Compliance in Progress Summary

As stated in the 2009 U.S. Department of Commerce Doing Business in Italy report, Italy has consistently enforced commercial and bankruptcy law. According to a report prepared for the European Commission (EC) in 2003, as of 2002 Italy had fully adopted 15 of the 41 principles, almost fully adopted 11 principles, partially adopted 10 principles and not adopted 5 principles. It was highlighted that insolvency procedures at the time were predominantly aimed at the liquidation of insolvent enterprises. Since then however, Italy’s insolvency framework has undergone numerous changes and revisions. Several reports, including that of the International Bank for Reconstruction and Development/World Bank’s 2008 Doing Business Case Studies report, observe that insolvency legislation was starting to place more emphasis on debt restructuring as an alternative to liquidation. The Marzano Law of December 2003 for instance, which was passed in the wake of the Parmalat insolvency case, aimed to streamline extraordinary administration proceedings outlined in the 1999 Prodi Law. Further amendments to the Marzano Law, in the form of Law No. 166 of 2008 were passed in October of that same year, prompted by the insolvency of Alitalia, which created a necessity for an insolvency procedure suitable for more systemically significant corporations. Both the Prodi and amended Marzano Laws are still in effect today, with the Prodi Law applying to medium-and-large insolvent companies and the amended Marzano Law to larger insolvent corporations. A report by law firm Paul, Hastings, Janofsky & Walker LLP states that Italy intends to eventually merge both the Prodi and amended Marzano Laws in order to simplify and streamline the insolvency framework pertaining to large corporations. However, as of February 2010, there does not seem to be any publicly available information regarding the status of this initiative.

General Overview

The "Principles and Guidelines for Effective Insolvency and Creditor Rights Systems" were developed by the World Bank to promote international consensus on a uniform framework to assess the effectiveness of insolvency and creditor rights systems. According to a report on Italy’s insolvency regime prepared for the European Commission (EC) in 2003, as of 2002 in Italy 15 of the 41 principles were fully adopted, 11 were almost fully adopted, 10 were partially adopted, and 5 were not adopted. The 2003 EC report highlighted how the legislative framework at the time was predominantly focused on the protection of creditors’ interests, and mainly aimed at the liquidation of insolvent enterprises. According to the report, the main law governing insolvency in Italy, the Royal Decree No. 267 of 1942 (Bankruptcy Law) displayed at the time, “a lack of sensibility to the social and economic effects that the winding-up of an entrepreneurial activity might trigger” and was awaiting “the approval of much needed reform” (p. 1). In its 2005 report titled "Restructuring and Insolvency in Italy," the firm Gianni, Origoni, Grippo & Partners reiterated that under Italy's insolvency system, creditors are usually favored over debtors; hence priority was given to the recovery of value from the debtor's business or assets. Italy, according to the report, offers the following insolvency proceedings to commercial traders, partnerships and companies: (1) bankruptcy and liquidation; (2) composition with creditors; (3) controlled administration; and (4) extraordinary administration.

Bankruptcy involves the discontinuation of business activities; the business is liquidated in a manner which would maximize return for creditors, who are then paid in order of ranking. According to the same report, as of 2005, bankruptcy was the most frequently used procedure, as controlled administration and composition with creditors often failed to prevent an entity from going bankrupt, and the extraordinary administration approach was rarely used. The insolvency framework at the time of the report was said to contain various flaws including, the high cost of the process paid for from the assets; long proceedings, at times exceeding seven years; the absence of a flexible legal procedures to restructure insolvent entities; and outdated sections in the Bankruptcy Law. However since then, a number of revisions have been made to Italy’s insolvency framework that according to the 2009 Department of Commerce’s "Doing Business in Italy: A Country Commercial Guide" “encourage corporate reorganization or debt restructuring as an alternative to liquidation” (p. 118).

The composition with creditors’ procedure involves a court-approved settlement between the debtor and creditors. Previously, this option was only viable if the debtor could guarantee payment of 100 percent of its secured claims and 40 percent of unsecured claims within 6 months of court approval. However the passing of Law No. 80 in May 2005, according to Gianni, Origoni, Grippo & Partners, made the process “swifter and more flexible” (p. 4) by removing the aforementioned prerequisites. According to the 2008 Doing Business Case Studies report, Law No. 80 of 2005 also enabled debtors who were in crisis but not yet in insolvency, to request composition with creditors. Tersilla's 2005 assessment of this reform of the insolvency legislation reinforces the importance of restructuring procedures as one of the main goals of Law No. 80 of 2005. The law was in part enacted to rescue a company from going bankrupt by employing the composition with creditors approach with the purpose to allow for a flexible payment arrangement with the company's creditors. Under this law and using this procedure, a company as well as a small business can propose: (a) debt restructuring; (b) the transfer of some or all of the assets of the company to another party that will assume the management of the assets; and (c) the division and treatment of creditors into different classes as per their legal status. In addition, both Tersilla and Freshfields Bruckhaus Deringer assert that Law No. 80 of 2005 imposes on insolvent entities a lower look-back period for "claw-back actions concerning non-gratuitous transactions" (Freshfields Bruckhaus Deringer 2005, p. 1). The period was reduced by one half compared to the period that existed under the old insolvency framework. Per various sources including Tersilla's 2005 report, several transactions like sale of real estate at market value, and some banking remittances are exempt from claw back actions.

The controlled administration process grants the debtor a 2-year moratorium period, after which it will be declared bankrupt if financial recovery is not achieved, unless a composition with creditors’ procedure is filed. According to the 2008 Doing Business Case Studies report however, this option was abolished by Law No. 5 of 2006 which went into effect in July of that year, “resulting in a comprehensive reform of the 1942 Bankruptcy Law” (p. 97). The report states that the law resulted in simplified bankruptcy procedures, clearly defined roles of the involved parties, and greater creditor involvement in bankruptcy proceedings. Law No. 5 of 2006 played a part in Italy’s new approach to bankruptcy procedures, which aimed focus on debt restructuring as an alternative to liquidation. Further legislative amendments to the Bankruptcy Law came into effect on January 1, 2008 in the form of Law No.169 of 2007. According to Farinacci’s March 2008 article, Law No. 169 of 2007 introduced a stay period of 60 days to debt restructuring agreements, which allows debtors more time to negotiate with creditors. The new law also introduces the possibility of paying secured creditors less than the full amount of debt, therefore allowing more resources to be directed to unsecured creditors.

Extraordinary administration proceedings, as stated in 2005 by Gianni, Origoni, Grippo & Partners, “aim to satisfy creditors’ claims on the one hand, while safeguarding the business and employees’ rights on the other” (p. 5). The proceeding is implemented though a debt restructuring plan over two years. If restructuring fails after the two year time period, it is converted into a plan for the sale of the business, or a bankruptcy proceeding. According to the 2008 Doing Business Case Studies report, the Law No. 347 of 2003 (Marzano Law), aimed to streamline the extraordinary administration proceedings outlined in Decree Law No. 270 of 1999 (Prodi Law). As stated in a 2009 report by law firm Paul, Hastings, Janofsky & Walker LLP (Paul Hastings LLP), the Marzano Law was passed in the wake of the collapse of Parmalat, a multinational food and dairy corporation. The extraordinary administration procedures available at the time, as outlined by the Prodi Law, were insufficient to deal with an insolvency case of such magnitude. The Marzano Law at the time of its enactment was applicable to companies with more than 1,000 employees and EUR1 billion in debts who had been insolvent for at least a year. However, an amendment on January 28, 2005 reduced these requirements to 500 employees and debt of EUR300 million. On the other hand, companies filing for corporate restructuring under the Prodi Law must have a labor force consisting of at least 200 employees and liabilities equal to at least two-thirds of the total balance sheet assets and revenues recorded in the preceding financial year. When reorganizing a company, whether under the Prodi or the Marzano Laws, management is removed and replaced with an extraordinary administrator, which is not the case for controlled administration and composition with creditors where management continues to oversee the business with the assistance of a court-appointed receiver.

Amendments to the Marzano Law, in the form of Law No.166 of 2008 were passed in October of that year. Paul Hastings LLP states that this was prompted by the insolvency of Alitalia, which created a necessity for an insolvency procedure suitable for “massive crises of large companies’ insolvencies” (p. 1). The amended Marzano Law allows the insolvency procedure to be extended to companies within the corporate group of the debtor parent entity, as well as those who provide services to the debtor on an exclusive basis. Alongside this, the amendments enable debtors to pursue immediate asset disposal plans. In urgent cases, the amended law also allows for such transactions to be authorized even before the debtor initiates the Marzano Law procedures. Special provisions for debtors who provide “essential public services” are also outlined in the amended law. The law defines “essential public services” as “services aimed at granting and protecting the exercise of the fundamental individual right of the person recognized by the Italian constitution, such as the right to life, healthcare, freedom, safety, freedom of circulation, social pensions, education and freedom of communication” (p. 5), notes Paul Hastings LLP. Both the Prodi and amended Marzano Laws are still in effect today. The Prodi Law applies to medium-and-large insolvent companies while the amended Marzano Law applies to larger insolvent corporations. Paul Hastings LLP reports that Italy intends to eventually merge both the Prodi and amended Marzano Laws in order to “simplify and harmonize the discipline of the insolvency of large corporations” (p. 5). However, as of February 2010, there does not seem to be any publicly available information regarding the status of this initiative.

The International Bank for Reconstruction and Development/World Bank 2010 Doing Business in Italy snapshot of closing a business evaluates the effectiveness of the insolvency regime in Italy along three dimensions: the average time (in years) to complete a bankruptcy proceeding, the average cost of such proceedings (as a percentage of the estate), and the recovery rate to creditors (expressed in cents on the dollar). For Italy, the time averages 1.8 years, and the cost is, on average, 22 percent of the estate. Creditors recover, on average, 56.6 cents on the dollar. By comparison, member states of the Organization for Economic Co-operation and Development average 1.7 years, 7.5 percent of the estate in costs, and a recovery rate of 68.6 cents on the dollar.