Proposed changes in Italian law mean that it should become easier to create certain types of security in Italy and to recover debt. The relevant law is Decree-law no. 59/2016 (“Urgent provisions on insolvency and executive procedures’’) which came into force on 4 May 2016 and which should be converted into binding law by early July.

The main changes introduced by the Decree are as follows:

  1. the introduction of a “pledge without possession”, a new type of security which has some similarities to an English floating charge; and
  2. banks and other entities authorised to lend to the general public can now secure their loans to enterprises by a form of security which transfers real estate to the lender upon a default.

It’s important to note that changes to the Decree may be made to its provisions prior to conversion into binding law.

The pledge without possession

Article 1 of the Decree provides that enterprises registered on the Italian Companies’ Register can create a pledge without possession to securing business loans. The relevant loans can be either current or future advances provided the maximum secured amount is indicated in the pledge.

A pledge without possession can be registered only on movable property with a designated business use (such as industrial machinery). Registered movable assets (for example, cars or other vehicles registered in the name of the enterprise) are excluded from the scope of this security. The pledge can be over present or future-acquired property with the secured assets identified by reference to product categories or with a reference being made to an overall asset value. It is not necessary to identify each individual asset at the outset.

A pledge without possession is designed to allow a business to continue running despite the existence of the security. In particular:

  1. unless the pledge agreement states to the contrary, the grantor of the pledge is allowed to sell, transfer or otherwise dispose of the pledged property; and
  2. the pledge will attach automatically to any resulting disposal proceeds or replacement assets purchased with those proceeds.

A pledge without possession must be created in writing and the pledge agreement must :

  1. identify the creditor, the pledgor and (if different) the debtor;
  2. describe the pledged property and the loan/credit which is being secured; and
  3. indicate the maximum secured amount.

Failure to include the above details may result in the pledge being void. In order for the pledge to be validly perfected, article 1, paragraph 4, of the Decree provides that the pledge must be registered (such registration having a 10-year validity, subject to renewal) in a register kept by the Italian Tax Authority (Agenzia delle Entrate). The operation of this register will be subject to regulations to be issued by the relevant Italian ministries within 30 days of the Decree becoming law.

A pledge without possession, even if registered on a prior date, will not take priority over any lender which financed the purchase of a specific business asset subject to reservation of title on the same asset or where the asset is subject to a pledge with possession.

As for the enforcement of a pledge without possession, if the relevant requirements are met, the Decree provides that the creditor may (if prior notice is served on the pledgor and on any creditors secured by pledges without possession registered on subsequent dates):

  1. sell the pledged property via an auction or competitive sale process (therefore, without the need for specific judicial procedures), subject to obtaining expert appraisals as to value and ensuring adequate publicity. The creditor can deduct the amount he is owed from the sale proceeds and transfer any balance to the debtor;
  2. enforce the relevant debt up to the secured amount specified in the pledge agreement;
  3. if a power to lease is provided for in the pledge agreement and in the relevant security registration lease the pledged property. The rent can be used to discharge the secured debt, provided that the pledge agreement contains criteria for setting rental values; or
  4. if provided for as a remedy in the pledge agreement and in the relevant security registration (and provided the pledge agreement contains an appropriate framework) repossess the pledged property.

The debtor may, however, raise an objection to a proposed sale, leasing or repossession if any of the conditions mentioned above are breached and will be able to bring a court action to recover any loss suffered as a result of such a breach.

The transfer of real estate as security

Article 2 of the Decree adds a new article to Italy’s Consolidated Banking Law. This allows banks and other entities authorised to lend to the general public to take security from an enterprise in the form of a conditional transfer of real estate or an interest in real estate. The relevant condition triggering the transfer to the lender (or one of its affiliates) is a default by the debtor. Certain types of property are excluded from the scope of this security, including any house which is the main residence of the owner, his spouse or other close family members.

This new type of security is available for pre-existing loans as well as loans entered into after the date of the Decree. It can be used even where the relevant real estate is already subject to foreclosure proceedings. Some key features to note regarding the enforcement process are described below:

  1. Default by the debtor – this is deemed to occur when the debtor fails to pay for more than six months from the due date (the exact calculation depending on the type of repayment schedule) before enforcement;
  2. Notification -- the creditor must notify inter alios the debtor and (if different) any owner of the relevant real estate of his intention of enforcing a conditional transfer;
  3. Expert appraisal - 60 days after the notification referred to above, the creditor may request the appointment, by the President of the Court where the real estate is located, of an expert for the appraisal of the property’s value. Notice of the outcome of the appraisal must subsequently be given to the addressees of the notification (who may raise an objection not affecting the enforcement of the condition transfer by the creditor but having impact of the balance (if any) to be paid to the debtor only);
  4. Expert appraisal - 60 days after the notification referred to above, the creditor may request the appointment, by the President of the Court where the real estate is located, of an expert for the appraisal of the property’s value. Notice of the outcome of the appraisal must subsequently be given to the addressees of the notification (who may raise an objection not affecting the enforcement of the condition transfer by the creditor but having impact of the balance (if any) to be paid to the debtor only);
  5. Transfer - a notarial deed is produced confirming that the triggering condition has occurred and the real estate register is updated, showing the definitive transfer of ownership of the real estate to the creditor.

Specific provisions have been provided for by the Decree with the purpose to allow the implementation of a conditional transfer even where a foreclosure or bankruptcy proceeding is pending with reference to the relevant real estate asset or its owner.

The Decree provides for the creation of an electronic register for logging forced sale proceedings regarding real estate and insolvency/debt management proceedings. The new register will be maintained by the Ministry of Justice and a specific section of the same will be searchable by the general public.