ITALIAN INSOLVENCY LAW
Sources and proceedings
The main source of Italian Insolvency Law is the Insolvency Act (r.d. 16-3-1942,n. 267) "Legge Fallimentare", hereinafter referred to as "The Insolvency Act 1942"
This act provides for five different proceedings :
BANKRUPTCY(fallimento) and procedures for reorganisation;
DEED OF ARRANGEMENT (concordato preventivo)
MORATORIUM (amministrazione controllata)
LIQUIDATION(liquidazione coatta amministrativa)
EXTRAORDINARY LIQUIDATION (amministrazione straordinaria)
DIRECTORS' LIABILITY to Company
and Company creditors
Commencement of the Proceedings |Procedural steps, and debt reorganization |Criminal Provisions|Receiver's Appointment and Duties|The Bankruptcy Estate|Priority of Claims|Procedure for Filing Claims|Contracts in Progress|
End of Bankruptcy Proceeding|Settlement of Bankruptcy Proceeding
Commencement of the Proceedings
The proceeding is initiated when a company or sole trader is deemed to be insolvent. The company must be a trading company, to be subject to these proceedings, as defined in the Italian Civil Code, that is; any company or individual whose main activity consists of the production or trade of goods and services. Small traders, as defined in the Italian Civil Code, are exempt.
Non-residents, (companies and individuals) may also be subjected to bankruptcy proceedings.
According to the provisions of The Insolvency Act 1942, a debtor trader is insolvent when he is no longer able to regularly meet his obligations.
A State of Insolvency is a per se situation which justifies a Declaration of Insolvency by the court even where the insolvency is not due to the debtor's misconduct.
The procedure is started by an order of the Court having jursdiction over the debtor's principal place of business on the basis of a petition which may be presented by :
- the debtor himself (or the directors of the debtor company)
- a creditor
- the Public Administrator or
- the Bankruptcy Court ex officio.
The court must serve the debtor with a subpoena requiring him to attend a hearing of the bankruptcy petition.
The proceeding is carried out and supervised by the following parties:
areceiver; a deputy judge; acreditors' committee, representing all creditors.
Procedural steps and debt reorganisation
The order issued by the Bankruptcy Judge will direct the
- the appointment of a deputy judge ("giudice delegato"), who will supervise the proceedings.
- the appointment of a receiver ("curatore") who will deal with the distribution of the debtor's assets;
- the filing of all the debtor's accounting records and ledgers with the court.
- the establishment of the terms upon which creditors must file their claims, and agreement as to the date, place and time of the creditors' meeting, which will review creditors' claims and the report prepared by the receiver on the debtor's assets and liabilities.
An appeal against the bankruptcy order may be filed within 15 days of the date of the order.
The court order deprives the debtor of the right to manage his business and, as a result, the debtor will no longer be able to dispose of his assets. Any legal action taken by creditors against the debtor will be stayed.
The Bankruptcy proceeding is entered in the Official Register of Bankruptcies. (Pubblico Registro dei Falliti).
A bankruptcy proceeding entails the loss of certain civil rights of the debtor, such as:
- the right to hold a passport or even leave his city of residence,
-the right to correspond in writing in connection with his business.
The debtor's name may be removed from this register only when all creditors have been repaid in full, or after he has reached a satisfactory settlement with his creditors. In any event, once a period of five years has elapsed subsequent to the bankruptcy, the debtor may apply to the court for final discharge.
When due to the debtor's fraudulent activities or misdemeanor, a bankruptcy may constitute a criminal offence. In the case of fraud, the offence is punishable by a prison sentence of between three and ten years, while misdemeanor carries a prison sentence of between six months and two years.
Directors of a company may be equally liable.
Receiver's Appointment and Duties
The court appoints a receiver chosen from practising accountants or lawyers deemed to be experienced in insolvency matters.
The receiver then becomes a public official and is required to perform his duties in person. However, eventually he may be allowed by the deputy judge to obtain expert or professional assistance. The receiver is paid out of the debtor's assets, and his remuneration takes precedence over creditors' claims. He acts in conjunction with a creditors' committee, consisting of either three or five creditors appointed by the deputy judge, which has an advisory as well as a supervisory role in the proceedings.
The receiver's duties are :
- to identify and dispose of all the debtor's assets;
- to review creditors' claims, both secured and unsecured;
-to draft a schedule of the debtor's liabilities, and submit it to the court;
-to report to the creditors' meeting on the status of the debtor's asset and liabilities; and,
- to use the funds available to compensate creditors on the basis of their claims and according to the order of prioritycertified by the Court.
The Bankruptcy Estate.
In the case of a general partner all the assets of the debtor's estate are to be made available to his creditors, with the exception of personal belongings such as clothing and essential furniture and earnings from personal activities to the extent that they are necessary for the maintenance of the debtor and his family.
When the bankrupt is a corporation or a limited company, the bankruptcy estate is limited to the assets of such legal entities. Save for the case of a general partner, the corporate veil may be discarded, that is , it may be possible to claim against the assets of directors of the company or corporation, but only when such directors are found to have acted improperly.
The Bankruptcy Estate includes:
a) any assets owned by the debtor at the time of the bankruptcy declaration.
b) any assets which the debtor may have disposed of prior to the bankruptcy in favor of some creditors and to the detriment of all other creditors (fraudulent conveyance).
c) (in the case of a sole trader or general partner) any assets to which he may become entitled prior to his discharge
d) any assets which were acquired by an individual debtor's spouse in the five years preceding the bankruptcy order, because such assets are presumed, prima facie, to have been purchased by the debtor, unless the spouse can prove otherwise by submitting appropriate evidence.
Priority of claims
The order of priority of claims is laid down by the Italian Civil Code and various sections of the Insolvency Act 1942. Claims of Italian and foreign creditors rank pari passu (equally).
The rights to preferential payment provided for at law are numerous. Such preferential claims are normally secured by pledges, mortgages or other liens of the debtor. However, the law provides for additional priviledges and liens. Creditors who believe their claims to be secured by mortgages, liens or other priviledges must advise the receiver accordingly within the time fixed for that purpose by the bankruptcy order - usually approximately two months.
The order of the distribution of assets as regards general claims - that is assets which are not secured by special priviledges, charges, or other forms of security is as follows:
1. The costs of bankruptcy proceedings, which have priority even over secured claims such as mortgages and pledges;
2. Employment compensation, including, without limitation, termination benefits;
3. Claims of independent professional contractors who performed services for the bankrupt during the twelve month period prior to the bunkruptcy order; commissions due within the previous twelve months pursuant to agency agreements; and compensation for the termination of an agency.
4. Taxes on real property
5. Claims of farmers;
6. Claims of suppliers of production plants and equipment, and the claims of banks which financed the purchase thereof; 7. The debtor's expenses for food, clothing, lodgings, medical treatment or funeral arrangements, incurred within a period of six months prior to the bankruptcy order, as well as the expenses relating to the support of the debtor's family within the previous three months.
8. Income taxes (subject to certain limitations)
9. Local taxes, social security payments and insurance premiums.
Any sum due in a foreign currency will by converted into Italian Lire as of the date of the bankruptcy order according to the rate of exchange then in force.
Other debts and counterclaims are off set at the same date.
Procedure for filing claims.
The receiver gives notice of the bankruptcy order to all creditors, indicating the time to file their claims (normally two months) and the Bankruptcy court where the proceeding is pending. In any event, the filing of a claim is deemed to be the responsibility of the creditor. Thus, even if a creditor does not receive notice of the order, he is not normally allowed to sue the receiver to recover sums which have already been allocated to other creditors.
Claims must be filed in writing, in Italian and on stamped paper ("carta da bollo"). Each claim must clearly indicate the name and address of the creditor, the amount claimed, together with any security backing the claim for which supporting documents must be produced.
The bankruptcy court then sets a date for the hearing at which the receiver's report on the claims filed will be discussed. In the event that the receiver rejects a claim, the creditor may file a motion with the court setting forth the resons why he believes his claim should be admitted. Finally, the court issues the schedule of liabilities and decides on any pro-rata claim, compensation or settlement.
Thereafter, a creditor may still file a claim, however, he may be required to bear the costs of an additional hearing. In addition, such crediitor may not recover from any funds already allocated.
Contracts in progress
A bankruptcy order may affect contracts in different ways. The most relevant case regulated, by the Insolvency Act 1942 is the contract of sale.
Sale of goods
Pursuant to the relevant provisions of the Insolvency Act 1942 whenever a buyer becomes bankrupt and a contract of sale is still in progress the seller has the right to deliver the goods and file a claim for the price of the goods with the receiver, and thus concur with all the other creditors for the final distribution of the debtor's assets.
If the seller decides not to deliver the goods the contract is suspended until such a time as the receiver, with the authorization of the deputy judge may decide to enter into the contract on behalf of the debtor .
The seller can ask the deputy judge to set a term of eight days in which the receiver has to make a decision. Once that term has expired without a decision by the receiver the contract is terminated.
When the debtor is the seller, if the goods have already been delivered, the contract cannot be terminated. If the goods still belong to the bankrupt seller the receiver may decide to perform the contract or terminate it. In the event that he terminates the contract, the buyer may file a claim concurring with all the other creditors, however he may not file a claim for damages. The right to stoppage in transit is laid down in the Insolvency Act 1942.
End of Bankruptcy Proceeding
A proceeding is closed by an order of the bankruptcy court.
Once the receiver has disposed of all the assets, but prior to allocating the proceeds, he must submit a final report to the deputy judge on his administration. Creditors may file motions against this final report. Finally (after such motions have been decided) the deputy judge orders the allocation of the net proceeds. Notice of such distribution must be given to all creditors. Thereafter, creditors may sue the debtor to obtain payment of any unrecovered portion of their claims and of interest thereon.
A bankruptcy proceeding may also end with a settlement accepted by the creditors.
Settlement of Bankruptcy Proceeding.
Once the court has established the schedule for the distribution of the proceeds, the debtor may choose to offer the creditors a settlement giving them either a greater or a quicker recovery than that provided for under the bankruptcy distribution.
In this event, the debtor must submit his offer to the court. If the court decides that the settlement offer is in the best interests of the creditors, it issues an order directing that notice of the offer be given to all the creditors. For the settlement to be effective, it must be accepted by a majority of the unsecured creditors representing at least two-thirds of the total amount of their claims. The court then sets a date for a meeting of the creditors at which they will vote on the settlement offer. Thereafter, creditors may submit their votes either in writing to the court within the term set by the judge, or by appearing in person, or by proxy, at the creditors' meeting. Creditors who fail to cast their votes are deemed to have accepted the settlement offer.