With the judgment No. 25162 of 7 December 2016 the Court of Cassation refers the expression set forth in Art. 67, third paragraph, a) of the Italian Bankruptcy Law to the custom between the parties of the specific commercial relationship and not to the wider use of trade

The case

An insolvency receiver sued a former supplier of the bankrupt company, requesting the claw-back of payments made by the company.

The Court in the first instance rejected the claim due to the exemption from claw-back set forth in Art. 67, third paragraph, a) IBL and, in particular, ruling that payments (made in cash at the warehouse of the supplier) were made «on usual terms» as they were complying with the rules of the trade in the specific commercial sector.

In the second instance, the Court of Appeals reversed the decision and clawed back the payments, ruling out that the exemption could apply: according to the Court, indeed, although complying with the use of trade, payments could not be considered «on usual terms» because they did not comply with the modalities consistently followed in the past by the parties in their own commercial relationship (which were delayed payments by bank transfer).

The issue

The issue, which led to contrasting positions in case law and among commentators, is whether payment «on usual terms», for the purposes of exemption from claw back, means only the custom between the parties, notwithstanding the use of trade, or if, to the contrary, it should always be taken into consideration in the sense that a payment cannot be considered «on usual terms» whenever the parties do not comply with the use of the trade.

The decision of the Court

The Court of Cassation stated the following principle of law: «reference by Art. 67, third paragraph, a) IBL to usual terms, for the purposes of exemption from claw-back of payments of goods and services in the ordinary course of business, relates to the specific modalities of payment in the relationship between the parties and not to the use of trade in the economic sector » and this for two reasons:

• because otherwise this set of facts would be equated to that taken into consideration by Art. 67, first paragraph, No. 2, IBL, which provides for the claw-back of payments made with means different from those which are ordinary;

• because this is the only construction consistent with the rationale of the law, i.e. with the aim to prevent the risk that a distressed business be isolated by its own suppliers, who instead should rely on a continuing safe relationship with the distressed business as long as they do that under «normal» terms, without having to change the terms of their relationship so far and, for this very reason, running the risk that payments received could be clawed back.

Commentary

The decision of the Court supersedes case law of lower Courts which construed the expression «on usual terms» making reference to the use of trade in the commercial sector in which the parties operate (see, e.g., Court of Milan, 1 March 2013; Court of Monza, 24 April 2012; Court of Turin, 4 May 2010). The Court of Cassation backs instead a different case law according to which the personal element relating to the custom between the parties should prevail, and in any case no reference to the use of trade should be made (see, e.g., Court of Salerno, 18 June 2013; Court of Marsala, 24 June 2011).

The Court considers this interpretation more consistent with the aim of the law to preserve the business as a going concern by avoiding that suppliers stop further deliveries thereby further increasing the state of distress. The Court prefers a personal approach based on the prior relationships between the parties to a more «objective» approach based instead on the rules of the wider trade sector, in order to avoid that the risk of claw-back become itself an accelerating factor leading to insolvency of an already distressed business.

The uncertainty on the meaning and scope of the exemption does in itself, clearly, frustrate the aim of the law: the decision of the Court of Cassation brings therefore with itself the benefit of a clear guidance to dealers and practitioners.

In the merits one can consider that this interpretation may lead to the conclusion that the custom between the parties shall prevail also when it is contrary to the very same terms originally agreed by the parties, e.g. with reference to due dates (see Court of Rome, 7 January 2014, which granted the exemption from claw-back in a case of a custom of late payments between the parties).