Italian Insolvency Research Articles

The Pandemic as a Chance to Modernise Italian Insolvency and Restructuring Law

The Pandemic as a Chance to Modernise Italian Insolvency and Restructuring Law

The Italian Insolvency Law Reform

The Italian insolvency and pre-insolvency frameworks have been reformed recently (2019, due to enter into force in September 2021 but now probably in 2022). This article recalls the intense period of reforms in Italian insolvency law, started in 2005 and culminated with the new ‘Code of enterprise crisis and of insolvency’. The Code introduces new rules for court-confirmed debt restructuring agreements (similar to schemes of arrangement) and judicial composition with creditors, as well as with regard to new rules for insolvency of groups, international jurisdiction and directors’ liability. The article addresses these novelties pointing out some unresolved issues. Finally, the article touches upon the compatibility of the new law with the Directive on restructuring and insolvency (Directive 2019/1023). Autonomy of sport, Private International Law, Public-private Governance, Corruption, Transnational Legal Order, Sports Economy, Legal Status of Sporting Organisations, Audit, Managerial Transparency, Economic Monitoring, International Sporting Convention

Can a quantitative approach be mitigated? Proposals for the application of the "early warnings" required by the new Italian Insolvency Code

In compliance with European regulations, the new Italian "Insolvency Code" introduced new tools to prevent future financial crises in businesses ("early warn-ings"). Their aim is to highlight future insolvency issues, to enable timely action in order to avert the potential crisis for as long as possible.V This mechanism will come into force on 15 August 2020. Based on a previous investigation that identified the most sensitive financial ratios for evaluating a go-ing concern, this study proposes and tests a possible approach which combines generic quantitative indicators with a case-by-case solution. A discriminant analysis was made on a pairwise sample of Italian non-listed small and medium-sized companies (SMEs). The proposed model overcomes the problem that arose from a combined interpretation of the indicators, and also it acts as a tool that can deter-mine the level of risk within each situation. This approach aims to limit the rigidity produced by common quantitative thresholds, thereby reducing false positives and negatives, ensuring an automatic reporting process that can preserve the efficiency of the early warning mechanism. Furthermore, our proposal is better suited to SMEs, since it is based on financial statements rather than forecasts.

Business Continuity in Times of Distress: Debt Restructuring Agreements and Compositions with Creditors in Italy

The Italian insolvency framework makes several restructuring tools available to firms and their creditors, so that distress does not necessarily lead to liquidation. This paper analyses two such instruments: debt restructuring agreements (DRAs) and compositions with creditors (CCs), both commonly used to reorganize distressed firms and preserve their continuity. These procedures typically involve large firms, particularly in the case of DRAs where judicial control over negotiations is milder. Firms using DRAs are in less critical economic conditions when they file for restructuring, but they do so after longer periods of distress. Despite their declared aim, the effectiveness of these instruments in terms of business continuity is limited: many firms that use them end up exiting the market, in particular in DRAs. Firms that survive display only partial recovery, which is relatively more intense in CCs. However, the apparently superior performance of CCs is overshadowed by the long duration of restructuring, which may prevent us from observing definitive outcomes.

The position of shareholders in the restructuring proceedings of distressed companies: From a shareholders' veto power to their duty to enforce (Aufopferungs‐ or Duldungspflicht) a restructuring plan

AbstractThis article addresses the problem of the position of equity holders in restructuring proceedings, tackling a new issue in the overall European scenario of insolvency law, where innovative rules have been introduced on this topic in Germany (ESUG), France (loi Macron), Spain (ley concursal), besides the new provisions laid down by the EU Preventive Restructuring Directive. Overall, these rules target the same outcome, while relying on different tools, namely, to overcome the veto power of shareholders in the enforcement of an approved and confirmed restructuring plan. Shareholders can in fact resort to their veto power pursuant to company law when dealing with structural operations having an impact on the property structure of a distressed company, that is, a debt‐equity‐swap. This article focuses on the rules governing the position of shareholders as laid down in Article 163, paragraph 5 and Article 185, paragraph 6 of the Italian Insolvency Law (IIL), in force since 2015, which will be probably amended in September 2021 by Articles 90 and 118 of the new Italian Crisis and Insolvency Code (ICC). The article ultimately provides a comparison with the legal framework in other European countries as well as in the EU Preventive Restructuring Directive. Many issues arise from the new Italian regulation, in particular regarding its field of application, its relationship and its coordination with company law and the protection of shareholders' property in the shares.

The Italian Insolvency Law Reform

The Italian insolvency and pre-insolvency frameworks have been reformed recently (2019). This paper recalls the intense period of reforms in Italian insolvency law, started in 2005 and culminated with the new ‘Code of enterprise crisis and of insolvency’. The Code introduces new rules for court-confirmed debt restructuring agreements (similar to schemes of arrangement) and judicial composition with creditors, as well as with regard to new rules for insolvency of groups, international jurisdiction and directors’ liability. The paper addresses these novelties pointing out some unresolved issues. Finally, the paper touches upon the compatibility of the new law with the Directive on restructuring and insolvency.

The role of the ISA 570 “Adverse key financial ratios” in going concern assessment in Italy

This study aims to identify if financial ratios may be useful tools to assess whether an entity may incur in going concern matters and, as a consequence, in a Going Concern Opinion. Starting from an IAASB suggestion reported in the ISA 570 and our previous investigation establishing which financial ratios are most widely used in professional practice by auditors for this type of evaluation, our research is focused on verifying their effectiveness. In particular, an empirical analysis, based on a logit model and than a discriminant analysis, performed on a sample of Italian listed companies confirms the importance of the relations between the net financial position and the cash flow from operations, as well as the relevance of the equity on debts ratio. The results would help auditors and directors to focus on the synthetic indicators that are the most relevant in the financial sustainability evaluation, but they may also be considered by the Italian Legislator that is implementing the new Italian Insolvency Law Reform to fix the synthetic indicators which are able to warn stakeholders regarding the risk of insolvency.

Reforming Italian Insolvency Law: Bankruptcy vs Judicial Liquidation

The Italian Parliament has recently approved the Enabling Law no. 155/2017, which draws on the results of the work of the so-called Rordorf Commission, previously established by the Minister of Justice with the task of preparing a general reform proposal on corporate rescue and insolvency (Reform Law). Among the interventions envisaged, the Reform Law provides for the elimination of the term “bankruptcy” from the Italian insolvency panorama and the replacement of the bankruptcy proceeding with a new procedure, called “judicial liquidation”. The explanatory memorandum says that the decision to abandon the term “bankruptcy” aims to avoid the social stigma historically related to a person being declared “bankrupt” even though this is not justified by the mere fact of an entrepreneur failing to achieve a successful outcome. There is no doubt that an entrepreneurial crisis cannot be considered incontrovertible proof of inherently antisocial and illegal conduct. Nevertheless, experience shows that entrepreneurs who are declared bankrupt are strongly discredited by dint merely of the bankruptcy, even when their honesty is indisputable. The following pages will thus verify the elements of discontinuity between the “old” bankruptcy and the “new” judicial liquidation, in order to understand whether the transition from the former to the latter actually represents a cultural revolution or should instead be regarded as merely a cosmetic reworking of the regulations.

Executory Contracts (in Italian Law)

The Reform of the Italian Insolvency Law, implemented with the decree of March 14th, 2005 n. 35 and of January 9th 2006, n. 5, contains significant elements of discontinuity compared to the former Insolvency Law of 1942. The mentioned provisions (as well as successive modifications) were profoundly altered including with reference to the instruments directed toward resolving the different problems of an enterprise’s crisis, and therefore in favor of the restructuring of the entity. Certainly, the most important insolvency procedures for companies are fallimento (i.e. liquidation) and concordato preventivo (i.e. a court-supervised arrangement between the debtor and the creditors). Both Procedures have rules on executory contracts but they are written in different ways according to the purpose of the single discipline. The aim of the ‘fallimento’ under Italian Law is only the liquidation. The goals of ‘concordato preventivo’ can be either the restructuring or the liquidation; and these two objectives can be present within the same Procedure. In the discipline of the ‘fallimento’ the principal rule on the effects of bankruptcy itself on pre-existing legal relationships is the art. 72 of the Insolvency Law that regulates in general the pending relationships. Subsequently there are in the Law some specific rules on single contracts: particularly, for instance, on contracts concerning real estate to be constructed (art. 72 bis) or on sales with retention of title (art. 73). In the discipline of the ‘concordato preventivo’ the principal rules on the effects of admission to the procedure are the art. 169 bis that regulates in general the ongoing contracts, and the art. 186 bis, §§ 3, 4 and 5 that regulates, without prejudice to art. 169 bis, the executory contracts in the Arrangement with Creditors on a Going Concern Basis. It is necessary to point out that the Italian Insolvency Law is under review from a global viewpoint. The Italian Parliament is discussing in this period the so-called “Rordorf Reform”: the Chamber of Deputies has already approved the Draft Law on February, 1st 2017 and successively transmitted the mentioned Draft to the President of the Senate on February, 31st 2017.

Financial distress pre-warning indicators: a case study on Italian listed companies

The reform of the Italian insolvency law in 2005 introduced the troubled debt restructuring (TDR) procedure as a means to restore companies that are in financial distress and avoid potential liquidation. The success of this procedure depends strictly on the timeliness of intervention. Therefore, the availability of a prediction tool appears to be crucial. This paper focuses on the ability of accounting ratios to predict the financial distress status of a firm as defined by the law. Based on a linear discriminant analysis, we formulate the probability of a firm filing for TDR in one year, as well as other quantitative techniques that are intended to monitor financial health. Specifically, we begin with a test of Altman's Z, Z0 and Z00 scores for bankruptcy on the listed Italian companies that filed for TDR in the period 2005-12. The test results do not completely satisfy the TDR prediction. We then introduce a new score formula based on seven accounting ratios and specific coefficients. Several confirmative analyses are also conducted to validate the predictive accuracy and the generalization power of our score formula.

PAC (PREVENTIVE ARRANGEMENT WITH CREDITORS): A TOOL TO SAFEGUARD THE ENTERPRISE VALUE.

Italian Insolvency Law has been widely reformed since 2005 in order to introduce new legal procedures aimed at preserving troubled companies, discerning viable from irredeemable businesses, and increasing productivity through a more efficient management of insolvency proceedings. The excessive duration of bankruptcy cases was repeatedly brought to the attention of the European Court of Human Rights, relating to the right to a fair trial in terms of reasonable duration. After the reform, the Preventive Arrangement with Creditors (Concordato Preventivo) became Italy’s equivalent of US’s Chapter 11 and can be considered the main instrument used by small and medium-sized companies (and sometimes large ones) to manage insolvency by avoiding bankruptcy. This paper provides an empirical analysis on filing of Preventive Arrangements with Creditors in the Court of Milan, one of the largest courts in Italy, in the 2005-2014 period. Through the exam of 720 cases, 60% of the total number, the research shows the different features of the procedure, analyzes the characteristics of companies that resort to it and its diverse purposes of liquidation or restructuring. Due largely to the newness of the legislation, along with the complexity of the Italian system, it is rather difficult to generalize conclusions. Nevertheless, the paper shows how Preventive Arrangements with Creditors can be considered a more efficient instrument than the alternative bankruptcy, both in terms of timeframe as well as with creditors‘ satisfaction. As part of the overall European reform process of insolvency proceedings, following the 2014 Recommendation issued by the European Commission, Italy seems to provide useful insights for other countries in Europe.

Companies' insolvency and ‘the nature of the firm’ in Italy, 1920s–70s1

This article analyses the functioning of Italian insolvency laws and practices, in particular their role in the selection and relaunch of viable firms. The article investigates the period between the 1920s and the 1970s, and focuses on joint‐stock companies. Using comparative data on the number of cases, we show that in Italy firms mainly used the procedure calledfallimento(bankruptcy), consisting of the collection and subsequent liquidation of assets. Other procedures, such as deals with creditors or forms of receivership, able to give companies a further chance, were rarely used. On the basis of archival documents we maintain that this result was due to the strictness and complication of Italian procedures, as well as to their inability to select viable companies. The article also investigates the relation between the features of insolvency law and the nature of the Italian industrial system, specifically the peculiar small size and rapid turnover of joint‐stock companies. We suggest that the pro‐liquidation character of the insolvency law might have been one of the causes of the peculiarity of Italian industrial capitalism, even if the opposite direction of causality cannot be excluded.

Dept restructuring in the "new" Italian Insolvency Law

The present contribution addresses the issue of debt restructuring in Italian Insolvency Law following its Reforms1 introduced by Legislative Decree n. 5/2006 and by Legislative Decree n. 169/20072. Besides general bankruptcy (fallimento), the “new” legal framework provides for the “Reorganisation plan” (according to Art. 67, § 3, lett. d.), Italian Insolvency Act), the out of court settlements with creditors, voluntary arrangements (concordato preventivo), the composition plan with creditors (concordato fallimentare) and the administrative liquidation (liquidazione coatta amministrativa). Not surprisingly, the Reforms had a strong impact on the main players involved in insolvency proceedings3, i.e. the insolvency court, the insolvency judge (giudice delegato), the off icial receiver (curatore fallimentare)4 and the members of the creditors’ committee (comitato dei creditori). In order to better understand the extent and the implications of the recent Reforms in Italian Insolvency Law, a brief outline of the Equality and Priority of creditors principle and the relevant provisions ruling for “claw back” actions seems appropriate.

French, German, Dutch and Italian Insolvency Laws - A Glance

There exists many a studies on the insolvency laws across all the nations worldwide. The simple reason for this is the fact that among many problems that a nation faces in the recent times, this is one of the most important issues. In this short write up an attempt has been made to review the insolvency laws existing in some small, yet very important nations.