Recent key reforms have been brought to Italian Law by Law Decree no. 59 of 3 May 2016, which is already in force although it will require formal conversion into Law within 60 days in order not to lose its validity.
Among the provisions of the Law Decree, of particular relevance are the introduction of a new type of floating charge, namely “non-possessory pledge”, and the possibility for the lender to appropriate the secured property in case of continuing default by the borrower.
1. “Non-possessory pledge”
The “non-possessory pledge” introduced in Italian legislation by art. 1 of the Law Decree offers to banks and financial intermediaries the possibility to obtain, as security for loans, a pledge over existing or future, identifiable assets of the debtor (or third party guarantor), which does not require the dispossession of the latter (or third party pledgor).
If provided for by the contract, the owner of the assets secured by the pledge may dispose of said assets, even selling them, although in such case the pledge will be transferred over the consideration obtained by the sale or over the replacing asset(s) purchased by the pledgor with the consideration of the sale.
The pledge must be agreed in writing through specific contract providing details of the creditor, the debtor and the pledgor, the description of the pledged assets, the secured credit and the maximum guaranteed amount. The creation of the pledge is perfected through recording in an ad hoc register hold by the Tax Authority. The registration has a ten-years renewable validity and is enforceable to third parties and bankruptcy proceedings.
Upon occurrence of an event causing the enforcement of the pledge, the creditor is requested to inform in writing the debtor (and the third party pledgor) and any possible pledgee resulting from subsequent registrations. Compared to the enforcement of the “traditional” pledge provided for by Italian Civil Code, the notice apparently must not be sent through a bailiff and the 5-days’ grace period for starting enforcement shall not apply.
The enforcement allows the creditor to have the pledged assets sold through competitive procedures based on an estimate of the assets made by expert appraisers, which may be appointed by mutual agreement between the creditor and the debtor or by the judge. The creditor will retain the sums obtained by the sale up to the amount of its credit and pay the difference to the debtor/pledgor.
Further enforcement procedures are granted to the creditor by the Law Decree, namely:
- lease of the pledged assets, whereby the creditor will apply rentals against repayment of its credit;
- appropriation of the pledged assets by the creditor, whereby the latter will apply the value of the asset against repayment of its credit.
The mentioned further enforcement procedures apply only if a specific clause in relation thereto is inserted in the contract creating the non-possessory pledge, and that such clause is registered in the companies’ register.
Also, the contract must provide for criteria and procedures for the evaluation of the rentals due for the lease of the pledged assets and/or for the assessment of the assets value in case of appropriation. In lack of such provisions, the debtor is entitled to seek damage, though the relevant action must be started within a strict 3-months’ time.
It is worth mentioning that the non-possessory pledge may be enforced by the creditor even in case of pledgor’s bankruptcy, provided that the credit has been fully admitted as privileged credit in the bankrupt’ liabilities pot.
The lack of dispossession of the pledged assets should entitle the debtor/pledgor to create multiple pledges over the assets, having the same or a different ranking.
2. Assignment of properties to the creditor
Art. 3 of the Law Decree introduces the new article 48 bis to the Legislative Decree no. 385/1993 (Consolidated Banking Act), allowing banks and other entities entitled to grant loans, to obtain, in case of default by the borrower, the appropriation of the property given as security for the loan by the borrower (or the third party security provider).
The appropriation may be agreed for all loans entered into following to the approval of the Law Decree, and also for existing loans, by means of specific amendments to be made by notarial deed.
Default of the borrower entitling the appropriation of the property by the lender requires a default of payment which is continuing more than six months; where the loan provides for monthly repayments, the six-months’ period runs from the expiry of at least three unpaid installments, even not in a row; if the loan provides repayments through installments due every two months or more, the six-months’ period runs from the expiry of each single installment.
The provision under discussion may be agreed only for loans granted to companies and not where the property serves as domicile of the owner, his spouse or strict relatives.
Upon breach of contract by the borrower, the lender must notify the latter (or the third party security provider) and other parties holding registered rights over the same property, with a declaration stating the intention to appropriate the property. Following 60 days from such notification, the president of the competent court shall be asked to appoint an expert to estimate the property.
Once the estimate value is communicated to the lender, the borrower (and the third party security provider, if any), the condition precedent to the appropriation is deemed automatically satisfied and the property will pass to the lender, who must pay to the borrower the difference, if any, between its credit and the estimated value of the property.
If the borrower (or the third party security provider) files opposition against the estimated value, the appropriation process is not suspended and the borrower could only be entitled to get a higher amount if the opposition is successful.
In the event that the property is subject to an enforcement procedure, the secured lender may in any case obtain the appropriation of the property, by filing an application in the enforcement procedure and paying the difference between the estimated value of the property and the amount of its claim, if any.
3. Further amendments related to enforcement procedures
The Law Decree introduces amendments to enforcement rules, also in relation to the direct assignment of the distrained property in favor of the requesting creditor, in case the property is not sold due to deserted auctions.
The creditor who obtained the assignment of the distrained property is now entitled by the new art. 590 bis of the Italian Civil Procedure Code introduced by art. 4 of the Law Decree, to name a third party within the 5 days following the assignment who will become the transferee of the property.
Furthermore, Article 596 of Italian Civil Procedure Code has been implemented providing for an interim distribution to creditors of the sums obtained in the enforcement procedure, which shall not exceed 90% of the sums to be paid to creditors. The aim is to accelerate the procedure.
The measures of the Law Decree favorable to creditors are further enhanced by provisions stating that debtors are no longer entitled to file oppositions to enforcement procedures after the creditor files an application for the sale or assignment of the distrained property.
Such provision does not apply where the debtor proves that the opposition is based on new circumstances or if is proved that he had no chance to file prompt opposition for reasons not ascribable to himself.
Finally, the Law Decree has amended art. 648 of Italian Civil Procedural Code related to opposition to payment injunctive orders. If the opposition is not based on written evidence and is not of immediate solution, the Judge is obliged to grant immediate enforceability to the payment order pending the opposition, whilst previously that was a mere discretion.
4. Amendments to bankruptcy law
The Law Decree provides for also minor amendments to bankruptcy law, basically aiming at simplifying the procedure. The hearing set forth for the examination of the liabilities of the bankrupt company, as well as the hearing for the examination of the composition with creditors plan, may be held through electronic means.
In addition, the receiver and the judicial commissioner and liquidator are now entitled to access public electronic records/data bases in order to identify assets owned by persons/entities owing debts to against the bankruptcy or composition with creditors procedure.
5. Special fund for the investors of the italian insolvent banks
The Law Decree establishes a special fund in protection of the bondholders of the four Italian banks recently declared insolvent: Cassa di Risparmio di Ferrara, Banca delle Marche, Banca Popolare dell’Etruria e del Lazio, Cassa di Risparmio di Chieti. The financial coverage resulting by the Law Decree amounts to Euro 4.3 mio. for 2016, 3.6 for 2017 and 3.5 for 2018.
Bondholders are entitled to request the fund a lump-sum compensation, set forth by the Law Decree, provided that certain conditions are met.
In order to access the fund it is necessary that:
- bonds have been purchased prior than 12 June 2014;
- the assets of the bondholder are lower than euro 100,000;
- the gross income of the bondholder in 2015 was lower than euro 35,000.
The compensation is equal to 80% of the amount paid for the bonds covered by the fund, net of charges and expenses for their purchase and of the difference, if any, between the bonds’ yeld and the yeld of long-term State bonds of same duration.
The request for compensation shall be addressed to the fund by bondholders within four months from the date of conversion in Law of the Law Decree, and the fund shall calculate and pay the compensation within 60 days.
As an alternative, bondholders may resort to the arbitration procedure provided for by Italian Law 208/2015, which is also applicable for claims of investors which purchased bonds issued by the mentioned four banks following 12 June 2014.