Ministero della Giustizia

Last updated on 27 March 2020 by the Ministry of Justice

STARTING, RUNNING AND CLOSING A BUSINESS - INSOLVENCY PROCEEDINGS AND LIQUIDATION OF COMPANIES

 

INSOLVENCY PROCEEDINGS

Main procedures provided for by Italian law when an enterprise is in crisis

• arrangement with creditors;
• restructuring agreement;
• compulsory liquidation;
• extraordinary administration;

 

Difference between state of crisis and insolvency

The state of insolvency is the most serious and definitive state in the crisis of an enterprise which can only be temporary.

Insolvency is the condition of an enterprise that is no longer able to meet its obligations regularly and is indicated by such symptoms as breaches of contract, even if modest, absconding by the business owner, sudden cessation of activities, evictions, or issuance of bad cheques.

 

Enterprises subject to insolvency proceedings

Only business owners carry out a commercial activity.

 

Enterprises excluded from insolvency proceedings

• public bodies;
• enterprises struck off from the company register for at least 1 year;
• large enterprises (the rules for extraordinary administration apply to these);
• enterprises subject only to compulsory administrative liquidation on an exclusive basis (banks, purely mutual cooperatives);
• small business owners who do not exceed the statutory size thresholds.

 

Size limits defining small business owners not subject to insolvency proceedings

Small business owners not subject to insolvency proceedings are those who in the three years preceding the bankruptcy or arrangement with creditors have not exceeded one of the following size limits:

1. annual assets equal to or greater than EUR 300 000.00,
2. gross annual revenues equal to or greater than EUR 200 000.00;
3. debts including those still immature equal to or greater than EUR 500 000.00

Relevant legislation

• Article 2082 of the Civil Code
• Article 2195 of the Civil Code
• Royal Decree of 16 March 1942 No 267 (Bankruptcy Act)
• Legislative Decree of 8 July 1999 No 270 and Decree-Law of 23 December 2003 No 347 converted with amendments by Law of 18 January 2004 No 39)

 

Existence of any insolvency/illiquidity tests resulting in obligations for debtor companies and directors

Companies and directors of debtors must consider the concept of insolvency and take into account:

• the situation of structural and non-transitory inability to satisfy the obligations assumed by the company regularly and with normal means;
• the lack of liquidity and credit conditions necessary for continuing in business;

The valuation has a prospective nature and must take all the enterprise's liabilities into account – both those already due and those still to mature.

The judgment is not limited only to the difference between assets and liabilities but must carefully consider the enterprise's ability to meet its liabilities with normal means.

If the director, even de facto, has carried out seriously imprudent operations to delay bankruptcy or has aggravated his own failure by knowingly refraining from requesting the declaration of his bankruptcy he commits the offence of reckless bankruptcy.

Imprisonment of 6 months to 2 years is provided for this offence if the business owner is declared bankrupt.

Conviction entails being disqualified from running a commercial enterprise and being banned from being a director in any company for up to two years.

The Crisis and Insolvency Code has changed some rules in the Civil Code regarding directors' liability and these amendments came into effect on 16 March 2019.

A business owner running a business as a company or partnership has the duty to:

1. establish an organisational, administrative, and accounting structure that is suitable for the company's nature and size as well as for the timely detection of its crisis and loss of its ability to continue in business;
2. to take action without delay to adopt and implement one of the tools the system provides for overcoming the crisis and continuing to operate as a going concern

Relevant legislation

• Article 5 l. Royal Decree of 16 March 1942 No 267 (Bankruptcy Act)
• Article 217 Royal Decree of 16 March 1942 No 267 (Bankruptcy Act)
• Article 2086 of the Civil Code

 

Which legislation determines the liability of directors in the event of charges owing to insolvency

The rules governing directors' obligations and duties are contained in the Civil Code (see also sector J10 sheets).

Subject to the official receiver's authorisation and having consulted the creditors' committee the liquidator takes legal action against

1. the directors, members of supervisory bodies, managing directors, and liquidators;
2. and the shareholders of limited liability companies in cases where the shareholders have taken decisions or authorised acts harmful to the company.

These actions are in the interests of all the company's creditors, which is why they are termed "class actions".

These are cases of liability:

• for bad management by the directors and therefore for any breach of duty made with intent or negligence of their obligations whether by statute or the articles of association;
• if they are in breach of their obligations to preserve the integrity of the corporate assets, which are no longer sufficient to pay the company's creditors in full.

The liability is joint and several (the directors are therefore all liable together) unless the functions are carried out in practice by one or more directors – in which case only those who have acted formally are liable.

The liquidator takes the various actions above both in favour of the company and in favour of its creditors.

In the latter case, the liquidator acts to ascertain the directors' liability in the event that they can be held responsible for failing to respect the obligation to preserve the integrity of the company's assets.

It should be noted that the Crisis and Insolvency Code has amended some rules in the Civil Code regarding directors' liability and these amendments already came into force on 16 March 2019, innovating some very important aspects of the rules on the liability of the managing body.

It now provides that the business owner is required to create (and is consequently liable in the event that the organisational structures are inadequate) ‘an organisational, administrative, and accounting structure that is suitable for the company's nature and size as well as for the timely detection of its crisis and loss of its ability to continue in business’ so as to ‘take action without delay to adopt and implement one of the tools the regulation provides for overcoming the crisis and continuing to operate as a going concern’ (Article 2086 of the Civil Code).

Furthermore, when the directors are found liable for not having ascertained in respecting the legal obligations that a cause for liquidation had occurred, in the event that they have taken harmful steps because not intended to preserve the integrity and value of the company assets, ‘except in case of proof of a different amount’, damages are ‘presumed to be equal to the difference between the shareholders’ equity on the date on which the director left office or, in the case of opening of insolvency proceedings, on the date this procedure is opened, and the shareholders' equity as determined for the date on which a cause for liquidation occurred as per Article 2484, less the costs incurred and to be incurred, according to reasonable standards, after the occurrence of the cause for liquidation and up to completion of the liquidation. If an insolvency procedure has been opened and the accounting records are missing or if due to their irregularity or for other reasons the net assets cannot be determined, the damage is liquidated to an amount equal to the difference between assets and liabilities ascertained in the procedure’ (Article 2486 of the Civil Code).

Relevant legislation

• Royal Decree of 16 March 1942 No 267 (Bankruptcy Act)
  • Article 146 Directors, managing directors, members of the supervisory bodies, liquidators, and shareholders of limited liability companies
• Civil Code
  • Article 2086 Management of the enterprise
  • Article 2476 Directors' liability and supervision by shareholders
  • Article 2486 Powers of directors
  • Article 2392 Liability to the company
  • Article 2393 Derivative litigation
  • Article 2394 Liability to company creditors
  • Article 2394 bis Litigation in insolvency proceedings

 

Who is entitled to act against insolvent persons, partnerships, or companies as a liquidator

The liquidator can take legal action against insolvent persons, partnerships, or companies with the official receiver's authorisation; he may act without such authorisation concerning disputes and late declarations by third parties of claims and rights over assets acquired in bankruptcy, in proceedings initiated to challenge the official receiver's or court's acts, and in any other case in which no attorney is required.

The liquidator cannot act as a lawyer in cases concerning bankruptcy.

• Royal Decree of 16 March 1942 No 267 (Bankruptcy Act)
  • Article 31 Management of the procedure

 

Who appoints the liquidators (creditors, courts)

The liquidators are appointed by the Court in the judgment declaring the bankruptcy or, in case of replacement or revocation, by court decree (Article 27 RD of 16 March 1942, No 267).

A national register is set up at the Ministry of Justice in which the provisions for appointing liquidators are inserted (and also of the other auxiliaries appointed in the other procedures: for example, in the arrangement with creditors the judicial commissioners and factors), the measures for closing the bankruptcy and approving the arrangement, as well as the amounts of assets and liabilities of the closed proceedings.

The register is kept electronically and is accessible to the public.

 

Who can be called to act as liquidator

1. lawyers, certified public accountants, book-keepers and accountants;
2. associated professional firms or companies, provided their associates have the professional requirements pursuant to letter a). In this case, the natural person responsible for the procedure must be designated upon acceptance of the assignment;
3. those who have performed administrative, managerial, and supervisory functions in joint stock companies and shown they have adequate business skills – provided no declaration for bankruptcy has been made against them.

The liquidators must have specific training acquired through specialist courses or training in the field of insolvency.

However, the following cannot be appointed as liquidators:

• the bankrupt's spouse, relatives and in-laws to the fourth degree,
• the bankrupt's creditors;
• those involved in the company's failure;
• those in conflict of interest with the bankruptcy;
• those who are linked by a relationship of marriage, civil union or de facto cohabitation, kinship within the third degree or affinity within the second degree with magistrates assigned to the judicial office of which the magistrate conferring the office of liquidator is a member, as well as those with a steady relationship with such magistrates (romantic relationship, close friendship).

The liquidators must file a declaration in which they declare that there are no reasons for incompatibility.

• Royal Decree of 16 March 1942 No 267 (Bankruptcy Act)
  • Article 27 Appointment of the liquidator
  • Article 28 Requirements for appointment as liquidator
• Legislative Decree of 6 September 2011, No 159 (Code of anti-mafia laws and preventive measures, as well as new provisions on anti-mafia documentation, pursuant to Articles 1 and 2 of Law No 136 of 13 August 2010)

 

To what extent and under what conditions can liquidators of another member state be appointed

Liquidators of another member state cannot be appointed.

The liquidator may make use, under his own responsibility and with the authorization of the creditors' committee (or official receiver) of assistants performing technical and specialist or executive functions and who act as an aid to the judge.

In the event of cross-border insolvency proceedings, Regulation 2015/848 in Article 7 provides that the law of the Member State in whose territory the proceedings are opened shall apply to the insolvency proceedings and their consequences.

The courts of the Member State within the territory of which the centre of the debtor's main interests is situated shall have jurisdiction to open insolvency proceedings.

The centre of main interests is the place where the debtor manages his interests in a habitual way recognisable by third parties.

The courts of another Member State also have jurisdiction if the debtor has an establishment in the territory of that other Member State, with effects limited to his assets located in the said territory (secondary insolvency proceedings).

In the event that secondary insolvency proceedings are opened, the administrators of the proceedings appointed by the judicial authority cooperate with one another and may conclude agreements or protocols as long as the collaboration is not incompatible with the rules that apply in the respective proceedings (they can exchange useful information, coordinate to elaborate restructuring plans for the debtor or for the management of the assets).

Relevant legislation

• Royal Decree of 16 March 1942 No 267 (Bankruptcy Act)
• Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings

 

How employee rights are managed (wages, holidays, pension contributions)

When the bankruptcy is declared the liquidator must withdraw from the employment relationship because the bankruptcy itself does not entail the dissolution of the relationship.

When the liquidator withdraws from the employment relationship, the withdrawal takes effect from the date of bankruptcy.

A worker may be included as a creditor for the purposes of the bankruptcy so as to claim wages and other indemnities accrued and not received up to the declaration of bankruptcy including severance pay.

After having been included as creditors – with definitive status – employees are entitled to obtain severance pay and their last three wages unpaid before the bankruptcy by applying for them from the INPS wage guarantee fund.

In the application to be included as a creditor, unpaid wages must be shown gross of withholding taxes (it is the liquidator who will make the deduction at the time the credit is paid) and net of deductions for social security. For further information on the procedure for being included as a liability, see the link to the Court of Turin judicial office.

Unpaid wages (which include overtime, allowance in lieu of holidays, allowance for lack of notice, etc.) and in particular those relating to:

• wages due, in any form, to employees;
• all indemnities due as a result of the termination of the employment relationship,
• sums owed to the worker for damages resulting from the employer's failure to pay compulsory social security and insurance contributions;
• money owed for compensation for the damage suffered as a result of wrongful or unfair dismissal

are senior and therefore paid before other debts.

The inflation adjustment is due, and has priority until the date on which the liabilities are declared to be enforceable.

Interest is also due on the sums accrued up to the date of filing of the distribution plan in which the creditors are satisfied even if only partially.

Relevant legislation

Royal Decree of 16 March 1942 No 267 (Bankruptcy Act)

• Article 72 Pending relationships

Civil Code

• Article 2119 Regulations for severance pay
• Article 2751 bis Credits for wages and commissions, credits of direct growers, cooperative companies or bodies and craft enterprises

Legislative Decree of 27 January 1992 No 80 (Implementation of Directive 80/987/EEC relating to the protection of employees in the event of the insolvency of their employer)

• Article 1 Guarantee of employment claims
• Article 2 Intervention by the Guarantee Fund as per Law no. 297, 29 May, 1982.

Law of 29 May 1982 No 297 (Regulation of severance indemnities and pension provisions)

• Article 2 Guarantee fund

 

Any special arrangements intended to facilitate insolvency proceedings for SMEs

Such agreements are not yet provided for in current national law. EU Directive 2019/1023 is being brought into implementation.

For non-bankruptable enterprises, Law 3/2012 provided for the institution of an agreement to settle the crisis which is based on a proposal to the debtors to restructure the debt by the insolvent business owner. For more information on the over-indebtedness crisis settlement procedure please consult the website of the Court of Turin

For the purposes of the Court's approval, an agreement has to be reached with creditors representing at least sixty percent of the debts.

Relevant legislation

Law of 27 January 2012 No 3 (Provisions regarding usury and extortion, as well as the settlement of over-indebtedness crises)

Section one – Procedure for settling the over-indebtedness crisis

1. General provisions
   • Article 6 Purpose and definitions
   • Article 7 Conditions of admissibility
   • Article 8 Content of the consumer agreement or plan
   • Article 9 Filing of the proposal
2. Agreement for settling the crisis
   • Article 10 Procedure
   • Article 11 Reaching the agreement
   • Article 12 Approval of the agreement

 

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