not provided for by the contract) carried out in the year before the bankruptcy declaration;
pledges and mortgages created by contract, if established a year before the bankruptcy adjudication as security for outstanding debts not yet due and payable; and
pledges and mortgages, whether created by contract or imposed by court order, if established six months before bankruptcy as security for due and payable debts that have remained unpaid.
Acts, transactions or payments that will be set aside if the trustee proves that the third party defendant knew or could not have ignored the debtor's insolvency at the time the act was performed, including:
payments and other non-gratuitous acts of disposition made by the bankrupt debtor in the six months before the bankruptcy adjudication; and
security interests, if the contemporaneous creation of the debt and grant of security occurred in the six months before the bankruptcy adjudication.
Certain transactions are expressly exempted from being set aside including:
Payments for goods and services in the normal course of business on standard terms.
Payment of employees' wages.
Transactions carried out, payments received and security interests taken under, or in performance of, a recovery plan, a settlement or a debt restructuring agreement.
If, during the suspect period, a debtor's property was transferred at an undervalue to a purchaser who then transferred it to a sub-purchaser, the setting aside of the first transaction through a clawback action will affect the sub-purchaser's right:
By operation of law where the transfer was gratuitous, or if the sale to the sub-purchaser was not registered in the competent Land Register before registration of the clawback action by the trustee.
Only if the trustee proves the sub-purchaser's bad faith, where the sale to the sub-purchaser was registered in the competent Land Register before registration of the claw-back action by the trustee.
Carrying on business during insolvency
During the settlement procedure, a debtor can continue to carry on business under the supervision of the commissioner. Urgent transactions that are not in the ordinary course of business (such as settlement agreements or granting securities and/or guarantees) are subject to court approval.
In the preliminary phase of the Prodi procedure (see Question 6, Extraordinary administration procedures for large insolvent enterprises), the court can either leave management to the debtor (with limits), or assign it to the judicial commissioner. After opening an extraordinary administration, the extraordinary commissioner carries on the business under the supervision of the Ministry of Economic Development and the surveillance committee.
In bankruptcy, the trustee appointed by the court is entrusted with the administration of the estate under the supervision of the judge and the creditors' committee. The trustee can be authorised by the court (with consent from the creditors' committee) to temporarily carry on the business or single business branches, or to lease them to a third party selected through a competitive procedure, with a view to preserving the bankruptcy estate and facilitating the sale of all or part of the business as a going concern.
Recent reforms grant the possibility to obtain new finance as long as the borrower opts to attempt reorganisation through a settlement or debt restructuring agreement (DRA).
Bridge finance will have administrative priority claim status if the following conditions are met:
The bridge loan cannot be used to pay existing debts or anticipate performance of the reorganisation plan.
The finance must be expressly contemplated in the reorganisation plan.
Its priority is sanctioned in the court order opening the settlement or confirming the DRA.
To incentivise intra-group bridge financing, administrative priority is afforded to downstream and cross-stream intra-group financing that meets the requirements. The priority is granted up to 80% of the amount of the financing.
During the interim period between filing the settlement or DRA and final court confirmation, the debtor can seek authorisation to receive new financing (which will benefit from administrative priority) to fund ongoing operations and the restructuring process. Authorisation is given if an expert certifies that the financing is appropriate and will likely enable all creditors to have a better chance of being satisfied than without it. The court can also authorise the:
Grant of future loans (by specifying the type or amount).
Creation of new mortgages or pledges or the assignment of receivables or other claims as collateral for the new finance.
The latest amendments to the Bankruptcy Law entitle the debtor to ask the court (after filing a settlement but before submitting the plan, or during DRA negotiations) to authorise interim rescue financing on an expedited basis providing a lender with an administrative priority claim if it is needed urgently to carry on the company's business. The debtor must provide evidence that:
There are no viable financing alternatives.
Failure to obtain the loan will result in imminent irreparable prejudice to the debtor.
Administrative priority is given to any new exit financing given under (or in performance of) the restructuring plan on which the settlement is based, or the court approved DRA.
Italy recognises any judgment opening insolvency proceedings handed down in other EU member states (section 16, Council Regulation 1346/2000 on insolvency proceedings (Insolvency Regulation)). This also applies to court approved settlements, preservation measures and judgment deriving directly from insolvency proceedings and closely linked with them (for example, clawback measures).
If the Insolvency Regulation does not apply and there is no bilateral convention with the EU country of the debtor's centre of main interests, recognition of foreign judgments applies when the following conditions are met:
The judge that issued the decision had jurisdiction.
The defendant knew of the proceeding and could take part in it and defend himself.
The decision is definitive and not contrary to another judgement issued by the Italian courts.
No proceeding on the same matter is pending before the Italian courts.
The judgment's provisions are not contrary to public policy.
Under the Insolvency Regulation, where the debtor's centre of main interests is situated within another member state, the courts of the other member state have jurisdiction to open (secondary) insolvency proceedings against that debtor. The secondary proceedings are restricted to the assets situated in that member state only.
If the debtor's centre of main interests is outside the EU, section 9 of the Bankruptcy Law applies. In substance, the rule states that the insolvent debtor can be adjudicated in bankruptcy in Italy even if bankruptcy proceedings have already been opened abroad (typically in the country where the debtor has its main seat). However, according to the Italian courts, there must be a relevant connecting factor to warrant the exercise of bankruptcy jurisdiction in Italy.
In addition to the EU treaties, Italy is also party to bilateral international treaties on judicial matters, including the Beijing Convention between Italy and China of 20 May 1991, which is expressly applicable to corporate matters.
Italy has not yet adopted the UNCITRAL Model Law on Cross-border Insolvency 1997.
Procedures for foreign creditors
Foreign creditors must comply with the same rules as Italian creditors.
The Italian bankruptcy system has undergone significant changes in the last decade. Further extensive reform of both reorganisation and liquidation procedures is under discussion and a draft statutory instrument delegating powers to the Italian Government "for comprehensive reform of the existing rules on business crisis and insolvency" was issued in January 2016.
Among other things, draft reform proposals provide for:
The introduction of mediation and other procedures to help debtors identify suitable measures to tackle and resolve a crisis promptly, with advice from insolvency practitioners and without court involvement.
Settlement procedures to be started by petition from a creditor.
Severe restrictions on settlement procedures only aimed at liquidating the debtor's assets.
The reduction or elimination of the 60% (of the total indebtedness) threshold currently required to reach a debt restructuring agreement with creditors.
The co-ordination of restructuring proceedings involving companies within the same group.
Italian Government (Governo Italiano)
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Court of Cassation (Corte di Cassazione)
Description. The official website of the Italian Court of Cassation containing Italian legislation and case law.
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Matteo Bazzani, Partner
Mazzoni Regoli Cariello Pagni Studio Legale Associato
Professional qualifications. Italy, Lawyer and Contract Professor of Bankruptcy Law at the Catholic University of Milan
Areas of practice. M&A banking and finance; international taxation; corporate and structured finance; restructuring and insolvency.
Non-professional qualifications. PhD in Commercial Law and International Commercial Law, Catholic University of Milan; JD, Catholic University of Milan Law School (summa cum laude)
- Represented distressed companies in a wide range of industries (including automotive, food and beverage, retail and manufacturing) in restructuring planning, filing of in-court reorganisations, negotiating and closing debt restructuring agreements and out-of-court workouts.
- Representing Italian and foreign entities purchasing businesses from restructuring debtors.
- Representing Italian and foreign creditors either in bankruptcy and liquidation proceedings in Italy or in cross-border insolvencies.
Languages. Italian, English, German
Professional associations/memberships. Italian Bar, International Bar Association.
Publications. Many publications in the fields of corporate, taxation and trust law.
- Co-Author Italy and EU Considerations on Financing Company Group Restructurings, in Financing Company Group Restructurings edited by Baer- O' Flynn, Oxford University Press, 2015.
- Speaker at 22nd Annual Global Insolvency and Restructuring Conference, May 2016, presented by IBA Insolvency Section: Rags to riches. . .to rags? The rising number of struggling businesses in the fashion, retail and textile industries. Distressed transactions and other solutions.
- Author Commento all' art. 2403-bis c.c., in Le società per azioni, codice civile e norme complementari, I, diretto da Abbadessa e Portale, Giuffrè, 2016.
- Author Profili di responsabilità amministrativa dei consiglieri di amministrazione non esecutivi di banche: doveri di vigilanza e di intervento e prova dell' immunità da colpa da parte dei singoli consiglieri, in Rivista di diritto societario, 2008, 2, 2, 327.