Another step towards a lender-friendly environment, but the new form of pledge is being delayed

The Italian Parliament passed law No. 155 of 19 October 2017 to delegate the Government to reform the rules on insolvency and financial distress. This has been commented widely in the press and between commentantors, as it is expected to bring about significant developments (we have previously reported here).

What has received less attention, is that the law also mandates Government to reorganise the system of legal priorities (privilegi), i.e. the rights of preference set out at law for given claims to have preference over other creditors. Further, the delegation includes the authority to introduce a form of non-possessory security over moveable assets.

The system of priorities gets a makeover

Italy has a complex web of legal priorities, set out in the civil code, the navigation code and countless other special laws. There are general priorities (covering all of a debtor’s assets), and special priorities (limited to particular goods), and the rules differ between priorities over real estate and moveable assets.

Generally, a privilegio on moveables will rank junior to a claim secured by a possessory pledge on the same goods, but priorities over real estate are senior to claims secured by a mortgage (ipoteca) on the same assets. And in each case, the general rules are subject to any special rules governing those priorities prescribing otherwise.

Lenders usually accept that these priorities are carved out of negative pledge and pari passu terms, but in fact it may require substantial due diligence to get to the bottom of exactly which claims rank prior to a given (secured or unsecured) payment claim vs an Italian business.

The other concern with the current system, is that many of the existing priorities are outdated, with some even dating back to the pre-republican civil code of 1865. These include liens for “funeral expenses” or “care, food and lodging in the last six months of life” of a debtor, or claims for the supply of seeds and fertilisers for agriculture. The civil code even allows hotel managers to retain the guests’ personal possessions to secure the payment of room charges, food and beverage.

The only guideline in the delegation is that Government should aim at reducing the number of general and special priorities, and clamp down on ‘retentive’ priorities, i.e. those that allow the creditor to hold the charged asset until the debtor discharges the secured claim, consistently with the developments in non-possessory security (which we address below).

While Government is granted wide discretion to implement the mandate, we hope that it will consider the case of the special lien under article 46 of the Banking Act. Unlike most other priorities, this is created by voluntary agreement between the debtor (or another chargor) and the lenders, and is a common fixture of specialised financing transactions in Italy. It requires a notarial deed in Italian, and registration with the court having jurisdiction over the chargor, or the charged assets. Sadly, this charge is only available (a) for the benefit of licensed banks, (b) to secure medium and long term financings (i.e. for a term in excess of 18 months), made available (c) to an enterprise (impresa). Commentators regard this charge as an exception to the general principle that priorities arise by operation of law, and hence its scope is to be construed narrowly.

The scope of the charge under article 46 of the Banking Act has been extended somewhat in 2013, and now it can be put in place to secure certain medium-long term debt notes issued by Italian companies. However, one does not follow why this security should not be available e.g. for non-bank lenders, or other forms of financing. After all, this is the only security available in Italy to charge moveables that won’t require the chargor to deliver the charged goods to the creditor (or an independent custodian), until the new non-possessory pledge comes into force.

Non-possessory… déjà vu

We were slightly baffled that the new law mandates Government to legislate on non-possessory pledges, because this is precisely the subject matter of law decree 59/2016 which Government enacted last year, and which Parliament converted into law, as reported here. Market participants were only awaiting the secondary legislation to put in place the centralised digital register for filing, and the inclusion in this new law means that there will be an opportunity to perfect this security further… and a few more months to wait until it can be effectively deployed.

Of the many recent changes in the law of Italian security interests, this is the one that has received more attention from the lending community, and reactions to last year’s measures were broadly positive. At first glance, the guidelines given to Parliament on the non-possessory pledge go in the same direction as last year’s rules. The delegation now includes measures for the protection of consumers, and third parties acquiring rights on the pledged goods in good faith. The law is not specific on the forms and procedure for registration, although it confirms that this will involve a digital register, publicly accessible on-line.

The new law does not specify whether the non-possessory pledge can be created by all, or only by registered businesses (imprenditori), and only over the assets related to the business, as is the case under last year’s rules. Also, it is not specified whether the register will be held by the Tax Agency (as dictated in last year’s rules), although this seemed a reasonable choice given that this authority is already responsible for the registers on land and buildings.

Of course law 155 only sets out a delegation, and there is little benefit in speculating what will be addressed and how. We can only hope that this second opportunity for consultation will allow Government to address potential interferences with the general Italian rules on security and the ranking of obligations, and reduce coordination problems down the line.