A look at corporate, personal and, where relevant, partnership insolvency proceedings in Italy, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.
Composition plan with creditors
- A court-supervised procedure where a corporate debtor in financial difficulty/insolvent seeks to combine all outstanding indebtedness by submitting a proposal to all creditors to the court.
- The procedure is initiated by the debtor filing a petition with the court with a number of supporting documents including the restructuring plan and an independent expert's opinion verifying the debtor's financial position and the feasibility of the proposal. It is also possible to file a straightforward petition for settlement while reserving the right to file the proposal to creditors and the other supporting documents within usually 60 to 120 days (extendable to a maximum of 180 days). Within the same period, it is possible to negotiate and file a debt restructuring agreement in lieu of a petition for settlement.
- The plan may be based on any type of composition: debt rescheduling, transfer of assets or business units to third parties, assignment of assets or business units to creditors, debt for equity swaps, etc.
- The plan must provide for the repayment of unsecured creditors in an amount at least equal to 20% of their claims. Such minimum threshold does not apply to restructuring plans based on business continuity.
- The proposal must be: (i) approved by a majority in value of creditors (if the creditors are split into classes, it must also be approved by a majority of the classes), and subsequently (ii) validated by the court.
- Upon validation, the composition plan with creditors will bind all creditors whose claims were in existence as at the date of the filing.
- The debtor remains in control of its assets throughout the procedure (under the supervision of a court-appointed official with pervasive powers) in order to continue trading. The debtor will require prior approval from the court to enter into any extraordinary transactions. Accordingly, all acts, payments and security interests contemplated by the composition plan with creditors and validated by the court are exempted from claw-back.
- The proposal can provide for secured creditors not to be repaid in full, provided that an independent expert certifies that the secured claims are being repaid for an amount at least equal to the value of the secured assets in a liquidation scenario. In such case, the unpaid portion of the claim is downgraded to an unsecured claim for voting purposes.
- When the plan proposed by the debtor does not allow for repayment of unsecured claims in an amount at least equal to 40% of their nominal value (if based on liquidation) or 30% (if based on business continuity), creditors holding claims representing at least 10% of the aggregate debt (even if the claims have been purchased after the filing) may submit a competing proposal. The deadline for the submission falls on the 30th day prior to the creditors' hearing scheduled by the court for the voting process.
- The accrual of interest is suspended for the entire duration of the proceeding, save for claims secured by pledges, liens or mortgages.
- The terms and the performance of pending contracts are not affected by the filing of the proposal. The company may seek court approval to terminate or suspend the effects (for a maximum period of 60 days) of pending contracts. When authorising the termination or suspension of pending contracts, the court will set an indemnity to be paid to contractual counterparties.
- When a petition for settlement is filed with the court and registered on the Enterprises Register (the public register of all companies incorporated under Italian law), the debtor is granted an automatic stay, preventing all creditors from instituting or continuing any interim proceeding or enforcement against the company and its assets. The automatic stay does not, however, prevent enforcement of share pledges granted pursuant to the financial collateral directive.
Accordi di ristrutturazione dei debiti
Debt restructuring agreement (DRA)
- A corporate debtor can enter into an out-of-court DRA with its creditors, which should subsequently be validated by a court decree.
- The debtor does not need to be insolvent and should negotiate with creditors representing at least 60% of the aggregate outstanding debt.
- The DRA must be published in the Enterprises Register along with an independent expert's report (certifying the accuracy of the debtor's data and the feasibility of the underlying restructuring plan) and the court's validation of the plan. Within 30 days of its publication, creditors and/or other interested parties may challenge the DRA.
- On publication of the DRA, an automatic stay for 60 days prevents all creditors from commencing any enforcement actions against the debtor and its assets. In certain circumstances, such an automatic stay may also apply pending the negotiation of the agreement.
- A validation decree completes 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.
- All acts, payments and security interests granted over assets of the debtor in implementing the validated DRA are exempted from claw-back actions in cases of subsequent bankruptcy.
Accordi di ristrutturazione con intermediari finanziari
DRA with financial creditors
- Special provisions may apply to DRAs entered into with financial creditors, i.e. banks and other financial intermediaries.
- The procedure is available only if the corporate debtor's financial indebtedness, i.e. liabilities vis a vis banks or other financial creditors, exceeds 50% of its aggregate outstanding debt.
- Financial creditors can be split into several classes, provided that each class is composed of financial creditors having homogeneous legal positions and economic interests.
- If the plan is approved by creditors holding at least 75% of the outstanding financial indebtedness relating to each class, it will extend its effects to the remaining dissenting creditors of the same class, provided that they: (i) have been duly informed of the negotiations relating to the DRA and were granted the opportunity to participate in good faith; (ii) have received complete and up-to-date information on the economic and financial performance of the debtor; and (iii) will be paid an amount at least equal to what would be recoverable in any feasible alternative scenarios.
- Other provisions applicable to ordinary DRAs remain unaltered, e.g. independent expert report, automatic stay, control of the debtor's asset.
Piano di Risanamento
- An out-of-court procedure where a corporate debtor in financial difficulty drafts a rescue plan aimed at restructuring its debts and rebalancing its financial position.
- The rescue plan must be supported by an independent expert's report, assessing the truthfulness of the company's data and whether it is reasonably capable of enabling the company's debt to be restructured and its financial position to be rebalanced.
- The debtor does not need to be insolvent in order to commence this procedure. Pre-emptive approval by the court is not required for the rescue plan to be effective.
- The debtor remains in control of its assets during the execution of the plan, and certain transactions completed during the same period are exempted from claw-back actions in case of bankruptcy.
- The implementation of the rescue plan has to be monitored on a regular basis as, in case of material deviations between the actual performance of the company and the forecasts set forth by the rescue plan, all acts/payments made after the occurrence of such material deviation cannot benefit from the protections afforded by the law, e.g. exemption from claw-back actions.
- No automatic stay prevents secured creditors' enforcement actions.
Convenzione di moratoria dei pagamenti
- An out-of-court procedure, aimed at temporarily regulating a corporate debtor's financial difficulties, in which a debtor reaches an agreement with its creditors, creating a moratorium for the outstanding financial claims.
- Financial creditors may be split into classes and if the agreement is approved by creditors holding at least 75% of the outstanding financial indebtedness relating to a single class, it will extend its effects to the remaining dissenting creditors of the same class.
- Crammed down financial creditors may file an opposition within 30 days of the relevant notification from the debtor, seeking a declaration of non-application of the moratorium by the competent court.
- The debtor remains in control of its assets when the agreement is effective.
- A contractual stay prevents any secured creditors from bringing an enforcement claim while the moratorium applies.
Amministrazione Straordinaria (Prodi-bis)
Extraordinary administration (also Prodi-bis proceeding)
- An administrative procedure commenced by court order with subsequent involvement of the government.
- Can be initiated as an alternative to bankruptcy proceedings for a company as long as there is a realistic prospect of rescuing the business and achieving the proposed restructuring.
- Available to insolvent debtors with at least 200 employees and liabilities exceeding two-thirds of total assets and total turnover.
- Upon declaration of the debtor's insolvency, the court assesses the likelihood of a positive outcome from restructuring the business.
- An automatic stay applies throughout the process that prevents any creditor from commencing or continuing any enforcement action against the debtor.
- The commissioner prepares a liquidation or restructuring plan that must be approved by the relevant government department. The creditors do not participate or vote on the plan unless it contains a proposal to close the administration by a settlement with creditors.
Amministrazione Straordinaria delle grandi imprese insolventi (Marzano)
Extraordinary administration of large enterprises (also Marzano proceeding)
- An administrative procedure that is commenced by court order with subsequent involvement from the government.
- The procedure is available to insolvent corporate debtors with at least 500 employees and liabilities amounting to (at least) EUR300 million.
- The debtor initiates the proceedings by applying to the Ministry of Economic Development (MED) for extraordinary administration. The debtor may simultaneously file an application for the declaration of its insolvency.
- The MED designates one or more extraordinary commissioners (up to a maximum of three) setting out their specific powers. The extraordinary commissioner is in charge of running the company and managing its assets in lieu of the management body.
- A supervisory committee is also appointed to act as a consulting body. This issues non-binding comments/opinions on the actions of the extraordinary commissioner(s).
- The commissioner can propose a compromise agreement with creditors' approval (by means of simple majority).
- Admission to the procedure does not trigger the automatic termination of pending contracts, although the extraordinary commissioner has the power to set aside agreements providing for future performance.
- Once the restructuring programme (either aimed at the divestment of the company's asset or at business turnaround) is authorised, the extraordinary commissioner is entitled to institute claw-back actions to the extent that they are beneficial for creditors.
- An automatic stay of proceedings is in place throughout the extraordinary administration. The stay prevents secured creditors from bringing any enforcement actions.
- A terminal proceeding available to companies and entrepreneurs.
- A company or entrepreneur is declared bankrupt when it is insolvent, i.e. when it is unable to pay its debts when they fall due. The assessment of a company’s solvency depends, inter alia, on: (i) whether the liquidity shortfall can be resolved in a reasonable timeframe, i.e. the liquidity crisis is temporary; and (ii) whether the company is capable of meeting its payment obligations by way of ordinary means, i.e. without entering into harmful or fraudulent acts.
- Companies that do not exceed the following thresholds are exempted from bankruptcy: (i) the value of corporate assets has not exceeded EUR300,000 for the three years prior to the petition for bankruptcy (unless the business activity has been carried out for a shorter amount of time); (ii) the annual gross revenue has not exceeded EUR200,000 for the three years prior to the petition for bankruptcy (unless the business activity has been carried out for a shorter amount of time); and (iii) the total amount of corporate debts does not exceed EUR500,000. The insolvent company has the burden of establishing that these thresholds have not been exceeded, so as to avoid a declaration of bankruptcy.
- Following a declaration that the company or entrepreneur is insolvent, the court appoints a supervising judge and a court-appointed bankruptcy trustee to manage the company and liquidate its assets to distribute the relevant proceeds to creditors in accordance with their legal ranking.
- The debtor no longer has control of its assets: these are managed by a court-appointed trustee.
- Creditors must file a proof of claim with the court.
- The supervising judge appoints a creditors' committee that supervises the work of the court appointed bankruptcy trustee(s), authorises certain actions and expresses opinions in the cases provided by law.
- The accrual of interest is suspended until completion of the procedure, unless the claims are secured by pledges, liens or mortgages.
- Agreements in force at the date of declaration of bankruptcy (i.e. contracts not performed yet, in whole or in part, by both parties) remain suspended until the court-appointed bankruptcy trustee, upon authorization of the creditors' committee, declares either to continue or to terminate the contract.
- Debts of the company or entrepreneur, even if not due and payable as at the date of the declaration of bankruptcy, are immediately due by operation of law, e.g. debts arising from loans and financings are accelerated.
- An automatic moratorium arises upon declaration of bankruptcy: all enforcement actions including those brought by secured creditors are stayed, other than those relating to fondiario loans and pledges over shares granted in accordance with the financial collateral directive.
Liquidazione coatta amministrativa
Mandatory administrative liquidation
- A court-supervised insolvency procedure reserved for banks and financial institutions, aimed at liquidating the entirety of their assets. This can be initiated at the request of the bank's management, shareholders, judicial receivers or liquidators.
- The Ministry of Economy and Finance can initiate such a procedure: (i) if the bank or financial institution is failing or likely to fail, i.e. in case of insolvency or financial distress; and (ii) if the situation in (i) cannot be resolved in due time by alternative measures, including the involvement of one or more private entities, government support or supervisory procedures.
- The failing entity's assets are under the control of one or more commissionaires appointed to manage both the bank's ordinary business and the asset disposal.
- An automatic stay affects creditors' interim relief and enforcement action against the corporate assets, unless the securities have been granted in accordance with the EU financial collateral directive.
Composizione della crisi da sovraindebitamento (e "piano del consumatore")
Composition for over-indebtedness
- An out-of-court procedure available to over-indebted entrepreneurs (sovraindebitamento) who cannot declare bankruptcy because they do not satisfy the requirements and thresholds set out in the Italian Bankruptcy Law.
- A simplified version of this procedure is also available to natural persons (piano del consumatore).
- The debtor submits to court a proposal to creditors for the restructuring of debts and satisfaction of creditor claims, in whole or in part, through different methods (rescheduling plans, issue of new securities, liquidation of specific assets).
- The proposal can provide for secured creditors not to be repaid in full, provided they receive no less than they would receive in a liquidation scenario.
- The decree establishes a stay preventing all creditors, whose claims originated before the proposal, from commencing enforcement action, from obtaining a seizure or exercising pre emption rights over the debtor's assets.
- The proposal needs to be approved by creditors representing at least 60% of the aggregate outstanding debt. Secured creditors due, under the proposal, to be repaid in full will not count towards the 60% threshold. Where creditors are divided into classes, the proposal must be approved by the majority of the classes.
- For the proposal to be effective, a validation by the court is also required. Pending the validation, the debtor remains in control of its assets in order to continue trading.
- An additional stay applies to claims originating after validation of the proposal.
Liquidazione del patrimonio
- An alternative to the piano del consumatore procedure where the debtor may apply to the court to seek the liquidation of all their assets (other than certain specific claims and receivables expressly identified by law) on providing a list of all their assets.
- The proceedings are opened with a decree and the court: (i) appoints a liquidator whose role is to prepare a statement of liabilities, manage and liquidate the debtor’s assets, and distribute the relevant proceeds to creditors in accordance with their legal ranking (the plan); and (ii) establishes a stay preventing all creditors whose claims originated before the plan from commencing enforcement action, seizing or exercising pre-emptive rights over the debtor's assets.
- On completion of the liquidation procedure: (i) an additional stay applies with regards to creditors whose claims originated after the validation of the plan; and (ii) the court orders the cancellation of mortgages and liens over the debtor’s assets.
- The security package of financing governed by Italian law customarily includes: (i) mortgages (ipoteca) over immovable properties such as land plots and buildings; (ii) pledges (pegno) over movable assets, shares (in case of a società per azioni) or quotas (in case of a società a responsabilità limitata) and bank accounts; and (iii) an assignment of receivables by way of security with respect to rents and other payments due to the debtor, e.g. indemnities from insurance policies.
- Among the loans secured by means of a mortgage, are the so-called fondiario loans, which are forms of medium- and long-term financing provided by banks and secured by a first-ranking mortgage over the financed property. They differ from the so-called ipotecario loans, which have greater flexibility in structuring the terms of an event of default.
- Enforcement steps for a mortgage include:
- Obtaining an enforcement order (titolo esecutivo) against the debtor.
- Notifying the debtor of the enforcement order (atto di precetto), not required for fondiario loans to the extent that it has been duly notarised.
- Notifying the debtor of foreclosure (atto di pignoramento).
- Issuing a sale order and schedule the hearing for the sale, on the basis of the evaluation of the court-appointed expert.
- Selling the assets: secured creditors may credit bid and repossess the asset.
- In relation to fondiario loans, there are several advantages for the lender in an enforcement scenario, including the possibility of commencing or continuing enforcement proceedings even after the debtor is declared insolvent, or when an insolvency procedure has been commenced in respect of the debtor.
- According to the Financial Collateral Directive, and even if the debtor is undergoing insolvency proceedings (e.g. concordato preventivo) or liquidation proceedings (e.g. bankruptcy), enforcement steps relating to a pledge over shares can include:
- Sale of the financial collateral, i.e. the pledged shares.
- Seizure of the pledged shares up to the value of the secured obligations, to the extent that the deed of pledge expressly reserves such rights and sets out the criteria for evaluating the financial collateral.
Anticipated changes in the next two years
The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.
Notable features required to be included in Member States’ national laws include:
- An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
- A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
- An ability to cram down dissenting classes of creditors.
- Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
- Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.
Regulation of the administrators’ profession
- Italy's bankruptcy law has been significantly reformed by the Italian Legislative Decree no. 14, 12 January 2019 (New Italian Insolvency Law) coming into effect 18 months after 14 February 2019 (except for certain provisions amending the Italian civil code that have already entered into force).
- The New Italian Insolvency Law intervenes not only on the insolvency discipline but also on the discipline contained in the Italian Civil Code that concerns, directly or indirectly, the crisis of companies: notably, the reform sets rules regarding organizational systems directed to promptly discover and take action in case of a crisis situation, in order to avoid the loss of continuity of the business.
- Note that the Italian legal system is grounded on the general principle tempus regit actum, pursuant to which an act is governed by the law in force when the act took place. Accordingly, article 390, first paragraph, of the New Italian Bankruptcy Law expressly provides that petitions for, inter alia, the validation of DRA and the opening of composition plans with creditors' proceedings, the ascertainment of the insolvency state of entities subject to mandatory administrative liquidation, bankruptcy proceedings filed and/or pending before the New Italian Insolvency Law comes into effect remain subject to the provisions in force at that time.
- The New Italian Insolvency Law does not include provisions amending the regulation of the Marzano and Prodi-bis procedures, which remain subject to the current provisions.
As a general outline, the following significant amendments are introduced by the New Italian Insolvency Law and will come into effect in August 2020:
- Replacing the term "bankruptcy" with "judicial winding-up procedure": the change is mainly justified by the need to avoid the negative and disparaging connotations that are traditionally associated with the word "bankruptcy".
- Introducing specific procedures of alert and assisted resolution of the crisis, aimed at facilitating the appearance of the situation of financial distress in its initial phase and simplifying the negotiations between the debtor and its creditors on a confidential basis. Specific bodies established in each Chamber of Commerce will be in charge of these procedures.
- The possibility to present unitary proposals for the recovery of the "group crisis." Such provisions are aimed at regulating intra-group operations and transactions to preserve business continuity, with the purpose of guaranteeing the protection of the shareholders and of the creditors of each company within a group.
Please note that the long period of vacatio legis (i.e. 18 months) provided for the entry into force of certain provisions of the New Italian Insolvency Law was resolved in order to allow harmonization of the provisions of the New Italian Insolvency Law with the EU Directive (which, at that time, was still to be approved).
Contact: Antonio Lombardo
1 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.