Restructuring and Insolvency in Italy 2024

Restructuring and Insolvency in Italy 2024 – Italy Supreme Court

RESTRUCTURING AND INSOLVENCY 2024

ITALY

Francesco Lombardo, Giuliano Marzi

(Freshfields Bruckhaus Deringer)

GENERAL

Legislation

What main legislation is applicable to insolvencies and reorganizations?

The main Italian legislation governing the liquidation, restructuring and insolvency of corporate entities are:

Royal Decree No. 262 of 16 March 1942 (the Italian Civil Code) (in particular, articles 2086, 2272 to 2283, 2308 to 2312 and 2484 to 2496 for the liquidation of partnerships and companies and article 2221 for the insolvency of a commercial activity);
Royal Decree No. 267 of 16 March 1942 on insolvency, composition with creditors and compulsory administrative liquidation, as subsequently amended and supplemented (the Former Insolvency Act), governing the proceedings commenced prior to the entry into force of the Insolvency Code (as defined below);
Legislative Decree No. 270 of 8 July 1999, governing the extraordinary administration of large, distressed enterprises as subsequently amended and supplemented (Legislative Decree No. 270/1999);
Law Decree No. 347 of 23 December 2003, governing the extraordinary administration aimed at the restructuring of large, distressed enterprises as subsequently amended and supplemented (Law Decree No. 347/2003); and
Legislative Decree No. 14 of 12 January 2019 enacting the new crisis and insolvency code (the Insolvency Code), entered into force on 15 July 2022 (as amended by Law Decree No. 118 dated 24 August 2021 converted into law, with amendments, by Law No. 147 dated 21 October 2021 and Legislative Decree No. 83 dated 17 June 2022 implementing the Directive 2019/1023/EU dated 20 June 2019 on preventive restructuring frameworks through the ‘early warning tools’, exoneration and disqualifications, and including measures to enhance the effectiveness of restructuring, insolvency and exoneration proceedings).

Excluded entities and excluded assets

What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

State, public entities and other entities subject to sectorial legislation (eg, banks, insurance companies or other financial institutions) are not subject to the Insolvency Code.

Specific insolvency procedures provided by Legislative Decree No. 385, dated 1 September 1993, as subsequently amended and supplemented (the Italian Banking Act) and the Legislative Decree No. 58 of 24 February 1998 (the Italian Financial Act) apply to these entities (including, by way of example, special administration of banks and banking groups – which, for the sake of clarity, differs in terms of requirements and procedure from the extraordinary administration of large, distressed enterprises set out in Legislative Decree No. 270/1999 and the extraordinary administration aimed at the reorganization of large, distressed enterprises set out in Law Decree No. 347/2003 – and the compulsory administrative liquidation).

Debtors who meet all the requirements set out below qualify as ‘minor debtors’ and, as such, are not subject to:

the judicial liquidation procedure – an insolvency procedure aimed at the liquidation and dissolution of the insolvent enterprise that replaces the bankruptcy procedure provided in the Former Insolvency Act in view of, among other things, superseding the concept of ‘bankruptcy’ (which was deemed to have a negative connotation) in the context of the new Italian insolvency framework introduced by the Insolvency Code; and
composition with creditors.

Minor debtors may instead apply for (or be subject to):

controlled liquidation (but only to the extent that the overall amount of the outstanding debts stated in the preliminary investigation papers is more than€50,000);
negotiated settlement for minor debtors; or
minor composition with creditors, which is one of the debt restructuring procedures for debtors in a state of over-indebtedness.

The requirements to be met by the relevant debtors (and, hence, the thresholds not to be exceeded) for them to qualify as minor debtors are as follows:

they own assets having an aggregate value not higher than €300,000;
they have achieved gross revenues for an aggregate amount not higher than€200,000 per year; and
they have an overall value of debts of any nature (including those not yet due) not higher than €500,000.

These thresholds must be calculated as the average value of the assets owned by the relevant debtor or gross revenues per year achieved by the same debtor over the three-year period (or the shorter period since the starting date of its business) preceding the date of filing for either a judicial or a controlled liquidation. If the debtor exceeds one of the thresholds, it will be eligible for the judicial liquidation procedure and the composition with creditors.

The Italian Ministry of Justice may update the thresholds every three years by issuing a ministerial decree.

As to the assets of the insolvent debtor and their possible inclusion in the insolvency estate, the following assets are generally excluded from judicial liquidation and controlled liquidation procedures and exempt from claims of creditors:

items and rights of a strictly personal nature;
maintenance, salary, pension, pay cheques and anything that debtors earn from their business up to the amount that is required to support debtors and their family (the relevant thresholds are set by the delegated judge, taking into account the personal conditions of the debtors and their family);
proceeds deriving from the legal use of their children’s assets, assets that are part of a trust fund and revenues arising therefrom; and
items that cannot be seized by law (religious items, clothes, bedding and beds).

Assets acquired by the relevant debtor during the aforementioned procedure might also be considered part of the insolvency estate unless, with the authorization of the creditors’ committee, the receiver refuses to accept those assets on the basis that their acquisition or maintenance costs would exceed their actual value.

Public enterprises

What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

Pursuant to article 1 of the Insolvency Code, public entities are not subject to judicial liquidation and other insolvency and reorganization procedures unless they run their business via an entity incorporated in the form of a company.

In fact, entities running a commercial business in the form of a company – even if the relevant shares or quotas are held by the state or other public agencies (ie, publicly owned companies) – are not immune to judicial liquidation nor any other insolvency and reorganization procedures. What is more relevant is the fact that they operate in a competitive market, with the same forms and methods as any private entity.

Also, during the period of application of the Former Insolvency Act, the prevailing case law held that publicly owned companies were subject to insolvency and reorganization procedures, as they could be considered as private law entities for the purposes of application of the insolvency laws (Italian Court of Cassation, 22 February 2019, No. 5346).

Protection for large financial institutions

Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

In Europe, the main legislation dealing with the financial difficulties of institutions that are considered too big to fail is contemplated in the Directive 2014/59/EU on recovery and resolution of banks (the Bank Recovery and Resolution Directive or the BRRD).

Italy has implemented the BRRD in the Italian Banking Act and other specific legislation applying to banks incorporated in Italy, holding companies controlling banking groups, financial institutions or insurance companies that are controlled by a bank or that are part of a banking group. Furthermore, the Italian Banking Act and the related legislation connected therewith have identified the Bank of Italy as the relevant national resolution authority.

As a resolution authority, the Bank of Italy is empowered to cooperate with the other member states’ supervising authorities or other Italian supervising authorities (ie, CONSOB for financial institutions and IVASS for insurance companies) in respect of a resolution of financial institutions or insurance companies controlled by a bank or part of a banking group.

Accordingly, following a significant deterioration in terms of performance, a bank operating in Italy (or any other entity to which the aforementioned laws apply) is required to prepare a full recovery plan that sets out the measures to be taken for the restoration of its financial position. This will provide the Bank of Italy with the required information to plan how the essential functions of the relevant entity or group may be isolated and continued. The Bank of Italy has also the power to require organizations to take steps to restore financial soundness or reorganize business.

On the basis of the recovery plan, the Bank of Italy will prepare, after having consulted the European Central Bank (ECB), a resolution plan for each bank (or any other entity to which the aforementioned laws apply), setting out different resolution options to be applied in a variety of scenarios.

To reduce the systemic risks posed by the crisis of the relevant bank (or entity), the Italian Banking Act and the related legislation connected therewith provide for the following harmonized set of resolution tools that can be issued by the Bank of Italy:

a sale of business tool, enabling the Bank of Italy to carry out a sale of a part or the whole of the business of the failing relevant bank (or entity);
a bridge institution tool, providing for a new institution to continue to provide essential financial services to clients of the failed bank (or entity);
an asset-separation tool, enabling the transfer of ‘bad’ assets to a separate vehicle or ‘bad bank’; and
a bail-in tool, ensuring that most unsecured creditors of an institution bear appropriate losses.

The possible application of the aforementioned resolution tools, and more generally resolution powers, are triggered when the Bank of Italy, on the basis of objective tests specified by the applicable law, determines that the relevant bank (or any other entity to which the aforementioned laws apply) is failing or is likely to fail and there are no alternative measures that would prevent such a failure within a reasonable time-frame.

Pursuant to the Italian Banking Act and the related legislation connected therewith, the resolution is activated when the Bank of Italy verifies the existence of public interest, namely, when the resolution appears to be necessary and proportionate to reach one or more of the resolution objectives, and the winding up of the bank (or any other entity to which the aforementioned laws apply) under compulsory administrative liquidation would not meet those resolution objectives to the same extent. The Bank of Italy may choose the specific tool to adopt in the relevant circumstances.

Considering the above, the Bank of Italy is empowered to place a bank (or any other entity to which the aforementioned laws apply) into special administration of banks and banking groups if it deems that there are reasonable prospects to restore financial soundness. The Bank of Italy will subsequently appoint various special bodies to provisionally manage the relevant bank (or any other entity to which the aforementioned laws apply) and, most importantly, to assess its financial situation and propose solutions to ensure the protection of savings.

Furthermore, in the context of a special administration of banks and banking groups, the Bank of Italy can appoint a commissioner to manage the relevant bank (or any other entity to which the aforementioned laws apply) for a maximum period of two months (temporary management), which may be extended upon discretion by the Bank of Italy.

If, however, the crisis is irreversible and cannot be overcome, the bank (or any other entity to which the aforementioned laws apply) will undergo a compulsory administrative liquidation ordered by the Minister for the Economy and Finance on the Bank of Italy’s proposal. The Bank of Italy will appoint the liquidating bodies, which will act under its supervision.

No other regimes apart from the special administration of banks and banking groups and compulsory administrative liquidation described above are provided for banks (or any other entity to which the aforementioned laws apply).

Finally, a set of rules also apply to financial intermediaries or insurance companies (other than the financial institutions or insurance companies controlled by a bank or a banking group, which are subject to the procedures mentioned above) that are facing financial difficulties or mismanagement by the corporate bodies of such entities. The relevant legislation is set out in the Italian Financial Act (for financial intermediaries) and in Legislative Decree No. 209, dated 7 September 2005 (for insurance companies).

Such special rules contemplate the potential commencement of various procedures depending on, among others, the magnitude of the crisis, the amount of capital losses and the irregularities or violations of the applicable laws and regulations.

Courts and appeals

What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

As a general rule, court-driven insolvency or reorganization proceedings are vested with the court of first instance of the district where the relevant debtor has its own center of main interests (COMI). Any transfer of the COMI during the year preceding the commencement of an insolvency or reorganization procedure would not affect the jurisdiction identified above.

The Italian concept of COMI mirrors the corresponding concept set out under article 3 of Regulation (EU) 2015/848 on Insolvency Proceedings Recast (the EU Insolvency Regulation), except for the period during which the transfer of the COMI does not affect the jurisdiction, which according to the EU Insolvency Regulation is three months (as opposed to the one-year period provided for under Italian law).

The Insolvency Code also introduces a set of rules governing the crisis of corporate groups. If the crisis affects several companies belonging to the same group and having their COMI in Italy, it is possible to present a single petition for access to the procedures for composition with creditors or approval of a debt restructuring agreement. The petition must be filed with the court where the parent company has its main center of activity or, in the alternative, the court of the place where the affiliated company with the greatest debt exposure is located.

While decisions as to the commencement or the completion of insolvency or reorganization proceedings (eg, a court order opening a judicial liquidation or the admission or approval of a composition with creditors procedure) are generally taken by courts composed of a board of three judges acting collectively, other decisions regarding the day-by-day administration of the procedure are usually delegated to a single judge in charge of that relevant procedure, acting individually.

Decisions and orders issued by the delegated judge may be challenged by the debtor subject to the insolvency or reorganization procedure or by other interested parties (eg, its creditors) before the same court of first instance, composed of a board of three judges acting collectively (provided that the delegated judge is not part of the board of three judges deciding on the appeal).

Decisions and orders issued by the court of first instance composed of a board of three judges can generally be appealed before the relevant court of appeal. No limitations apply to the right to appeal a decision (neither court permission, nor granting of a security by the appellant or by a third party on its behalf), other than the fact that in many cases the appealing party must have taken part in the proceeding leading to the appealed decision.

More specifically, the court order opening a judicial liquidation procedure can be appealed by the insolvent debtor or any other party by lodging an appeal before the court of appeal. The appeal must be filed:

within 30 days from the notification of the order;
within 30 days from the registration of the relevant court order in the Business Register (if any); or
absent any notification or registration of the court order, within six months from the issuance of such order.

The decision of the court of appeal may then be further appealed for specific reasons (limited to the application of the relevant law and excluding factual reasons) before the Italian Court of Cassation. The same terms mentioned above (ie, within 30 days from the notification or registration of the decision of the court of appeal or six months from that decision if no notification or registration occurs) apply mutatis mutandis to the appeal before the Italian Court of Cassation.

The court order rejecting the request of the opening of a judicial liquidation procedure may be appealed by the party that had requested the opening of the procedure and by the public prosecutor by lodging an appeal before the court of appeal within 30 days from the notification of the relevant court order. If the court of appeal rejects the appeal, the decision is final and not subject to further appeals. If the court of appeal upholds the appeal and therefore opens the judicial liquidation procedure (transferring the relevant files to the competent court of first instance), the decision may be further appealed for specific reasons (limited to the application of the relevant law and excluding factual reasons) before the Italian Court of Cassation within 30 days from the notification of the decision of the court of appeal.
The court decision providing for the homologation of a debt restructuring agreement, a restructuring plan subject to homologation or a composition with creditors may be appealed by creditors or other interested parties by lodging an appeal before the court of appeal within 30 days from the notification or registration of the decision providing for the homologation, or six months from that decision if no notification or registration occurs. Only parties that have opposed the homologation before the court of first instance are entitled to appeal the relevant decision before the court of appeal. The decision of the court of appeal may then be further appealed for specific reasons (limited to the application of the relevant law and excluding factual reasons) before the Italian Court of Cassation. The same terms mentioned above (ie, within 30 days from the notification or registration of the decision of the court of appeal or six months from that decision if no notification or registration occurs) apply mutatis mutandis to the appeal before the Italian Court of Cassation.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

As a general rule, Italian companies are subject to voluntary liquidation upon a decision of the shareholders’ meeting.

Furthermore, joint-stock companies, limited liability companies and joint-stock limited partnerships are considered as terminated upon occurrence of any of the events below (termination events):

expiry of the company’s term of duration as stated in the by-laws;
achievement of (or impossibility to achieve) the purpose for which the company was established;
the shareholders’ meeting can no longer function or remains long inactive;
the share capital is reduced below the legal minimum amount and the shareholders fail to increase it or, alternatively, fail to convert the company into another type of company (in respect of which the minimum share capital requirement would be complied with);
there are no profits or reserves available to reimburse the shares of a resigning shareholder and the company does not intend to or cannot follow the route of the capital reduction;
any other reason laid down in the deed of incorporation or the by-laws; or
in other circumstances provided for by law.

The occurrence of any termination event triggers the directors’ duty to convene a shareholders’ meeting to resolve on the removal of such triggering event or on the appointment of liquidators of the company. If the shareholders’ meeting fails to adopt such a resolution, and no reorganization seems to be reasonably feasible, the directors must apply for a judicial liquidation procedure or a controlled liquidation procedure.

The directors are personally and jointly liable for any damage that the company, its creditors and third parties may have suffered as a consequence of such delay or failure to take action. Furthermore, the directors of the company maintain the power to manage the company solely for the purpose of preserving its value. If they fail to do so, they are personally and jointly liable for any damage that the company, its creditors and third parties may have suffered as a consequence.

Upon occurrence of any termination event, the extraordinary shareholders’ meeting must appoint one or more liquidators to manage the company to pay the company’s creditors’ claims by distributing to them the proceeds deriving from the sale of the company’s assets, until the company has been fully wound up, after which it is removed from the Business Register and ceases to exist.

A company in voluntary liquidation may still become insolvent (if it is unable to regularly pay its own debts), in which case the company’s directors or the liquidator (as the case may be) start reorganization (namely, composition with creditors, debt restructuring agreement, restructuring plan subject to homologation, certified recovery plans or negotiated settlement arrangement) or file a request for the opening of a judicial liquidation procedure or a controlled liquidation procedure.

Following the filing of a petition for a composition with creditors or a debt restructuring agreement and until the date of their homologation, the rule that considers the reduction of the share capital or the company as an automatic termination event does not apply.

Voluntary reorganizations

What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

The main types of voluntary reorganizations are:

debt restructuring agreement;
restructuring plan subject to homologation;
certified recovery plans; and
negotiated settlement arrangement.

The extraordinary administration of large, distressed enterprises under Legislative Decree 270/1999 and the extraordinary administration aimed at the reorganization of large, distressed enterprises under Law Decree 347/2003 could also be theoretically considered as voluntary reorganizations, to the extent that both procedures can be started by the debtor voluntarily (in addition to the request that can be filed by a creditor or by the public prosecutor).

However, both types of extraordinary administration procedure differ from the aforementioned reorganizations insofar as the latter can solely be commenced voluntarily by the debtor, who may in no way be legally forced to start any of the aforementioned reorganizations.

The requirements for a debtor to commence a voluntary reorganization are different in relation to each of the tools and procedures mentioned above.

Composition with creditors

A debtor in crisis or insolvent may file a petition for a composition with creditors with the first instance court where its center of main interests (COMI) is located. Once the composition with creditors has been opened, creditors representing at least 10 per cent in value of the aggregate amount of the debts owed by the debtor are entitled to file a concurrent plan and proposal for a composition with creditors where certain conditions (specified below) are met.

As a general rule, the petition must contain a proposal for an agreement with creditors and must be accompanied by:

a restructuring plan;
a report issued by an expert assessing the plan’s feasibility and certifying that the restructuring plan is suitable for successfully overcoming the insolvency status and that creditors will be better off than in a liquidation scenario; and
other documents illustrating the debtor’s financial situation.

The experts are appointed by the debtor and must be independent professionals registered with the relevant register of auditors. Being technically insolvent (ie, unable to regularly pay its own debts) at the time of filing of the proposal is not a requirement for the debtor, as it is sufficient that the relevant debtor is in a state of crisis (ie, a situation of temporary illiquidity or financial difficulties).

The debtor’s proposal must provide for the following:

the restructuring of debts and satisfaction of creditors through a wide range of arrangements, including, without limitation, the assignment of assets or the attribution of shares or financial instruments to creditors (as a means of satisfying their claims);
the grounds upon which the composition with creditors is more favorable than a procedure of judicial liquidation; and
the segmentation of creditors into separate classes, based on homogenous economic interest and legal situation, each of which may be offered a different treatment.

In general, secured creditors should be paid in full (and they are not entitled to vote on the approval or the refusal of the plan). However, when the value that could have been achieved from the sale of the asset in a liquidation context is less than the market value, the debtor’s proposal may also provide that such creditors are not fully satisfied, provided that each of them obtains at least the value of the secured asset that could have been achieved from the sale of the asset in a liquidation context and does not receive a worse treatment compared to unsecured creditors.

If the debtor’s proposal provides for a partial payment of the secured creditors’ claims, secured creditors will be admitted to voting for the portion of their claim that is not expected to be paid in full. Furthermore, secured creditors are admitted to voting if they waive their security interests.

As to unsecured creditors:

no floor is provided to their payment in the context of a composition with creditors envisaging the continuation of the business; and
the proposal must ensure that at least 20 per cent of the unsecured debt is paid and, in any event, the injection of external finance must increase by at least 10 per cent of the value of the assets of the insolvent company at the time of the filing, if the composition with creditors envisages the disposal of the debtor’s assets and its dissolution (as opposed to the continuation of the business).

As an alternative to filing the ‘complete’ petition for a composition with creditors, the debtor may also file a conditional petition for a composition with creditors (ie, a generic petition without attaching the restructuring plan and the other documents required by law), reserving the right to subsequently file a final and complete proposal within a certain period.

The relevant court can set a time-frame to file the final and complete proposal, which could be between 30 and 60 days (with a possible extension of a further 60 days). By the end of that period, the debtor may file the complete composition with creditors proposal or a petition for the homologation of a debt restructuring agreement.

To prevent abusive requests for a conditional petition, the following rules apply:

when requesting to open the relevant procedure, the debtor is required to deposit a list of its creditors (indicating the amount and the priority ranking of the respective claims) together with its three latest financial statements;
the court may decide to reduce the term by which the debtor must file the complete proposal;
the court has the power to appoint a commissioner to monitor the debtor’s management and to report any breaches to the court during the procedure (eg, the concealment of losses);
the debtor must provide information reports to the court at least once a month during the procedure; and
if a commissioner has been appointed by the court, the debtor must pay an amount of between 20 per cent and 50 per cent of the costs of the procedure by the deadline set out by the court, in any case not exceeding 15 days from the appointment of the commissioner.

Without prejudice to the above, a concurrent plan and proposal for composition with creditors may also be filed by creditors representing at least 10 per cent of the outstanding claims towards the debtor when the debtor’s proposal does not provide for the satisfaction of:

at least 40 per cent of its unsecured creditors (in the case of a plan contemplating the business liquidation); or
at least 30 per cent of its unsecured creditors (in the case of a plan providing for business continuity).

In the case referred to under item (2) above, the relevant percentage would decrease to 20 per cent if the debtor has previously filed a petition for the commencement of a negotiated settlement arrangement. Competing proposals must be submitted no later than 20 days from the date set out by the relevant court for the voting of the creditors.

The petition for a composition with creditors, whether complete or conditional, is published in the Business Register. Upon publication of the petition:

if the debtor expressly requested the granting of protective measures, its creditors are prevented from starting or continuing any enforcement or interim actions on the debtor’s assets, and acquiring preferential rights or security thereupon, unless authorized by the relevant court. Such protective measures:
must be confirmed, revoked or amended by the court upon a request filed by the relevant debtor;
must not exceed the duration of four months and may be extended (subject to certain conditions to be met), but in any case must not exceed 12 months overall; and
do not apply to employees’ receivables;
any judicial mortgages registered in the 90 days prior to the publication of the petition for composition with creditors in the Business Register will have no effect on creditors who have acquired their claims prior to the filing of the relevant petition;
interest on the creditors’ claims ceases to accrue;
the debtor may carry out acts of ‘ordinary’ (day-by-day) administration and, only if authorized by the relevant court, urgent acts of ‘extraordinary’ administration; and
the debtor may request the court to authorize the termination or the suspension of ongoing contractual agreements (excluding employment contractual agreements).

Once the petition has been declared admissible, the court appoints a judicial commissioner (who, in the event of a conditional petition, is appointed after the filing of the conditional petition). The judicial commissioner monitors the debtor and its management and informs the delegated judge or the court (as the case may be) and the creditors of the results of its monitoring activity.

The court verifies that:

the documents provided by the debtor are sufficiently coherent and clear in order to allow creditors to form a view on the proposal; and
the plan’s feasibility does not breach any provisions of law.

Upon homologation, the composition with creditors becomes binding on all creditors existing before the publication of the relevant petition in the Business Register. However, creditors maintain their rights in relation to any joint obligors and to the debtor’s guarantors.

Finally, as a general rule, any payments or security interests provided in the composition plan or authorized by the relevant court in the context of a composition with creditors are not subject to clawback actions in the case of opening a procedure of judicial liquidation.

Debt restructuring agreement

The debtor may request the court to homologate one of the following types of debt restructuring agreements:

a (standard) debt restructuring agreement, executed with creditors representing at least 60 per cent of the debtor’s outstanding debts;
a debt restructuring agreement allowing extension of the effects of the agreement event to non-adhering creditors, provided that such agreement is executed with at least 75 per cent of the creditors of each relevant class and that other conditions are met. If the debtor’s indebtedness towards banks and financial intermediaries exceeds 50 per cent of the debtor’s overall indebtedness, the extension of the effect of the agreement to non-adhering creditors can be requested also in the case of a debt restructuring agreement contemplating the disposal of the debtor’s assets and its dissolution, otherwise, the extensions may only be obtained if the agreement contemplates the continuation of the business; or
a simplified restructuring agreement that may be executed with creditors representing at least 30 per cent of the debtor’s outstanding debts (instead of the 60 per cent threshold generally required for debt restructuring agreements), provided that no protective measures and no 120-day moratorium of the debts towards creditors who are not party to the agreement are requested by the debtor.

Together with the petition for the homologation of any of the debt restructuring agreements mentioned above, in principle, the debtor is required to file the same documentation required for the composition with creditors.

Notwithstanding the similarity with the documentation to be filed in respect of a composition with creditors, the expert’s report must certify that:

the company’s data are accurate;
the agreement is feasible; and
the creditors who are not party to the agreement will be paid in full (possibly within the 120-day moratorium as described below).

Similarly to the procedure of composition with creditors, the debtor is also allowed to file a conditional petition for a debt restructuring agreement, reserving the right to subsequently file a final and complete proposal within a certain period, which the court can set out between 30 and 60 days (with a possible extension of further 60 days upon request from the debtor and subject to the existence of justified reasons).

Except for ‘simplified’ debt restructuring agreements, the payment of claims of creditors not adhering to the debt restructuring agreement must occur within 120 days of the homologation date (in respect of debts that are already due and payable on such date) or within 120 days of the expiry date (in respect of those debts that are not yet due and payable on such date).

All the aforementioned types of debt restructuring agreements are published in the Business Register. The creditors and any interested party may oppose the homologation of the debt restructuring agreement within 30 days from such publication. The relevant court homologates the debt restructuring agreement if it decides to reject the opposition. In that case, the homologation is published in the Business Register and the debt restructuring agreement becomes effective.

The agreement can be homologated by the court even in the absence of adherence by the tax and social security authorities, whose adherence must be received within 90 days from filing of the agreement with the Business Register. Lacking that adherence, the silence by the tax authority or the social security authority, or both, can be then overcome by the court if the agreement provides for a more advantageous settlement than the judicial liquidation, and the expert certifies it in its relevant report.

Upon request by the debtor, during the negotiations of the debt restructuring agreement and upon its homologation the court may grant the debtor a protection from creditors’ enforcement actions over the debtor’s assets.

Restructuring plan subject to homologation

The restructuring plan subject to homologation is a new tool contemplated by the Insolvency Code. It consists of a restructuring plan subject to a judgment of admissibility by the court, an approval by creditors and homologation by the relevant court.

It differs from the composition with creditors, among others, because:

during the procedure the debtor preserves the ordinary (day-by-day) and the extraordinary administration of the business, under the supervision of the judicial commissioner, although such administration must be ‘in the best interests of the creditors’; and
the restructuring plan subject to homologation – under certain conditions – is exempted from the rules governing the distribution of the proceeds in accordance with the creditors’ priority ranking that generally apply to insolvency procedures.

The restructuring plan subject to homologation is homologated by the relevant court only if it is approved by the simple majority of the creditors (by value, not by headcount) representing each voting class.

If the plan is approved by all classes of creditors, the proceeds obtained from the execution of the plan may be distributed – as mentioned above – also waiving the rules governing the distribution of the proceeds in accordance with the creditors’ priority ranking generally applying to insolvency proceedings (except for payroll debts, which must be paid in full within 30 days from the date of homologation of the plan).

If the plan is not approved by the simple majority of the creditors of each class and, in general, any time prior and until homologation, the debtor may convert the plan into a composition with creditors and file the relevant petition.

Certified recovery plans

A debtor in state of crisis or insolvency (not irreversible) may prepare a plan with creditors aimed at restructuring its debt exposure and restoring its economic-financial situation.

The plan must be in written form, meet certain requirements imposed by law as to the certainty of the date of execution (required also for unilateral deeds and implementing agreements), and include:

a description of the economic and financial situation of the debtor;
the main causes of crisis;
an express indication of the strategy and timing for restructuring and instruments to be adopted in the case of deviations (the ‘self-adjusting’ plans);
the number of creditors, the amount of the debts for which the renegotiation is proposed and the indication of resources allocated to the satisfaction of debts at maturity date; and
the injection of new money (if any).

The plan must be certified by an expert (an independent professional enrolled with the register of statutory auditors) appointed by the debtor.

The certification by the expert exempts any action carried out in accordance with the recovery plan from clawback actions and insolvency-related criminal liability, except for cases of gross negligence or willful misconduct of the debtor or of the expert (that creditors were aware of).

Negotiated settlement arrangement

Among the innovations introduced by the Insolvency Code, it is also envisaged that, when a debtor is in a state of financial instability or distress that may likely lead to crisis or insolvency, it may file an application to the relevant chamber of commerce for the appointment of an expert to facilitate negotiations among the relevant debtor, its creditors and any other interested parties to restore its financial position.

The petition for the appointment of the expert must be made via a digital platform accessible from the website of the relevant chamber of commerce. The expert is appointed by an ad hoc committee established at each chamber of commerce within five business days from the filing of the petition. The appointment must be accepted within two days thereof.

The debtor may file an online petition for protective measures together with the petition for the appointment of the expert or thereafter (by means of a separate petition). From the publication of the petition, no enforcement actions or procedure of judicial liquidation can be continued or opened, and no security interests can be obtained by creditors on the debtor’s assets unless specifically agreed with the same.

Furthermore, the filing of the petition does not entitle the debtor’s creditors to terminate, withdraw from or accelerate (or otherwise refuse the performance of) pending contracts, and any contractual provision that does not comply with this rule will be considered as unenforceable.

The solution to overcome the crisis must be identified within 180 days of the appointment of the expert.

In the context of the negotiated settlement, the expert assesses the prospects for recovery of the relevant debtor, in particular:

if there are no concrete chances of recovery, the expert will order the closure of the procedure; and
if there are concrete chances of recovery, the debtor, its creditors and any other interested parties must cooperate in good faith and in a timely manner with the expert in order to identify solutions to overcome the crisis.

If in the context of the negotiations the parties have detected suitable solutions to overcome the crisis, the expert must submit a final report with the Business Register. In this respect, the debtor may alternatively:

enter into an agreement with one or more creditors benefiting from the tax incentives, provided that the expert’s final report certifies that the agreement is likely to ensure business continuity for a period of at least two years;
enter into an agreement with one or more creditors (and signed also by the expert) and benefit from the clawback exemption; or
commence one of the restructuring procedures provided for under applicable law and namely:
request the homologation of a debt restructuring agreement;
prepare a certified recovery plan;
enter into a moratorium agreement;
file a request for simplified composition with creditors; or
request the accession to other procedures provided under the relevant applicable law.

Successful reorganizations

How are creditors classified for purposes of a reorganization plan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

The classification of creditors and the approval of the reorganization plan varies depending on the type of reorganization chosen by the debtor.

In general, only the composition with creditors, the restructuring plan subject to homologation and, to the extent its effects need to be extended to non-adhering creditors, the debt restructuring agreement require a proper classification of creditors and an approval by the same.

Indeed, on the one hand, certified recovery plans only apply to creditors who are party to the relevant agreement and do not generally require (or imply) a proper approval by creditors and a classification of the same.

On the other hand, extraordinary administration of large, distressed enterprises pursuant to Legislative Decree No. 270/1999 and extraordinary administration aimed at the reorganization of large, distressed enterprises pursuant to Law Decree No. 347/2003 do not usually require approval by creditors, and their classification follows the same rules as provided for in judicial liquidation procedures (ie, the former bankruptcy procedure).

As far as the composition with creditors and the restructuring plan subject to homologation are concerned, the debtor may propose:

the division of creditors into classes according to their legal status and homogenous economic interests. The latter must be assessed in relation to the specific proposed plan. Factors such as the type of claim, its amount, the time of its formation or its maturity as well as whether there is a possibility that the satisfaction and the existence of guarantees will be relevant to determine whether economic interests are sufficiently similar (to be included into a single class); and
different treatment of creditors of different classes.

The composition with creditors and the restructuring plan subject to homologation must be approved by the favorable vote of creditors representing the majority by value of all creditors’ claims. If the majority is represented by one creditor only, the plan is considered approved if the majority per capita of the votes of the eligible creditors is obtained.

Where creditors are divided into classes, votes in each class are counted separately. The plan is approved upon the favorable vote of the majority of each class.

When the tax authority or social security institutions, or both, are included within the creditors and are entitled to vote, the relevant court may homologate the composition with creditors even if the tax authority (or social security institution) admitted to the procedure has not expressed its vote and its approval is essential to reach the above-mentioned majorities, provided that, according to the assessment of the expert relating to the proposal filed by the debtor, the plan is deemed to satisfy the claims of the tax authority (or social security or welfare institution) more than a judicial liquidation procedure.

Any dissenting (or non-voting) creditor, as well as any interested party (other than an admitted creditor), may file an opposition against the homologation of the composition with creditors arguing for its inadmissibility.

In addition, in the composition with creditors, dissenting (or non-voting) creditors may also file an opposition against the homologation, by claiming that the proposal does not fit the ‘no creditors worse off’ principle (ie, creditors are worse off than in a judicial liquidation procedure), provided that:

if the creditors have been divided into different classes, the opposing creditor belongs to a class that voted against the composition; or
if the creditors have not been divided into different classes, the opposing creditors represent (individually or in aggregate) at least 20 per cent of the claims admitted to voting.

The court can nonetheless homologate the composition with creditors despite such challenge if the terms of the petition allow dissenting creditors to be satisfied for not less than the amount they would have received following a viable alternative procedure.

Involuntary liquidations

What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

As a general rule, creditors are entitled to request that a debtor is placed into involuntary liquidation when that debtor is insolvent.

A business is deemed insolvent when it is unable to pay its debts as they fall due (the Insolvency Code defines insolvency as the inability of a debtor to regularly meet its payment obligations). A situation of transitional illiquidity or financial difficulty that is likely to be cured in a short term should normally not compel the debtor nor give grounds to creditors for filing for insolvency.

The Insolvency Code has replaced the original bankruptcy procedure with the judicial liquidation procedure – which is still an insolvency procedure aimed at the liquidation and dissolution of the insolvent enterprise – with a view to, among other things, supersede the concept of bankruptcy, which was deemed to have a negative connotation.

Like the former bankruptcy procedure, the procedure of judicial liquidation can be started before the competent court upon a petition filed by the debtor itself, one or more creditors or by the public prosecutor. Petitions are often filed by one or more creditors.

The main effects of the opening of a judicial liquidation by the competent court are the following:

the debtor is no longer entitled to manage assets that are managed by a receiver appointed by the relevant court;
the business activity is suspended, unless the relevant court expressly authorizes the temporary continuation of business (which rarely happens);
there is an immediate suspension of the payments of all debts and liabilities of the debtor;
certain payments, security interests and other transactions could be subject to clawback actions if made or entered into by the debtor in a certain period (ie, the ‘suspect’ period, which varies from six months to two years) before the opening of a judicial liquidation;
legal actions commenced by creditors (including incomplete enforcement proceedings) are suspended and any execution or attachment on the assets of the debtor cannot be further pursued (save for some enforcement proceedings relating to certain mortgage loans that are subject to specific publicity formalities); and
any monetary obligation of the debtor towards each creditor must be verified during the procedure of judicial liquidation.

Some of the differences between the various voluntary liquidation procedures and the procedure of judicial liquidation can be summarized as follows:

the voluntary liquidation procedures are private as they are initiated by the directors of the company and can be revoked upon a resolution passed by the extraordinary shareholders’ meeting, while the judicial liquidation, once triggered, is a court-driven procedure and not within the debtor’s control;
the voluntary liquidation procedures are governed by one or more liquidators appointed by the shareholders’ meeting, while the procedure of judicial liquidation is governed by a court-appointed receiver; and
unlike the judicial liquidation, during the voluntary liquidation procedures, the corporate bodies retain some powers, in particular:
the liquidators retain the power to manage the company to preserve its value and realize its assets, until the necessary measures are taken; and
statutory auditors (if appointed) remain in charge.

Involuntary reorganizations

What are the requirements for creditors commencing an involuntary reorganization and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Among reorganization procedures, the only ones that may be started by third parties and as such imposed on the debtor are:

the extraordinary administration of large, distressed enterprises; and
the extraordinary administration aimed at the reorganization of large, distressed enterprises.

Those procedures can be commenced not only by the debtor itself, but also – as is often the case – by one or more creditors or the public prosecutor filing the relevant petition. Both of these extraordinary administration procedures are aimed at the reorganization of large enterprises and at the protection of employment levels. As opposed to other insolvency and reorganization proceedings that are court-driven, significant powers are vested with the Ministry of Economic Development.

Moreover, compared to the other (voluntary) reorganization procedures, in the procedures of extraordinary administration of large, distressed enterprises and extraordinary administration aimed at the reorganization of large, distressed enterprises, the debtor (and if it is a company, its directors or shareholders, or both):

may not revoke the procedures of extraordinary administration of large, distressed enterprises and extraordinary administration aimed at the reorganization of large, distressed enterprises that are completely driven by the relevant administrative authority (and to some extent by court), and are not under the debtor’s control; and
loses all management powers, which are instead entrusted to one or more extraordinary commissioners.

More specifically, the extraordinary administration of large, distressed enterprises and extraordinary administration aimed at the reorganization of large, distressed enterprises will be described in brief below.

First, the extraordinary administration of large, distressed enterprises is available to companies or groups where at least one company individually belonging to the relevant group:

employed at least 200 employees during the previous year (including those admitted to the redundancy fund);
has debts equaling at least two-thirds of its own assets; and
is insolvent but able to show serious restructuring prospects within strict time limits (to be achieved through the sale of business assets, financial restructuring or assignment of contracts).

The court is tasked with assessing the chances of achieving such restructuring. After hearing the advice of the judicial commissioner and the Ministry of Economic Development concerning the opening of the aforementioned procedure, the court issues a decree that places the relevant company under the procedure of extraordinary administration of large, distressed enterprises or, if the restructuring is deemed to be unachievable, the court will open a judicial liquidation of the relevant company.

The Ministry of Economic Development appoints one or three extraordinary commissioners, who are primarily responsible for drafting a reorganization plan, detailing the assets to be kept, the assets to be transferred and any possible sale option. The execution of the plan must be authorized by the Ministry of Economic Development after consultation with a supervisory committee appointed by the ministry.

The extraordinary commissioners may (within 60 days from the appointment) request the Ministry of Economic Development to extend the extraordinary administration to other companies of the group (ie, companies that control or are directly or indirectly controlled by the company subject to the extraordinary administration), if that is considered as beneficial for the procedure and the feasibility of the reorganization plan.

The whole procedure is also supervised by a supervisory committee of three or five members, appointed by the Ministry of Economic Development within 15 days of the appointment of the extraordinary commissioners. The Ministry of Economic Development can raise questions to the supervisory committee in relation to any acts carried out by the extraordinary commissioners.

Second, the extraordinary administration aimed at the reorganization of large, distressed enterprises has been introduced following the insolvency of the Parmalat Group in 2003 to facilitate and expedite the restructuring and reorganization of large insolvent companies (or groups of companies). In the past, the economic and financial restructuring provisions set out by the extraordinary administration of large, distressed enterprises had rarely been used and the preferred route was often disposal of the relevant company’s or group’s assets.

In summary, the extraordinary administration aimed at the reorganization of large distressed enterprises and large groups of companies under Law Decree No. 347/2003 differs from the extraordinary administration of large distressed enterprises under Law No. 270/1999, among others, because:

it provides the extraordinary commissioners with more powers so that the reorganization may be pursued in a shorter time frame; and
it enhances the powers of the Ministry of Economic Development compared to those of the court, with the former having most of the approval powers.

In general terms, extraordinary administration aimed at the reorganization of large, distressed enterprises is currently available to insolvent companies or groups of companies with at least 500 employees and an overall debt of at least €300 million (at consolidated group level).

The Ministry of Economic Development (or in the case of companies providing public services also the Prime Minister) can admit large enterprises to extraordinary administration aimed at the reorganization of large, distressed enterprises, and can appoint one or three extraordinary commissioners immediately upon application by the relevant company. The court is informed of the company’s application and the ministry’s decision and must declare the company’s insolvency within 15 days of the relevant ministry’s decision.

Within 180 days of the relevant appointment the extraordinary commissioners must:

file with the relevant court a report on the state of insolvency and the list of creditors with the relevant security interests and ranking; and
file with the Ministry of Economic Development (which has the power to approve):
a plan for the extraordinary administration, consisting of either an economic and financial restructuring and reorganization of the business throughout a period not exceeding two years, or the disposal of business assets for a period not exceeding one year; and
a detailed report of the reasons underlying the insolvency of the company or the group.

Prior to the approval of the plan by the ministry, the extraordinary commissioners may request to be authorized by the ministry to implement the transactions (or categories of transactions) that are necessary to ensure the continuation of the business and protect the economic and commercial value of the relevant company or group. Authorization is not required for any transaction implemented in the ordinary course of business or having a value (when considered individually) lower than €250,000.

Should the Ministry of Economic Development reject the plan, the relevant court must, after consultation with the extraordinary commissioners, open a judicial liquidation.

As an alternative to the above, the extraordinary commissioners may carry out negotiations for the disposal of the business concern and assets. The decision of the extraordinary commissioners must comply with the principles of transparency and non-discrimination governing any insolvency and restructuring procedure and the disposal price must not be lower than the market value of the disposed assets (as estimated by the Ministry of Economic Development).

If the part of the business requiring licenses or concessions is sold, such licenses and concessions are transferred to the purchaser.

If the extraordinary commissioners are willing to dispose of certain business assets to protect the economic and commercial value of the relevant company, the extraordinary commissioners and the purchaser must enter into a consultation procedure with the trade unions to agree on the transfer of the appropriate number of employees. In particular, the extraordinary commissioners and the purchaser may agree to transfer only some of the employment contracts, thus granting the possibility for employees to benefit from the redundancy fund. Any decision relating to the employee redundancy or unemployment will be agreed upon among the parties in a very short time frame.

The extraordinary commissioners may (within 60 days from the appointment) request the Ministry of Economic Development to extend the extraordinary administration of large enterprises and large groups of companies to any other company of the group (ie, companies that control or are directly or indirectly controlled by the company subject to the extraordinary administration), if that is considered beneficial for the procedure and the feasibility of the reorganization plan.

Expedited reorganizations

Do procedures exist for expedited reorganizations (eg, ‘prepackaged’ reorganizations)?

A debtor in financial difficulties may try to avoid the opening of a formal court-driven reorganization (or, even more so, insolvency) procedure by means of an out-of-court recovery plan aimed at restoring its financial balance. The recovery plan may take different forms and it is often documented by an agreement between the debtor and all or some of its creditors (very often lenders). The recovery plan must provide:

an overview of the company’s financial situation;
the main reasons of the crisis and the strategies to avoid the risk of insolvency;
the adhering creditors and the proceeds to fully satisfy non-adhering creditors; and
the expected time-frame for restoring financial balance.

An independent expert must certify the truthfulness of the accounting data and the sustainability of the recovery plan. The main advantages and disadvantages of the recovery plan compared with the reorganization procedures can be summarized in the following.

Advantages

There is no court involvement;
there is no minimum threshold of creditors’ approval of the plan;
as a general rule, a recovery plan would achieve the exemption from clawback action against any act, payment or security interest executed or granted under the recovery plan in the case of subsequent opening of a procedure of judicial liquidation. However, such exemption is granted to the extent that certain requirements are met and only insofar as no fraud or willful misconduct is established in the execution of such recovery plan;
a recovery plan would achieve the exemption from criminal liability for bankruptcy-related crimes in respect of any act or payment carried out or made under the plan; and
a recovery plan is not required to be published in the Business Register, thus ensuring a higher degree of confidentiality. However, the decision on whether to proceed with the publication of the recovery plan is also often the result of commercial or tax considerations, or both.

Disadvantages

There is no stay of enforcement actions;
only creditors approving the plan are involved in and bound by the plan (ie, there is no cramdown); and
there is a risk that the exemption from clawbacks and bankruptcy related crimes is questioned ex post in court if gross negligence or willful misconduct of the debtor or the expert (and the awareness of the relevant creditors) is claimed.

Unsuccessful reorganizations

How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

Out-of-court reorganizations (like the certified recovery plan and, to a certain extent, the negotiated settlement arrangement) are not subject to specific approvals and, therefore, once the agreement with the relevant creditors has been reached, there is generally no specific risk that the reorganization is defeated or rejected.

In contrast, the composition with creditors, the debt restructuring agreement and the restructuring plan subject to homologation are subject to approvals (by the creditors and the court) and there is a risk that they are rejected (by the relevant creditors or the court).

In general, the main effect of such rejection is that the reorganization ceases its effects, including possible protection from enforcement actions by creditors, if any, and from requests to open a judicial liquidation. Moreover, as the debtor is either insolvent or at least in a distressed situation (crisis), it runs the risk that any creditor or the public prosecutor may request the opening of a judicial liquidation.

More specifically, with reference to the composition with creditors, the relevant petition will be declared inadmissible if the statutory requirements for its admission have not been met. The court will issue a decree, which may be challenged within the following 15 days, declaring the petition to be inadmissible once it has heard the debtor.

Following the above decree, it must be noted that a procedure of judicial liquidation may be opened by the relevant court upon request of one or more creditors or of the public prosecutor, subject to verifying that the debtor is insolvent and that any other statutory requirements for the opening of a procedure of judicial liquidation have been met.

A procedure of judicial liquidation (subject to verifying that the debtor is insolvent and that any other statutory requirements are met) could further be opened if a composition with creditors has not been approved by the creditors. The admission of the composition with creditors may also be revoked ex officio by the relevant court (which will inform the public prosecutor and the creditors), when it becomes apparent that the debtor has hidden any part of its assets, willfully omitted to declare one or more debts, declared non-existent liabilities or committed other fraudulent acts.

At the end of the procedure, the relevant court, upon request of one or more creditors or the public prosecutor, may issue a decree declaring the company insolvent if the relevant requirements are met. The same rules apply if, during the composition with creditors, the debtor carries out unauthorized acts or acts intended to defraud one or more of the creditors.

Moreover, the composition with creditors may be rejected by the court (possibly, but not necessarily) upon opposition filed by one or more creditors or other interested parties, in the context of the homologation decision, or even after the homologation if the same is appealed. The consequences are the same as those described above, namely a judicial liquidation procedure could be opened upon request of one or more creditors or the public prosecutor.

Finally, after the homologation of the composition with creditors and during the performance of the plan, any creditor may ask for the procedure to be terminated if the debtor fails to comply with the arrangements provided for in the plan. However, the procedure may not be terminated for a minor default.

The above applies, mutatis mutandis, also with respect to the debt restructuring agreement, the debt restructuring agreement allowing the extension of the effects of the agreement to non-adhering creditors, the simplified debt restructuring agreement and the restructuring plan subject to homologation, regarding the rejection of the relevant reorganization plan and the relevant effects.

In the cases of non-performance of the relevant plan, while the general rule for the composition with creditors and the restructuring plan subject to homologation is that the plan may not be amended after its homologation, such amendments are allowed regarding the debt restructuring agreement, the debt restructuring agreement allowing the extension of the effects of the agreement to non-adhering creditors, and the simplified debt restructuring agreement, provided that:

the expert certifies that such amendments do not hamper the ability of the debtor to fulfil the agreement;
the amendment and the relevant report by the expert are registered with the relevant Business Register; and
the creditors are given notice.

Creditors are then entitled to challenge the amendment before the relevant court within 30 days of the relevant notice.

On a different ground, in respect of the procedure of extraordinary administration of large, distressed enterprises, if at any time during the relevant procedure it appears that the reorganization cannot be usefully continued, the relevant court may, upon request of the extraordinary commissioners or upon its own initiative, order the conversion of the procedure into a procedure of judicial liquidation. Before submitting the request for conversion, the extraordinary commissioner must inform the Minister of Economic Development.

A conversion into the procedure of judicial liquidation may also occur in any of the following circumstances:

when, despite the authorization of a program providing for the sale of business assets, the sale has not yet taken place, in whole or in part, after the expiry of the program, unless an extension has been granted; or
when, once a restructuring plan is authorized, at the end of the program the debtor has not recovered the ability to regularly meet its obligations.

The conversion of the procedure of extraordinary administration of large, distressed enterprises into the procedure of judicial liquidation is ordered by the relevant court, following the consultation with the Minister of Economic Development, the extraordinary commissioners and the debtor. Any interested party can further file a complaint before the relevant court of appeal against such decree within 15 days from its notification (as to the relevant debtor and the commissioner) or its publication (for any other third party).

Likewise, concerning the procedure of extraordinary administration aimed at the reorganization of large, distressed enterprises, the court may, upon consultation with the extraordinary commissioners, order the conversion of the procedure into a procedure of judicial liquidation when the adoption of the relevant program (which is one of the conditions for the admission to such procedure) is not possible or the Minister of Economic Development does not authorize it. The same rule applies when any of the events mentioned above occur with respect to the extraordinary administration of large, distressed enterprises.

Corporate procedures

Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

The dissolution of a company may be voluntary, in which case the rules set out by the Italian Civil Code apply and no court is involved in the procedure. Dissolution of joint-stock companies, limited liability companies and joint-stock limited partnerships are subject to voluntary liquidation procedures.

Conclusion of case

How are liquidation and reorganization cases formally concluded?

In general, liquidation cases are formally concluded with the dissolution and cancellation of the debtor, while reorganization cases are concluded with the completion of the relevant reorganization (of whatever nature) and the restoring of the financial viability of the debtor. In the case of in-court reorganization procedures, the court issues the homologation, sanctioning the (positive) conclusion of the procedure, or orders its rejection in case of negative outcome.

More specifically, in voluntary liquidation, the liquidator must draft and file with the Business Register the final liquidation financial statements (which are considered as approved by the shareholders if not challenged by any of them within 90 days following their filing).

The company will then be removed from the Business Register upon request of the liquidator and ceases to exist. However, after the removal of the relevant company from the Business Register and notwithstanding the consequent extinction, creditors whose claims have not been fully satisfied may initiate or continue individual enforcement proceedings against:

the shareholders, up to the amount of the sums collected by them based on the final liquidation financial statements; and
the liquidator, if the non-payment was their fault.

According to the prevailing case law of the Italian Court of Cassation, if no amount is collected by the shareholders, the unsatisfied creditors’ claims are extinguished (see, among others, Italian Court of Cassation, 31 January 2017, No. 2444 and Italian Court of Cassation, 22 June 2017, No. 15474).

However, a judicial liquidation procedure may be opened in respect of an insolvent company within one year from the cancellation of the relevant company from the Business Register, provided that the insolvency status became apparent before the cancellation or within the year following the cancellation.

Regarding the procedure of judicial liquidation, the relevant court issues a formal order that declares the procedure closed. The main effect of the order is that creditors whose claims have not been fully satisfied may initiate or continue individual enforcement proceedings over the debtor’s residual assets (except for specific cases of exemption). To this purpose, the court decree by which the relevant claim has been admitted to the procedure of judicial liquidation constitutes written evidence for the purposes of starting an injunction procedure.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

What is the test to determine if a debtor is insolvent?

The Insolvency Code provides that a debtor is insolvent when ‘it is no longer able to regularly meet its payment obligations’.

Insolvency is interpreted as an irreversible inability to satisfy, when due and by normal means, the payment obligations assumed. Payment defaults are a typical indicator of insolvency, but other circumstances may also reveal it, such as:

payments made by non-customary means (eg, payment in lieu);
transactions at undervalue; or
creation of security interest in respect of a pre-existing debt.

The Insolvency Code has introduced a specific concept of ‘crisis’, defined as a status of the debtor that would likely result in insolvency, consisting of the inadequacy of the prospective cash flows to satisfy the payment obligations assumed by the debtor over the following 12 months. The crisis might be revealed, among others, upon the occurrence of one or more of the following warning signals:

payroll liabilities overdue for more than 30 days and corresponding to at least half of the total monthly payroll amount;
commercial liabilities past due for more than 90 days and exceeding the amount of outstanding liabilities; or
exposures towards credit institutions and financial intermediaries past due by more than 60 days, to the extent that they jointly represent at least 5 per cent of the total exposures.

Mandatory filing

Must companies commence insolvency proceedings in particular circumstances?

The insolvency law reform has expressly provided that the debtor, and in the case that the enterprise is a company, the company’s directors have a duty to set and maintain organizational, accounting and administrative measures adequate to the nature and size of its business, aiming at promptly detecting any signs of incipient crisis. As soon as the first signs are detected, the company’s directors should adopt any appropriate remedy to face the crisis, including starting one of the reorganization procedures.

Prior to its reform, the Insolvency Act did not contain an express obligation for the debtor to start one of the reorganization procedures upon detection of a state of crisis or an insolvency situation. However, even before the reform, a similar obligation could be inferred from the circumstance that a delay in filing for insolvency (or starting a reasonable reorganization procedure) is still a trigger for directors’ civil and (under certain circumstances) criminal liability, when their inaction worsens the company’s financial situation.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

Pursuant to the Italian Civil Code, any company is obliged to set up and maintain organizational, accounting and administrative measures adequate to the nature and size of its business, aiming at promptly detecting any signs of incipient crisis. The Insolvency Code now expressly clarifies what is meant by ‘organizational, accounting and administrative structure adequate to the nature and size of its business’. In particular, the measures allow the company, among other things, to:

detect potential imbalances of a capital or economic-financial nature;
verify the inability of the company to sustain its liabilities and the absence of any positive outlook of the company continuing as a going concern for the following 12 months; and
verify the occurrence of certain ‘warning indicators’ (or crisis signals) identified by the Insolvency Code itself (the existence of payroll debts overdue for at least 30 days amounting to more than half of the total monthly payroll, the existence of exposures overdue for more than 60 or 90 days to suppliers, banks and financial intermediaries exceeding certain thresholds set by law and so on).

As soon as the first signals of an incipient crisis are detected, the company’s directors should adopt any appropriate remedy to face the crisis, including by starting one of the reorganization procedures.

The same legal reform has also tightened the directors’ duties to preserve the assets value of the company by clarifying (also in respect of limited liabilities companies, while a similar provision already applied to directors of joint stock companies) that the company’s directors can be held liable towards the company’s creditors for the breach of their duties to preserve the company’s value.

Upon occurrence of a termination event, and provided that the court has ascertained the directors’ liability for breach of their duty to exclusively manage the company to preserve its value, the Italian Civil Code (as amended by the Insolvency Code) now provides for specific criteria to calculate the amount of liability. More specifically, there is a rebuttable presumption that the directors should be liable for an amount equal to the difference between:

the net asset value of the company at the time when the directors’ appointment was terminated (or – in the case of opening of a procedure of judicial liquidation or procedures of voluntary reorganization– the date of opening of such proceeding); and
the net asset value of the company at the time when the termination event occurred, net of the costs reasonably borne (or to be reasonably borne) between the occurrence of the relevant termination event and the completion of the winding up.

In the case of opening of a procedure of judicial liquidation and where the accounting records are missing or irregular (or for any other reason the net asset value of the company cannot be determined), the directors can be held liable for an amount equal to the difference between the company’s assets and liabilities as ascertained during the procedure.

Directors’ liability – other sources of liability

Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

In general, directors may be held liable to the company, the company’s shareholders, the company’s creditors and to third parties (only) for the breach of their duties.

More specifically, directors are liable to the company if they negligently fail to fulfil the duties imposed upon them by the law or the company’s by-laws. They are also liable if they fail to supervise the general conduct of the company or if, being aware of prejudicial acts, they do not take actions to prevent such acts from occurring.

Directors may be liable also to the company’s creditors if the company becomes insolvent as a consequence of the breach of the directors’ duties. However, directors cannot be automatically held personally liable for the company’s obligations.

As far as pre-insolvency duties are concerned, directors have a duty to avoid making preferential payments, to not continue trading in a way that would be detrimental to the financial position of the company and, if the statutory minimum share capital is not complied with, not to enter into new transactions (other than those exclusively aimed at preserving the value of the company’s assets in the interest of creditors). The directors will be jointly and severally liable to the company and its creditors for any breach of these duties.

If these directors’ duties are breached, the company’s shareholders during a general meeting (or the auditors) may resolve to bring a civil action for damages against the directors who are held liable to have caused them, even when the company is under a voluntary liquidation process.

Such a resolution leads to the automatic removal of the directors only if it is approved with the favorable vote of at least one-fifth of the share capital. Otherwise, a separate and specific resolution of removal is required. A civil action for damages against the directors may also be brought directly by shareholders representing one-fifth of the share capital or the different percentage provided for in the by-laws, which in any case cannot be higher than one-third. A lower quorum applies in the case of, among others, listed companies.

Directors are also liable to the company’s creditors when the company’s assets are insufficient to satisfy their claims as a result of failure by the directors to preserve the company’s assets. Such actions do not prevent single shareholders or third parties from bringing claims for damages if they are directly and individually damaged by the directors’ conduct, but in practice most of the directors’ liability actions are brought by receivers in the context of judicial liquidation procedures (former bankruptcy procedures) and by extraordinary commissioners in the context of extraordinary administration of large, distressed enterprises.

Directors, officers (including de facto directors and officers) and statutory auditors may be charged with criminal liability for fraudulent bankruptcy where a procedure of judicial liquidation has been opened in respect of a company if one or more of them:

has disposed and transferred all or part of the company’s assets with the intent to defraud creditors of the company;
has destroyed or falsified all or part of the corporate books or other accounting records; or
before or during the procedure of judicial liquidation, has made payments with the intent to prefer one or more creditors.

The criminal sanction for fraudulent bankruptcy is imprisonment ranging from three to 10 years and disqualification from acting as a director for up to 10 years.

Directors may be held liable for simple bankruptcy if they:

carried out high-risk transactions with the intent of delaying the commencement of the reorganization procedures or the procedure of judicial liquidation;
increased the company’s liabilities by failing to file a petition for the commencement of the reorganization procedures or the procedure of judicial liquidation when the company was insolvent, over-indebted or in a state of crisis; or
during the three years preceding the opening of the procedure of judicial liquidation, failed to keep correctly the corporate books and the other accounting records prescribed by the law.

The criminal sanction for simple bankruptcy is imprisonment ranging from six months to two years and disqualification from acting as a director for up to two years.

There are some exemptions for bankruptcy offenses, including in respect of payments and transactions carried out to implement a composition with creditors, a debt restructuring agreement, a restructuring plan subject to homologation, a negotiated settlement arrangement or a certified recovery plan, as well as in respect of other payments and financing transactions authorized by the court. These provisions apply to both simple and fraudulent bankruptcy offenses.

Criminal liability may also occur if directors and officers (including general managers), by hiding the company’s crisis or insolvency, continue to obtain loans from credit institutions. The Insolvency Code provides for a period ranging from six months’ to three years’ imprisonment and disqualification from acting as a director for up to three years. An increased penalty is provided where the company acts as a financial intermediary on the market.

Always in terms of criminal liability, directors and officers can be held liable if one or more of them has influenced the formation of majorities, or simulated claims or assets wholly or partially non-existent for the sole purpose of being admitted to the composition with creditors or obtaining the approval of a debt restructuring agreement with financial intermediaries. The same sanctions applicable for simple and fraudulent bankruptcy apply.

Directors’ liability – defenses

What defenses are available to directors and officers in the context of an insolvency or reorganization?

Directors and officers may defend themselves from any claim brought against them in the context of an insolvency or reorganization by demonstrating that they have been acting lawfully. In short, they should try to prove the following:

if the claim is brought by the company itself, the directors and officers should demonstrate that:

they fulfilled the duties imposed upon them by the law (including ensuring thatthe company has ‘organizational, accounting and administrative structure adequate to the nature and size of its business’) or the company’s by-laws;
they monitored the general conduct of the company; and
once becoming aware of harmful activities, they did what they could do to prevent such activities from being carried out or limit their negative consequences. Directors and officers who, lacking any negligent behaviour, had their dissent reported in writing in the book of the meetings and resolutions of the board of directors will not be held liable;

if the claim is brought by the company’s creditors, the directors and officers should prove that they complied with their duties to preserve the company’s assets (as per items (1), (2) and (3) above) or alternatively demonstrate that the assets of the company, although reduced also as a result of their actions, are still sufficient to satisfy its creditors; and
if the claim is brought by single shareholders or third parties directly damaged by the directors’ and officers’ conduct, directors and officers should demonstrate that they have not acted with willful misconduct or negligence (or that the five-year prescription term applicable to such extra-contractual liability is elapsed and therefore the action is time-barred).

Shift in directors’ duties

Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

Italian law does not expressly provide for a shift of the director’s duties to creditors when the company appears to be in crisis. However, directors can be held liable towards creditors of the company and the Insolvency Code expressly provides that the company will be managed in the preeminent interest of creditors during the implementation of restructuring tools (even at an early stage).

Directors’ powers after proceedings commence

What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

Following the opening of a procedure of judicial liquidation, the directors lose all powers of administration save for:

the power to appeal against the decision of the company’s insolvency or other court decrees;
the power to bring an action in certain circumstances against the receiver or the creditors’ committee; and
the power to apply to court to suspend a sale of the company’s assets.

Furthermore, the directors are entitled to receive a copy of the receiver’s report and bring claims in respect of such report.

As in the case of a judicial liquidation procedure, with the commencement of the procedures of extraordinary administration of large, distressed enterprises and extraordinary administration aimed at the reorganization of large, distressed enterprises, the directors lose all powers of administration, and the extraordinary commissioners take over the management of the company and the company’s assets.

Conversely, following a composition with creditors, the directors retain certain powers. In particular, they still have the power to:

prepare and file the proposal with the relevant court;
continue to manage the company (administrating the assets and exercising the business), under the supervision of the extraordinary commissioners; and
apply for loans, enter into transactions, sell real estate, grant mortgages or pledges and, in general, perform activities that go beyond the ordinary administration (with the written authorization of the delegated judge).

In the case of negotiated settlement arrangement, certified recovery plan, debt restructuring agreement and restructuring plan subject to homologation, the directors of the relevant company retain all the powers of administration related to their office (subject to compliance with certain duties).

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

In general, from the date on which the judicial liquidation is opened, no legal action can be started or continued against the debtor’s assets and legal proceedings that are commenced or continued are ineffective. The same provision applies to assets admitted to the procedures of extraordinary administration of large, distressed enterprises and extraordinary administration aimed at the reorganization of large, distressed enterprises.

However, there are a few exceptions to the above prohibition, which are mainly related to enforcement procedures for certain security interests (pledges and specific types of mortgage loan).

In reorganizations, a stay against creditors’ action may be requested of the relevant court and may be granted for a limited time from 60 to 120 days; it may be renewed upon certain conditions, but in any event not exceeding in the aggregate 12 months.

More specifically, in the procedure of composition with creditors, upon a debtor’s request (to be included in the petition for the composition with creditors or in the conditional petition), any enforcement and interim action may be blocked by a court order granting protective measures, from the date on which the filing of the petition is published in the relevant Business Register (and for a period up to four months to enable the drafting of the relevant plan and proposal, but in any case not exceeding 12 months including the period after the debtor’s admission to the procedure) and any judicial mortgage registered in the 90 days prior to the filing of the petition is ineffective.

Similarly, protective measures may be granted in the context of a debt restructuring agreement and restructuring plan subject to homologation.

Protective measures may be granted by the relevant court also:

in the context of a negotiated settlement arrangement; or
before the filing of the petitions for the homologation of a debt restructuring agreement, during the negotiations with creditors of such debt restructuring agreement, provided that certain conditions are met (ie, the positive submission of a set of documents required by the Insolvency Code and the existence of an opinion by the independent expert regarding the fact that the debtor is negotiating with at least 60 per cent of its creditors a proposal of debt restructuring agreement that would allow – where accepted – the complete satisfaction of the creditors).

However, in both cases under (1) and (2) above, protective measures do not apply to employees’ claims, who remain entitled to start or continue enforcement actions against the debtor.

Doing business

When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

The conditions under which a debtor may carry on business during a reorganization procedure vary according to the type of arrangement used. In general, no specific limitations are provided for in the context of a certified recovery plan and of a debt restructuring agreement. In the context of a negotiated settlement arrangement, the debtor is free to carry on its business, but must keep the expert duly informed and give the expert prior notice of any extraordinary transaction it intends to carry out.

Similarly, in the context of a restructuring plan subject to homologation, the debtor is free to carry on the business, which must be run in the main interest of creditors, and the judicial commissioner must be notified in advance of any extraordinary transactions that the debtor is willing to carry out.

If the judicial commissioner disagrees with the performance of any extraordinary transaction, it informs the debtor and if – notwithstanding the disagreement of the judicial commissioner – the debtor carries out the transaction, the admission of the debtor to the procedure may be rejected by the court and a judicial liquidation may be opened.

Limitations to the debtor’s business activity are provided for also in the context of a composition with creditors. In that context, the debtor is permitted to continue trading under the supervision of the judge and the commissioner. Transactions, other than those in the ordinary course of business (any new loans, disposals of real estate, settlement of disputes and so on) may only be made upon prior authorization by the delegated judge. Any third-party receivables arising from these acts have a priority status (ie, they are super senior).

To carry out a composition with creditors, the debtor must file a plan indicating the expected costs and earnings arising from the continuation of the business and the resources required to pursue the continuation. Among such costs, the plan must consider any financial burdens until the transfer of the business to third parties or, if the business is not transferred but turned around, until the creditors have been satisfied.

The plan must also be accompanied by an expert’s report certifying that the continuation of the business is in the best interests of the creditors. It is also possible to provide for a moratorium covering the payment of preferential creditors (eg, with pledges, liens or mortgages) except where the plan provides for the liquidation of the assets or rights covered by the security interest.

The debtor may also ask the court for authorization to:

receive loans with priority status if an expert certifies that they are in the best interests of the creditors; and
carry out the payment of previous debts for the provision of goods or services (if an expert states that such services are essential for the continuity of the business and are in the best interests of creditors).

The court may also authorize the debtor to receive loans with priority status upon the filing of a conditional petition for a composition with creditors and, if those loans are deemed to be urgent, they may be authorized by the court without an expert’s certification, but upon consultation with the main creditors.

The same authorization (to pay debts due for the provision of goods or services and to receive loans) may also be requested by the debtor filing petitions for the homologation of a debt restructuring agreement.

The activities carried out by the debtor during a composition with creditors (following its homologation) are generally supervised by the delegated judge, and the judicial commissioner verifies the company’s compliance with the procedures established in the homologation decree.

In the case of composition with creditors providing for the liquidation of the company, the liquidation may be carried out by a court-appointed liquidator, and a creditors’ committee may also be appointed to supervise the liquidation and express its opinion on certain actions.

Also, as a general rule, in the procedures of both extraordinary administration of large, distressed enterprises and extraordinary administration aimed at the reorganization of large, distressed enterprises, the business is continued (as those procedures aim to protect employees’ interests), but it is no longer run by the debtor, but by one or more extraordinary commissioners.

Ongoing contracts (such as leases, supply contracts or contracts that have not yet been completely performed by all contracting parties) may be terminated at the commissioner’s discretion. During the procedure of extraordinary administration of large, distressed enterprises authorizations, certifications, licenses, concessions and other acts or securities are to be transferred to the tenant or the purchaser in the case of letting or sale respectively of the entire business or business complexes.

Furthermore, the extraordinary commissioners must require the tenant or purchaser of the business or of single business complexes to file, when submitting the offer, a business and financial plan covering investments (indicating the necessary financial resources and coverage) and the undertaking to keep certain agreed employment levels for a period of two years following closing and outlining the strategic objectives of the group companies’ production.

All credits accrued by contracting parties in the context of the procedure in connection with the performance of pending contracts or otherwise due to the continuation of the business by the extraordinary administration rank super senior.

In principle, the same rules apply to the procedure of judicial liquidation. Also in that case the debtor is not entitled to carry on business, since one of the effects consists of the seizure of its assets, but as the judicial liquidation is usually aimed at the dissolution of the business, the continuation of the business (or of a part thereof) by the receiver is rather exceptional and may only be authorized by the relevant court for a limited time frame (an interim period) if the discontinuation of business activities may bring serious damages and provided that such continuation does not cause any prejudice to creditors.

The creditors’ committee is convened by the receiver at least every three months to be informed about the performance of the management and to decide on the opportunity to continue the business. If the creditors’ committee does not consider that it is appropriate to carry on business, the delegated judge will order the discontinuation of the business. The receiver must promptly inform the delegated judge and the creditors’ committee of any supervening circumstances that may affect the temporary continuation of the business activities.

During the interim period, pending contracts continue to have effect, unless the receiver decides to suspend their performance or to terminate them. Finally, debts arising during such a period have priority (ie, super senior) status.

By a non-challengeable decree, the court may order the termination of the business activities at any time that it deems it appropriate, after consultation with the receiver and the creditors’ committee.

Post-filing credit

May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

The possibility to obtain loans or credit is often critical for a successful reorganization. Therefore, loans and credits granted to an enterprise in the context of a reorganization (such as the debt restructuring agreement, the composition with creditors and the extraordinary administration of large, distressed enterprises) are generally treated as super senior, subject to certain conditions.

More specifically, in the context of a composition with creditors or a debt restructuring agreement, the debtor may also ask the court to be authorized to receive (secured or unsecured) loans with priority status if an expert certifies that they are in the best interests of the creditors.

Similarly (but at an earlier stage), this provision also applies to debts arising from loans issued for the purposes of filing the petition for composition with creditors (or for the homologation of a debt restructuring agreement) where such loans were envisaged in the plan (or in the relevant agreement) and the priority status is acknowledged in the decree by which the relevant court approves the petition.

The court may also authorize the debtor to receive loans with priority status upon filing of a conditional petition for a composition with creditors and, if those loans are deemed to be urgent, they may be authorized by the court without any expert’s certification, but upon consultation with the main creditors.

Furthermore, the relevant court may also authorize the debtor to grant pledges or mortgages to secure such loans.

In the event of subsequent opening of a procedure of judicial liquidation, the authorized loans generally rank super senior. However, that super priority ranking may be rejected where it is jointly established that:

the relevant authorization was based on false information or willful misconduct; and
the lender was aware of false information or willful misconduct.

Also, in the context of both the procedures of extraordinary administration of large, distressed enterprises and extraordinary administration of enterprises and large groups of companies, the extraordinary commissioners may request (and potentially obtain) loans or credit, which acquire priority status insofar as they have been granted to continue the business activity and to allow for the ongoing management of the debtor’s assets.

These rules apply also to the judicial liquidation procedure, although the need to obtain loans or credit in the context of a liquidation procedure aimed at the dissolution of the enterprise is generally less frequent than in reorganizations.

Sale of assets

In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

As a general rule, specific provisions apply for the sale of assets or business in the context of in-court reorganization and liquidation procedures (such as judicial liquidation, extraordinary administration of large, distressed enterprises and composition with creditors) to make sure that sales follow a competitive and transparent process, aimed at maximizing the proceeds of the sale.

More specifically, in the context of a procedure of judicial liquidation, the receiver should carry out a competitive sale process aimed at disposing of the entire business, or part of it as a going concern when this appears to be the best option for maximizing the recovery ratio of creditors. If this is not possible (or the sale of the business – or part of it – as a going concern does not appear to be in the best interest of the creditors), the receiver should carry out the liquidation of individual assets.

In that case, an expert (appointed by the receiver) estimates the value of the single assets to be sold in the context of the judicial liquidation, except for assets of modest value. Following the submission of the appraisal by the expert, the receiver sets up a competitive procedure that, in compliance with the liquidation plan prepared by the receiver itself and sanctioned by the delegated judge, should be aimed at maximizing the proceeds of the judicial liquidation. The procedures are subject to the supervision of the court and in some cases to the (non-binding) opinion of the creditors’ committee.

To speed up the sale procedure and to ensure the highest realizable value, payment by installments can be granted to the purchaser, subject to the provision by the purchaser of an adequate security as to the payment of the price (typically a first demand guarantee issued by a bank, an insurance company or a financial intermediary).

Generally speaking, under Italian law the transfer of a business (or a part thereof) as a going concern implies the transfer of all those assets that are organized for the purpose of carrying out that business or that part of the business (including real property, plants and machinery, stocks, trade receivables, goodwill and contracts, including employment contracts).

If a transaction qualifies as a transfer of business as a going concern, certain provisions of the law concerning contracts, employment, liabilities and receivables pertaining to the business become applicable.

Although the parties may agree to derogate from such laws in many respects, they are generally not allowed to derogate from the law in relation to certain rights of third parties (ie, employees and creditors), save for specific cases provided by the Italian legal system.

For instance, a specific set of rules (setting out a favorable and protective regime for employees in the context of transfer of business as a going concern) provides for the application of the principle of the automatic transfer from the transferor to the transferee of all the employees of the business. Such principle can be excluded by the transferor and transferee exclusively under certain conditions and upon completion of a specific procedure that must involve a consultation and an agreement with the trade unions.

Furthermore, as far as creditors of the transferor are concerned, the latter remains liable to its creditors after the transfer of the business for the debts that exist at the time of the transfer, unless the creditors have given their consent to the transfer. The transferee is jointly liable along with the transferor for the debts and liabilities of the business, if and to the extent the debts and liabilities are recorded in the accounts of the transferor.

In general terms, this rule is aimed at protecting the creditors’ interests, and cannot be derogated from by the parties. However, the rule does not apply to the sales of business, when the seller is subject to certain liquidation or reorganization procedures such as judicial liquidation, composition with creditors, extraordinary administration of large, distressed enterprises and, if requested by the debtor and authorized by the relevant court, the negotiated settlement arrangement; in these cases, the purchaser acquires the business (or the relevant assets) ‘free and clear’.

More specifically, under this set of rules:

unless agreed otherwise, the transferee of a business as a going concern is not liable for the business debts arising before the transfer; and
the receiver or the extraordinary commissioners may provide for the transfer of the business as a going concern or assets or receivables by way of contribution to one or more companies, with the exclusion of liability on the transferor for the liabilities arising from the carrying out of the business before the transfer.

Moreover, pursuant to the laws regulating the extraordinary administrations of large, distressed enterprises, the sale of a business as a going concern (or part of the business) or the sale of a group of assets of the relevant company must be made in accordance with specific provisions, pursuant to which, among other things:

the transferee must undertake to continue the same business activity for at least two years starting from the effectiveness of the transfer;
the transferee must maintain the level of employment established at the time of the transfer for at least two years. Insofar as the employees are involved in the trade unions’ consultations applicable in the transfer of business as a going concern, the extraordinary commissioners, purchaser and employees’ representatives may agree on certain exceptions to Italian law on the protection of employees transferred by way of a transfer of business as a going concern;
in the framework of the above-mentioned trade unions’ consultations, or after the unsuccessful conclusion of such consultation, the extraordinary commissioners and the transferee may agree to transfer only parts of the businesses as a going concern with the identification of specific employees in those parts of the business to be transferred to the transferee; and
the existing liens and guarantees in favor of the transferor maintain their validity and rank in favor of the transferee.

Moreover, under certain conditions, some Italian employment provisions setting out a favorable and protective regime for employees in the event of any transfer of business going concerns may not apply to transactions carried out in the context of liquidation or reorganization procedures (such as the rule providing that upon transfer of the business to the transferee, the employees included in the business retain all their rights arising from the employment relationship with the transferor, including the terms and conditions of the employment, and any dismissal following the transfer will be deemed to be wrongful).

With respect to the possibility of suspending the sale, it must be noted that the power of the delegated judge, upon a specific request by the debtor or the creditors’ committee, to suspend the sale is conditional upon the existence of justified reasons or in the case of a price significantly lower than that deemed adequate.

Furthermore, if the price offered is lower than the price indicated in the sale order by more than one quarter, the delegated judge may prevent the sale from being completed if there is any strong evidence showing that a new sale attempt may likely result in a higher price.

Furthermore, regarding the case of a composition with creditors, specific rules apply for the competitive sale (or lease) of businesses and assets. In the case of composition with creditors providing for the disposal of a significant part of assets, the court may appoint a liquidator who will take care of the relevant selling procedures. The same rules mentioned above (concerning the sale of business in a judicial liquidation) apply, so that the purchaser acquires the business (or the relevant assets) ‘free and clear’ of claims and liabilities.

Negotiating sale of assets

Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

A credit bidding procedure is provided for in the context of the rules regulating the composition with creditors and is set up by means of a specific court decree, in cases where the plan includes the transfer of the company’s business going concern, single business units or specific assets (irrespective of whether binding offers have already been received by the debtor). Upon completion of the competitive procedure pursuant to the terms and timing set by such specific court decree, in the case that the business or assets are sold or assigned to a person different from the first bidder, this latter is:

released from any obligation undertaken towards the debtor; and
entitled to receive up to 3 per cent of the price offered as reimbursement of costs and expenses incurred to formulate the offer.

The above-described credit bidding procedure also applies:

in the case of acts of sales envisaged to be carried out following the filing of a conditional petition pending the submission of a plan in the procedure of composition with creditors or a debt restructuring agreement; and
with respect to the lease of a company’s business going concern or single business units.

Rejection and disclaimer of contracts

Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

In the context of the procedure of judicial liquidation, the general rule is that if an agreement has not yet been performed or has not been completely performed in its main obligations by both parties at the opening of the relevant procedure, the performance of the agreement will be suspended, unless otherwise provided by law, until such time as the receiver (having been authorized by the creditors’ committee) may decide whether they intend to become a party to the agreement (replacing the debtor), thereby assuming all the obligations thereunder, or to terminate the agreement.

The counterparty may serve the receiver with a formal notice and request the delegated judge to set a deadline of no more than 60 days to make such a decision. If this deadline expires and no action is taken by the receiver, the relevant agreement is deemed terminated.

If the relevant agreement is terminated, the counterparty is entitled to submit a creditor’s claim relating to the failure to perform the agreement but is not entitled to claim compensation for damages.

Contractual clauses that provide that the opening of a procedure of judicial liquidation constitutes a ground for termination are not enforceable. However, this rule does not apply to certain contracts that are deemed terminated by law as a consequence of the commencement of any procedure, such as contracts awarded as a result of a tender, contracts of commission, and current account contracts.

Similar rules apply regarding the procedure of extraordinary administration of large, distressed enterprises. In this case, the extraordinary commissioners may terminate any agreement, including contracts requiring a continuous or periodical performance that has not yet been performed or has not been completely performed by both parties on the date on which the relevant procedure starts.

Until such time as the right of termination is exercised, the agreement continues to be in effect (in that respect, the rule differs from the one applying to judicial liquidation, where pending contracts are suspended until the receiver decides whether to step into or terminate them).

Furthermore, once the execution of the restructuring plan has been authorized, the counterparty may give the extraordinary commissioners 30 days’ notice to elect to continue the contract. If this period has expired without such election having been made, the agreement is deemed to be terminated.

If the extraordinary commissioners elect to continue the contract and then breach its terms, the counterparty has a claim for damages with a priority status, although unsecured.

Lastly, as far as the composition with creditors is concerned, the debtor may request the relevant court (while submitting the petition for a composition with creditors) to be authorized to terminate pending contracts or suspend them for no longer than:

the term granted by the delegated judge for the submission of the plan in the case of the filing of a conditional petition; or
30 days starting from the submission of the plan.

However, to protect the legitimate interest of the non-defaulting party, the debtor can submit a filing for the termination or suspension of pending contracts only to the extent the continuation of the contract is neither consistent with the plan’s forecasts nor functional to its implementation and, but only concerning the filing for the termination, insofar as the plan is simultaneously submitted.

The counterparty is entitled to oppose these requests by means of a written brief, to be filed before the relevant court within seven days starting from the debtor’s request, and may request damages equal to the damages that would have arisen from default; this sum will not be paid with priority, but as any other unsecured debt, namely, in accordance with the rules on the priority of claims.

Furthermore, it must be noted that there are specific rules for composition with creditors whose plans are aimed at the continuity of business; in this case, any contracts pending on the date on which the petition is filed are not terminated because of the commencement of the relevant procedure, and any stipulation to the contrary will be unenforceable.

In general, rules on termination and suspension of pending contracts do not apply to employment contracts, property lease contracts and, under certain conditions, preliminary residential property sale contracts.

Intellectual property assets

May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

Contractual clauses (either in the IP field or otherwise) that provide that the opening of a procedure of judicial liquidation constitutes a ground for termination are not enforceable against the procedure. If an IP contract has not yet been executed (in full) when a procedure of judicial liquidation has been opened, the execution of the IP contract is suspended until the receiver, after the authorization of the creditors’ committee, either accepts to continue the contract on behalf of the debtor (assuming all the rights and obligations thereto) or resolves to terminate the contract.

Furthermore, the counterparty can solicit the choice of the receiver by requesting the relevant court to set a deadline of 60 days for such decision to be made and on expiry of the deadline the contract will be deemed to have been terminated.

As far as liquidation and reorganization procedures other than judicial liquidation are concerned, given that no specific rules are provided with respect to intellectual property assets or agreements, the general framework on rejection and disclaimer of contracts applies.

Personal data

Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

EU rules provided by Regulation (EU) 2016/679 (the General Data Protection Regulation) apply in Italy. Therefore, in principle, wherever personal data are used for a purpose other than the one for which personal data were obtained or there is a change in the relevant data controller (eg, following a transfer of data to a purchaser), the relevant customers must be informed about the change in the purposes for which data are processed or in the relevant data controller, or both.

It must also be checked on a case-by-case basis whether any new use of the data or their transfer to a new data controller requires consent from customers, or both.

Furthermore, according to the Italian code of conduct for processing of personal data for the purpose of business information, providers of business information services may retain information coming from public sources and relating to the procedure of judicial liquidation or any other liquidation and reorganization procedures for a period not exceeding 10 years starting from the date of the opening of the relevant procedure, unless otherwise provided by the law.

Following the expiration of the 10-year period, if additional information referring to a subsequent procedure of judicial liquidation or of any other liquidation and reorganization procedures arises, the relevant information may be further processed for an additional period of 10 years starting from the opening of the relevant procedure.

Arbitration processes

How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

In the context of a composition with creditors, the debtor may only enter into arbitration with the prior written authorization of the delegated judge, but pursuant to the Insolvency Code the termination of an agreement does not affect the arbitration clause.

In the context of compulsory administrative liquidation, the liquidator may enter into arbitration, but if the claim is for an indeterminate value or exceeds €1,032.91, it has to be authorized by the administrative body supervising the liquidation, which will do so after consulted the supervisory committee.

In the context of the judicial liquidation procedure, the court allows arbitration to continue after a judicial liquidation is opened, but if the agreement containing an arbitration clause is terminated, the pending arbitration proceedings cannot continue (unlike composition with creditors). If the receiver replaces the debtor as a party to the agreement, the capacity to sue and be sued is transferred to the receiver, with the prior authorization of the delegated judge.

Thus, the receiver is bound by the arbitration agreement. Moreover, in this case, once the arbitration panel has been informed of the procedure, it must notify, or ask the non-insolvent party to notify, the receiver that a procedure is pending. Once notification has been served and the receiver has been informed, the (potential) adverse arbitral award may be enforced against the debtor.

All claims arising from a procedure of judicial liquidation may only be submitted to the court that opened the relevant procedure, which is the sole court with jurisdiction.

Notwithstanding this rule, according to academics and case law, certain claims may be submitted to arbitration. In particular, claims against third parties and those aimed at ‘restoring’ the estate of the debtor – which are not strictly connected to the procedure of judicial liquidation – can be referred to arbitration, such as compensation or damages claims, or claims aimed at obtaining repayment of a debt.

However, arbitration is not available for the settlement of claims directly relating to the procedure, such as any acts of the relevant bodies (eg, the receiver, the judicial commissioner and the extraordinary commissioners), the collection or distribution of assets, claims against orders or other judgments issued by both the court and the delegated judge, creditors’ claims or any other claim aimed at challenging the assessment of the liabilities made by the delegated judge.

CREDITOR REMEDIES

Creditors’ enforcement

Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

The procedure of judicial liquidation is aimed at satisfying the claims of the debtor’s creditors in accordance with the principle of equal treatment of creditors. Starting from the opening of the procedure (and save as described below), creditors are prevented from filing individual enforcement or interim actions over the assets of the debtor outside the relevant procedure.

Pursuant to this rule, all pending individual enforcement proceedings are suspended upon the opening of the procedure, save for enforcement proceedings relating to special mortgage loans and a few other exceptions that are subject to specific publicity formalities.

There are particular rules for debts secured by liens or pledges, which may be recovered by the relevant creditor during the procedure of judicial liquidation, provided they are included in the insolvency estate with priority status, through the direct sale of the asset. To obtain authorization for the asset to be sold, the creditor is required to file a petition with the delegated judge, who, after consulting with the receiver and the creditors’ committee, will issue an order detailing the timing and the procedure for the sale.

Also, pursuant to Legislative Decree No. 170 of 2004, implementing Directive EC/2002/47 (the Financial Collateral Directive), as an exception to the above general rules, a financial collateral can be enforced by the relevant secured creditor (eg, through sale or appropriation) also in the case of opening a procedure of judicial liquidation with respect to the collateral provider.

Unsecured credit

What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

Any unsecured creditor may, before the opening of a procedure of judicial liquidation, initiate individual proceedings to enforce its rights. If certain conditions are met, a creditor may obtain a summary judgment that is immediately enforceable and may subsequently obtain an attachment order over the debtor’s assets. Unsecured creditors need to participate in the procedure of judicial liquidation to enforce their rights. A request to participate must be submitted to the delegated judge of the relevant procedure and before any distribution plan is approved.

Unsecured creditors’ claims, submitted before the distribution plan is approved, will rank senior to any unsecured claim submitted after the approval of the distribution plan. Where the procedure of judicial liquidation has already been opened, unsecured creditors simply file their request to participate in the relevant procedure and any individual proceedings commenced before such declaration lose their effect.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

The receiver must serve creditors with the notice regarding the court decision to open a procedure of judicial liquidation by registered post or PEC (certified email); the court order will also indicate the date of the hearing during which the creditors will be able to prove their claims. If the registered office of a creditor is located outside of Italy, the notice may be delivered to the legal representative of the relevant creditor in Italy.

Following the proof of claims hearing, the receiver will prepare a distribution plan. Creditors whose claims have been partially admitted or rejected will be notified by the receiver by registered post or any other form of communication where receipt can be evidenced. Creditors are allowed to challenge the receiver’s distribution plan within 30 days of the above-mentioned notification.

The challenge is filed against the receiver and all other creditors whose distribution share may vary should the challenge be successful. Within 30 days of the decision by means of which the judicial liquidation has been opened, the creditors’ committee must be appointed by the delegated judge. The committee has a general supervisory and consultative role and may authorize the receiver’s actions or express an opinion in the cases (and subject to the conditions) expressly provided under the law.

Creditor representation

What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

A creditors’ committee is composed of a limited number of creditors (three or five) and it is appointed by the delegated judge within 15 days from the court decision to open a procedure of judicial liquidation. The creditors’ committee is required to appoint a chairperson within 10 calendar days from its appointment.

Over the past years, the powers of committees have gradually increased. Creditors’ committees have become both active stakeholders as well as essential cooperators with the receiver during the procedure of judicial liquidation.

The creditors’ committee has a central role in authorizing the receiver’s actions, in controlling the management carried out by the receiver and, under certain conditions, may ask the court to revoke (and replace) the receiver.

However, certain powers (eg, the power to ask the court to replace the receiver for cases of conflict of interest) remain related only to those creditors who have been admitted to the judicial liquidation.

Enforcement of estate’s rights

If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

There are no procedures by which the creditors can pursue the estate’s remedies if the receiver does not have funds to pursue a claim. However, nothing prevents the receiver assigning certain claims to third parties (including creditors or outside investors) by way of a competitive sale or assignment procedure.

Claims

How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

Following the decision by means of which the judicial liquidation is opened, a notice is sent to all creditors specifying the date by which their claims must be lodged. This will normally be approximately two months after the notice is sent to the creditor and before the hearing relating to the preparation of the list of creditors. If a creditor considers itself entitled to a security (eg, a mortgage or lien), the creditor must inform the receiver within the time specified in the notice.

There is no statutory form for the claim, but it should nevertheless state the name and address of the creditor, the amount due and attach any supporting documentation. Any creditor whose claims have not been recognized or have been recognized only in part may lodge a challenge to the decision within 30 days of the hearing. Within the same period, any creditor may challenge the recognition of other creditors’ claims.

Notwithstanding the above:

a claim may also be submitted in the period between 30 days following the hearing on the preparation of the list of creditors and six months following the filing of the decree that crystallizes the debtor’s liabilities. In this case, the creditor may be asked to (indirectly) contribute to the costs of arranging a further hearing, considering that all creditors will ultimately bear the costs of the procedure (in terms of lower recovery ratios); and
if the creditor does not comply with the above deadlines, the creditor will have the right to submit the claim provided that
the creditor proves that the delay was not attributable to them; and
the claim is submitted within 60 days from the date on which the circumstance causing the delay has ceased.

If a claim admitted to the procedure of judicial liquidation is assigned before the partition, the receiver allocates the relevant partition share to the assignee provided that the assignment is promptly notified to the receiver together with any assignment supporting documentation evidencing the assignment and bears a date certain at law.

A proof of claims procedure generally relates only to claims arising before the opening of the procedure of judicial liquidation. Whether a claim has arisen before or after such decision depends on the legal basis of the claim or its cause. Therefore, future claims (ie, claims arising following the opening of the procedure of judicial liquidation) are generally not subject to distribution of the insolvency estate.

Indeed, claims that arise while the company is authorized to continue its business on a temporary basis, or claims that arise as a direct result of liquidation measures issued by the receiver, are generally paid directly and only need to be proved in the context of the proof of claims procedure to the extent they are rejected or challenged by the receiver.

Claims that arise before the opening of the procedure of judicial liquidation, but the amount of which is not established at the time of the decision by means of which the judicial liquidation is opened, must be quantified and proven by the creditor at the time of their admission to the relevant procedure.

In that case, the relevant amount may be challenged by the receiver and the delegated judge during the verification of the claims. If a claim is rejected or is admitted for a lower amount than that requested, the creditor may challenge the distribution plan and provide evidence that it is entitled to receive the amount originally requested.

Conditional claims may be admitted with reservations and the relevant amount is set aside pending the fulfillment or non-fulfillment of the relevant conditions. If the conditions occur, the delegated judge will, upon request of the creditor, order the admission of the claim. If the conditions no longer apply, the amount previously set aside is shared among the other creditors.

The opening of the procedure of judicial liquidation suspends the accrual of interest until the closing of the relevant procedure, unless the claim is secured by mortgage, pledge or special lien. Therefore, due to this rule, unsecured creditors cannot claim interest accrued after the opening of the procedure of judicial liquidation.

Set-off and netting

To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

Creditors are entitled to set off debts they owe to the debtor against claims that they have against the debtor even though the claims towards the debtor are not due yet at the time of the opening of the procedure of judicial liquidation.

However, the set-off will not take place where the creditor purchased the claim (through an inter vivos deed of transfer) after the filing for the opening of the judicial liquidation or in the one-year period immediately before such filing.

A prerequisite for the right to set-off is that debts and claims to be set off against each other must be liquid (ie, determined in their amount), or may be made liquid promptly and easily, and that they either all arose prior to the opening of the procedure of judicial liquidation or all arose afterwards (meaning that the debtor’s debt arising after the opening of the judicial liquidation cannot be set off against the debtor’s claims arising prior to the opening of the judicial liquidation).

The above principles of set-off and netting apply, mutatis mutandis, to all liquidation and reorganization procedures.

Modifying creditors’ rights

May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

The relevant court may change the rank (ie, the priority) of a creditor’s claim if the security interest on which the ranking is based is ascertained to be null or invalid or if it reconsiders the factual elements based on which the ranking had been determined (eg, if it considers a claim as employee-related, it may consider it as having the same ranking as the employees’ claims, which are senior to other unsecured claims).

Priority claims

Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

Priority claims that rank ahead of secured claims in the procedure of judicial liquidation and in the other liquidation and reorganization procedures are:

liens over movable property, which may be either:
general liens over all the debtor’s assets (eg, general lien covering the entire property of the debtor for judicial expenses, sickness, wages and taxes); or
special liens on specific assets (eg, liens for customs duties on merchandise, taxes on rent and leases); and
liens on immovable property (eg, liens arising from income tax payable in relation to real estate property, from any form of indirect taxation and other claims as indicated by specific legal provisions).

On a separate ground, claims and credits that arise after the opening of a judicial liquidation, an extraordinary administration of large, distressed enterprises, a composition with creditors, in the context of a debt restructuring agreement or upon authorization by the relevant court are generally granted a super priority ranking and, as such, are repaid in advance of other debts.

Employment-related liabilities

What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

The opening of a procedure of judicial liquidation does not automatically terminate employment contracts, but it rather suspends them until the receiver (upon approval of the delegated judge, having heard the creditors’ committee) decides to continue their performance or terminate them.

If the receiver decides to terminate the employment contracts, the termination is effective starting from the opening of the judicial liquidation.

If it is not possible to continue the activity or transfer the business going concern (or a part thereof) or, in any case, there are evident business reasons related to the organization of work, the receiver proceeds, without delay, to terminate the employment contracts.

In any case, if the receiver has not communicated the takeover after four months (this term can be extended in specific circumstances upon approval of the delegated judge) starting from the opening date of the judicial liquidation, the employment contracts are considered terminated starting from the opening of the judicial liquidation.

The receiver can also proceed to conduct collective dismissals. This occurs when a debtor employing more than 15 employees intends to dismiss more than four employees, including executives in the same work unit, or in more than one work unit in the same province, within a period of 120 days.

When an employer intends to proceed to a collective dismissal, a mandatory information and consultation procedure with the work councils (if any) and trade unions must be carried out. In the context of a procedure of judicial liquidation, the mandatory information and consultation procedure, to be carried out by the receiver, is simplified and shorter than the one generally provided by the Italian law, and is structured as follows:

the receiver must send a communication to the work councils (if any) and trade unions providing information on the decision to implement a collective redundancy within the context of the judicial liquidation;
within seven days following receipt of the above-mentioned communication, work councils (if any) and trade unions may request that a consultation meeting be held to discuss the possibility of avoiding or reducing the redundancies (or, if this is not possible, to implement measures aimed at reducing the social impact of the redundancies); and
the relevant procedure is considered completed:
seven days after the receipt of the above-mentioned communication, if work councils (if any) or trade unions do not request a meeting to be held within seven days following receipt of the above-mentioned communication; or
10 days after the above-mentioned consultation started, if a union agreement has not been reached (but the delegated judge may prolong this term for an additional period of no longer than 10 days).

When the procedure is completed, the receiver can give notice of dismissal in writing to the employees concerned, within the usual notice periods; once the employees receive a dismissal letter, the notice period will begin (the length of the notice period depends on the national collective bargaining agreement applicable).

The above-mentioned mandatory procedure does not apply in cases of extraordinary administration of large, distressed enterprises.

Pension claims

What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

All pensions-related claims are privileged claims included within the class of liens on movable property. Claims arising from the employer’s failure to pay contributions to pension and insurance plans managed by institutions and bodies can be submitted by institutions or bodies as privileged claims in the procedure of judicial liquidation.

Environmental problems and liabilities

Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

Neither the Insolvency Code nor the Environmental Code expressly provide for the allocation of liabilities for the control of environmental problems or remediating damage caused in the case of liquidation or reorganization procedure. As a result, general rules apply when an environmental issue arises during any liquidation and reorganization procedures. With specific reference to the procedure of judicial liquidation, the receiver will operate in accordance with their powers to solve the problem under the scrutiny of the delegated judge and the creditors’ committee.

As a general rule, the party whose actions caused the pollution or contamination is obliged both to implement and finance the remediation measures required to eliminate the issue. These obligations apply regardless of any intent or knowledge on the part of the party. This principle (‘polluter pays’) derives from the implementation in Italy of European legislation (see Directive 2004/35/EC, establishing the principle that a company causing environmental damage is responsible for it and must undertake the necessary preventive or remedial action, or both, and bear all the related costs).

Failure to take appropriate remediation measures is a criminal offence.

The owner of the contaminated site who did not cause the pollution is under no obligation to clean up the site, although it has a right to do so. If the owner chooses to clean up the site, it assumes the same remediation obligations as the party responsible for the pollution and can claim back all damages, costs and expenses incurred in the clean-up from the responsible party.

However, in its Note dated 18 January 2018, No. 01495, the Italian Ministry of Environment and Energy Security clarified that if the party responsible for the environmental problem could not be identified, the owner of the property must reimburse the public authorities for the measures they adopted to clean up the property.

Furthermore, the owner of the contaminated site who did not cause the pollution is also subject to the obligation to adopt adequate preventive measures pursuant to paragraph 1.i, article 240 and paragraph 2, article 245 of the Environmental Code.

Liabilities that survive insolvency or reorganization proceedings

Do any liabilities of a debtor survive an insolvency or a reorganization?

As a general rule, liquidation or reorganization procedures are aimed at the satisfaction of all existing creditors, following with the principle of equal treatment.

reorganization procedures are generally aimed at the survival (and turnaround) of the business that may be continued with the same debtor or transferred as a going concern to third parties.

In each case, the debtor’s (pre-filing) liabilities regarding its creditors must be satisfied in accordance with the relevant plan (eg, unsecured creditors are usually not paid in full).

More specifically, upon homologation by the relevant court, the composition with creditors is mandatory for all creditors (even dissenting or non-voting). Where the debtor pays only a percentage of the current debts because the creditors accepted the plan, the latter are deemed to have waived their right to be repaid for the remaining share of the debt. No liabilities of the debtor or of the party acquiring the debtor’s assets survive.

This principle also applies in the cases of extraordinary administration of large, distressed enterprises under Legislative Decree 270/1999 and Law Decree 347/2003.

However, the creditor may still exercise its rights against co-debtors, the debtor’s guarantors and with-recourse obligors.

The debt restructuring agreement must involve at least 60 per cent of the creditors and is only binding upon those creditors who have agreed to its terms, as the agreement does not constitute a ‘mass’ composition.

In the context of a procedure of judicial liquidation, which may be opened also if a reorganization procedure turns out to be unsuccessful, the enterprise is generally dissolved and canceled upon completion of the liquidation.

Exceptionally, should this not be the case (eg, the liquidation of certain assets has turned out to be non-viable and the receiver has decided to abandon them), the debtor’s creditors are free to bring actions against the relevant debtor (and its residual assets) concerning the parts of their claims that have not been paid.

However, the debtor may be freed from all remaining debts owed to unpaid creditors, upon certain conditions, by a court order providing for the debtor’s exoneration. In that case, no further actions may be started by (pre-filing) unpaid creditors after the conclusion of the judicial liquidation.

Distributions

How and when are distributions made to creditors in liquidations and reorganizations?

As far as the procedure of judicial liquidation is concerned, after the debtor’s assets have been disposed of, the receiver, after consulting the creditors’ committee, is required to prepare a distribution plan that is notified to the creditors and submitted to the relevant court for approval. The creditors are entitled to challenge the plan within 15 days from receipt of the notification including the distribution plan. The court will approve the plan and order a distribution.

The Insolvency Code provides a mandatory order of priority for the payment of claims as follows:

any claims identified as having a priority status by the law, together with expenses of the procedure and claims arising from the activities of the debtor during the procedure (super senior claims), which are normally paid in full when they fall due;
despite the priority status of this type of claims, certain types of secured claims remain entitled to be satisfied prior to the super senior claims;
secured claims over movables and real estate;
unsecured claims; and
subordinated claims (which are usually completely written off and left unpaid).

As far as the composition with creditors is concerned, distributions will follow the terms and conditions of the plan and may be approved by the judicial commissioner or the delegated judge, in accordance with the provisions included in the homologation decree.

SECURITY

Secured lending and credit (immovables)

What principal types of security are taken on immovable (real) property?

Under Italian law, loans are mainly secured by way of a mortgage over immovable property. Some types of assets (eg, aircraft, vessels and motor vehicles) are subject to specific regimes applicable to the constitution, validity and enforcement of a mortgage.

A mortgage grants the right to appropriate the asset (even against third-party transferees) and a priority on the proceeds of the sale of the mortgaged assets.

There are three types of mortgage over immovable property:

a legal mortgage – which is a mortgage created by operation of law (eg, as a security for the performance of the transferee’s obligations under a real estate asset transfer transaction);
a judicial mortgage – whenever a judgment is rendered against a debtor and provides for, among others, the creation of the mortgage on the debtor’s personal property; and
a contractual mortgage – whenever the parties to an agreement agree to grant a mortgage, for example, as security for a loan. The creation of a mortgage over real estate assets requires, among other perfection formalities, a notarial deed.

Mortgages are established through the registration of the relevant mortgage deed with the property register of the place where the property is located, or with the relevant register for the registered chattel. The mortgage deed must clearly identify the mortgaged property and state the value of the secured obligations.

Some recent legislative measures (Law Decree No. 59 of 2016, converted into Law 30 June 2016 No. 119 and Legislative Decree No. 72 of 2016) have superseded the Italian rule pursuant to which a secured creditor is not allowed to repossess a pledged or mortgaged asset upon the debtor’s default (which aims to prevent the risk that the creditor may take advantage of the debtor’s default), provided that certain conditions are met and without prejudice to the application of the aforementioned rule in all other cases.

It is now possible for banks and financial intermediaries to agree in the financing arrangements (also with consumers) to obtain, in the case of a debtor’s default that is continuing (which is expressly defined in the context of such legislative measures), title to a designated real estate asset.

To repossess, however, a payment default needs to be outstanding and continuing for a minimum period. Furthermore, among the key principles governing repossession:

the value of the property must be assessed by an independent appraiser; and
if the appraisal value exceeds the outstanding debt and the transfer costs, the secured creditor must pay to the debtor the relevant difference.

Secured lending and credit (movables)

What principal types of security are taken on movable (personal) property?

The main types of security interests over movable property are:

pledge;
non-possessory pledge;
general or special liens; and
special lien under article 46 of the Banking Act.

Pledge

The main type of security taken over movable property is the pledge. A pledge may be taken over any movable property (other than certain specific assets (eg, aircraft, vessels and cars) that are subject to mortgage, including shares (whether listed or unlisted), patents, trademarks, businesses, book debts or bonds, owned either by the debtor itself or by a third party, to secure the debtor’s obligations.

Subject to a few exceptions (eg, the pledge over dematerialized shares and the non-possessory pledge described below), the perfection of the pledge requires the de-possession of the pledged asset, whose possession is transferred by the pledgor to the pledgee or to a jointly appointed custodian until the obligations secured by the pledge have been discharged in full. In the case of failure to satisfy the obligations secured by the pledge, the pledged asset may be sold. Where the court so consents, the pledged asset may also be assigned to the pledgee in discharge of the claim.

To enforce the pledge against third parties or to gain priority in the procedure of judicial liquidation, it is essential to prove that the pledge is created in writing and bears a date certain at law. The Italian Civil Code sets out specific rules governing how the date is determined.

Non-possessory pledge

Law Decree No. 59/2016 introduced in the Italian legal system the non-possessory pledge, a new form of security over movable assets available to businesses and aimed at improving businesses’ access to lending. The regulation of this new form of security was implemented by Law Decree No. 114/2021, published on 10 August 2021.

Any business registered with the Business Register can grant a pledge over its assets without losing the right to use or trade such pledged assets (in contrast to what would happen for ordinary Italian pledges requiring de-possession, as described in the above paragraph). Furthermore, any proceeds from the use or disposal of pledged assets are automatically subject to the same form of security without additional formalities.

In the past, under Italian law, the only security interest that allowed the security giver to dispose of the secured assets was the special lien under the Italian Banking Act. However, the special lien is only available to banks as a security for medium to long-term loans and qualified investors as a security for medium to long-term bonds.

By contrast, the non-possessory pledge can be granted in favor of any type of creditor as a security interest for any obligation (including those arising from short-term credit lines and future obligations related to the pursuit of the business activity, as long as they are determined or determinable and the maximum amount is indicated).

The agreement creating the non-possessory pledge must be in writing and the pledge may be created over existing or future assets, provided that they are used for the conduct of business and are sufficiently described (a general reference to a category of assets or to a total amount would suffice).

The circumstance that the pledged assets must be sufficiently described has also been highlighted by the Italian Court of Cassation in its Order No. 20895 of 5 August 2019, in which the court held that the pledge over all present and future assets of the debtor is unenforceable against the creditors and the receiver if the future assets are not sufficiently identified or identifiable.

This new security must be registered with an online register held by the Italian Revenue and Land Registry Agency and is enforceable on third parties as from the date of registration. The registrations and other formalities cannot be carried out other than by virtue of a public deed, notarized private deed, judicially ascertained deed, digitally signed agreement or order of the judicial authority.

The online register was implemented by the Italian Revenue and Land Registry Agency on 12 October 2021 and it has been activated in accordance with an order of the same authority issued on 14 June 2023.

In the context of the procedure of judicial liquidation, non-possessory pledges can be enforced by the creditor only after its credit is admitted to the procedure, and are subject to the clawback provisions applicable to ordinary pledges. Provided that the collateral is classified as a ‘financial collateral agreement’ pursuant to the Financial Collateral Directive, the relevant enforcement by the creditor will be subject to the terms provided therein, notwithstanding the commencement of a procedure of judicial liquidation.

General or special liens

Liens (both special and general) are granted by law to certain creditors.

A general lien is created upon all movable assets of the debtor. A special lien is created over specific movable or immovable assets.

With a few exceptions, the granting of a lien is neither dependent on the parties’ agreement nor on public notification.

Liens allow the creditor to satisfy its claim in priority to other creditors, although in compliance with the ranking expressly set out by law.

General liens may not be enforced to the detriment of third parties who have rights over the movable property concerned (except where this has been seized by a creditor, which can no longer be done after the opening of the procedure of judicial liquidation).

Conversely, special liens on movable property may be enforced in priority to rights acquired by third parties over the assets concerned.

Where a pledge and a special lien have been created over the same asset, the pledge takes priority, and the creditor with a special lien cannot enforce the lien in priority to the pledge.

Special lien under article 46 of the Banking Act

Article 46 of the Italian Banking Act provides for a special lien created by contractual agreement of the parties.

The special lien is a security that may be created voluntarily on unregistered movable property (eg, equipment and licenses) by a company as security for medium or long-term loans granted by banks. The main feature of this type of security is that the creation of the special lien does not require the de-possession of the relevant asset (which would prevent the use of the asset in the business activity of the security grantor) but only a written deed and certain specific registration formalities.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

The provisions governing clawback or the setting aside of transactions in the procedure of judicial liquidation are set out in the Insolvency Code. Transactions and disposals that unfairly favor a single creditor at the expense of the general mass of creditors (for example, by giving a creditor a preference or other benefit at the time when the debtor is unable to pay debts) may be revoked by the relevant court by means of a clawback action.

A clawback action can only be promoted by the receiver and is aimed at obtaining a judgment from the relevant court that declares void and ineffective the acts performed by the debtor during a certain period (whose duration can vary within a range set by the law, as further described below) before the filing of the petition for the opening of the judicial liquidation.

The following transactions can be clawed back, unless the counterparty to the transaction can demonstrate that it had no knowledge of the debtor’s status of insolvency at the time of the relevant transaction:

transactions carried out following the filing of the petition for the opening of the judicial liquidation, or during the preceding year, in which the value of the obligations performed or assumed by the debtor exceeded at least by one-fourth the consideration received in exchange by the debtor (ie, transactions at undervalue);
payments of monetary debts that are overdue, where the payment was made following the filing of the petition for the opening of the judicial liquidation, or during the preceding year, and was not made with money or other customary payment methods;
pledges, security interests and mortgages willfully created following the filing of the petition for the opening of the judicial liquidation, or during the preceding year, to secure pre-existing debts that were not yet past due; and
pledges, security interests and mortgages created voluntarily or by court order in respect of debts past due following the deposit of the filing for the opening of the judicial liquidation, or during the preceding six-month period.

The following transactions can be clawed back if carried out following the filing of the petition for the opening of the judicial liquidation, or during the preceding six-month period, and if the receiver can demonstrate that the counterparty to the transaction had knowledge of the debtor’s insolvency at the time of the relevant transaction:

payment of liquid and enforceable debts;
transactions against consideration; and
transactions creating pre-emption rights to secure simultaneously incurred debts, including third-party debts.

Furthermore, the following additional transactions are subject to clawback actions by operation of law:

free transfers (eg, donations);
payments of debts due and payable on or after the date of the opening of the procedure of judicial liquidation, if such payments have been performed by the debtor following the filing of the petition for the opening of the judicial liquidation, or during the preceding two years; and
payments aimed at repaying shareholders’ loans granted in favor of the debtor (where the debtor is a company), if such payments have been performed by the debtor following the deposit of the filing for the opening of the judicial liquidation, or during the preceding year. The same applies if the shareholders’ loan has been granted to a company subject to direction and coordination activity by the entity exercising such direction and coordination activity.

Assets having been disposed under one of the above transactions are immediately and automatically transferred to the insolvency estate upon the transcription of the court’s decision to open the judicial liquidation proceeding.

Courts have taken a broad approach in determining a party’s knowledge of the status of insolvency of the relevant debtor and have ruled that if there are symptoms of insolvency such as judicial attachment, collective dismissal of employees or press reports referring to the relevant debtor’s financial difficulties, the burden of proof as to the knowledge of insolvency will be shifted onto the party defending the clawback action.

Certain transactions are expressly exempted by the law from clawback actions. These include, for example:

payments for goods and services carried out in the ordinary course of business of the debtor;
remittances to a bank account not materially and permanently reducing the indebtedness of the debtor in respect of the bank;
sales of real estate assets used as the main residence of the debtor (or its family) or as headquarters of the relevant company (if the debtor is a company), provided in both cases that the sale was at fair market value;
acts, payments or security interests implementing a certified recovery plan. However, this exemption does not operate in the case of willful misconduct or gross negligence of the expert certifying the plan, or willful misconduct or gross negligence of the debtor, when the creditor was aware of the willful misconduct or gross negligence at the time the act was performed, the payment was made or the security interest was created;
acts, payments or security interests implementing a composition with creditors or a debt restructuring agreement (including the restructuring plan subject to homologation);
payments of debts owed to the debtor’s employees and collaborators as compensation for their working activity; and
payments of debts due and payable, executed when due, to obtain services instrumental to the accession to the liquidation and reorganization procedures regulated in the Insolvency Code.

Before the entry into force of the Insolvency Code, the Italian Court of Cassation expressed its view in respect of the clawback exemption, which, under the Former Insolvency Act, referred to ‘payments of debts … instrumental to the accession to [insolvency procedures] and to composition with creditors’. In particular, the Court of Cassation’s decision No. 4340 of 20 February 2020 states that this exemption is to be deemed applicable only if the petition for composition with creditors or the debt restructuring agreement has been filed with the relevant court.

Consequently, payments made before the filing of the relevant request would not benefit from the clawback exemption if the petition was not eventually filed.

Equitable subordination

Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

Only legal subordination (as opposed to equitable subordination, intended as the ability of a court to downgrade a claim’s priority and subordinate its payment to other creditors’ payments) is provided under Italian law.

In particular, by operation of law, shareholders’ and intra-group loans are subordinated to third parties’ claims, and any repayment thereunder, if made following the filing of the petition for the opening of the judicial liquidation or during the preceding year, must be paid back by the shareholder or controlling group lender. The principle of legal subordination only applies if the loan was made:

at a time when the company’s financial situation (in terms of assets or liabilities ratio) was excessively ‘unbalanced’; or
in a situation where it was ‘reasonable’ to expect that the shareholder would make a further contribution to the company’s share capital (as opposed to making a shareholder loan).

As an exception to the above rules, shareholder and intra-group financing that is ‘instrumental’ to (1) the filing of the debt restructuring agreement or the composition with creditors petition; (2) the continuation of the borrower’s business prior to the homologation of the debt restructuring agreement or the composition with creditors petition; or (3) the execution of the debt restructuring agreement or the composition with creditors petition are qualified as priority status claims (ie, they are super senior) up to the 80 per cent of their nominal value, provided that:

the debt restructuring agreement or composition with creditors petition provide for continuity of the business;
the relevant financing is contemplated by the plan;
in the case under (1) above, the relevant financing is authorized by the court and labeled as priority claims in the order of admission to the composition with creditors, or in the homologation decision of the relevant debt restructuring agreement; and
in the case under (2) above, the relevant financing is authorized by the court through the issuance of a proper decree.

Moreover, in the cases under (1) and (3) above, the relevant financing loses its priority status if the plan underlying the debt restructuring agreement or composition with creditors petition are found to be based on untrue information, on the omission of relevant information or the debtor has carried out fraudulent acts against the creditors and the receiver proves that the relevant lender was aware of such circumstances at the date of the utilization.

Furthermore, if the lender has acquired the status of shareholder pursuant to the debt restructuring agreement or the composition with creditors (including via a debt-for-equity swap), the above-mentioned limit related to the 80 per cent of the nominal value of the financing is not applicable, with the consequence that the entire 100 per cent of the financing is qualified as priority claims.

Lender liability

Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

Lenders could be held liable for the insolvency of a debtor in various situations.

First, lenders could be held liable for abusive granting of credit that, even if not disciplined under Italian law, consists of a tort developed and applied by Italian case law.

Based on the Italian law general principles of performance of agreements in good faith and diligent performance of professional services, Italian courts have developed the legal concept of abusive granting of credit, pursuant to which a lender should only make or maintain credit after having thoroughly examined the debtor’s current and prospective status and ability to repay, and should, conversely, abstain from continuing to sustain and lend money (including in the form of an extension of the maturity date) to a debtor who is insolvent or in a state of crisis, with the consequence of causing (or contributing to) further financial losses for the borrower’s estate and its creditors.

The granting of credit qualifies as ‘abusive’ if the lender has failed in its primary duty of prudent management. Lenders carrying out abusive granting of credit are exposed to general extra-contractual liability that, once ascertained by the relevant court, causes the lender to pay compensation for damages.

If, on the one hand, Italian case law has always been unanimous in sustaining that the abusive granting of credit could cause damages to other creditors, and could therefore be pursued in court by them, the same interpretation, on the other hand, has not always been applied in respect of the damages suffered by the debtor.

For a long time, Italian courts excluded the legal capacity of the receiver to initiate a liability action against the lenders acting in an abusive manner on the basis that the debtor would have not been directly damaged by the abusive granting of credit, which, conversely, would have benefited the debtor by providing it with financial resources.

In 2017, for the first time, the Italian Court of Cassation held, in decision No. 9986, that the receiver itself could be entitled to bring the relevant action on behalf of the creditors. The change of approach by the Italian Court of Cassation is based on the ground that the abusive conduct of the lenders, consisting of their failure to comply with their primary duties of prudent management, is directly linked to the deterioration of the economic and financial situation of the debtor, thus leading to the opening of the procedure of judicial liquidation.

In this regard, a recent decision of the Court of Cassation (decision No. 18610 of 30 June 2021) clarified that the extra-contractual liability of the lenders can be pursued by the receiver either jointly or severally with the contractual liability of the directors pursuant to the Insolvency Code, which entitles the receiver to initiate – against the directors or extraordinary commissioners of the relevant company (if the debtor is a company) – any liability actions aimed at obtaining compensation for the damages suffered by the relevant company.

Moreover, in the most serious cases, the abusive granting of credit may also result in criminal liability. Granting new financing or the maintenance of current facilities in favor of a debtor may expose the lenders to criminal liability where the lenders’ imprudent or negligent conduct contributes to one of the bankruptcy offenses provided for under the Insolvency Code and facilitates the occurrence of the damaging event (ie, the insolvency leading to the opening of a procedure of judicial liquidation).

More specifically, lenders acting in an abusive manner can be charged together with the debtor (or debtor’s directors or officers) with criminal liability for having, among other things, contributed to causing:

a preferential bankruptcy offence pursuant to the Insolvency Code consisting of making payments before or during the judicial liquidation with the intent of favoring one or more creditors; or
simple bankruptcy pursuant to the Insolvency Code consisting of, among other things, carrying out high-risk transactions with the intent of delaying the commencement of the judicial liquidation.

In addition to the above, the lenders (that are also creditors of the debtor) may also be held liable for certain crimes set out under the Insolvency Code and punishing the debtor’s creditors.

In particular, the Insolvency Code sets out the following crimes that could be committed by a creditor:

outside the cases of complicity in the crimes of bankruptcy, a creditor can be held liable if, also through an intermediary, it files an application for the admission of a fraudulently simulated claim to the procedure of judicial liquidation;
after the opening of a procedure of judicial liquidation, and other than in cases of complicity in the crimes of bankruptcy, a creditor can be held liable if it takes away, distracts or disposes of, or conceals in public or private statements, assets of the debtor subject to the procedure of judicial liquidation;
a creditor can be held liable if, being aware of the state of insolvency of the relevant debtor and subject to the subsequent opening of the procedure of judicial liquidation, it diverts or disposes of goods or other assets of the debtor or purchases them at a price significantly lower than their fair value; and
a creditor can be held liable if it has agreed with the debtor (or with others in the interest of the said debtor), advantages in its own favor in exchange for its vote in the creditors’ committee.

GROUPS OF COMPANIES

Groups of companies

In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

The general discipline provided under the Italian Civil Code in the case of insolvency of a company belonging to a group does not generally allow for an (automatic) ‘piercing the veil’ (ie, liability of the parent for the debts of the controlled company).

The only case in which a company can be held responsible for the liabilities of another company (belonging to the same group) is when, while exercising an activity of direction and coordination, it has acted in a manner contrary to the principles of sound company management and can therefore be held liable towards the other shareholders of the controlled company or to the controlled company’s creditors, or both.

In this case, despite the general principle of full separation of the assets and liabilities of the various entities (along with the relevant ‘corporate veil’), based on which a parent or affiliated corporation should not be liable for the subsidiaries’ or affiliates’ debts, the receiver is entitled to exercise the same rights as the relevant company’s creditors, and has the right to submit a claim against the parent company on behalf of the insolvent company’s creditors. The same liability may be extended to other entities of the group that were involved in the unlawful act or benefited from it.

One of the main innovations of the Insolvency Code is the inclusion of specific sections regulating group liquidation and reorganization procedures. While confirming the general rule of full separation of assets and liabilities of the group entities, and the possible liability for abusive direction and coordination of the group, it allows the drafting of group liquidation and reorganization plans, possibly including (at certain conditions) asset transfers between group entities, subject to a ‘no creditors worse off’ test.

Combining parent and subsidiary proceedings

In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

Pursuant to the Insolvency Code, companies in a state of crisis or insolvency, belonging to the same group and having their center of main interests (COMI) in Italy, are entitled to file a single petition for either:

the admission to a composition with creditors;
the homologation of a debt restructuring agreement, debt restructuring agreement allowing the extension of the effects of the agreement event to non-adhering creditors or simplified debt restructuring agreement; or
the opening of a procedure of judicial liquidation.

In the cases under (1) or (2) above, the petition may either include:

one single plan; or
different plans (one for each group company), mutually related and interfering with one another.

Moreover, and in addition to the documentation to be attached to the petition for the admission to a composition with creditors or the homologation of a restructuring agreement concerning a single company the petition concerning a group of companies must include:

the reasons of convenience for the filing of a single plan or multiple plans;
analytical, complete and updated information about the structure of the group and existing shareholding or contractual obligations among the group companies; and
the consolidated financial statements of the group, if available.

Regardless of the type of procedure that is initiated, the assets and liabilities of each of the companies contemplated under the petition remain separate and autonomous from the pool of assets and liabilities of the other companies contemplated under the same petition.

Without prejudice to this principle, within the context of group debt restructuring agreements (or group compositions with creditors), the Insolvency Code allows the provision that, at certain conditions, certain assets be transferred from one group entity to the other and that other extraordinary transactions be carried out by and between different group entities, subject to:

the transactions being necessary for the purposes of business continuity; and
a ‘no creditors worse off’ test (which applies to all group entities involved).

Furthermore, companies meeting the above requirements are allowed to prepare a single, or multiple mutually related and interfering with one another, certified recovery plans to pursue a completely out-of-court recovery of each company involved.

The above-described provisions are included under the specific section of the Insolvency Code governing the crisis and the insolvency of groups of companies.

The Insolvency Code states that, save for those cases where the crisis or the insolvency of the group of companies is regulated exclusively under Legislative Decree No. 270/1999 (concerning the extraordinary administration of large, distressed enterprises) or Law Decree No. 347/2003 (concerning the extraordinary administration aimed at the reorganization of large, distressed enterprises), the ‘ordinary’ procedures provided under the Insolvency Code remain applicable.

In the case of extraordinary administration of large, distressed enterprises, the relevant procedure may be extended to the other insolvent companies of the group. Although the procedure is the same, the individual proceedings are separated and the group companies’ assets are not pooled. Each company maintains its financial autonomy and is only liable for its own payment obligations.

A list of creditors will therefore be drawn up for each relevant company of the group before the relevant court can open a procedure of judicial liquidation with respect to the company. The costs of the extraordinary administration of large, distressed enterprises are borne by each company of the group in proportion to their respective assets.

In the case of extraordinary administration aimed at the reorganization of large, distressed enterprises, the extraordinary commissioners may request the Minister for Economic Development to admit other insolvent companies of the group to the procedure by submitting an application for insolvency to the relevant court. The relevant procedures for each group company may be implemented jointly with those for the parent company, or separately.

If the restructuring plan provides for the implementation of a composition with creditors, several group companies subject to the procedure of extraordinary administration aimed at the reorganization of large, distressed enterprises may submit a single proposal, subject to the autonomy of their respective assets and liabilities.

Such autonomy may lead to a different treatment, even within the same class of creditors, according to the financial situation of each individual company to which the composition with creditors refers (for the sake of clarity, composition with creditors in the context of an extraordinary administration differs from the proper composition with creditors in many aspects).

Where a liquidation or reorganization procedure has been opened for a company having offices in various EU member states, the competent court for the procedure must be the court of the place where that company carries out its main operational decisions (as ascertainable by third parties).

Therefore, the jurisdiction tends to lie with the country in which the main interests of the parent company are located, on the presumption that, although the subsidiary conducts its business in other member states, in practice it merely receives and follows the strategy of the parent company.

For large groups of companies, the competent court for insolvency proceedings is the corporate specialized section where the COMI is located.

INTERNATIONAL CASES

Recognition of foreign judgments

Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

For procedures opened in a member state of the European Union, the EU Insolvency Regulation applies, which states that the opening of a liquidation or reorganization procedure in that member state must be recognized in all other member states. Recognition of the procedure does not preclude the opening of a liquidation or reorganization procedure in another member state concerning assets of the debtor situated in that territory (a secondary procedure).

An EU member state may refuse to recognize or enforce a judgment rendered in the context of a liquidation or reorganization procedure in another member state where the effects of such recognition or enforcement would be manifestly contrary to that state’s public policy, especially when its effect is to restrict fundamental rights and freedoms, or on the grounds of public policy where the principles of due process have been breached (ie, breach of defense rights and the principle of impartiality of the court).

According to the prevailing interpretation of doctrine and case law, the principle of non-discrimination among creditors (ie, the par condicio creditorum principle) does not constitute a mandatory rule of state’s public policy, as expressly stated, among others, in the Italian Court of Cassation decision No. 10540 of 15 April 2019.

The interpretation is supported also by the provisions of the Insolvency Code allowing derogation from the non-discrimination principle in the preparation of plans concerning any type of debt restructuring agreements, negotiated settlement arrangements and certified recovery plans.

Where the liquidation or reorganization procedures are not subject to EU legislation, there are two possible alternatives:

the effects of the relevant procedure abroad may be extended to Italy, where the receiver or the creditors apply for recognition of the foreign judgment; or
the receiver or the creditors may request the opening of a procedure of judicial liquidation in Italy, with the risk that there may be conflicts and interferences between the two procedures.

Indeed, the receiver and the creditors involved in the foreign procedures could lodge any claims admitted abroad in the Italian procedure if they first obtain interlocutory rulings recognizing such orders.

However, foreign creditors, like Italian creditors, could also lodge independent claims in the procedure of judicial liquidation. Likewise, the Italian receiver could lodge claims under the same terms against the estate in the foreign insolvency procedure.

Foreign judgments and orders may be recognized by the relevant Italian courts with immediate effect if certain conditions are met. The competent court of appeal will declare the foreign judgment enforceable in Italy if:

the foreign court was competent to decide on the matter in accordance with Italian law principles on jurisdiction;
the document that instituted the relevant foreign procedure was notified to the defendant in accordance with the rules applicable in the country where the relevant foreign procedure took place and the fundamental rights of defense were not breached;
the parties appeared before the foreign court in accordance with the law applicable in the country where the relevant foreign procedure took place or were otherwise declared in default of appearance in compliance with the law;
the judgment is final and conclusive in accordance with the rules applicable in the country where the relevant foreign procedure took place;
the judgment is not irreconcilable with another final and conclusive judgment rendered by an Italian court;
a liquidation or reorganization procedure involving the same cause of action and between the same parties is not pending before an Italian court, provided that the Italian procedure was commenced prior to the relevant foreign procedure; and
the judgment does not produce effects that are contrary to public policy.

UNCITRAL Model Laws

Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

Cross-border insolvency is regulated in Italy by the EU Insolvency Regulation. The UNCITRAL Model Law on Cross-Border Insolvency has not been adopted yet, although the explanatory report to the Insolvency Code expressly refers to the principles of the UNCITRAL Model Law on Cross-Border Insolvency among the principles inspiring the Italian insolvency reform.

Foreign creditors

How are foreign creditors dealt with in liquidations and reorganizations?

Foreign creditors are subject to the same regime applicable to Italian creditors.

Cross-border transfers of assets under administration

May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

Transfer of assets between related administrations are expressly regulated only in respect of transfers to other EU member states where related administrations are opened pursuant to the EU Insolvency Regulation. Pursuant to article 49 of the EU Insolvency Regulation, assets may be transferred from the member state of the secondary procedure to the member state where the relevant procedure is primarily opened, provided all creditors in the secondary procedure have been satisfied.

COMI

What test is used in your jurisdiction to determine the COMI (center of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

The Insolvency Code defines the center of main interest (COMI) as ‘the place where the debtor habitually handles its interests in a manner recognizable by third parties’.

The Insolvency Code provides for a rebuttable presumption that:

the COMI of a natural person performing business activity coincides with the registered office according to the commercial register or, lacking that, with the actual place where business is habitually carried out;
the COMI of a natural person not performing business activity coincides with their residence or domicile and, if these are unknown, with the last known abode or, lacking the latter, with the place of birth. If this is not in Italy, the Court of Rome will be competent; and
the COMI of a company or a different entity (also not performing business activities) coincides with its registered office according to the commercial register or, lacking this, the actual place of habitual business or, if unknown, as provided above with respect to the legal representative.

Furthermore, any transfer of the COMI that occurred during the year preceding the filing of the petition for the homologation of a debt restructuring agreement, the composition with creditors or the opening of a procedure of judicial liquidation is not relevant for the purposes of the identification of the competent court.

The provisions concerning the COMI envisaged under the Insolvency Code are aimed at mirroring the corresponding concepts and provisions of the EU Insolvency Regulation, which, due to its direct applicability in EU member states, remains the main piece of legislation in this regard.

The judgments of the Court of Justice of the European Union (CJEU) is naturally also relevant to the interpretation of the concept of COMI introduced into the Insolvency Code. For instance, in the case of Interedil (Interedil Srl v Fallimento Interedil Srl and Intese Gestione Crediti SpA (Case C-396/09)), the CJEU confirmed that COMI must be interpreted in a uniform manner by EU member states and by reference to EU law and not national laws.

The CJEU further held that, where a company’s registered office and place of central administration are in the same jurisdiction, the registered office presumption set out in the recitals to the EU Insolvency Regulation cannot be rebutted.

Where a company’s central administration is not in the same place as its registered office, the presence of assets belonging to the debtor and the existence of contracts for financial exploitation of those assets in an EU member state, other than the one in which the registered office is situated, are not sufficient elements to rebut the registered office presumption, unless a comprehensive assessment of all the relevant elements makes it possible to establish, in a manner that is ascertainable by third parties, that the company’s central administration is located in the other EU member state.

This principle has been confirmed by the Joint Chambers of the Italian Court of Cassation, which, before the entering into force of the Insolvency Code, stated that in the case of insolvency the effective company’s headquarters cannot be identified in a merely formal new registered office transferred abroad, when it appears that the transfer of the company’s registered office has not been followed by the actual carrying on of the business activity at the new office and with the establishment of the administrative and managerial company’s core therein.

For this reason, the Court of Cassation held that Italian courts have jurisdiction to declare the insolvency of a company that had its actual center of interests and its own business in Italy, before the formal transfer of its registered office abroad (the Italian Court of Cassation, Joint Chambers, 18 March 2016, No. 5419; the Italian Court of Cassation, Joint Chambers, 6 February 2015, No. 2243; and the Italian Court of Cassation, Joint Chambers, 9 January 2014, No. 265). The interpretation provided by the Court of Cassation has now been reflected in the Insolvency Code.

In general, even prior to the entering into force of the Insolvency Code, courts’ decisions played an important role in identifying factors relevant to determining a debtor’s COMI (in addition to the rebuttable registered office presumption). These factors typically include:

the location of internal accounting functions and treasury management;
the governing law of the debtor’s main contracts;
the location of business relations with clients;
the location of lenders;
the location of restructuring negotiations with creditors;
the location of human resources functions and employees as well as the location of purchasing;
contract pricing and strategic business control;
the location of IT systems;
the domicile of directors; and
the location of board meetings and the general supervision of the debtor.

Cross-border cooperation

Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognizeforeign proceedings or to cooperate with foreign courts and, if so, on what grounds?

The EU Insolvency Regulation requires cooperation between insolvency officeholders as well as courts supervising liquidation and reorganization procedures. Pursuant to article 3 of the EU Insolvency Regulation, the courts of the member state where the COMI is located have jurisdiction to open liquidation and reorganization proceedings.

Moreover, according to article 41 of the EU Insolvency Regulation, the administrators of main and secondary proceedings must exchange all relevant information and be cooperative among each other. Furthermore, cooperation is specifically envisaged among the players of insolvency proceedings relating to two or more members of a group of companies.

The Insolvency Code provides for the applicability of international treaties and EU legislation, implicitly referring to the provisions of the EU Insolvency Regulation.

Italian case law reveals a generalized application of the principle of recognition of judgments opening a liquidation or reorganization procedure (prior to the entry into force of the Insolvency Code), although mainly at EU level. In this regard, the following rulings may be of interest:

the Court of Appeal of Turin reiterated the principle, previously stated by the CJEU in its Decision, C-341/04 of 2 May 2006, that ‘the main insolvency procedures opened in one member state must be recognized by the courts of the other member states, which do not need to verify the jurisdiction of the court of the member state in which the procedures were opened’;
the Court of Milan stated that insolvency procedures opened against an investment company in the member state in which it has its headquarters are automatically effective in Italy (the case involved an administration procedure in the United Kingdom);
the Court of Naples held that the recognition of a foreign judgment that opened insolvency procedures does not imply that such decision has the same effectiveness in Italy as an Italian insolvency ruling, since it is necessary to take into account the effects produced in the country of origin; and
the Court of Milan, applying German rules, recognized that the payment of a certain sum of money by the debtor in the three months preceding the application for the opening of insolvency procedures could be clawed back if the debtor was not in a position to fulfil its obligations.

Regarding the jurisdiction for opening a liquidation procedure, the following court decisions are significant:

the Court of Rome opened the liquidation procedure of Cirio Del Monte NV, whose registered office was in the Netherlands and that was a wholly owned subsidiary of an Italian insolvent parent, on the grounds that its operational and executive center was situated in Italy, where all the Italian members of the board of directors were resident; and
the Court of Parma, within the context of the insolvency of the Parmalat group, held that it had jurisdiction to declare the insolvency of Parmalat Neth BV, a company of the group whose registered office was in the Netherlands, on the grounds that the executive activities and operational center of the company were located in Collecchio (Italy), at the headquarters of the parent company. It concluded that the Dutch company was merely a vehicle for the financial policy of Parmalat SpA, which was created for the sole purpose of facilitating cash flows.

Concerning cross-border cooperation over insolvency proceedings involving extra-EU countries, Italy has not entered into any bilateral – or multilateral – conventions on the recognition of insolvency proceedings. Therefore, a foreign declaration of insolvency cannot be recognized in Italy other than as a result of the ordinary rules of recognition of foreign judgments set out under the Italian private international law.

The Insolvency Code provides that a foreign debtor having its COMI abroad can be subject to a procedure of judicial liquidation in Italy ‘also if’ it has already been declared insolvent or involved in a liquidation procedure in another country, which implies that the foreign judgment can be disregarded by an Italian court.

Cross-border insolvency protocols and joint court hearings

In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

The EU Insolvency Regulation contains specific provisions on the coordination of parallel insolvency proceedings, including duties of cooperation on receivers.

Although Italian courts have dealt with few cross-border insolvency cases, we are not aware of any cross-border protocols entered into by Italian courts to coordinate procedures with courts in other countries.

Winding-up of foreign companies

What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

The Insolvency Code recognizes the applicability of EU legislation, and in particular the EU Insolvency Regulation, to Italian liquidation procedures.

The Insolvency Code, supplementing the corresponding provision under the Former Insolvency Act, adds that, when opening cross-border insolvency proceedings under the EU Insolvency Regulation, the court must declare whether the relevant procedure is main, secondary or territorial.

Pursuant to the EU Insolvency Regulation, the relevant court of a member state can open insolvency proceedings against foreign debtors whose COMI is within that state.

If an insolvency proceeding is opened by the court of another EU member state, an Italian court may open a secondary procedure (of judicial liquidation) against such relevant company.

To validly pursue the secondary procedure, article 3(2) of the EU Insolvency Regulation requires the debtor to have at least an establishment within the territory of that other member state. The effects of a secondary liquidation procedure are restricted to the assets of the debtor located within the territory of the member state in which those proceedings have been opened.

Regarding insolvency proceedings involving a debtor whose COMI is located in a non-EU country, pursuant to the Insolvency Code, if the relevant debtor has an establishment in Italy, an Italian court may open a judicial liquidation procedure in respect of the debtor, notwithstanding the opening of an analogous procedure before a foreign court.

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN ITALY

Trends and reforms

Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

On 10 January 2019, the Italian government approved Legislative Decree No. 14 of 12 January 2019 enacting the Insolvency Code, which was amended and supplemented several times and recently, through Legislative Decree No. 83 of 17 June 2022, also implemented in Italy the provisions of Directive (EU) 2019/1023 of the European Parliament and of the council of 20 June 2019 on preventive restructuring frameworks.

The Insolvency Code has replaced in its entirety the Former Insolvency Act, dated back to 1942. The reform process started back in 2017 when, on 19 October 2017, the Italian Parliament passed Law No. 155 of 2017 delegating the government to adopt, within the following 12 months, a comprehensive reform of the rules governing financial crises and insolvency procedures.

* The information in this chapter was accurate as at October 2023.

If you need more consulting, please Contact Us at TNHH NT International Law Firm (ntpartnerlawfirm.com)

You can also download the .docx version here.

Rate this post

“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”

LEGAL CONSULTING SERVICES

090.252.4567

HÃY CLICK ĐỂ LẠI SĐT CHÚNG TÔI SẼ GỌI NGAY CHO BẠN MIỄN PHÍ

NT INTERNATIONAL LAW FIRM

Email: info@ntpartnerlawfirm.com – luatsu.toannguyen@gmail.com
Phone: 090 252 4567
Address: B23 Nam Long Residential Area, Phu Thuan Ward, District 7, Ho Chi Minh City, Vietnam