BANKRUPTCY IN ITALY: Before turning to the text of the Italian Bankruptcy Law, it seems appropriate
to reflect briefly on the profound changes that have been progressively introduced by Parliament since 2005. The bankruptcy law’s very basis, and its philosophical point of view have
been radically transformed in order to adapt to changing economic and historic circumstances.
Traditionally, the law was directed at punishing those entering into bankruptcy for their bad
faith behavior and breach of market rules; i.e. for failing to honor their obligations. The bankrupt was expelled from society and deprived of his civil capacity – a morte civile or civil
disenfranchisement. The law as it historically stood did not envision those situations where
the businessman was “honest, but unfortunate” or provide the leeway necessary for the exercise of business judgment in the running of an enterprise. Bankruptcy as a punishment, not
as a tool for coping with economic factors often beyond our control, was the product of the
unique economic and political circumstances that dominated Italy when the law was enacted
on March 16, 1942.
Over time the circumstances underlying the law’s approach slowly disappeared as society became ever more industrialized. The structural
changes in the economy that accompanied it clashed with bankruptcy rules developed and
intended for the predominately agricultural economy that existed during the first half of the
last century. This scenario, from a subjective point of view, is then inserted in an objective
context that has completely changed over the intervening 60 years. Globalization, and ever
bigger and unstable markets, steeper competition, products that rapidly become obsolete and
a society bombarded by advertisements have necessitated modification in the Italian bankruptcy law. The incompatibility of the law with the facts and developing international practice required a Copernican revolution of the very basis of bankruptcy in the Italian legal system by issuing a series of innovative reforms to overcome – through procedures allowing
for agreements between creditors and debtors – obstacles that the lack of liquidity introduces
into the relationship between employees, suppliers, creditors and businesses.
The work of modernizing the law moved the process’ center of gravity from one focused on judicial proceedings and court control to one that involved all interested stakeholders, including the “piano attestato”, or in more complicated situations, restructuring plans
and the “concordato preventivo“. In more recent times (October 2012), the automatic stay
was introduced to protect the value of the whole business when timely action is taken to avert
the crisis by filing for bankruptcy protection in order to obtain the time necessary to enter
into a restricting plan or “concordato preventivo“. All these procedures involve the debtor
reaching some form of an agreement with creditors. Under the old system, a judge would
oversee the proceedings with the assistance of a trustee who operated much as the court’s
right hand or executor. Following the reform, the proceedings are now entrusted to a team
composed of a trustee and a creditors’ committee who work in tandem to protect the interests
of the creditors and the procedure as a whole. In those cases where the sole goal of the proceedings is to liquidate the bankruptcy estate, the trustee and committee develop a liquidation
plan designed to transition the estate’s assets back in to the market. The judge still has a role
to play in this system, however he or she adopts a less visible role only intervening in those
cases where disputes arise or the creditors’ committee is not timely formed or some extraordinary activities have to be authorized such as settlements, special agreements etc.
Moving from a “judge-centered” to a “stakeholder-centered” model was dictated by
another related change: the move of the judicial system as a whole from a formal procedural
model to one based on the will of the parties. This change was induced by a desire to remove
formal barriers to resolving the economic crisis of the entity entering bankruptcy. The new model took inspiration from other systems and implemented a process that includes that possibility of concluding settlements, debt restructuring agreements and other arrangements with
creditors. A single philosophical line of thought runs between all these “therapeutic” mechanisms: they are designed to forward an economic purpose by sanitizing the enterprise in crisis
and transition its assets back into the market as quickly as possible. The new law promotes
agreement and supports it by employing a flexible and informal system. Accordingly, those
actions taken in pursuance of any approved agreement will be protected from third party challenges.
In many ways the reforms have brought about a “futuristic” system where the interests
of the creditors and the debtors can be merged in a “New Co.”, a new company, to which the
task of overcoming the crisis is entrusted. This includes the conversion of debt into equity,
or the application of “put and call” selling, or protecting a company while it weathers the crisis, or debt restructuring so as to allow more time for payment or alternative methods thereof.
The reform was also influenced by other public interest considerations. One such important factor was the cost associated with the judicial management and coordination of bankruptcies. Considerable public resources are required for the court system to oversee and
manage multidisciplinary proceedings such as the liquidation of a company or its administration while agreements are made with creditors. Every judge who essentially becomes a
company’s administrator is another not sitting in other cases where delegated administration
is not possible.
The requirements for admission to the bankruptcy procedure have also worked to keep
in check the number of cases that can be filed before the courts by permitting only those cases
that are of sufficient economic weight. The new law looks to defend the economic value and
production capabilities by finding an agreement between all the stakeholdersto put the enterprise
back in motion, to provide a “fresh start” and allow the entity to overcome the crisis. The philosophy animating the new bankruptcy law no longer revolves around an interest in the punishment of the bankrupt and the liquidation of his assets, but one that seeks to protect the public
interest in a functioning economy saving and maximizing the value of the enterprise.
Today, bankruptcy finds its greatest value through the system’s ability to provide a
discharge of debt. A bankrupt who understands early on that he is headed toward insolvency
and that collaborates with the system, by placing all the company’s future revenues at the disposal of the bankruptcy proceedings, can under the terms thereof liberate himself from unsatisfied creditors at the end of the liquidation proceedings. Discharge, a new fresh start for
the debtor, is made possible in light of the authoritative jurisprudence of the Court of Cassation. The actual criteria established by the Supreme Court require a case-by-case evaluation
to be made by the court to ensure greater fairness and a more realistic result.
Bankruptcy is an unfortunate part of any healthy functioning economy. The role of
the law in such circumstances is to provide a mechanism by which the public interest is best
served, that is to say, that secures the timely recovery of the economic assets involved so that
they may continue to contribute to the general welfare. The Italian Bankruptcy Law as modified in 2012 attempts to strike the right balance between favoring the continuing concern
and not sheltering those economic actors who abuse the system to the detriment of society.
The historical origins of the law are still apparent in its structure, however, no system will
ever be completely divorced from its past. The reforms have attempted to keep the best of
what came before while adapting to new challenges.
The systematic reforms discussed above are the reason I felt it opportune to offer an
English translation of the Nuova legge fallimentare, the new Italian bankruptcy law. The reforms have brought about a modern, efficient and effective system that is attuned to the market
and the capable of coping with economic ebbs and flows. While it is not perfect, the new law
is a fine tool for providing answers to the questions that any investor or creditor asks during
bankruptcy: When and how much of my investment/claim will I recover? and how much will
it cost me? The reformed Italian law ensures needed predictability to the response to these
questions.

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