With judgment No. 10105 of 9 May 2014, the Italian Supreme Court of Cassation ruled that trusts can be recognized in Italy, when the settlor is insolvent, only if they are consistent with the purposes of the procedure.

The Case

An Italian company which was declared bankrupt by the Court of Rome, filed an appeal arguing that it could not be considered insolvent, because it had previously established a trust for the purpose of liquidating its own corporate assets, and that such a trust could not be held unlawful, as the Court did.

The Issue

The Supreme Court faced the issue of the recognition of liquidating trusts in the Italian legal system. Trusts, which originated in common law legal systems, were recognized in the Italian legal system following the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1 July 1985 (the Convention) implemented in Italy with Law no. 364 of 16 October 1989 (Law 346/1989). Article 13 of Law 346/1989 prohibits the recognition of trusts in all cases in which they can be considered as fraudulent, abusive or have effects that cannot be granted protection under the Italian legal system.

Then, the Court of Cassation examined the issue with specific reference to the insolvency status of the settlor and principles of Italian insolvency law.

The Court Ruling

Recalling the function of the specific trust –that of “establishing a separation of assets in order to satisfy the interests of the beneficiary or continuation to a given end” – the Court clarified that the concrete aim of the transaction must be assessed, considering three different scenarios.

The first scenario is that in which the trust works as an alternative to voluntary liquidation of the company for the purpose of achieving, by other means, the result of selling the debtor’s assets, discharging all liabilities, distributing any residual amounts and cancelling the company. In such a case, an argument may be raised that the trust should not be recognized in the Italian system, as it does not offer any advantage with respect to alternatives available under Italian domestic law. In this respect, the Court noted that “it does not appear that the [Italian] system imposes this limit”, considering that Italian insolvency law recognizes some degree of autonomy to the parties even in curing companies in distress.

The second scenario is that in which the trust is created within an insolvency procedure as an alternative means of achieving its purpose which is to cure the financial distress of the company by liquidating the assets of the debtor under the control of the Court and of the creditors (know as an “endo-concorsuale” trust).

The third scenario is that in which the trust replaces insolvency proceedings thus hindering the relevant officers to take control of the debtor’s assets (known as an “anti-concorsuale” trust). In this scenario the trust cannot be recognized because it is in contrast to public interests aimed at protecting creditors and in particular their equal treatment (par condicio creditorum): insolvency procedures cannot then be superseded by a trust which does not ensure such protection to creditors.

The court faced then the issue of the consequences arising from such contrast to principles of the domestic legal system. In this regard, the provision of article 15 of the Convention provides that the Convention itself cannot constitute an “obstacle to the application of the law determined by the conflict of laws rules of the forum”, and further provides that “if the provisions of the preceding paragraph are an obstacle to recognition of the trust, the judge shall seek to implement the aims of the trust in another manner”. The Court of Cassation stated that such a provision allows local Courts to refuse recognition of the trust when the debtor was insolvent at the time when the trust was set up. As a consequence, the trust will have no legal effect in the Italian legal system. Accordingly, the bankrupt receiver can disregard the trust and seize all the assets assigned to the trustee.


The reasoning of the Supreme Court is driven by consideration of the aim of the parties in setting up the trust, in order to evaluate whether the settlor is seeking to deprive the creditors of protection to which they are entitled (by means of diversion of the debtor’s assets) or allows, by contrast, for the liquidation of the assets under the control of the Court and of creditors within an insolvency procedure.

This allows room for trusts to be recognized in the Italian legal system, when the settlor is insolvent, as far as the trust can be considered consistent with the aims of insolvency procedures, e.g. when a trust could serve the purpose to isolate certain assets for the benefit of a specific class of creditors, whose interests are recognized by the Insolvency Court as different from those of others.