The New Italian Insolvency Code

In July 2022, Italy incorporated into its legal system a new Insolvency Code, which is being applied to new proceedings. The new insolvency and restructuring rules have been introduced for two main reasons: to comply with the obligation to transpose the EU Restructuring Directive (n. 2019/1023) and to provide Italian businesses with a range of tools to deal with the aftermath of the pandemic.

New Principles and Values

The mentioned EU Restructuring Directive aims to introduce (or reinforce) into EU member states' legislation the principle of restructuring a company's indebtedness early to prevent more invasive insolvency procedures and avoid liquidation proceedings.?

Accordingly, the new Italian Insolvency Code aims to anticipate and prevent the company's financial crisis and resolve it in a way that is the least traumatic possible. To reach this target, the New Code introduces more restructuring-friendly rules, allows an early intervention by the supervisory body and the management of a debtor company (to prevent debtors from continuously delaying the request for restructuring procedures), and favors out-of-court restructuring procedures to remedy businesses' outstanding exposure.?

The above represents an in-depth change to the core principles of the Italian insolvency law. Historically, the latter was built to maximize creditor satisfaction while ensuring all creditors were treated equally and without discrimination. With the recent reform, however, the guiding principle has changed. The value it now seeks to protect is instead preserving the debtor company activity while, of course, making sure that the rights of creditors can have the maximum satisfaction - but by the first, primary objective.

Negotiated Settlement and Judicial Liquidation

Among the newly introduced flexible instruments and procedures that facilitate the restructuring of Italian businesses in financial distress, the so-called Negotiated Settlement with creditors is worth mentioning.?

It is a measure that can be requested by any entrepreneurs facing a financial or economic crisis whose entity is still recoverable but potentially could lead to insolvency. The negotiated settlement has the paramount goal of preserving the ongoing business; it is a voluntary out-of-court settlement that does not involve judicial authorities. The company's management can file the application online on the competent Chamber of Commerce portal to benefit from it. Upon receiving the request, the Chamber of Commerce will appoint an independent expert to facilitate and support the negotiations between the distressed company and its creditors to find a viable solution.

In parallel, the New Code has also amended the rules of the old bankruptcy procedure, which has been replaced by the (now called) Judicial Liquidation, a process still devoted, as the previous one, to liquidating the assets of an insolvent company. In this regard, the main novelty lies with the change of terminology. In Italian, the old name of bankruptcy was?fallimento,?which means "failure." Therefore, the reform has changed the name into?liquidation giudiziale?(judicial liquidation), clearly aiming to give the procedure a more neutral qualification and trying to avoid stigmatizing the (according to the old terminology) "failed" entrepreneur.?

Conclusion

The New Italian Insolvency Code aims to pursue early countermeasures to severe - but still reversible - business crises, focusing on the renegotiation of debts and trying to assure the continuity of business activity. Following those guidelines, it aims to protect the interests of the distressed company and all stakeholders, including commercial creditors. The liquidation solution, instead, becomes residual and discouraged unless inevitable. The New Code assigns duties and rights to all the parties involved in the process, and they must act reasonably and in good faith. Creditors, in particular, are expressly requested to be cooperative and give their tangible contribution to help overcome the debtor's distress.?

Written by: Paolo Diman

*This article is informative and is not to be used as legal, economic, or commercial advice.

Sources: Springer, Ashurst, ICLG, Hogan Lovells, Norton Rose Fulbright, White & Case