Restructuring and insolvency law in Italy

The Italian Bankruptcy Act and the European Regulation on Insolvency Proceedings (2015/848) are the primary pieces of legislation governing insolvency proceedings in Italy. Starting from September 1st, 2021, the new Corporate Crisis Code (Legislative Decree January 12th, 2019, n. 14) is due to enter into force and regulate several aspects of insolvency matters.
The Extraordinary Administration for Major Undertakings Act of 1999 [Nuova disciplina dell'Amministrazione Straordinaria delle Grandi Imprese in Stato di Insolvenza], also known as the New Prodi Law [Nuova Legge Prodi], which provides a government-supported reorganisation plan for insolvent enterprises exceeding a certain size, is also of relevance.

The initiation of insolvency proceedings assumes the filing of a petition by the insolvent debtor. With respect to bankruptcy, this can also be submitted by the relevant creditors or by the public prosecutor under certain circumstances (i.e. the state of insolvency is ascertained during the course of a criminal trial). 

The insolvency petition must be based on the existence of a reason for instituting the proceedings that may vary from the specific proceedings being considered (the legal reasons for insolvency are highlighted in point 3 below). Otherwise the court will not initiate proceedings. 

Restructuring proceedings in Italy are constituted by debt restructuring arrangements (“accordi di ristrutturazione del debito”) pursuant to Art. 182bis or Art. 67 of the Italian Bankruptcy Act and can be agreed only by the debtor and its creditors. The intervention of the judge takes place only at the subsequent stage and only in the Art. 182bis procedure, where the court is required to proceed with homologation of the arrangement. 

The following reasons for instituting insolvency proceedings exist under Italian law: 

1. State of crisis, which is the requirement for initiating an arrangement with creditors (in Italian, “concordato preventivo”). Before the issuing of Legislative Decree January 12th, 2019, n. 14, there was no regulatory definition of a state of crisis. Now, Art. 2 of the new Corporate Crisis Code provides the relevant definition: “the state of economic and financial difficulty which makes the debtor’s insolvency probable, and which for companies is demonstrated by the inadequacy of the prospective cash flows to regularly meet the planned obligations”. Certain indicators of the state of crisis are provided under Art. 13 of the new Corporate Crisis Code, such as budgetary, income and financial imbalances, related to the specific characteristics of the company, which can be detected through specific indices. For these purposes, the indicators that measure the sustainability of debt burdens with the cash flows that the company is able to generate and the adequacy of its own resources compared to those of third parties are considered significant indices. Repeated and significant delays in payments are also indicators of crisis.
2. State of insolvency, which is the requirement for starting bankruptcy proceedings. Art. 5 of the Italian Bankruptcy Act provides that the state of insolvency is manifested by defaults or other external events which demonstrate that the debtor is no longer capable of regularly fulfilling its obligations when due. This definition is confirmed in the new Corporate Crisis Code. However, the term bankruptcy has been replaced with “judicial liquidation” (in Italian: “liquidazione giudiziale”). According to certain court precedents, “indications of insolvency” can be found even prior to, and regardless of, payment defaults, if it is foreseeable that the debtor will no longer be in a position to regularly pay its debts. Insolvency may also be found to exist upon just one event of default, if the event demonstrates that the debtor is in distress.
3. Over-indebtedness, which, according to the new Corporate Crisis Code, is the state of crisis or insolvency of consumers, professionals, minor entrepreneurs, agricultural entrepreneurs, innovative start-ups and any other debtor which is not subject to judicial liquidation (i.e. bankruptcy), or forced administrative liquidation or other insolvency proceedings provided for by the Civil Code or by other regulations governing the state of crisis or insolvency. In the event of over-indebtedness, legal persons not subject to bankruptcy can resort to three procedures: i) a debt restructuring plan (Art. 67-73), reserved for consumers; the “concordato minore” (Art. 74-83), addressed to professionals, minor entrepreneurs, agricultural entrepreneurs and innovative start-ups; and the controlled liquidation of the debtor (“liquidazione controllata del debitore”) (Art. 268-277).

The following are the main insolvency/restructuring proceedings in Italy: (i) bankruptcy, (ii) court arrangement with creditors and (iii) debt restructuring agreements. However, other minor procedures exist, such as those provided for over-indebtedness, as listed in point 3 above.

As required by Art. 1 of the Bankruptcy Act, entrepreneurs carrying out a business activity, excluding state entities, which exceed the following thresholds are subject to arrangement with creditors and bankruptcy: 

• Assets in each of the last three financial years greater than €300,000.00; 
• Gross revenues in each of the last three financial years greater than €200,000.00; 
• Payables, including those not overdue, greater than €500,000.00.

The key insolvency procedure is bankruptcy (“fallimento”). Bankruptcy is a court-supervised procedure for the liquidation of an insolvent company’s assets and distribution of the proceeds. It results in the company’s dissolution. As noted above, bankruptcy applies to business undertakings, with the exception of state entities and small businesses.

The procedure is started by an order of the court having jurisdiction over the debtor’s principal place of business on the basis of a petition which may be submitted by: i) the debtor himself (or the directors of the debtor company); ii) a creditor; iii) the public prosecutor. The court must serve the debtor with a subpoena requiring them to attend a hearing of the bankruptcy petition. The proceeding is carried out and supervised by the following parties: a receiver; a deputy judge; a creditors’ committee representing all creditors.

The Bankruptcy Court will verify whether the petition for bankruptcy is formally valid and whether the conditions for bankruptcy are met. If both are confirmed, the Bankruptcy Court will declare the company bankrupt. The bankruptcy judgment has immediate effect starting from the day of its docketing. 

The arrangement with creditors (“concordato preventivo”) is a court-supervised procedure, the purpose of which is to discharge the debtor’s debts and avoid bankruptcy. The debtor must submit a plan, which can provide for the restructuring or discharge of debts in whatever form, including transfer of assets, assumption of debts or any other transaction. In order to strengthen the position of the unsecured creditors, Article 160 of the Italian Bankruptcy Act provides that the concordato proposal must grant the payment of at least 20% of the unsecured creditors’ claims. This provision does not apply to proposals that contemplate business continuation pursuant to Article 186bis of the Italian Bankruptcy Act. 

Only the debtor is entitled to start a composition plan and the relevant decision must be taken by the management body (usually the board of directors) of the company. The composition plan must be submitted to the Bankruptcy Court of the district where the debtor has its main place of business in Italy.

Moreover, in order to give the distressed company more time to prepare a viable proposal, the law also provides that the debtor may file an application for composition with creditors and simply attach the latest three financial statements, postponing to a later time the filing of the proposal, the plan and the documents to be annexed thereto (“concordato in bianco”). These other documents must be filed within a term fixed by the delegated judge (from 60 to 120 days), which term can be extended by an additional 60 days maximum. During such period, creditors are prohibited from starting or continuing enforcement and foreclosure proceedings over the debtor’s assets (“automatic stay”).

The Italian Bankruptcy Act allows for debt restructuring arrangements (“accordi per la ristrutturazione di debiti”) under Art. 182bis, whereby a debtor “in a state of crisis” enters into a composition with creditors which is binding on all the debtor’s creditors, provided that: 

• The debt restructuring arrangement is agreed by creditors representing at least 60% of the value of the debts; and 
• The reasonableness and feasibility of the debt restructuring arrangements, the truthfulness of the company’s accounting data and the suitability of such arrangements to ensure repayment of those creditors who did not agree with such arrangements are certified by an independent expert who fulfils the requirements set out in Article 67 of the Italian Bankruptcy Act. 

In any case, the debtor must guarantee full satisfaction of the creditors who have not approved the arrangements. 

The Italian Bankruptcy Act does not mandate a specific format for the debt restructuring arrangement. The parties can freely determine the specific obligations and how these are to be performed. For example, they may include the waiver of interest, guarantees, total or partial transfer of assets, different treatments between different classes of creditors or simple rescheduling. 

The debt restructuring arrangement is subject to homologation (confirmation). To that end, it is recorded in the Companies Register; within 30 days of registration, creditors and any interested party may file an objection. If the Bankruptcy Court considers that the aforementioned conditions are met and that objections, if any, are ill-founded, it issues a decree of homologation. If the Bankruptcy Court does not homologate the debt restructuring arrangement, it does not automatically declare the bankruptcy of the debtor.

Italian law distinguishes between unsecured credits, secured credits and super-secured credits (“crediti prededucibili”). 

Unsecured creditors are those who have no preference or security and will therefore be paid only if and to the extent any proceeds of the estate remain after all other claims have been satisfied. Unsecured creditors rank pari passu among themselves in the estate, in proportion to the size of their claims.

Secured creditors benefit from a specific ranking that may consist of: i) voluntary liens (i.e. mortgages, pledges, etc.) and (ii) liens established by laws (in Italian “privilegi”) consisting of causes of pre-emption granted by law to the creditor in consideration of the particular nature of the credit. 

Super-secured credits are those originating from the initiation of insolvency proceedings or those strictly related to it. Thus, such credits arise as a result of, or following, adjudication in bankruptcy, and are considered claims against the estate administration. Examples of such claims are: bankruptcy receiver’s fees and costs; the costs for sale of the assets; the rent for the debtor’s offices after adjudication; employees’ salaries and social security payments relating to the period after adjudication; attorney’s and other advisors’ fees, etc.

As a direct effect of the above distinction, super-secured credits have priority over secured credits. In the same way, creditors benefiting from secured credits will be satisfied before those holding unsecured credits. However, note that the secured creditor will participate, like any other unsecured creditor, in the balance of the estate if the value of the secured good(s) is insufficient to satisfy the whole debt. 

Finally, please be aware that the Italian Civil Code and the Italian Bankruptcy Act provide for further distinction and ranks for secured credits and super-secured credits. 

With respect to bankruptcy, the insolvent debtor is under an obligation to file the relevant petition when it is unable to pay its debts when they fall due. 

In this regard, Article 217 of the Italian Bankruptcy Act states that a debtor (including the debtor’s legal representative) who delays the filing of a petition for bankruptcy commits the crime of simple bankruptcy (“bancarotta semplice”), where such delay has worsened the debtor’s distress; this may also be true where the filing of the petition has been put off because of implementation of an out-of-court voluntary composition plan, in case bankruptcy should follow. 

Under the same provision, any delay by the directors of a debtor in requesting the debtor’s admission to bankruptcy may also be construed as mismanagement (“mala gestio”), i.e. violation by the directors of their duties. They would therefore be liable for damages suffered by the company’s creditors and shareholders.

As highlighted in point 7 below, with the entry into force of the new Corporate Crisis Code directors have far stricter responsibilities with regard to identifying and preventing the financial or debt crisis of the company. This means that, although the starting of restructuring/insolvency proceedings is not mandatory, it is highly recommended for the responsible bodies to start such procedures once the relevant indices of distress are ascertained.

Once the state of financial crisis is ascertained, the directors must convene the shareholders so that the latter can adopt the necessary measures. However, under the new Corporate Crisis Code (Legislative Decree January 12th, 2019, n. 14), the directors have far stricter responsibilities. 

To this end, directors must: i) establish an organisational, administrative and accounting structure appropriate to the nature and size of the company, which is also aimed at (but not limited to) the timely detection of the company’s state of crisis and the loss of business continuity; ii) promptly adopt and implement one of the remedies envisaged by current regulations for overcoming the state of crisis and recovering business continuity.

Note that in the case of a reorganisation plan (Article 67, Bankruptcy Act) and a restructuring plan (Article 182bis, Bankruptcy Act), no civil or criminal liabilities apply to directors or officers for all payments made in accordance with the plan’s execution.

In case of bankruptcy, an insolvency administrator (receiver) is regularly appointed in the court order providing for the opening of insolvency proceedings. From that moment on, the debtor’s right to administer and dispose of assets belonging to the insolvency estate is transferred to the insolvency administrator. If the debtor disposes of assets after the opening of insolvency proceedings, such disposals are invalid. The representative bodies are therefore normally not involved in the insolvency proceedings. However, they have the duties of disclosure and cooperation in order to assist the insolvency administrator with the fulfilment of his duties. 

In case of “concordato preventivo”, the court appoints a Judicial Commissioner to oversee the management of the company and if the plan sets out the liquidation of the assets, a Judicial Liquidator.

The situation is different in debt restructuring agreements pursuant to Art. 182bis of the Italian Bankruptcy Act (such proceedings will also be governed by Art. 57 of the Legislative Decree n. 14/2019). In such cases, execution of the agreement, based on a specific recovery plan that must be accepted by the court, must be carried out by the debtor (through its representative bodies), which has to punctually fulfil the obligations arising from the agreement.  

Shareholders are under no direct obligation to comply with the duty to file for insolvency petitions. 

Once the state of crisis has been ascertained by the directors, it is their specific duty to convene the shareholders to make them aware of the crisis. In such cases, however, shareholders have no obligation to provide additional funding to enable the company to survive (or to decrease overall debt). In fact, capital increases constitute a discretional choice that may be taken by shareholders. However, if the legal structure of the company does not provide for limited liability, the shareholders will be liable for losses. The shareholders, once convened by the directors, can also resolve the dissolution of the company.

In general, shareholders have no right to make decisions on the assets belonging to the insolvency estate because the debtor’s assets are economically reassigned to the creditors. The shareholders can cooperate with the management of the debtor, especially in the event of debt restructuring.

Voluntary or solvent liquidation is a corporate unwinding process governed by compulsory provisions of law and aimed at satisfying the company’s creditors by liquidating the company’s assets and paying any remaining assets or proceeds over to the shareholders. Therefore, during this process the company still exists and operates. For this same reason, the company can also be declared bankrupt. Usually a company chooses voluntary liquidation when the requirements for filing a petition for composition with creditors are not met or when it is incapable of reaching an agreement with its creditors and thus utilising the debt restructuring arrangements provided for by Art. 182bis of the Italian Bankruptcy Act.

Please be aware that Italian law also provides for involuntary liquidation, which occurs: (i) when the term of existence of the company expires; (ii) upon achievement of the corporate purpose, or when its achievement becomes impossible; (iii) if shareholders’ decisions cannot be taken because of deadlock; (iv) when the company’s capital is reduced below the statutory minimum and not increased again; (v) in case of redemption of all shares; and (vi) for any other reasons set out in the by-laws.

The Italian Bankruptcy Act does not mandate a specific format for the debt restructuring arrangement (which is the Italian form of preventive restructuring). Thus, the parties can freely determine the specific obligations and how these are to be performed. For example, they may include the waiver of interest, guarantees, total or partial transfer of assets, different treatments between different classes of creditors or simple rescheduling.

However, regardless of any legal frameworks, debt restructuring arrangements are subject to homologation (confirmation) by the court. To that end, it is recorded in the Companies Register; within 30 days of registration, creditors and any interested party may file an objection. If the Bankruptcy Court considers that the aforementioned conditions are met and that objections, if any, are ill-founded, it issues a decree of homologation. Specifically, the judge can reject the agreement entered into with creditors, not on the basis of its worth, but due to the likelihood that it will prejudice the interests of non-adhering creditors. Therefore, any framework of restructuring arrangement should consider the interests if not of all creditors, of the great majority of them, in order to be accepted by the court.

This information is not easy to provide as statistics on this matter are not generally available.