In its 2005 report titled "Restructuring and Insolvency in Italy," the firm Gianni, Origoni, Grippo & Partners indicates that Italy's insolvency system usually favors creditors over debtors. Several articles, acts, decrees and laws govern insolvency and liquidation in Italy. The Insolvency Act of 1942 was amended by Decree-Law 35 of 2005 and subsequently became Law No. 80 of 2005 leading to the introduction of several important reforms. The new act, according to the International Monetary Fund's 2005 Article IV Consultation, simplifies insolvency procedures, offers access to the procedures at an early stage, emphasizes the roles of reorganization procedures, and introduces the possibility for debtors to negotiate out of court restructuring agreements. According to a report prepared for the European Commission in 2003, as of 2002, in Italy 15 of the 41 Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank were fully adopted, 11 were almost fully adopted, 10 were partially adopted, and 5 were not adopted.

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 prepared for the European Commission 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.

In its 2005 report titled "Restructuring and Insolvency in Italy," the firm Gianni, Origoni, Grippo & Partners indicates that under Italy's insolvency system, creditors are usually favored over debtors, hence priority is 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 compulsory administrative liquidation where a company is liquidated and removed from the market as a result of its insolvency; (2) controlled administration and composition with creditors which attempts to avoid bankruptcy of a company in financial distress; and (3) extraordinary administration which allows for the financial restructuring of a company in trouble. Of all three procedures, bankruptcy is the most frequently used as controlled administration and composition with credits often fail to prevent an entity from going bankrupt, and the extraordinary administration approach is rarely used. The current insolvency framework contains various flaws including, among other things, the high cost of the process which is paid for from the assets; long proceedings, at times exceeding seven years; the absence of a flexible legal procedure to restructure insolvent entities; and outdated sections in the Insolvency Act.

Several articles, acts, decrees and laws govern insolvency and liquidation in Italy. Insolvency and liquidation in Italy, according to Gianni, Origoni, Grippo & Partners, are governed by Articles 2272 to 2283, Articles 2308 to 2312 and Articles 2484 to 2496 of the Civil Code, as amended by the Company Law No. 6 of 2003 on the liquidation of partnerships and companies. In addition, Article 2221 of the Civil Code, on insolvency of commercial traders; the Insolvency Act (Royal-Decree No. 267 of 1942), amended by Decree-Law No. 35 of 2005, which had been converted into Law No. 80 of 2005; and Decree-Law No. 270 of 1999 on the Extraordinary Administration of Large Insolvent Companies, as amended by the Marzano Law (Decree-Law No. 347 of 2003, ratified by Law No. 39 of 2004, and subsequent amendments) also provide guidance on insolvency matters in Italy.

The Insolvency Act of 1942 did not go through many reforms until the enactment of Decree-Law No. 35 of 2005, which subsequently became Law No. 80 of 2005 introducing crucial amendments. According to the IMF's 2005 Article IV Consultation, the introduction of Law No. 80 of 2005 which reformed the Italian insolvency system "favors an early access to the procedures by reducing the sanctions for the bankrupt debtor, reinforces the role of reorganization procedures, and introduces the possibility for debtors to negotiate, out of court, restructuring agreements to be submitted to the bankruptcy judge" (p. 4). Tersilla's 2005 assessment of Italy's reform of the Insolvency Act 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.

According to Gianni, Origoni, Grippo & Partners, the Marzano law's approach is to concentrate on corporate restructuring as opposed to liquidation of the debtor's assets. The Law is applicable to insolvent companies that satisfy the following criteria: minimum of 500 employees in the previous year and no less than €300 million in total debts. On the other hand, companies filing for corporate restructuring under Decree-Law No. 270 of 1999 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 Decree-Law No. 270 of 1999 or the Marzano Law, 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.

The World Bank's 2008 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% of the estate. Creditors recover, on average, 61.8 cents on the dollar. By comparison, member states of the Organization for Economic Co-operation and Development average 1.3 years, 7.5% of the estate in costs, and a recovery rate of 74.1 cents on the dollar.