Giulia Battaglia and Antonio Tavella of Chiomenti assess the bankruptcy and insolvency regime in Italy
Section 1: processes and procedures
1.1 What reorganisation and bankruptcy processes are available for financially troubled debtors?
Italian bankruptcy law provides that businesses in distress or that are insolvent can make use of: judicial insolvency processes whose principal purpose is the liquidation of the company's assets, such as winding-up and liquidation, and non-judicial rescue arrangements whose purpose is instead to restore financial stability to the business via a reorganisation with creditor assent, such as a certified rescue plan and debt restructuring agreement.
Two further judicial procedures exist under the Italian restructuring and insolvency regime: (i) the settlement with creditors procedure, a pre-bankruptcy arrangement with creditors that, although a judicial procedure, requires creditor consent to the borrower's proposal; and (ii) the so-called extraordinary administration for large insolvent companies, which applies to companies exceeding certain indebtedness thresholds and with more than a certain number of employees. The purpose of the latter is the preservation of the asset base of the business with a view to financial and economic recovery.
Italian law safeguards the borrower during the insolvency process by providing that: payments effected or acts undertaken by it in pursuance of a certified rescue plan, debt restructuring agreement or settlement with creditors cannot constitute certain offences under Italian bankruptcy law; and such payments and acts are not subject to clawback or being set aside.
The settlement with creditors procedure is a judicial process which allows a borrower to restructure its debts subject to reaching an agreement with its creditors. The borrower must first present its proposal to the court having primary jurisdiction over it and then obtain creditor approval. The proposed settlement with creditors plan must be accompanied by an appraisal of a suitably qualified and independent professional. A borrower may be made subject to a settlement with creditors, whether it is technically insolvent or merely in distress. The day-to-day management of a business subject to a settlement with creditors lies with the borrower itself, albeit under the supervision of a court-appointed insolvency practitioner ( commissario giudiziale ), while certain transactions are subject to approval by the court. The settlement with creditors is the only consensual Italian insolvency procedure under which a dissenting creditor can by crammed down (see 1.4).
A company in financial distress may avail itself of a debt restructuring agreement in order to restructure its debts and recover economically. It requires the agreement of such creditors as represent 60% of a company's debts, and an appraisal of a suitably qualified and independent professional as to feasibility. The borrower has the freedom to contract with assenting creditors as regards the content of the debt restructuring agreement. However, the borrower is bound to satisfy the claims of any dissenting creditors in full by the statutory payment deadline. The borrower retains full and unsupervised control of its business during the implementation of a debt restructuring agreement.
A certified rescue plan is an agreement reached between the borrower and its creditors without the intervention of the courts, the purpose of which is the restructuring of the borrower's debt exposure in order to stabilise its financial position. The financial data on which the plan is based and its feasibility must be independently certified by a suitably qualified professional. Again, the borrower retains full and unsupervised control of its business during the implementation of a certified rescue plan. Examples of certified rescue plans include a moratorium, a debt rescheduling and an industrial plan.
Winding-up is a judicial liquidation procedure. It consists of the certification of the borrower's state of insolvency, the quantification of its liabilities, and the subsequent distribution of its assets in satisfaction of such liabilities. This requires the liquidation of all assets of the insolvent estate and the application of proceeds according to the principle of equal treatment of creditors taking due account of statutorily and other preferred creditors. Under this procedure, the management of the company and administration of the company's assets becomes the responsibility of the official receiver. The winding-up process may be commenced by the borrower itself, the creditors, or by the public prosecutor. It may conclude with a settlement with creditors (subject to rules differing slightly from those applying to the settlement with creditors procedure), in which case it must receive creditor approval.
Extraordinary administration for large insolvent companies is a judicial process intended to preserve asset value. As noted above, it only applies to companies exceeding certain thresholds. Its purpose is the recovery and restructuring of significant businesses in order to preserve the value of the business' assets and avoid widespread redundancies. A special receiver is appointed by the Italian Department for Economic Development ( Ministero dello Sviluppo Economico ) to manage the day-to-day affairs of the company and its assets, and it is required to restructure the company via the assumption and implementation of measures to dispose of selected business divisions or to restructure the business.
The Italian Department for Economic Development is required to supervise the procedure, which is initiated by the borrower. Special measures apply under the Marzano Law ( legge Marzano ) for very large companies and those companies considered to provide essential public services (such as Italy's national carrier, Alitalia, which was subject to extraordinary administration).
1.2 Is a stay on creditor enforcement available?
Except for a few limitations, a stay on creditor enforcement action is available under a number of Italian insolvency procedures, including settlement with creditors, winding-up, debt restructuring agreements, and extraordinary administration. The effect of such stay is that creditors (whose debts arose prior to the commencement of proceedings) are prevented from enforcing any rights as against any company property.
Stays of action do not apply to certified rescue plans.
1.3 What are the key features of a reorganisation plan and how is it approved?
The features of any particular reorganisation plan can vary considerably depending on the structure of the transaction and the nature of the borrower.
In summary, a reorganisation plan may include: (i) actions to reinforce the financial or internal structure of the company, such as a recapitalisation by existing shareholders, a debt issuance, or the provision of third party equity; (ii) a debt restructuring and (iii) a reorganisation of the business of the borrower, for example, via one or more business sales, via further investment to improve productivity, or via a re-focusing of the company from a strategic perspective, such as exiting unprofitable markets, re-deploying staff, and making redundancies.
The reorganisation plan under a settlement with creditors must be approved both by: a simple majority of voting creditors and a majority of classes of debt (for example, if there are three classes of debt, at least two classes of debt must approve).
1.4 Can a creditor or a class of creditor be 'crammed-down'?
The settlement with creditors procedure is the only consensual Italian insolvency procedure under which a dissenting creditor can be crammed down. Indeed, the court can approve the settlement with creditors where it holds that the debt of the creditor belonging to a dissenting class (or to dissenting creditors representing 20% of qualifying claims) will be discharged as a result of the settlement with creditors to no lesser an extent than would be the case under other alternative procedures available in the circumstances.
A settlement with creditors may also proceed on the basis that the debts of secured or preferential creditors will not be discharged in full; this is provided that the plan contemplates that the extent of the discharge will not be less than would otherwise have been obtained were the relevant assets sold upon a winding-up. A professional valuation will be required to attest the value of such assets in such case.
1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
In the case of winding-up and extraordinary administration proceedings, the official receiver or special receiver must liquidate the insolvent company's assets and/or businesses via procedures that are competitive and well publicised, so as to generate wide market interest. A purchaser for the value of a business purchases it free of the debts of the business that arose prior to the sale. In a winding-up procedure, the official receiver may proceed with the transfer of the assets of the business prior to the final determination of company indebtedness.
A settlement with creditors procedure may contemplate the liquidation of company assets, the company, or the company's businesses. Whether it is necessary to undertake a competitive tender process or a pre-packaged procedure may vary depending on the courts. Often, prior to the sale of the company or business, the purchaser will run the business under a lease arrangement. The settlement with creditors procedure favours the sale of the company or of its businesses since: it provides that a purchaser for value of a business takes free of the debts of the business that arose prior to the sale and it may permit a partial-only transfer of the employees of the seller.
1.6 What are the duties of directors of a company in financial difficulty?
The directors of a company in financial distress are required: (i) to manage the company in a prudent manner; (ii) not to do anything that may worsen the financial position of the company; (iii) to take steps to overcome the state of financial distress and (iv) to treat equally the creditors, avoiding any preferences. In the event that the company suffers a reduction in its share capital to below the legally required minimum, the directors must promptly call a shareholder meeting to increase them to or above the legally required minimum, or to resolve to liquidate it. In the case of settlement with creditors procedures and debt restructuring agreements, recent legislation stays the obligation to liquidate the company in the event the share capital is not increased.
1.7 What priority claims are there and is protection available for post-petition credit?
The ranking of creditors' claims upon liquidation under Italian law is as follows: (1) debts arising during or for the purpose of an insolvency procedure (administrative costs and expenses associated with the insolvency procedure itself and any other claim arising in connection with such procedure); (2) Italian tax and national insurance contributions, and employee arrears of salary and (3) unsecured creditors. Secured creditors have a priority claim (subject in turn to the priority of certain claims by operation of law) to the proceeds of liquidation of the assets securing their debt.
Italian insolvency proceedings also deal with debts arising after the judicial proceedings have been commenced and those arising as a result of such proceedings. Such debts, conceptually, are considered preferential and must be discharged in preference to other creditors (provided that the proceeds of sale of any assets securing claims of secured creditors are satisfied in priority to the claims of preferential creditors). Debts against the insolvency estate resulting from the administration of the insolvency procedure itself and claims against a borrower arising from acts done after the commencement of the proceedings are both examples of preferential claims.
1.8 Is there a different regime for banks and other financial institutions?
When a bank becomes insolvent, a specific Italian compulsory winding-up regime known as liquidazione coatta amministrativa applies under the supervision of the Italian Department of Economy and Finance. This procedure also applies to co-operatives and insurance companies and its purpose is to liquidate the relevant entity.
A bank may also be made subject to this compulsory winding-up regime for serious management failures.
Special procedures apply to insurance companies, investment funds and financial intermediaries.
Section 2: international/cross border issues
2.1 Can bankruptcy or reorganisation proceedings be opened in respect of a foreign debtor?
The EU Insolvency Regulation (EC 1346/2000) applies to trans-national insolvency procedures in the EU. It provides that insolvency proceedings can only be commenced in the member state in which the company has its centre of main interests (Comi), which is the jurisdiction from which the borrower manages its business.
Italian insolvency law provides that extraordinary administration and winding-up proceedings can be commenced against a business headquartered outside Italy, provided that the transfer abroad of the headquarters took place after the lodging of the winding-up request or request for extraordinary administration.
2.2 Can recognition and assistance be given to foreign bankruptcy or reorganisation proceedings?
The EU Insolvency Regulation provides that in the event there is an establishment in Italy (any place of operations where the debtor carries out a non-transitory economic activity with human means and goods) of a foreign debtor subject to main insolvency proceedings outside Italy (on account of its Comi; see 2.1) then such proceedings shall also apply to the Italian establishment. The insolvency official of the foreign state is entitled to exercise in Italy all the powers they have under the law applicable to the main insolvency proceedings, provided that they do so in accordance with Italian law and Italian liquidation procedures.
Section 3: other material considerations
3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
A number of major stakeholders could have a material impact on the outcome of the reorganisation. For example: in extraordinary administration proceedings, the Italian Department of Economic Development plays a central role through its supervision of the special receiver. The rights of a company's employees may also represent a deterrent to third party investors intending to buy a business subject to insolvency proceedings. The Italian Tax Authority ( Erario ) or lending banks may also have a material influence over insolvency proceedings due to the sheer size of the debts owed to them.
In the case of settlement with creditors procedures and debt restructuring agreements, the insolvent company may be able to mitigate the impact of tax liabilities by entering into a settlement agreement with the Italian Tax Authority. This can provide, among other things, for the partial write-down or payment in instalments of tax as regards the part of the debt which is not preferred by law. As regards outstanding VAT payment obligations, it may be agreed that the debt should be paid in instalments (but it cannot be written-down).
Section 4: current trends
4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction.
In recent years, the Italian restructuring and insolvency market has undergone a shift; the past prevalence of certified rescue plans and debt restructuring agreements has given way to an increase in the use of the settlement with creditors procedure. This trend is due to legislation favouring the use of the latter (for example, the ability to lodge the recovery plan with the court but deliver the underlying documents at a later date). The widespread use of settlement with creditors procedures has seen increased activity from opportunistic investors such as distressed funds who are attracted by the prospect of purchasing Italian companies with drastically reduced debt exposures.
The number of Italian real estate finance restructurings are also increasing on account of the banks being more willing to assume real estate risk and more resilient to write-downs.
Finally, it should be noted that banks are taking an ever more active role in restructurings, including as a result of debt-to-equity swaps and investment in other equity-linked instruments.
First published by our sister publication IFLR magazine. Take your free trial today.
About the author
Giulia Battaglia joined the firm in 1992 and became a partner in 2003. She has a consolidated experience in structured finance (real estate financing, acquisition financing, project financing and securitisation, including distressed assets deals) and in debt restructuring. In 1994 she was visiting lawyer at Slaughter and May in London. She is the head of the finance department.
Battaglia specialises in providing assistance to Italian and foreign clients in finance (acquisition and leveraged finance, real estate financing, and project finance), insolvency and restructuring (insolvency and pre-insolvency proceedings, financial restructuring) and infrastructure and public tenders (energy infrastructure projects, infrastructure concessions and contracts).
Battaglia graduated in economics (1992) and in law (1999) from the University of Rome, La Sapienza (1991). She was admitted to practise before the taxation courts in Italy in 1992, and to the Bar in Italy in 2003. She is fluent in Italian and English.
About the author
Antonio Tavella joined the firm in 2004 and became a partner in 2013. He specialises in providing assistance to Italian and foreign clients in finance (structured finance, real estate financing, acquisition finance, project finance, securitisation, covered bonds), insolvency and restructuring (insolvency and pre-insolvency proceedings, financial and corporate restructuring).Tavella graduated in law from the University of Parma in 2000 and was admitted to the Bar (Italy) in 2006. He is fluent in English and Italian.