Italian Insolvency procedures were regulated for more than 60 years by Law No 267/1942. Recently this system has been greatly modified by the reform of Italian bankruptcy law enacted through Law Decree 14 March 2005 No 35 (LD 35/05) which modified the composition with creditors procedure, avoidance actions, and introduced section 182bis on restructuring arrangements of debts, as converted into Law 14 May 2005, No 80 (Law No 80/05). This Law gave the Italian Government the task of preparing one or more legislative decrees to reform the entire insolvency procedure. This legislative decree No 5/2006 (LD No 5/06) was published in the Italian Official Gazette on 9 January 2006 and will enter into force on 16 July 2006.
In Italy there are different types of insolvency proceedings:
While bankruptcy and the compulsory winding-up procedure turn the company’s assets into a liquidation proceeding, the composition with creditors and the management reorganisation for big companies provide a re-establishment of the company itself.
A. DOMESTIC FAMILY OF COMPANIES
1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgement of the related proceedings?
If insolvency proceedings must be commenced for the family of companies, Italian law provides a separate proceeding for each of these companies.
In Italian law, the corporate group is not considered an independent entity. Most court decisions highlight the autonomy, both legal and economic, of each member of a group, so that the assets and the personality of each company will remain separate. The corporate group is perceived as an aggregation of productive bodies, legally self-governing when managed in a unitary way in order better to achieve the accomplishment of the objectives of the group.
The fundamental characteristics of the group are as follows:
With regard to bankruptcy (or liquidation), where a few companies (‘members’) of a same group (‘family’) become insolvent, each bankruptcy (or liquidation) will proceed separately, so that there will be as many bankruptcy (or liquidation) proceedings as the number of members that will enter into an insolvency condition.
Court’s territorial jurisdiction will depend on the ‘main headquarters’ of each single member of the family (Law No 267/1942 s 9(1), confirmed by LD No 5/2006). There will be many different and independent proceedings before different courts. Each court will have to judge the proceeding filed before it, and will declare the insolvency of only that member. The Reform of Bankruptcy law (LD No 5/2006) has not made any more relevant amendments.
With regard to the extraordinary management for big companies in crisis, any proceeding relating to a member of the family will proceed separately; however, the extraordinary commissioner will have a global view of the proceedings relating to the entire group. In fact, the extraordinary commissioner will be designated by the Italian Ministry for Industry to manage the reorganisation of the entire group, while preserving the assets’ autonomy of each single company. Moreover, to the management proceeding of a member are appointed the same bodies appointed in the ‘parent proceeding’ (LD No 270/99, s 85) except for an eventual integration by the Committee of Vigilance.
(a) What if members of the family are organised under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceeding where its affiliate is located, if the affiliate has already commenced its bankruptcy proceeding?
The general approach followed by the Italian insolvency legislator, in particular with regard to the extraordinary management for big companies (LD No 270/1999, s 3), bankruptcy (or liquidation) (Law No 267/1942, s 9(1) as modified by LD No 5/2006, s 7), compulsory winding-up proceedings (Law No 267/1942, s 195 confirmed by LD No 5/2006, s 148), or the composition with creditors (LD No 35/2005, s 161), takes into consideration the main headquarter (sede principale) of each company. Therefore, the insolvency of the company can be declared and proceedings commenced before the court of the place where the company registered its main headquarter.
In case of bankruptcy (or liquidation), each insolvency proceeding will be conducted in a separate way. Through the Reform of the Italian Bankruptcy law (LD No 5/2006, s 7) the Italian legislator has introduced section 9ter which regulates any conflict of competence between different courts. In accordance with this section, when the bankruptcy has been declared by two or more courts, the proceeding will continue before the court which has declared the company’s insolvency first. The court that has issued the latter declaration of bankruptcy will have to transfer all the acts and documentation to the competent court. This new section has radically modified Law No 267/42 which provided, on the contrary, the voidness of the bankruptcy judgement issued by the incompetent court. This measure considerably slowed down proceedings because the bankruptcy before the incompetent court had to be revoked in order to restart before the competent court with a risk of expiring terms related to the ‘suspicious period’ for the filing of avoidance actions.
In case of extraordinary management for big companies in crisis, each proceeding will be conducted in a separate way but it is possible to appoint one extraordinary commissioner for all the members of the family.
(b) To the extent your country has different types of insolvency proceedings (such as Chapter 11 reorganisation and Chapter 7 liquidation in the US) do the members of the corporate family all have to proceed under the same type of proceeding?
As noted in the preface to this chapter, Italian law provides different types of insolvency proceedings (see question 1 above).
The members of a corporate family will not all have to proceed under the same type of proceeding. Remaining consistent with the general principle of autonomy, it will be necessary to analyse the real financial and economic condition of each member of the family.
In fact, the financial distress of a company does not necessarily lead to insolvency. It can be considered as a temporary condition that can be (more or less) easily overcome. The company may enter, for example, into a management proceeding for big companies, or, in the case of a smaller company, the corporation may decide to give trust to the creditors and enter into a voluntary arrangement with them in accordance with LD No 35/2005 (enacted with Law No 80/2005). However, in the case of fraud of the debtor, the commissioner may convert the arrangement into a bankruptcy procedure (LD No 35/05, s 173).
In accordance with the extraordinary management for big companies (LD No 270/99, s 81 No 2), the members of the group submitted into a bankruptcy (or liquidation) proceeding may be admitted into the management procedure for big companies of the ‘parent’:
The legislative decree No 347/2003, in force after Parmalat’s default (LD No 347/2003, s 3), has partially modified LD No 270/1999. Particularly, this section provides that, when the circumstances (described in the prior LD No 270/1999, s 81) occur, the extraordinary commissioner may ask the Ministry for Industry to submit the other members of the group to the management proceeding for big companies. This request is made through the filing of a petition before the court which has declared the insolvency of the ‘parent’ company (LD No 347/2003, s 2(1).
These proceedings may be filed jointly with the management procedure for big companies of the parent company (LD No 347/2003, s 4(2) or independently through a reorganisation or a liquidation plan (LD No 347/2003, s 4(2, 3).
Moreover, if the court’s decision which opens the ‘parent proceeding’ is issued subsequently to the declaration of bankruptcy (or liquidation) of a family member, the court which has declared the bankruptcy will convert this proceeding into an extraordinary management procedure for big companies under the control of the same extraordinary commissioner (LD No 270/99, s 84). In this case, two conditions are required in order to change from a bankruptcy (or liquidation) proceeding into a management proceeding for big companies: (1) the requirements provided in s 81 LD No 270/99; (2) the liquidation of the assets of the subsidiary is not terminated.
On the contrary, if a member of the family is facing serious financial distress, a bankruptcy (or liquidation) proceeding may be necessary for this company in order to face its default. This economic and financial distress could involve the other members of the family in case of guarantees granted to creditors for new finance necessary for the company’s restart.
2. Does your law permit, or prohibit, a single administrator/trustee/ receiver to administer the assets and the liabilities of the entire corporate family?
In accordance with Italian law, in the case of bankruptcy (or liquidation), there will be as many bankruptcy proceedings as the number of members which enter into an insolvency condition. Each proceeding will have a different trustee (who will be appointed by the court). A single trustee will administer the assets and liabilities of the respective member of the family and not of the entire group.
In the case of management procedure for big companies, on the contrary, a single extraordinary commissioner of a company (who will be appointed by the Italian Ministry for Industry) may jointly administer the assets and liabilities of the entire corporate group but the assets and liabilities of each member will remain independent of one another for the main satisfaction of its respective creditors (LD No 270/99, ss 67–68).
(a) If so, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or to be heard at such hearing?
In the case of bankruptcy (or liquidation), the debtor has the opportunity of claiming for different insolvency procedures (see question 1 above). The creditors, on the contrary, are only able to ask for liquidation.
The Reform of the Italian bankruptcy law (LD No 5/2006) gives more power to the trustee who has the management of the assets and liabilities of the bankrupt and to the creditors’ committee which becomes the reference point of the entire procedure and decreases the power of the delegated judge, who will control and supervise the procedure (Law No 267/1942, s 25 as modified by LD No 5/2006, s 22). Moreover, the judge may call the trustee and the creditors’ committee in all cases provided by law and every time it is necessary for the correct and prompt carrying-out of the procedure (LD No 5/2006, s 22(3).
Secured and unsecured creditors can ask the judge to be heard for specific matters. In case of irregularities, the creditors may, in fact, demand the court (within a strict time) to fix an appropriate hearing in order to be heard on asserted irregularities. These creditors’ requests are often made during the verifications of the credit or during the preparation of the distribution plan, or liquidation plan as a result of the sale of the company’s assets.
In the case of extraordinary management procedure for big companies in crisis, the creditors’ committee (which is designated by the Ministry for Industry) gives its opinion over the acts made by the extraordinary commissioner in all cases provided by law and in all cases where the Minister considers this duty necessary (LD No 270/1999, s 45).
(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?
Until the recent reform of the bankruptcy law, the Italian regulation did not allow other professionals such as law firms or accounting or auditing firms to be involved as trustee in any insolvency procedure.
Today, LD No 5/2006 allows lawyers, accountants, firms of attorneys, who have undertaken administration, direction and control inside joint stock companies, and other professional companies (LD No 5/2006, s 25 which modified Law No 267/1942, s 28) to be appointed as trustees.
In the case of companies, the professionals who accept the position of trusteeship have to be identified and indicated as they are financially responsible for such commitment. Moreover, the court can designate the same types of professionals (1) for a valuation of the assets; (2) for the control on the feasibility of the plan (in case of management procedure for big companies); (3) for the verification of a treatment not worse applied to those dissenting creditors.
In case of composition with creditors (LD No 35/2005, s 172), the debtor must support his petition to bankruptcy with a plan which will be prepared and signed by professionals. These professionals will be responsible also in an economic way, and will have to guarantee the correctness and truthfulness of the company’s financial items indicated in the plan and the feasibility of the plan itself.
In case of bankruptcy (or liquidation), the trustee, if authorised by the creditors’ committee, can appoint experts to estimate the assets (LD No 5/2006 s 28 which modified Law No 267/1942, s 32) and a verification of the fairness of the purchase offer, jointly or in block.
3. Does your law encourage or discourage overlapping boards of management teams for separate members of a corporate family?
In accordance with Italian law, it is possible to have overlapping boards of management teams for separate members of a corporate family. In other words, a director may be on the board of directors of more than one company but must avoid any conflicts of interests in accordance with sections 2373, 2391, 2475ter of the Italian Civil Code (ICC) and with many courts’ decisions (Court of Cassation, dept I, 9 June 2004, No 10895; Court of Appeal of Naples, 23 October 2003).
(a) If the directors of a parent company are not directors of the subsidiary, but they either directly or indirectly manage the affairs of the subsidiary anyway, do your country’s laws render such people de facto or ‘shadow’ directors of the subsidiary?
If the directors of a parent company are not directors of the subsidiary, but in any case they either directly or indirectly manage the affairs of the subsidiary, Italian law does not consider such people de facto or shadow directors of the subsidiary but they will be responsible for their illicit conduct.
Two important issues arise: the directors’ behaviour and the company’s conduct.
With regard to the directors’ behaviour, section 2392 ICC states that the director is responsible for any violation of the duties provided by law or indicated in the company’s statute. The directors’ responsibility is one for contractual default based on the fact that the director is bound to the company through a contract of mandate. The directors must accomplish their duties through the ‘mandatory’s diligence’. The principle of good and correct management does not mean profitable business but highlights a certain kind of attention, efficiency and respect to the company’s rules. The Reform No 6/2003 requires a professional diligence: section 2392 ICC, in fact, states that the directors must accomplish their duties through the diligence requested in accordance with the ‘nature of the task and their own specific ability’. It will be therefore necessary to analyse the diligence applied by the directors in their work. Directors have to deliberate after a careful consideration of the facts. An informed decision reflects the important role played by the director inside the company and highlights the duty of vigilance of non-delegate directors toward the delegate ones.
The report which supported the legislative decree No 6/2003 stated that the technical knowledge required by directors does not require that ‘the directors must necessarily become experts in accountancy, financing or in any other areas of the company management, but that their choices must be informed and meditated or based on their respective knowledge as a result of a calculated risk and should not be, on the contrary, the result of an irresponsible or negligent improvisation’.
All this discussion becomes important with the Reform of the Italian company law enacted by the legislative decree No 6/2003 (known as Riforma Vietti) which provided that in all acts and documentation, not only formal and public, but also in correspondence between companies of the same group, it is necessary to give notice of belonging to the group. Through this reform, the directors will be responsible proportionally to the loss suffered by the creditors.
In particular, a director will be responsible for bankruptcy fraud where he was aware of the illicit conduct of another director (de facto) but did not do all he could to mitigate or eliminate the negative consequences (Court of Naples 3500/2004).
With regard to the company’s conduct, the parent company (and its directors) which manages the main business of the group must abide by specific duties of correctness toward its subsidiaries. The Italian jurisdiction and courts have perceived the general duty of control of the parent company over its subsidiaries as a specific obligation of the parent company (Court of Cassation, dept I, 23 March 2004, No 5718).
The Court of Milan (decision dated 22 January 2001) declared that the bankruptcy trustee of an insolvent member of a family will be able to enact actions either toward the directors of the parent company or toward the parent company where the company abused the unitary direction and its position of supremacy.
The ratio of the decision of the Court of Milan is reflected in the ICC (s 2497(1) part II ICC). In accordance with section 2497(1) ICC, the parent company, which conducts its business for its own interest, in violation of the principles of correctness, will be liable toward shareholders and creditors of the subsidiary, if its conduct is considered an abuse of the unitary direction.
Whoever has been part of the illicit enterprise will be jointly responsible with the parent company, however within the limits of the damage caused (s 2497(2) ICC).
Thus, the creditors of the subsidiary, in a case in which their claims have not been satisfied by the subsidiary itself, may enact claims, not only against the subsidiary’s directors, but also against the parent company and its directors (s 2497(3) ICC).
The obligation on directors of the parent company is, in this case, more severe than that on the directors of the subsidiary. In fact, the subsidiary’s director may be exempted from liability if, in contrast with some deliberations/directives of the company, he expressly indicates his position and objects in writing, highlighting the purpose of his refusal.
The same concept of parent abuse has been pointed out also in the extraordinary management procedure for big companies in crisis (s 90 LD No 270/1999) in accordance with which, in case of a unitary direction, the directors of the parent who, abusing of their position of supremacy, fraudulently induce the directors of a subsidiary to undertake dangerous transactions, are responsible together with the directors of the insolvent company (subsidiary), for the damages caused to the subsidiary itself. In this case, the parent company will have to indemnify the creditors of the insolvent company, jointly with its directors and with the subsidiary’s directors.
In case of compulsory liquidation, bankruptcy (or liquidation), extraordinary management proceeding for big companies of a subsidiary, the claims of these creditors will be enacted by the trustee/receiver/extraordinary commissioner (s 2497(4) ICC).
Through legislative decree No 6/2003 (reform on the company law) the liability of directors of a joint stock company has been expressly extended also to the directors of the company with limited liability as indicated in section 146(2) of the Italian bankruptcy law as modified by section 130 of the LD No 5/2006.
(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? For example does their duty shift from a responsibility to the shareholder to a responsibility to the creditors. What if only one of the companies is insolvent?
Before the insolvency distress of a company, the officers and directors of the parent company have joint exposure with the parent company itself to civil claims made by shareholders and creditors of the controlled company.
The ICC provides through s 2392–2396 for the civil liability of a company’s directors and officers. The liability of directors is articulated in three directions:
(i) Contractual liability of the directors deliberated by the company’s assembly (ss 2392–2393bis ICC)
In accordance with section 2393bis of the ICC, the shareholders, who represent at least one-fifth of the company’s capital or the amount provided in the company’s statute, may file a claim against the company’s directors and officers who have caused an economic loss to the company. The key element in deciding on the effective liability of these directors and officers is the directors’ knowledge of the company’s insolvency condition. In other words, this kind of liability comes into effect when the director of a company does not respect the duties imposed in the contract through which he has accepted his office.
A misconduct of the directors (such as not having warned the assembly of the insolvency of the company or having enlarged the insolvency of the company through new debts; or having made a recourse to the risk capital), represents illicit behaviour, in respect of which civil action may be taken.
(ii) Tort liability of the directors claimed by the company’s creditors
This action can be filed in order to claim against directors who did not comply with the duties related to the integrity of the company’s total assets (s 2394 ICC). The main precondition is the insufficiency of the total assets of the company to meet the amount owed to the creditors. For this purpose, consideration must be given also to the (unsettled) losses on the balance sheets before than any insolvency condition.
The subjects entitled to act are: (a) the company’s creditors: they do not substitute themselves for their company, therefore, they will independently and directly file claims against the directors. As a result, the directors will not object against the creditors the exceptions owned by the company itself; (b) trustee in bankruptcy or liquidator or extraordinary commissioner in the event of bankruptcy (or liquidation), winding up or management administration for big companies.
(iii) Tort action of the directors claimed by a single shareholder or third party
This rule provides a civil action in order to satisfy a single shareholder or third party for the damages suffered because of directors’ negligence or fraud. It is a personal liability of the directors. The main condition on which such an action is based is the negligence or the fraud of the directors; a direct loss into the plaintiff’s asset; a causal link between the fraud and the loss. The rules that govern the directors’ behaviour are extended to officers too (s 2396 ICC).
When the court declares the bankruptcy (or liquidation) of a company, the trustee will operate as the representative of all the company’s creditors and shareholders. In accordance with section 2394bis ICC, if the company is in liquidation/bankruptcy/extraordinary proceeding, all the claims for liability against directors, officers, internal auditing, will have to be filed by the company’s trustee/receiver/extraordinary commissioner. In order to file such claims, the trustee must be authorised by the judge who will also listen to the creditors’ committee in accordance with section 146(2) of the Italian bankruptcy law as modified by section 130 of the LD No 5/2006.
4. Are there rules and do they change regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transaction) when the members are insolvent?
The general principle in insolvency is the prohibition, on the company and its directors, on dissolving the company’s assets in prejudice against creditors’ claims.
In the case of bankruptcy (or liquidation), the bankruptcy judgement removes from the debtor the possession of his assets (which are transferred to the trustee), except for those goods indicated in section 46 of the Italian Bankruptcy Law No 267/1942 (as modified by s 43 of LD No 5/2006) All the business conducted by the bankrupt after his bankruptcy declaration (including payments made/received by the bankrupt) does not affect the company’s creditors (Law No 267/42 s 44 as modified by LD No 5/2006 s 42) and can be subjected to avoidance actions if made within a certain period of time before the bankruptcy declaration (Law No 267/1942 s 67 as substantially modified by LD No 35/05 s 2(1) (a), amended in Law No 80/05. This modification will be applied to all avoidance actions filed in proceedings started after 17 March 2005).
In the extraordinary management procedure for big companies in crisis, all the business of the insolvent company is concentrated in the extraordinary commissioner’s hands. He then has to be authorised by the Ministry for Industry in the case of sale, lease of companies, branches of companies, immovable or sale in block (s 42 LD No 270/99). Also in these proceedings, the extraordinary commissioner may propose avoidance actions in accordance with bankruptcy law, where the Ministry approves the plan of assets’ liquidation (s 49 LD No 270/99).
(a) Are cash sweep procedures allowed, that is, all cash from all subsidiaries is swept out to one account controlled by one of the family entities and then redistributed among the family members to pay bills?
Italian law does not expressly regulate a cash sweep procedure. In the case of bankruptcy (or liquidation), as in the case of extraordinary management procedure for big companies, all the money collected by the trustee during bankruptcy proceedings must be deposited into a mail office or a bank appointed by the judge (Law No 267/42 s 34 as modified by LD No 5/06 s 30; Law No 267/42 s 86(4) as modified by LD No 5/06, s 72; LD No 270/1999, s 19).
The phenomenon of cash sweep may lead to an abuse condition of the parent company against its subsidiary. This abuse could negatively limit the subsidiary’s power of decision.
When considering a cash sweep, it would be necessary to prove that this procedure respects the subsidiary’s interest, for example that the offered profit rate is competitive, or that the subsidiary does not need that money (swept into a consolidated account) for a certain period or that this cash sweep is justified by the benefit and the advantages, also indirect, that the subsidiary receives through the temporary use of this money by the parent company.
The ICC (s 2497(1) takes into consideration this kind of approach through the concept of the ‘Theory of compensation among advantages and disadvantages’ within a group, in accordance with which there is no liability of the parent company if, in order to pursue an economical policy of the group, it is forced to sacrifice the subsidiaries’ interest and such damage is irrelevant in respect to the result achieved.
The important thing is to understand if this sacrifice is lawful or not. This kind of approach was supported by several decisions made by the Italian Supreme Court (Court of Cassation No 2001/96; Court of Cassation No 9532/97; Court of Cassation No 12335/98), which stated that an eventual clashing of interests should be analysed in accordance with the complex relations within the corporate group. On one side, preferential relations, set up by the directors, should not be converted into favourite choices for the parent company and prejudices for the affiliates. On the other hand, this prejudice must not be analysed separately, but in accordance with the balance of advantages and disadvantages that the subsidiary progressively receives as a result of belonging to the group. The clashing interests, therefore, must be carefully examined in each case, in order to compensate for the eventual damages suffered by the affiliate from the profits obtained from approved business transactions. Anyhow, the power of decision and valuation of the subsidiary will be preserved.
(b) What if the redistribution results in a healthy subsidiary funding the shortfalls in another subsidiary that is losing money?
The directors of the subsidiary who undertake a non-remunerative operation that is harmful to the subsidiary itself, even though it favours another subsidiary in a critical financial condition, would be liable unless they prove that this company would anyway have gained from the reorganisation of the company in crisis, an advantage. Italian courts are still very rigorous in applying the theory of the compensation of the advantages with the disadvantages (see question 4(a)).
5. How does your law treat claims of one member of a corporate family against other members of the corporate family?
Italian law does not discriminate between claims of one member against other members of the same family. In accordance with Italian law, the corporate group is not considered as one whole entity (see question 1 above). Most Italian courts’ decisions highlight the autonomy, both legal and economic, of each family company part of a group, so that eventual claims of one of these companies against another company of the same group will be compared to any other claim enacted by a third party.
(a) Are such claims invalid or unenforceable?
As indicated above, the claims enacted by one member of a corporate family against another member of the corporate family are valid and as enforceable as any other claim. All claims that are properly and timely filed are presumptively allowed.
(b) If not, are such claims on equal footing with those of third party creditors, or are they subordinated, or is there other treatment required or permitted under your law?
Italian law does not specifically regulate claims from one member of a corporate family against another members of the corporate family. Therefore, such claims are treated on an equal footing with those of a third party or creditors provided that these family companies have suffered damage.
6. Does your law allow for the pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members (sometimes referred to as ‘substantive consolidation’)?
In the case of bankruptcy (or liquidation), the actual regulation does not allow a pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members. This is sometimes referred to as ‘substantive consolidation’.
Such provisions might instead be applied in case of composition with creditors, in case of collateral guarantees, mutual guarantees (see ss 182bis and 182ter of Law No 267/42 as modified by LD No 35/05).
(a) If so, is such pooling automatic or does it require a factual showing and court involvement?
In the case of composition with creditors, the eventual pooling of assets can be considered an arrangement reached outside the court with all the problems connected to transacting arrangements.
In case of restructuring debt arrangements, section 182bis of law 267/42 (modified by s 2(1) LD No 35/05 as amended in Law No 80/05), provides that when the members (each one of them represented by the deliberative organs) compose one family group, they could set an arrangement that needs to be agreed by creditors who represent at least 60 per cent of the claims.
This arrangement is supported by a report (s 161 n 3 as modified by Law No 80/2005) prepared by an expert who will guarantee the enforceability of the arrangement and its feasibility to pay the last 40 per cent of the creditors (s 182bis as modified by Law No 80/2005). In this case, there will be a court involvement. Within a strict term (two months) this arrangement will be effective.
(b) What proceedings (motion, request, trial, etc) are required for the court to order the pooling of assets and liabilities?
As with the answer above, the arrangement will be published in the company’s register; the creditors and any interested party may object within 30 days from its publication. The court will decide on the creditors’ objection and afterwards will decide on the agreement. The decision which declares effective the settlement (decree) among the debtor and the creditors can by objected through a complaint by the dissenting creditors within 15 days from its publication. It a very fast and easy proceeding.
(c) Does your country’s law contemplate any partial pooling of assets and liabilities?
As with the answer above, Italian law does not prohibit settlements of partial pooling of assets and liabilities with regard to certain creditors or with regard to specific credits.
In accordance with section 182ter of Law No 267/42 as modified by section 146 of Law No 80/05, the debtor may propose to pay part of the tribute administrated by tax agencies; the payment should be limited to the quote of the unsecured claim.
(d) If the pooling of assets and liabilities is called for, are there any protections for certain types of creditors, such as creditors with a lien or other security interest in particular assets?
As already indicated in question 6(a), (b) and (c) the pooling of assets may be contemplated in case of an arrangement between the debtor and his creditors. Therefore, the principle of ‘non-vulnerability’ of the secured claim stated in section 2741 of the ICC may be over crossed through the will of the secured creditor, who (through an arrangement) decides to content himself with a lesser sum of money he deserves.
In a case in which the secured creditor does not agree to the offer proposed by the debtor, he can demand the entire payment.
7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest, in the assets of one member of the family and a guarantee from another of the family, are such claims valid in insolvency proceedings of the entire family?
The creditors of a member of the family will be treated independently with respect to creditors of another member of the same family. Each creditor will be treated differently inside different members’ assets and liabilities in accordance to the credit he owns. For instance, if a creditor has a security interest, in the assets of member (A) and an unsecured claim toward member (B), he will be treated as a secured creditor in member (A) assets and liabilities and as unsecured creditor in member (B) assets and liabilities.
The bankruptcy (or liquidation) proceeding of each member of the group will have its own creditors. Each proceeding will have to take into account the limits of the claim of each creditor and divide its creditors into different classes (Law No 267/42 s 124 as modified by LD No 5/05 s 114; law 267/42, s 160(c) as modified by LD No 35/05 s 2(1)(d)).
In accordance with section 52(1) Law No 267/42 (confirmed by LD No 5/06 s 49), the bankruptcy proceeding creates a competition among all the creditors over the debtor’s assets. The court’s decision, which will declare the company’s bankruptcy, will give to each creditor the right to participate, in accordance with the amount of their credit, at the distribution of the proceeds obtained from the liquidation of the debtor’s assets. The amount of each credit is valued at the moment of the bankruptcy declaration. This concurrency is based on the par condicio creditorum principle (s 2740 of ICC). The secured creditors, whose claim is based on specific title such as pledge, mortgage, liens, will be satisfied first. It is necessary to underline that in accordance with such principle, in the debtor’s assets are included not only the goods which belong to the debtor at the time bankruptcy is filed, but also goods that do not belong any more to the debtor at the time before bankruptcy was filed. For this reason, any sale/purchase made by the bankrupt, within one year before the declaration of bankruptcy, will be subordinated to avoidance action.
8. Do your laws or courts provide for post-insolvency commencement of new financing that allows continued operation of the business and provides adequate protection to the lender who made the loan? Explain.
In case of extraordinary management procedure for big companies, the purpose is to protect the value of the insolvent company which has a real chance of reorganising its business. The company will continue its business and management also through the help of new finance. The provision of this new finance will be paid in prededuction, in accordance with section 111(1), No1, of the Italian bankruptcy law (s 20 Law No 270/1999). It is a kind of ‘super priority’ which will be decided by the extraordinary commissioner after a positive judgement of the creditors’ committee and by the Italian Ministry for Industry.
In case of bankruptcy (or liquidation), the court may permit, in the context of the bankruptcy judgement, the temporary continuance of the business of the insolvent company, where stopping it may cause serious damage, and so long as it will not prejudice the creditors.
After the declaration of bankruptcy, the temporary continuance of the business of the insolvent company may be allowed by the delegated judge, if requested by the trustee and through a positive opinion of the creditors’ committee, who will be convene by the judge at least every two months in order to verify the need of such temporary measure (s 90 of Law No 267/42 as modified by LD No 5/2006 s 104).
The trustee will decide on the company’s need for new finance at the time of the preparation of the liquidation plan. This plan will need a positive opinion by the creditors’ committee. The secured creditors can object to this plan if they receive a loss from its application. In this case, the court will have to intervene.
The need for new finance, eventually guaranteed by a super priority, will have to be finalised by a greater increase of the company’s value, and to the satisfaction of the creditors’ interests.
9. Are directors and officers subject to civil or criminal sanctions if:
(a) Fraud or misrepresentation of a company’s finances are discovered?
The officers, directors, internal auditors and liquidators have criminal exposure (jail up to 18 months) if they publish fraudulent reports, balance-sheets, or other economic statements with the intent to deceive single partners or third parties (s 2621 ICC ‘False Financial Statement’ as reformed by LD of 11 April 2002 No 61). Economic damage to shareholders and creditors leads to a heavier punishment (jail from six months up to three years in accordance with s 2622 ICC). This criminal liability is excluded if the falsity and the forbearances of the documentation do not seriously alter the economic and financial condition of the company or of the group.
The director who tries to obtain an unfair profit for himself or others (with intent to defraud), by exhibiting false information in requested reports on investment solicitude or on ordinary market quotation, or in documentation published during the public offering, or hides such information in order to induce in error the belief in such information, causing an economic loss, may face imprisonment for up to one year (s 2623 ICC ‘False Prospectus’).
The director who divulges false notices, or sets out simulated operations or other artificial conduct that causes an alteration of the price of financial means can go to jail for a maximum of five years (s 2637 ICC ‘Manipulation’). Market manipulation can be committed also through separate legal activities, whose combination or the time in which these separate activities are made, provoke a distortion to the process of the prices elaboration (Court of Milan, 11 November 2002).
Whoever, through their conduct, achieves an unfair profit for himself or others will be liable for fraud (s 640 of the Italian Criminal Proceeding) and may go to jail for a period of from six months to three years.
Section 216 of Law No 267/42 (confirmed by the LD No 5/06) ‘Fraudulent Bankruptcy Offence’ provides jail sentences from three years up to ten years for the bankrupt: (1) for embezzlement /misapplication, concealment, misrepresentation, of the entire/part of the debtor’s assets or for recognition (for the only purpose to damage creditors) of non-existent liabilities; (2) for abstraction, destruction or falsification of the entire/part of the company accounting books with the purpose (a) of creating profit for the debtor himself or for other person or (b) damaging creditors or for hiding the accounting books in order to avoid a reconstruction of the debtor’s economic patrimony.
Section 217 of Law No 267/42 (confirmed by the LD No 5/06) ‘Bankruptcy Offence’ provides jail sentences of six months to two years if the bankrupt, outside the cases described in section 216(1) has spent an exaggerated amount of money for his family and him given his economic condition; (2) has involved a relevant part of his patrimony into careless economic operations; (3) has made imprudent economic operations in order to delay his bankruptcy (or liquidation); (4) has enlarged his economic distress by not requesting an insolvency declaration; (5) has not performed his duties as provided in an antecedent bankruptcy creditors composition.
(b) They allow the company to continue to operate while knowing it does not have the ability to pay the debt incurred?
The general insolvency principle is the prohibition on an enlargement of the company’s financial distress (s 217 n 4 Law No 267/42). In other words, the directors and officers of a distressed company cannot overburden an enlargement of the company’s deficit economy; they have to reduce any costs that are no longer feasible given the company’s financial situation.
(c) Same as b) but the directors believe that if some event occurs, it will be able to save the company and its bills?
As underlined above, the Italian general standard that has to be taken into consideration is the prohibition of an enlargement of the company’s financial distress (see question 9(a), (b))
In the case of a judicial action against directors it will be necessary to prove that these directors reached their decision after a deep, careful and diligent analysis of the company’s condition (see also question 3(b)).
B. INTERNATIONAL FAMILY OF COMPANIES
1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?
In case a debtor (individual/entity; entrepreneur/not) has the centre of his main interests in one of the Member States of the European Union (Denmark excluded), the European Regulation on Insolvency Proceedings No 1346/2000 must be applied. Therefore the answers to the questions set forth above need to be changed.
Through this law (in force since 31 May 2000), the European Union, gave its contribution to the regulation of corporate group insolvency. This regulation, in order to promote the proper functioning of the internal European marketplace, creates a unitary insolvency discipline and co-operation between courts of different countries.
2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries:
(a) What controls as to where the case must be filed (eg, centre of main interest, principal place of business, location of parent, etc)?
The European Regulation No 1346/2000 exclusively applies to judicial proceedings:
• on insolvency (bankruptcy/liquidation, composition with creditors, winding up, little reorganisation, management proceeding);
• about debtor’s insolvency which cause a dispossession (total or partial) of the assets of this latter and the entrusting to a liquidator (trustee) of an administration, winding up and supervision task.
Jurisdictional competency concerning the opening of a main insolvency proceeding belongs to the Member State where the centre of main interests of the debtor is located. However, though the various European bodies co-operated closely on this, the Regulation is characterised by several heavy limits: for example, there is no rule determining the eventual jurisdictional conflict where two states declare their competence for the same opening main proceeding. In fact, the definition of centre of main interests is not too clear, as such a term should refer to the place where the debtor conducts his main regular business and therefore represents a known and sure location for third parties.
This main proceeding is mostly characterised by a universal approach so that judgment is immediately recognised in all other Member States and the liquidator may exercise all available powers the law (in which the controlled company is located) permits. This main proceeding will be governed by the internal laws of the Member State where this proceeding initiated. Thus, it may follow liquidation and balancing purposes.
(b) Do the courts attempt to exercise jurisdiction over the assets of the company filing domestically no matter where located (for example, overseas), or do they limit their jurisdiction to only those assets located in your country?
The main proceeding:
(c) Would your courts enforce a court order from a foreign country that attempted to exercise jurisdiction over assets located in your country but owned by the company that is subject to the foreign insolvency proceedings?
In order to guarantee united and efficient procedure, co-operation and co-ordination between trustees and courts during all the phases of any proceedings (whether primary or secondary), the European Regulation No 1346/00 provides a secondary proceeding which might be opened, through a petition of the trustee of the main proceeding, in the state where the insolvent debtor has an ‘asset’ in order also to protect local creditors’ interests. This secondary proceeding can be exclusively a liquidation procedure. It is sufficient that the trustee of the main proceeding claims for the insolvency liquidation of the secondary debtor (see Eurofood/Parmalat).
This secondary proceeding is regulated by the domestic law of the forum of the member state according to the principle of lex fori concursus. The effects of the decision are limited to the assets that the debtor owns in that country and the liquidator only has the task of administering the estate.
(d) Has your country adopted any procedures (such as the Model Law on Cross-Border Insolvency) to address the various issues that arise in dealing with cases of cross-border insolvency?
Italy has not adopted, yet, any supportive procedures such as the UNCITRAL Insolvency Legislative Guide, in order to address cross-border insolvency cases.
