Insolvency 2023 Comparisons

Statistical and Empirical Data

In Italy, the NPEs in the first quarter of 2023 stood at approximately EUR58 billion, equating to a 2.9% gross NPE ratio, indicating historically low levels compared to the past. This figure shows almost no change compared to the fourth quarter of 2022, signifying a consistent convergence towards EU standards (EU non-performing exposures remained stable quarter-on-quarter at EUR357 billion (2.2% of total loans).

The default rate indicator had been continuously decreasing from 2013 to 2021, reaching a historical low of 1.5%, mainly due to government interventions providing financial support to companies during the early waves of the COVID-19 pandemic, while in 2022 it stabilised at 2%.

Looking ahead to 2023, banks expect asset quality to deteriorate across both consumer and corporate due to sluggish economic growth, sticky inflation, and rising interest rates (reference is made to the results of the spring 2023 edition of the EBA's risk assessment questionnaire).

In this context, after the extensive clean-up of bank balance sheets from bad loans, the focus of new flows has now shifted towards UTP and pre-deteriorated/stage 2 assets (in December 2022, Italian banks held approximately EUR227 billion of stage 2 loans, representing 11.3% of the total).

These peculiar kind of credits require a closer approach to companies in order to preserve their business continuity.

Restructuring Trends

Italy is undergoing a real cultural leap that can be read in the epochal passage from Bankruptcy Law (contained in Royal Decree no 267 of 1942) to a system (ruled by Legislative Decree no 14 of 2019) that places the company and its business continuity at the centre of the insolvency universe.

Incoming Developments

Said trends will be likely impacted by the ambitious reform agenda and investment programme provided by the Italian Recovery and Resilience Plan (PNRR). As a matter of fact, the most important reforms concern public administration and justice systems.

These reforms will presumably influence the non-performing exposure (NPE) market in Italy, mainly because of a creditor-oriented approach (strengthening of enforcement and executive actions is one of the areas involved by the reform).

Starting from 15 July 2022, the Bankruptcy Law, after its 80 years of application, has been repealed by the “Crisis and Insolvency Code” (CIC).

CIC regulates situations of “crisis” or “insolvency” (please see 2.5 Requirement for Insolvency for the relevant definitions) of the debtor (whether consumer or professional) or entrepreneur who carries out commercial, craft or agricultural activities (for profit or otherwise), operating as a natural person, legal person or other collective entity, group of enterprises or company public, excluding the state and public entities.

CIC provides for a thorough discipline regarding “instruments for the regulation of crisis and insolvency”, meaning the measures, agreements and procedures aimed at the rehabilitation of the enterprise.

Should the state of insolvency not be removed through one of the legal instruments above, then judicial liquidation (liquidazione giudiziale) applies to commercial entrepreneurs who are not a “minor enterprise”.

The Crisis and Insolvency Code

The most innovative provisions set forth by CIC are:

• an early warning system aimed at facilitating an earlier inception of the distress situation through certain preventive restructuring remedies, entirely represented by the composizione negoziata per la soluzione della crisi di impresa ("CNC”);
• a wide set of rules emphasising the going concern through the access to one of the “instruments for the regulation of crisis and insolvency”;
• a unified procedure for access to said instruments, as well as to judicial liquidation;
• rules concerning the insolvency and restructuring of groups of companies; and
• replacing the name “bankruptcy procedure” with “judicial liquidation procedure” (liquidazione giudiziale).

In Italy, all restructuring, reorganisation, insolvency, receivership and similar proceedings are commenced on a “voluntary” basis, since they can only be activated by the debtor.

Only judicial liquidation may be filed by interested third parties, ie, one or more unsatisfied creditors or the public prosecutor.

In order to avoid negative effects of creditors’ passivity in negotiations, reforms enacted in recent years have introduced “involuntary” (meaning compulsory) restructuring, reorganisation, insolvency, receivership and similar proceedings, providing forms of intra- and/or cross-class cram-down.

Mere private agreements between debtors and relevant creditors may be negotiated and perfected, but with no effect vis-à-vis third parties and no protection granted by the above-mentioned procedures.

CIC sets out specific obligations of activation by the debtor if certain circumstances occur, in order to address a crisis in a timely manner.

In particular, CIC imposes a proactive attitude on the debtor, such as:

• the obligation of the debtor to take appropriate company measures to promptly detect the crisis in order to take the necessary initiatives to resolve it without delay (Article 3); and
• the obligation of the debtor, during the negotiation and execution of the agreements and procedures for the regulation of the crisis and insolvency, to take timely appropriate measures for the prompt resolution of the procedure, also in order not to affect creditors’ rights (Article 4, paragraph 2).

In accordance with the early warning system, an alert duty is imposed on specific company offices/entities (such as the board of auditors) and on specific categories of creditors (such as the Tax Authority and the National Social Insurance Agency), which must immediately report any sign of the crisis to the board of auditors (Article 25-octies to 25-decies).

If it is proved that shareholders that have intentionally decided or authorised the accomplishment of detrimental acts to the company, they are deemed jointly and severally liable with the directors (Article 2476, paragraph 8, Italian Civil Code).

Italian case law has recently ruled on the specific topic concerning abusive use of credit (abusivo ricorso al credito) and related directors’ liability in the context of an attempt to resolve the enterprise crisis (Supreme Court, judgments No 18610/ 2021 and No 24725/2021 as further confirmed by judgment No 1387/2023). The Supreme Court stated, among other things, that in the event of abusive lending (abusiva concessione di credito), the bank’s liability may be joint and several with that of corporate bodies.

Creditors or parties other than the debtor may only initiate a judicial liquidation.

For sake of completeness, “competing proposals” (proposte concorrenti) and “competing offers” (offerte concorrenti) must be mentioned (respectively, Articles 90 and 91, CIC).

Article 2, paragraph 1, letters a) and b) of CIC introduced the following definitions:

• crisis - “the state of the debtor that makes insolvency probable, manifested by the inadequacy of the prospective cash flows to meet its obligations in the next 12 months”; and
• insolvency - “the state of the debtor manifested by defaults or other external facts showing that the debtor is no longer able to meet its obligations on a regular basis”.

Procedures Applicable to Financial Companies

Within the Italian legal system, banks, financial institutions, investment companies or fund management companies, under either Legislative Decree No 385 of 1 September 1993 (the “Consolidated Banking Law”) or Legislative Decree No 58 of 24 February 1998 (the “Italian Securities and Exchange Act”) are subject to:

• an administrative compulsory liquidation (liquidazione coatta amministrativa) with mainly liquidation purposes; and
• a special management procedure, which is mainly aimed at restructuring.

All these special procedures are initiated, supervised (and, to some extent, managed) by the relevant supervisory authorities (Banca d’Italia – Consob).

Procedures Applicable to Assurance, Insurance and Reinsurance Companies

Assurance, insurance and reinsurance companies, as defined by Legislative Decree No 209 of 7 September 2005 (the “Italian Private Insurance Code”), are subject to the same procedures as mentioned above.

Other

Large insolvent enterprises meeting certain requirements in terms of number of employees and size of debts are subject to extraordinary administration for large insolvent enterprises, in lieu of ordinary liquidation under the bankruptcy procedure.

General Perceptions

In Italy, consensual, non-judicial and other informal restructuring processes are positively viewed by creditors and professionals assisting the parties, and therefore they are preferred over the statutory processes. From 2005 to the present (with the implementation of CIC), the Italian legislature has provided sufficient tools and reliefs to allow for the restructuring of viable businesses; as a consequence, a generally restructuring-friendly legal environment has been created in the last 15 years or more.

Support from Banks

Usually, financial entities like banks - and, increasingly, funds specialised in distressed situations - are supportive of borrower companies that are in a state of financial and economic difficulty, but still worthy of restructuring attempts; this is mainly because of sensible privileges such as priorities for interim and new financing.

Legal Instruments that Influence the Choice of Restructuring Procedures

Starting from 2005, certain legal instruments have been introduced in the Italian legal system encouraging the choice of restructuring procedures. In particular:

• actions, payments and guarantees provided in a plan, approved by the company and aimed at reinstating a balanced financial situation and at restructuring its indebtedness, as well as acts, payments or guarantees made in execution of a judicial composition with creditors or of a restructuring agreement approved by the court and those legally created after the filing of an appeal for the opening of a judicial composition with creditors, are exempted from claw-back actions in case of subsequent bankruptcy (Article 166, paragraph 3, letters d) and e), CIC);
• crimes of “preferential bankruptcy” (bancarotta preferenziale) and “simple bankruptcy” (bancarotta semplice) are not committed for payments and transactions made pursuant to judicial compositions with creditors, restructuring agreements and certified recovery plans (Article 324, CIC); and
• receivables arising from loans in all forms in the framework of a restructuring agreement or a judicial composition with creditors are pre-deductibles (Articles 99 and 101, CIC).

Mandatory Consensual Restructuring Negotiations

Italian laws do not require mandatory consensual restructuring negotiations before the commencement of a statutory process.

However, it is worth recalling that any of the “instruments for the regulation of crisis and insolvency” may be preceded by the CNC.

Consensual “Standstills” as Part of an Initial Informal and Consensual Process

In principle, consensual “standstills” and waivers may be used at the very first step of an informal and consensual restructuring process and they are highly recommended mainly because a negotiation phase is necessary for the debtor to properly restructure its indebtedness.

In order to ease the negotiations among debtors and relevant creditors which occur during the CNC, CIC expressly states that all parties thereto have a duty to co-operate loyally and promptly with the entrepreneur and the expert and respect the obligation of confidentiality as to the situation of the entrepreneur, the initiatives taken or planned by them and on the information acquired in the course of negotiations. The same parties shall give feedback to the proposals and requests they receive during the negotiations with a timely and substantiated response (Article 16, paragraph 6, CIC).

Undertakings and Obligations of a Debtor Company

A standstill agreement is usually proposed by the debtor company to its creditors while drafting its business and financial restructuring plan.

In return, typical interim obligations on the same company may include:

• to develop the restructuring plan with the assistance of regarded financial and legal professionals;
• to project updated and comprehensive cash flows;
• to provide comfort letters issued by an independent expert (attestatore) as to the company’s financial situation;
• to use the facilities granted by the banks in accordance with terms of the standstill agreement;
• to act in order to preserve the business value; and
• to prevent default events from occurring.

Steering Committees

CIC does not provide for any creditors’ committee (comitato dei creditori) under consensual restructuring processes; nonetheless, it is customary to have professionals performing as co-ordinators and representatives of creditors, such as loan agents and financial/legal advisers creditors’ side.

Information Provided by the Company

As an immediate consequence of the fact that no sensible creditor would accept a restructuring plan without being properly informed, the debtor company must constantly provide creditors with adequate asset, economic, financial and legal information giving evidence of the going concern.

CIC expressly states that the entrepreneur has a duty to represent his situation to the expert, creditors and other stakeholders in a complete and transparent manner (Article 16, paragraph 4).

Legal Situations

Legal situations such as contractual priority, security/lien priority, equity-holder and intercompany priority rights, and the relative positions of competing creditor classes (and equity owners) should be duly represented in the restructuring plan, in the relevant report by the independent expert appointed by the debtor, as well as in the agreements with creditors.

Money is not commonly injected, particularly by banks, into a distressed company before and outside of a statutory or other formal process mainly because super-priority liens or rights established under intercreditor agreements are not enforceable against third parties when a bankruptcy procedure is commenced.

New money is usually injected by:

• equity owners who may take advantage of the provision set forth in Article 102 of CIC, which establishes a super-priority rank granted to 80% of shareholders’ loans, if these loans are provided in execution of a restructuring agreement; and
• banks and financial institutions, pursuant to Articles 99 and 101 of CIC.

Also during negotiations taking place in the course of the CNC, the debtor may be authorised by the competent court to obtain super-priority ranked financing.

CIC explicitly imposes certain duties and obligations of conduct on creditors, as already written under 3.2 Consensual Restructuring and Workout Processes. More specifically, banks and financial intermediaries (and relevant assignees) are required to participate in the negotiations in an active and informed manner. Access to said procedure does not constitute in itself a cause for suspension and revocation of bank facilities granted to the entrepreneur (suspension or revocation of credit facilities are allowed only if required by prudential regulations, with a notice giving the reasons for the decision made) (Article 16, paragraph 5, CIC).

Restructuring over the Dissent of Creditors

In order to facilitate composition with creditors, CIC provides for certain legal instruments whereby consensual out-of-court restructuring or workout may be accomplished and effectuated over the dissent of minority creditors.

Legal Instruments

Judicial composition with creditors

Except as provided for by the judicial composition with creditors on a going concern basis, the arrangement shall be approved by the creditors representing a majority of the claims eligible to vote. Where there are different classes of creditors, the arrangement is approved if a majority of the claims eligible to vote is reached in the majority of classes.

In a judicial composition with creditors on a going concern basis, if one or more of the classes are dissenting, the court will approve if the following conditions are jointly met:

• the liquidation value is distributed in compliance with the graduation of legitimate pre-emption;
• the value in excess of the liquidation value is distributed in such a way that the claims included in the dissenting classes receive, in aggregate, a treatment at least equal to that of the classes of the same grade and more favourable than that of the classes of a lower degree;
• no creditor receives more than the amount of their claim; and
• the proposal is approved by a majority of the classes, provided that at least one consists of creditors with pre-emptive rights, or, failing that, the proposal is approved by at least one class of creditors who would be at least partially satisfied respecting the graduation of pre-emption rights even on the value exceeding the liquidation value.

If a dissenting creditor objects in relation to the defect of convenience of the proposal, the court shall nonetheless approve the arrangement when, according to the proposal and the plan, the claim is satisfied to an extent not less than the judicial liquidation (Article 112, paragraph 2, CIC).

Restructuring agreement

A cram-down of dissenting minority creditors under a restructuring agreement is possible by creating one or more categories among them for those with similar legal status and economic interests, provided that the following conditions are met:

• all creditors belonging to the relevant category have been informed of the negotiations, have been allowed to participate in such negotiations in good faith and have acquired complete and up-to-date information about the debtor’s asset, economic and financial situation;
• the agreement provides for the continuation of the business activity, directly or indirectly;
• the claims of the creditors belonging to one category that have agreed to a restructuring agreement represent at least 75% of the debtor’s overall indebtedness vis-à-vis the creditors belonging to the same category;
• the creditors of the same non-member category to whom the effects of the agreement are extended are satisfied to an extent not less than the winding-up alternatives; and
• the debtor has notified to the creditors the agreement, the application for approval by the court and the attached documents.

Some of these conditions are not required (for example, even when no continuity of business is provided) when at least 50% of the overall indebtedness of the debtor is represented by debts vis-à-vis banks and financial intermediaries (Article 61 CIC).

A restructuring agreement may also contain a proposed tax settlement for the partial or deferred payment of certain overdue taxes.

The court approves restructuring agreements even in the absence of adherence by the financial administration or the institutions managing forms of mandatory social security or assistance when the adherence is decisive for the achievement of the above-mentioned percentages, and, also based on the findings of the report of the independent professional, the proposed satisfaction of the aforementioned creditors is convenient compared to the alternative liquidation (Article 63, paragraph 2-bis, CIC).

The Italian legal system provides for various forms of guarantees over specific assets and/or over the whole of the debtor’s property. Collateral includes the following.

• Mortgages (ipoteca immobiliare) - creditors often use a mortgage to secure rights over immovable property.
• Mortgages over registered movable goods (ipoteca su beni mobile registrati) - creditors can use a mortgage to secure registered movable property, such as ships and motor vehicles.
• Pledges (pegno) - creditors often use a pledge to secure their rights over movable property.
• Special liens (privilegio speciale) - special liens arise automatically by operation of law over certain claims.
• General lien (privilegio generale) - a general lien differs from a special lien because it must apply to all the debtor’s assets and can only apply to movable property. Claims automatically protected by a general lien include employee salary claims, social security claims and certain tax claims.

Law Decree No 59/2016 of 3 May 2016 introduced a new form of credit guarantee, the so-called “non-possessory pledge” (pegno non possessorio), in order to secure receivables in connection with the ordinary conduct of business.

The effective use of such new security has been recently made possible by Decree No 114/2021 and, operatively, by Revenue Agency resolution No 26/2023, through a web portal for the registration of non-possessory pledges, in which the formalities submitted must be entered daily.

Moreover, such decree also introduced a new form of corporate financing secured by the transfer to the lending party of a real estate asset and conditioned to the possible breach by the borrower of certain obligations under the relevant facility agreement.

Once the insolvency procedure is opened, secured creditors are satisfied according to the order laid down by specific rules provided by the law, regardless of any contractual intercreditor covenants.

Under a judicial composition with creditors, the proposal made by the debtor may envisage secured creditors not being satisfied in full, provided that it allows that their claims be met to an extent that is not lower than the proceeds in the event of liquidation (Article 84, paragraph 5, CIC).

A stay of action on a creditor is available under reorganisation and insolvency procedures.

Article 54 of CIC provides for certain limits to enforce secured creditors’ rights and remedies.

Secured creditors must follow certain rules in order to enforce their rights under a bankruptcy procedure. Every claim, even if secured, must be determined according to the strict provisions set forth by CIC.

Under a judicial composition with creditors:

• secured creditors whose claims are proposed to be reimbursed in full are not entitled to vote if they do not waive in whole or in part their pre-emptive right; the portion of the claim not secured shall be treated as an unsecured credit and the waiver shall take effect for the sole purpose of the agreement (Article 102, CIC); and
• the plan may provide a moratorium of up to two years from the approval for the payment of creditors with privilege, pledge or mortgage, unless provision is made for the winding-up of the assets in respect of which the pre-emption exists (Article 86, CIC).

CIC provides for a division of creditors into classes (classi) under a judicial composition with creditors (Article 85), or categories (categorie) under a restructuring agreement (Article 61); in both cases such division depends on legal position and economic interests.

In a bankruptcy procedure, once the company’s assets have been sold, the distribution of the relevant value among creditors follows a specific order:

• super priority pre-deductible credits;
• secured credits subject to pre-emption; and
• other unsecured credits.

This waterfall applies in all insolvency proceedings aimed at winding up the company.

Specific rules apply to the brand new “restructuring plan subject to approval” (piano di ristrutturazione soggetto ad omologazione), whereby the commercial entrepreneur (not “minor”) who is in a state of crisis or insolvency may provide for the satisfaction of the creditors, after dividing them into classes according to legal position and homogeneous economic interests, distributing the value generated by the plan also in derogation of Articles 2740 and 2741 of the Civil Code and the provision governing the graduation of pre-emption, provided that the proposal is approved by unanimity of the classes.

The crisis and insolvency regulation instruments may provide for the formation of a class of shareholders (or of several classes if there are members to whom the bylaws, even following the amendments provided for in the plan, grant different rights). The formation of the classes is mandatory if the plan provides for amendments that directly affect the participation rights of shareholders and, in any case, for listed companies.

Unsecured trade creditors are not generally kept as a whole in a single class or category during a restructuring process; conversely, it is possible to place specific unsecured creditors (eg, all the company’s suppliers) in the same class or category to make it possible for them to build consensus among creditors, abiding by the principle of par condicio creditorum.

Should a judicial composition with creditors have a liquidation purpose, new money must increase the satisfaction of unsecured creditors by at least 10% compared with a judicial liquidation (Article 84, paragraph 4, CIC).

In the judicial composition with creditors on a going-concern basis, creditors are also not predominantly satisfied from the proceeds produced by direct or indirect business continuity; the proposal must provide each creditor with a specifically identified and economically assessable utility, which may also consist of the continuation or renewal of contractual relations with the same debtor or its assignee (Article 84, paragraph 3, CIC).

In the judicial composition with creditors with mere liquidation purposes, the proposal must provide for a contribution of “external resources” (ie, coming from the shareholders for any reason without obligation of repayment or subordination) that increases the available assets by at least 10% and ensures the satisfaction of unsecured creditors (ab origine or as degraded) to an extent of no less than 20% of their total amount. External resources may be distributed by derogating from civil law rules on asset liability (Article 2740, Civil Code) or the concurrence of creditors pre-emption (Article 2741 Civil Code), as long as the 20% requirement is met (Article 84, paragraph 4, CIC).

Should stay of action measures be provided, they also apply to unsecured creditors.

CIC does not provide for any pre-judgment attachments, even though precautionary measures may be issued by the competent court for the protection of the debtor’s assets or business in order to temporarily ensure the effects of the procedures for the regulation of the crisis or insolvency (Article 2, paragraph 1, letter q).

Proceeds from the sale of the assets are meant to be used to satisfy priority claims specifically described (Article 6, CIC), such as costs and expenses that the receiver (curatore) and the court incur during insolvency proceedings as well as professional fees and other debts incurred after the debtor files its bankruptcy petition. Moreover:

• receivables arising from loans in performance of a judicial composition with creditors or a restructuring agreement are pre-deductibles (pursuant to Article 101, CIC); and
• a debtor who has an application for admission to a judicial composition with creditors or an application for the approval of a restructuring agreement can request the court for the authorisation to obtain financing, which is pre-deductible, if an independent expert certifies that these loans are functional to the best satisfaction of creditors (pursuant to Article 99 of CIC).

The following are the main provisions concerning statutory processes, procedures and mechanisms for reaching and effectuating a financial restructuring/reorganisation.

Creditor Consents

A judicial composition with creditors is approved when the prerequisites specified under 3.5 Out-of-Court Financial Restructuring are met. Once a judicial composition with creditors is confirmed by the court, it is binding on all creditors prior to its publication in the Register of Companies.

A restructuring agreement is approved when the agreement is concluded with creditors representing at least 60% of claims. The debtor can ask that the effects of the restructuring agreement be extended to creditors that have not agreed to the contents of the agreement, under certain conditions (Article 61, CIC).

Limitations on the Types of Agreements

In a judicial composition with creditors, there are no limitations on the types of agreements between the affected parties, provided that the par condicio creditorum rule is respected.

Under a restructuring agreement, there are even fewer limitations on the types of agreements which can be reached between debtor and creditors since no par condicio creditorum rule applies.

Specific rules apply to the brand new “restructuring plan subject to approval” (piano di ristrutturazione soggetto ad omologazione); please see 5.1 Differing Rights and Priorities.

Objectives and Purposes

A judicial composition with creditors is generally aimed at safeguarding the company and protecting the assets in the creditors’ interest. CIC provides that, under a judicial composition with creditors, debtors may achieve the satisfaction of creditors by continuing their business or by liquidating their assets (Article 84).

The purpose of a restructuring agreement is to resolve a company’s state of crisis.

Role of the Court

A judicial composition with creditors is an in-court procedure during which the company is under the supervision of the judicial commissioner(s) (commissario giudiziale). Certain extraordinary transactions require court approval.

A restructuring agreement is negotiated between the parties out of court, even if court confirmation is required in order to provide legal certainty through assessing the viability of the plan.

Timelines and Milestones

A judicial composition with creditors proceeding cannot last for more than 12 months from the date of filing the petition (Article 113, paragraph 2, CIC).

Conversely, there is no time limit for restructuring agreements since their length depends on the negotiations with creditors. The in-court phase usually lasts for two or three months.

Calculation of Claims

The application for admission to a judicial composition with creditors must be submitted together with a list of names of creditors, with an indication of their claims and causes of pre-emption. The judicial commissioner shall then proceed to the verification of the list of creditors and debtors based on accounting entries submitted, making any necessary adjustments (Article 87, CIC).

The application for the approval of a restructuring agreement must be submitted together with the same documentation, including a list of creditors (Article 57, CIC).

Binding of Creditors

Upon confirmation, a judicial composition with creditors is binding on all creditors prior to its publication in the Register of Companies.

Article 63 allows the court to approve a restructuring agreement also without the adherence of the financial administration or of the bodies managing social security forms, under certain conditions.

Challenging Mechanism

Dissenting creditors and interested third parties may challenge a judicial composition with creditors in court on the grounds of its validity.

Moreover, one or more creditors representing at least 10% of the claims resulting from the balance sheet deposited pursuant to Article 90 of CIC, may submit a competing (and different) proposal.

Within 30 days after publication of a restructuring agreement in the Register of Companies, creditors and any other interested party may file an opposition. The court, in deciding on the opposition, may approve the restructuring agreement.

Final Steps and Conclusion

A judicial composition with creditors is approved when the prerequisites specified under 3.5 Out-of-Court Financial Restructurings are fulfilled.

If a judicial composition with creditors is not approved by creditors, the debtor, if found insolvent, is declared bankrupt and becomes subject to a bankruptcy procedure.

The debtor is allowed to reach out-of-court restructuring agreements, to be approved by not less than 60% of creditors by value of claims (Article 57, CIC), or by not less than 30% of creditors by value of claims, if certain conditions are met (Article 60, CIC).

Such agreements, which are only binding for the consenting creditors, are subject to judicial confirmation.

Certified Recovery Plans

Though certified recovery plans (piani di risanamento attestati) are not to be included in insolvency procedures, according to CIC (Article 56), a company may prepare a plan, to be presented to creditors, which is deemed appropriate to allow the recovery of the company’s debt exposure and to ensure the rebalancing of its economic and financial situation.

This plan shall be accompanied with a relevant certification by an independent expert.

Automatic Stay

Upon a debtor’s request, from the date of the publication of the application referred to in Article 40 in the commercial register, creditors may not commence or continue enforcement and precautionary measures on its assets or on the property and rights with which the business activity is exercised. From the same date, prescriptions remain suspended and forfeitures do not occur and the judgment opening the judicial liquidation or determination of the state of insolvency shall not be pronounced.

The debtor may apply to the court, by subsequent application, for additional temporary measures to prevent certain actions of one or several creditors that may jeopardise, from the stage of the negotiations, the successful outcome of the initiatives taken for the regulation of the crisis or insolvency.

The protective measures may be requested by the entrepreneur even during the negotiations and before the filing of the application for approval of the restructuring agreements.

Management and Continuation of Business Activities

During a judicial composition with creditors, the debtor can continue to run its business under the supervision of a court-appointed commissioner (spossessamento attenuato). The court must approve extraordinary transactions, such as the company incurring new debt.

For restructuring agreements (as well as for certified recovery plans), there is no dispossession and therefore the directors of the company are entitled to manage the business.

As to CNC, it is expressly stated that the entrepreneur has a duty to manage the assets and the enterprise without unfairly prejudicing the interests of creditors (Article 16, paragraph 4, CIC).

New Money

Under CIC, financing is generally allowed and the relevant claims have a super priority rank when granted in the forms described under 5.5 Priority Claims in Restructuring and Insolvency Proceedings.

Classes of Creditors

In a judicial composition with creditors, the plan may provide for the division of creditors into classes with differential treatment among creditors belonging to different classes.

In certain situations the division of creditors into classes is mandatory (Article 85, CIC)

The treatment established for each class may not alter the order of legitimate causes of pre-emption.

In a restructuring agreement, the debtor may create different classes of creditors with similar legal positions and economic interests (Article 57, CIC).

Organisation and Representation

If the judicial composition with creditors consists of the transfer of assets, the court shall appoint one or several liquidators and a committee of three or five creditors to assist in the liquidation and shall determine the other procedures of the liquidation (Article 114, CIC).

Information Made Available to Creditors

CIC provides that creditors must be fully and clearly informed about the crisis or insolvency management tool chosen by the debtor (please see 3.2 Consensual Restructuring and Workout Processes).

Cram-down mechanisms have also been introduced into the informal consensual processes under CIC to avoid a restructuring agreement's failure or delay

Claims against a company undergoing a restructuring procedure may be traded.

CIC introduces a brand-new set of provisions governing the crisis and the insolvency of corporate groups (Articles 284-292), firstly providing for the definition of “corporate group”, based on the notion of direction and co-ordination (Article 2497, Italian Civil Code).

Companies in a state of crisis or insolvency belonging to the same group, all having the centre of their main interests (COMI) in Italy, can present a single petition for access to a judicial composition with creditors or for the approval of a restructuring agreement. Companies may submit a single plan of all of them or different plans mutually linked.

CIC sets out a number of rules intended to simplify the procedures relating to companies belonging to the same group.

Generally, during a judicial composition with creditors, the existing management can continue to run the company under the supervision of a court-appointed commissioner. The court must approve extraordinary transactions, such as the company incurring new debt.

For restructuring agreements and certified recovery plans, there is no dispossession and therefore the directors of the company are entitled to manage the business.

Execution of the Sale of Assets

An entity in a state of crisis may propose a judicial composition with creditors based on a plan that may include the restructuring of debts and satisfaction of claims by any means, including disposal of assets, assumption or other extraordinary transactions (Article 84, CIC).

A noteworthy aspect is the introduction of a competitive procedure intended to search for parties interested in the purchase of the assets.

Cancellation of Registrations and Transcriptions

The cancellation of the registrations relating to rights of pre-emption, as well as the cancellation of the transcriptions of attachments and seizures and of any constraint, shall be carried out by order of the court, unless otherwise provided for in the approval decree (Article 118, paragraph 7, CIC).

Credit Bidding

Regarding credit bidding, although there are no provisions on this point, on the basis of general principles, offsetting does not seem to be allowed.

In a bankruptcy procedure and judicial composition with creditors, creditors are prohibited from making deals with the debtor to “sell” their votes (mercato di voto) (Article 339, CIC).

Pre-negotiated Transactions

Though during restructuring proceedings it is deemed possible to effectuate sales and similar transactions that have been pre-negotiated prior such proceedings, only acts carried out in execution of a plan certified by an independent expert are exempt from claw-back actions.

Secured creditors may freely dispose of their claims without any limits.

Conversely, judicial mortgages recorded in the 90 days preceding the date of publication of the application in the Register of Companies are ineffective with respect to claims existing before the judicial composition with creditors (Article 46, paragraph 5, CIC).

Priority new money can be obtained by the company under the rules set forth in Articles 99-102 of CIC.

New loans may also be secured by assets of the company.

It is not possible to use a statutory process as a forum for determining the value of claims.

Judicial composition with creditors, as well as restructuring agreements and certified recovery plans, are based on a debtor’s plan, the assumptions and conclusions thereof being certified by an independent expert.

The debtor may request the court to authorise the terminating of pending contracts or suspend them.

Such rules do not apply to certain contracts, such as employment contracts, and specific rules are provided for others (property lease contracts and finance agreements).

Once approved, judicial composition with creditors is binding on all creditors, co-debtors, guarantors of the debtor and other jointly and severally liable debtors remain responsible towards creditors. Further, unless otherwise agreed, it is also effective for unlimited liability partners. Conversely, some specific rules provide for release of non-debtor parties from liabilities.

In particular, Article 59 of CIC (restructuring agreements) states that Article 1239 of the Italian Civil Code (the remission granted to the principal debtor frees the guarantors) applies to creditors that have concluded a restructuring agreement with the debtor.

In the event that the effectiveness of a restructuring agreement is extended to non-adhering creditors, the latter shall not lose their rights against co-obligors, guarantors of the debtor and recourse holders.

Unless otherwise agreed, a restructuring agreement of the company shall be effective vis-à-vis members with unlimited liability, who, if they have provided securities, shall continue to be liable on that other basis.

Creditors have the right to offset the debts they owe the bankrupt company with claims owed to them by that company, even where they have not come due before the bankruptcy decree (Article 155, CIC).

No set off will take place if the creditor acquired the credit by an inter vivos transfer after the bankruptcy decree or within the year before.

A condition for the right of set-off is that debts and claims to be set off against each other must be liquid (and so determined in their amount) and be of the same nature.

The non-performance of a restructuring agreement resulting in a significant deviation from assumptions (scostamento significativo) may lead to different consequences, depending on creditors’ positions.

As for adhering creditors, such non-performance will give rise to the consequences set forth in the agreement entered into with the debtor (eg, the possibility of activating an express termination clause) and will entitle creditors, if the conditions are met, to invoke the ordinary remedies provided for by the Italian Civil Code, such as the acceleration and termination of the contract. In such event, creditors’ original claims are reinstated, usually forcing the debtor into insolvency.

For non-adhering creditors, as no agreement has been perfected with them, they usually file for a bankruptcy procedure.

In order to avoid termination of a restructuring agreement, it is now provided that whenever substantial amendments to the restructuring plan become necessary after the approval by the court, the debtor shall make such amendments as may be appropriate to ensure the execution of the restructuring agreement (Article 58, CIC).

In this case, the independent expert must renew the relevant report.

In judicial composition with creditors, each of the creditors may only request the termination of the judicial composition for non-performance for serious non-fulfilment, or annulment when it is discovered that the debtor has exaggerated its liabilities or subtracted a significant part of its assets.

One of the most significant innovations of CIC has been introduced by Article 120-quater, which states the conditions to be met for the approval of the judicial arrangement with creditors where allocations to the benefit of shareholders are provided.

In particular, if the plan provides that the value resulting from the restructuring is also reserved for shareholders, the arrangement, in case of dissent of one or more classes of creditors, may be approved if the treatment proposed to each of the dissenting classes would be at least as favourable as that proposed to the classes of the same rank and more favourable than that proposed to the classes of lower rank, even if those classes would be allocated the total value reserved for the shareholders. If there are no classes of creditors of equal or lower rank than the dissenting class, the arrangement may be approved only when the value allocated to the satisfaction of creditors belonging to the dissenting class is greater than the total value reserved for the shareholders.

General Overview

The bankruptcy procedure (fallimento) with mere liquidation purposes has been replaced by the judicial liquidation (liquidazione giudiziale) with the entry into force of CIC.

The court delegates a judge to supervise the procedure, and it appoints a committee representing the debtor’s creditors and a receiver who oversees the liquidation and distribution of the proceeds to creditors according to the priority of their respective claims.

The law provides for the possibility of reaching a court-supervised composition with creditors (concordato fallimentare) during the proceeding, prompted by creditors or third parties, thereby enabling a faster and generally more profitable closure of the liquidation.

Commencement

Judicial liquidation may be filed either by the debtor, its creditors or, in rare cases, a public prosecutor.

A compulsory administrative liquidation may be requested by the company, the authority supervising the company or one or more creditors.

Statutory Requirements

CIC regulates situations of “crisis” or “insolvency” (please see 2.5 Requirement for Insolvency for the relevant definitions) of the debtor (whether consumer or professional) or entrepreneur who carries out commercial, craft or agricultural activities (for profit or otherwise), operating as a natural person, legal person or other collective entity, group of enterprises or company public, excluding the State and public entities.

The subjective condition of a compulsory administrative liquidation is identified from time to time by special laws that provide for it in specific categories of companies, all of which have a public connotation, while the objective condition is the state of insolvency of the company.

Calculation of Claims

The company filing for judicial liquidation must do so by depositing, among other things, a list of its creditors and the amount of their claims (Article 39, CIC). Moreover, creditors must file a motion to be placed on the list of creditors at least 30 days before the hearing for the verification of the claims (Article 201, CIC).

Timelines and Milestones

The bankruptcy judgment has immediate effect from the day of its docketing.

A relevant deadline is that which is related to the liquidation programme: within 60 days from the compiling of the inventory plan, and no later than 150 days from the bankruptcy judgment, the receiver issues a liquidation programme to submit to the creditors’ committee for its approval. That plan must indicate the deadline to complete the liquidation of the company’s assets, which cannot go beyond five years from the filing of the bankruptcy judgment; in cases of exceptional complexity, this deadline may be deferred to seven years by the delegated judge (Article 213, CIC).

Stay of Actions

Except as otherwise provided by law, from the day the bankruptcy judgment is issued, no individual enforcement or protective action, even for claims that matured during the bankruptcy procedure, may be started or pursued on the assets of the company.

Appointment of Office Holders

The management and directors of the company are not allowed to continue its business. A bankruptcy procedure implies that the company is deprived of the administration and availability of assets existing at the date of the starting of the procedure.

The receiver is responsible for managing the procedure and for administering the assets of the bankrupt company in order to liquidate them and satisfy the claims of creditors. A liquidator is appointed in a compulsory administrative liquidation.

Disclaim of Contracts

If a contract has not yet been carried out or completed by both parties when one of them is declared bankrupt, its execution generally remains suspended until the receiver, with authorisation from the creditors’ committee, decides to take the place of the bankrupt party, assuming all the obligations arising therefrom, or decides to terminate the contract.

Conversely, in a judicial composition with creditors, the debtors may request to be authorised to dissolve the contracts in progress at the time of submission of the application or to suspend them for not more than 60 days, renewable once. In such cases, the contractor is entitled to a compensation equal to the damages resulting from the contract’s non-fulfilment.

Rights of Set-Off

The Bankruptcy Law establishes a right of set-off, provided that the claims are due, quantified and certain (Article 155).

Information Made Available to Creditors

CIC provides that creditors must be fully and clearly informed about the crisis or insolvency management tool chosen by the debtor (Article 3).

Final Steps and Conclusion

The receiver provides for payment of sums assigned to creditors in the distribution plan following the methods set by the delegated judge to preserve evidence that payments were made. Having approved the accounting and paid the receiver’s fee, the delegated judge orders the final distribution according to the rules established above. The bankruptcy procedure closes when one of the following events takes place (Article 233, CIC):

• if, within the timeframe set in the bankruptcy decree, no one requests to be placed on the list of creditors;
• when, even before the final distribution of assets, the distribution to creditors satisfies the whole sum of credits contained on the list of creditors or when they have otherwise expired or all the debts and costs to be satisfied in pre-deduction have been paid;
• when the final distribution of assets is complete;
• when it becomes clear during the proceedings that the proceedings will not allow the satisfaction, even in part, of creditors or of pre-deductible claims and costs of the procedure.

Execution of the Sale of Assets

The receiver may sell the business in one block to a third party or sell single assets through a competitive procedure.

Cancellation of Pre-emptive Rights

Unless otherwise provided, the purchaser shall not be liable for debts of the transferred businesses arising before the transfer of such businesses (Article 118, paragraph 8, CIC).

For immovable assets and other assets contained in public registries, once the sale is concluded and the full price has been paid, the delegated judge orders the cancellation of the any entry regarding pre-emptive rights, including liens and attachments and any other kind of interest (Article 118, paragraph 7, CIC).

Credit Bidding

Regarding credit bidding, although there are no provisions on this point, on the basis of general principles, such offsetting does not seem to be allowed. In fact, while creditors’ claims are against the bankrupt company, the debts incurred with the purchase of the assets would be against the mass of creditors. Thus, since the bankrupt and the mass of creditors are different entities, offsetting in a similar situation would violate the par condicio creditorum principle.

Pre-negotiated Transactions

On the basis of general principles, it is not possible to effectuate pre-negotiated sales transactions following the commencement of a bankruptcy procedure as no protection from claw-back actions is provided.

In a bankruptcy procedure, the court appoints a committee representing the debtor’s creditors. Its members are chosen from creditors.

The creditors’ committee monitors the activities carried out by the receiver, authorises their actions, and expresses its view in those cases established by law and on request of the delegated judge, by a succinct and reasoned opinion (Article 139, CIC).

In a judicial composition agreement with transfer of assets, the court shall appoint a creditors’ committee.

In certified recovery plans or restructuring agreements informal committees of creditors may be formed.

For procedures opened in an EU member state, Regulation (EU) No 2015/848 applies, stating that the opening of insolvency proceedings in that member state shall be recognised in all other member states.

Regulation No 2015/848 also enables the main insolvency proceedings to be opened in the member state where the debtor has its COMI. Those proceedings have universal scope and are aimed at encompassing all the debtor’s assets. To protect the diverse interests, Regulation No 2015/848 permits secondary insolvency proceedings to be opened to run in parallel with the main insolvency proceedings. Such secondary proceedings may be opened in the member state where the debtor has an establishment and their effects are limited to the assets located there.

With the aim to support the convergence of targeted elements of Member States’ insolvency rules and create common standards across all Member States, thus facilitating cross-border investment, the Proposal for a Directive of the European Parliament and of the Council harmonising certain aspects of insolvency law (COM(2022) 702 final) definitely identifies insolvency law as a key area for achieving a true Capital Markets Union.

Italian courts have not entered into any protocols or other arrangements with courts in other countries to co-ordinate proceedings.

Insolvency protocols are expressly mentioned in Regulation No 2015/848 and contemplated as a possible means of co-operation.

The CIC has now introduced rules determining which jurisdiction is paramount.

A company with its COMI abroad may be subject to proceedings for the regulation of crisis and insolvency in Italy even if similar proceedings have been opened abroad, when it has an establishment in Italy (Article 26, CIC).

The transfer of the COMI abroad shall not exclude the existence of the Italian jurisdiction if it has taken place in the year preceding the filing of the application for an agreed resolution of the crisis or insolvency or the opening of a judicial liquidation or after the beginning of the CNC, if earlier.

It is also clarified that, when opening cross-border insolvency proceedings with the Regulation No 2015/848, the court shall declare whether the proceedings are main, secondary or territorial.

Finally, this provision shall apply without prejudice to international conventions and EU legislation.

Therefore, according to the Italian provisions on international law, as well as the UNCITRAL Model Law on Cross-Border Insolvency, if there is no specific bilateral treaty, Italian courts have jurisdiction to start proceedings whenever such courts verify that the company’s COMI is located in Italy.

Foreign creditors are not treated differently under Italian law.

Insolvency proceedings opened in another EU member state are automatically recognised in Italy. However, the automatic recognition does not apply to out-of-court procedures, since they are not included within the context of Regulation No 848/2015.

In the event that a company is declared bankrupt in a state that is not member of the European Union nor party to a bilateral treaty, the foreign judgment shall be recognised and enforced in Italy only if it is not opposed by an interested party.

Italian law provides for various types of statutory officers.

In a judicial liquidation, the receiver (curatore) administers the assets of the bankruptcy estate and takes all procedural actions under the supervision of the delegated judge and the creditors’ committee.

In a judicial composition with creditors, the court appoints a judicial commissioner (commissario giudiziale), with supervision and control functions. If the plan provides for the liquidation of the debtor’s assets, a judicial liquidator (liquidatore giudiziale) is appointed.

In a compulsory administrative liquidation, a liquidator (commissario liquidatore) is appointed, as well as a monitoring committee (comitato di sorveglianza) of three or five members skilled in the type of activity exercised by the company.

In an extraordinary administration for large insolvent enterprises, the company is managed by a special commissioner (commissario straordinario) appointed by Ministry of Economic Development.

In the CNC an independent expert (esperto indipendente) aimed at assisting the company in crisis is appointed. acting as a “mediator” or “conciliator” (pursuant to European Commission Recommendation 2014/135/EU and Restructuring Directive 2019/1023/EU).

The receiver is required to manage a judicial liquidation and are supervised by the delegated judge and the creditors’ committee.

The receiver must present the delegated judge with a report of the events causing bankruptcy, bankrupt’s diligence in running the business, bankrupt’s (and any other persons') responsibility, and facts that may trigger a criminal investigation. The receiver may file actions for damages against directors and members of the board of auditors, CEOs and liquidators, as well as liability actions against members of a limited liability company.

The judicial commissioner (and the receiver as well) is a public official. During a judicial composition with creditors, they supervise the administration of the company by the debtor and shall establish an inventory of the debtor’s assets and a detailed report on the causes of the insolvency, on the conduct of the debtor, on the proposed composition and on the guarantees offered to creditors. The judicial commissioner must report immediately to the court if it finds that the debtor has concealed or hidden assets, intentionally failed to report one or more claims, asserted the existence of non-existent assets or committed other acts of fraud.

In compulsory administrative liquidation, the liquidator carries out the liquidation of the assets under direction of the supervising authority and the supervision of the monitoring committee. Moreover, they shall exercise the liability actions against directors and members of boards of control of the company in liquidation, with the approval of the supervising authority.

The special commissioner is required to manage the business and to deliver a report on the causes of the insolvency as well as a prospect for the economic recovery, also describing the value of the enterprise.

The CNC independent expert facilitates negotiations between the debtor, creditors and any other interested parties in order to find a solution for overcoming the financial or economic imbalance.

The receiver is nominated in the judicial liquidation decree or, in case of substitution or removal, by order of the court.

The court may at any time remove the receiver by reasoned order, hearing the receiver and the creditors’ committee.

The same provisions apply to the judicial commissioner within a judicial composition with creditors as those that apply the receiver in a bankruptcy procedure.

In compulsory administrative liquidation, the liquidator is appointed by the court and, with regard to their removal, the same provisions apply as those that apply to the receiver.

A special commissioner is appointed by Ministry of Economic Development to control the company and to act as the representative of the insolvent estate.

Strict rules are prescribed with regard to the eligibility requirements for the special commissioner and their removal, as well as for the CNC independent expert.

Obligations

CIC amended Article 2086 of the Italian Civil Code by introducing a new paragraph. Directors of all types of business acting as corporations or in a collective form must establish an organisational, administrative and accounting structure appropriate in relation to the nature and size of the company, and react in a timely manner to a business crisis and/or loss of going concern.

The obligations provided in new Article 2086 also affect the “business judgment rule” principle, since the breach of such obligations is no longer related to the general principle of the “required diligence” (diligenza esigibile) but is a breach of a specific obligation determined by law.

Responsibility to All Creditors

Directors owe their responsibility to all creditors.

Measure to Determine Insolvency

Under Italian law, there is no objective and predetermined term within which a filing for a bankruptcy procedure must be made and prior to which such filing is not needed, nor is there a standard practice recognised by case law.

For definitions of “crisis” and of “insolvency”, please see 2.5 Requirement for Insolvency.

Practices to Limit Risks of Criminal Offences

There are some steps which are usually taken by directors in the context of Italian turnarounds in order to limit the risk that certain criminal offences may arise, such as:

• convening regular board meetings and taking all actions deemed appropriate in order to clearly analyse the company’s financial and economic situation;
• avoiding preferential payments, carrying out transactions that may damage the company and/or third parties (including creditors and subsidiaries) or trading in a way that may worsen the financial situation of the company;
• not making payments to shareholders and related parties and applying cash only towards payment of such expenses of the company that are necessary to keep it as a going concern (for example payroll, suppliers or fundamental investments); and
• continuously controlling the status of the turnaround.

Duties Owed to Owners and Shareholders

Directors must fulfil their duties as set out in law and the corporate charter with the diligence required by the nature of their position and their specific role (Article 2392, Italian Civil Code). Their duties include:

• drawing up financial statements;
• convening a shareholders’ meeting when it is necessary to reduce share capital due to loss or when the share capital is eroded under the legal minimum; and
• comply with decisions taken by shareholders.

Directors may be liable if they are aware of prejudicial facts and they do not take actions to prevent, eliminate or mitigate damages.

Following the declaration of bankruptcy, directors lose almost all powers.

Criminal Offences and Liability

In the context of the insolvency or financial distress, certain acts performed by the directors may give rise to specific criminal offences such as:

• simple bankruptcy (in the case of negligent delay in filing for the opening of insolvency proceedings);
• preferential bankruptcy (in the event of payments to or creation of security interest in favour of some creditors in order to benefit them over other creditors);
• “fraudulent bankruptcy” (in the case of failure to properly keep the required accounting books or diverting, wasting or concealing funds or assets or making transactions at an undervalue); and
• “illegal recourse to credit” (which occurs when financings are sought from third parties while hiding the company’s insolvency or financial difficulties).

Directors of a joint stock company are liable to:

• the company itself for damages arising from the failure to perform their duties;
• the company’s creditors for any failure to comply with their obligations to preserve the integrity of the company’s assets;
• shareholders or third parties for damages suffered as a direct result of intentional or negligent acts committed by the directors.

During a judicial liquidation, compulsory administrative liquidation or extraordinary administration for large insolvent enterprises, actions for liability provided by the Italian Civil Code shall be brought by the receiver, the liquidator and the special commissioner.

Article 378 CIC amended Article 2476 of the Italian Civil Code, providing that directors of a limited liability company shall be liable to the company's creditors for any failure to comply with obligations relating to the preservation of the integrity of the company's assets.

Historical transactions that preceded an insolvency process may be annulled under certain conditions.

A claw-back action can be exercised when it is proved that:

• a third party was aware of the debtor’s state of insolvency;
• any transaction for consideration occurred within one year prior to the date of declaration of bankruptcy, when the services provided or the obligations assumed by the company are disproportionate, exceeding 25% of the value of the counterpart's obligation;
• the transaction was used to extinguish due debts that have not been paid through ordinary methods of payment and were made in the year prior to the declaration of bankruptcy;
• pledges or mortgages created within six months prior to the declaration of bankruptcy as collateral for those debts come due; and/or
• transactions were performed for free by the company within the two years prior the declaration of bankruptcy.

Look-back periods established by CIC are six months, one year or two years prior to the insolvency proceedings, depending on the type of transaction carried out by the company (Article 166, CIC).

Claw-back and ineffectiveness actions may be exercised by the receiver within three years from the opening of a bankruptcy procedure and within five years from the execution of the transaction (Article 170, CIC).

Acts, payments and guarantees given on the assets of the debtor as part of a certified recovery plan are not subject to claw-back actions; the exclusion does not operate in cases of wilful misconduct or gross negligence on the part of the independent professional (attestatore) or malice or gross negligence on the part of the debtor, when the creditor was aware of it at the time of time of the performance of the act or payment or at the time of the establishment of the guarantee.

The same actions as above made in execution of a judicial composition with creditors, of a restructuring agreement approved by the court or of a restructuring plan subject to approval and those legally created after the filing of an appeal for the opening of a judicial composition with creditors, are not subject to claw-back actions.

The exclusions also operate with respect to the ordinary revocatory action.