Reform of Italian insolvency

07 September 2007

Antonio Danile

The Italian Insolvency Law[1] has recently undergone a major reform[2] which focused on two of the main insolvency procedures:


  1. compulsory liquidation (“fallimento”); and

  2. arrangements with creditors (“concordato preventivo”).

Here, we consider only the new rules regarding compulsory liquidation.

Compulsory liquidation

It is worth pointing out at the outset that judicial liquidation proceedings are usually complex and capable of lasting several years. Generally the proceedings run as follows:

  • filing of the petition;

  • issuing of the judicial liquidation order (so-called “sentenza dichiarativa di fallimento”) and the appointment of the public receiver (“curatore fallimentare”);

  • drawing-up of the creditors’ list and rank order (“verifica dello stato passivo”);

  • liquidation of the debtor’s assets and filing of claw-back actions; and

  • distribution of the proceeds of the bankruptcy estate (if any) to the creditors.

The main effects of compulsory winding-up are:

  • the debtor cannot continue trading, unless the Court expressly authorises this for a limited period of time, which rarely happens in practice;

  • the Court appoints a public receiver and directors are removed from their positions. The public receiver has the power to collect assets, bring legal actions in relation to the debtor’s claims and otherwise manage the debtor’s assets;

an immediate suspension of the payment of all debts and liabilities of the debtor;

  • the debtor cannot manage or dispose of its assets;

  • any legal actions brought by creditors are stayed; and

  • some payments made, securities given or transactions entered into by the debtor within the so-called “suspect period” prior to the declaration of insolvency can be set aside under certain conditions (see points d.iv. and d.v. below)

Reform

The key issues can be summarised as follows:


  1. The new regulation is applicable to both business legal entities and individual entrepreneurs providing:


    1. the overall value of the business assets and investments at stake exceed the threshold of €300,000.00;

    2. the average gross annual turnover during the previous three fiscal years is higher than €200,000.00;

    3. the debtor is deemed to be “insolvent”, i.e. unable to pay its debts on a regular basis by way of a common means of payment (e.g. cash). Usually any transitory and/or non-material illiquidity or financial difficulty that is likely to be resolved in the short term neither compels the debtor nor gives creditors reason to file for the entity’s liquidation.

  2. Insolvency orders can no longer be issued by the Court ex officio, (as was possible prior to the reform). This means that only creditors, the debtor itself and the public prosecutor are now entitled to file a petition for the compulsory liquidation of the company or the individual entrepreneur, and petitions are generally filed by creditors.

  3. The Court of the place where the registered office of the individual or company is located has the power to issue an insolvency order. It has also been clarified that – in order to avoid the risk of “forum-shopping” – any change of the place of business made on the part of the debtor within the year prior to the filing of the petition is to be regarded as ineffective when determining the competent court.

  4. The court appointed public receiver is entitled to start legal proceedings (by filing a “claw back action”) in order to have the following transactions set aside:


    1. Transactions for no consideration (“gratuitous”) entered into by the insolvent company/individual entrepreneur in the two years before the insolvency order are automatically ineffective as against the public receiver;

    2. Any transaction at an undervalue carried out by the insolvent company/individual entrepreneur in the year before the insolvency order. A transaction is assumed to be “undervalue” when the actual value of the consideration paid to the debtor is less than one quarter in comparison to the value of the counterparty’s consideration;

    3. Any discharge of due and payable obligations performed in the year before the insolvency order, made by means other than money (such as, for example, the transfer of goods to a creditor to discharge a payment obligation);

    4. Any security (pledge and mortgage) granted by the insolvent company/individual entrepreneur in the year before the insolvency order to secure pre-existing debts not yet due at the time the relevant security was granted;

    5. Any security (pledge and mortgage) granted by the insolvent company/individual entrepreneur in the six months prior to the insolvency order to secure pre-existing debts that were due and payable at the time the relevant security was granted.


The defendant can resist a claw-back action by giving sound and reliable evidence that – at the time when the transaction under scrutiny took place – it was not aware of the debtor’s state of insolvency (the burden of proof is on the defendant).



  1. The official receiver may also apply to have the following transactions set aside, provided that they have been entered into by the insolvent company/individual entrepreneur in the six months prior to the insolvency order:


    1. Any payment of debt – already due and payable – made by way of common means of payment;

    2. Any security (pledge or mortgage granted) granted by the insolvent company/individual entrepreneur to secure debts in relation to transactions performed at the time the relevant security was granted; and

    3. Any other transaction for consideration.


Unlike the set of transactions at point d. above, here, the burden of proof is on public receiver, who – in order to succeed and have its claim upheld by the Court – must give evidence that, at the time the transaction under scrutiny took place, the defendant was aware of the debtor’s state of insolvency.



  1. The law has finally been clarified and confirms that the following commercial transactions/deals are no longer capable of being challenged and set aside by the public receiver:


    1. Payments for goods and services performed by the debtor within the scope of its own ordinary course of business and in accordance with customary terms and conditions;

    2. Banking remittances, except for those that significantly increased the company’s indebtedness towards the bank;

    3. Sales of land to be used by the purchaser for his or his close relative’s living purposes;

    4. Transactions, payments and guarantees over the debtor’s assets carried out or granted according to a plan agreed upon with creditors, aimed at reducing the company’s liabilities and rebalancing its financial position, supported by a favourable opinion of an independent expert; or pursuant to a composition with creditors;

    5. Payments made to either employees or consultants; and

    6. Payments of receivables for services necessary for the debtor’s admission to the composition with creditors.






 

[1] Law Royal Decree of 16 March 1942, no. 267


[2] This took place by way of Law decree no. 35 enacted on 14 March 2005 (as ratified by Law no. 80, 14 May 2005) and the subsequent Legislative decree no. 5, on 9 January 2006.