Extract taken from 'The Lending and Secured Finance Review' – edition 5

Credit support and subordination

i SecurityForms of security interests

Lending transactions are typically followed by a combination of security interests. Accordingly, Italian law offers a wide range of legal arrangements, meant to ensure the debtor's solvency. Security documents are invariably entered into in writing. In many cases, this is a legal requirement; in other cases, this is done anyway to prevent the guarantor from raising any questions about the existence of the guarantee. The most common forms of in rem security interests are privilege, pledge and mortgage.


In broad terms, the law grants a privilege over the generality of a debtor's movable assets or the debtor's specific assets in favour of a specific credit because of legal purposes and the nature of said credit. As a consequence, the person entitled to the credit is entitled to satisfy in priority compared with other creditors over the proceeds of a given asset (pre-emption right). A privilege also gives the creditor a right of subrogation and a right of retention.

The law establishes the order of different privileges on the same asset, and the relationship between privilege and mortgage, as well as the relationship between privilege and pledge.

Special privilege pursuant to Article 46 of the Italian Banking Act

This special privilege is a lien available to secure debt claims under medium or long-term loans (over 18 months) granted to entrepreneurs by banks authorised to carry on banking business in Italy.

A special lien can be granted by a written document (describing, inter alia, the assets over which the lien is granted, and the amount and terms of the secured loan) but will only be effective regarding third parties once the special privilege is registered in a special register kept in the clerk's office of the court of the place in which the borrower's registered office is located, and, as the case may be, of the place in which the third party granting the special privilege has its registered office.


Under Italian law, a pledge is a security on movable properties, which is normally perfected when the pledged asset is delivered to the pledgee, although the dispossession of the pledgor is not always necessary and can be avoid under certain conditions. A pledge may also be given by a third-party pledgor.

A pledge gives the pledgee a pre-emption right over the proceeds of the pledged asset but does not allow the pledgee to dispose of the pledged asset.

A pledge requires a written agreement, with the date certain at law.

Non-possessory pledge

A non-possessory pledge, which has been recently introduced in Italy, allows the pledgor, who is engaged in entrepreneurial activities, to keep hold of the pledged asset and continue to use it for business purposes. In this perspective, a link to the relating entrepreneurial activity of the pledgor is necessary for the pledge to be valid.

By keeping possession of the assets, the pledgor has the chance to transform, transfer or otherwise dispose of them. Accordingly, the pledge would extend to any asset resulting therefrom.

A non-possessory pledge agreement requires a written form and shall indicate a maximum secured amount. However, the pledge is enforceable regarding third parties only upon registration on an electronic register of non-possessory pledges, to be set up within the Italian Revenue Agency. The pledge, in addition, will rank according to the time of registration with the electronic register, except for a special derogation in favour of those pledges (ordinary and non-possessory) granted as collateral for a loan, which prevail over the non-possessory pledge previously registered.

Foreclosure proceedings are in this case far simpler than the ordinary proceeding described by the Civil Code, allowing the creditor to protect his or her rights in several ways.

Pledge over shares of a joint stock company

A pledge over shares is valid if granted by a written document bearing the date certain at law, which specifically describes the receivable and the shares covered by the pledge. The share pledge is perfected by either endorsing the share certificate by way of a pledge or by entering the pledge in the share certificate and, in either case, by entering the pledge in the shareholder's book.

Specific rules apply to pledges over dematerialised shares.

The voting rights in the pledged shares are transferred to the pledgee on execution of the pledge. However, it is open to the parties to agree otherwise.

Pledge over quotas of a limited liability company

Under Article 2471 bis of the Civil Code, a debtor may grant a pledge over a limited liability company, namely a pledge over the rights of a quotaholder corresponding to its quota interest in the company. Quota pledges are granted by a notarised private writing and are perfected by entering the pledge in the Register of Enterprises and, where relevant, in the quotaholder's book. The legal regulation of voting rights is basically the same as for a pledge over shares of a joint stock company.


A mortgage over real property gives the lender a right to foreclose on the specific property made liable to secure its identified claim, even against a third-party transferee; and a preference in being paid from the proceeds of the foreclosure. Mortgages will have different rankings, depending on the date of registration. A mortgage may also be given by a third-party mortgagor. A mortgage may also be granted on assets that the mortgagor does not currently own (in this case, the mortgage can be validly perfected only upon acquisition of the asset by the mortgagor) and on future assets (in this case, it can be validly perfected only upon the asset coming into existence).

A mortgage may be granted by either a unilateral deed or a bilateral agreement. In any case, the mortgage deed must be made in the form of a public deed or a written document with signatures certified as true by a notary public or other authorised public officer. If these formalities are not followed, the mortgage cannot be registered and therefore is not validly created. The instrument granting a mortgage must specifically designate and describe the immovable property involved and the secured amount.

The mortgage is perfected (for 20 years and subject to further renewals) and enforceable regarding third parties upon registration in the public register of immovable property of the place in which the immovable property is situated (the local land or property registry).

The details contained in the mortgage register would need to be amended if any changes occur in the parties secured by the mortgages, except for transfers made pursuant to Article 58 of the Italian Banking Act or pursuant to the Italian Securitisation Law to another bank authorised in Italy, as the formalities set out therein for a transfer to be effective regarding third parties will take the place of any other formalities to the same effect.

If the property over which the mortgage is granted and registered is transferred, the mortgage will also be transferred, but the third-party purchaser will either have the right to release the property to the secured creditors or pay to the creditors an amount determined pursuant to the applicable provisions of the Civil Code; but in the second case, the secured creditors will have the right to start foreclosure proceedings on the property, subject to certain conditions being met.

In addition to the general legislation applicable to mortgage lending, Italian mortgage loans over real property may fall within the provisions of a specific legislation. If a loan qualifies as a fondiario mortgage loan (as defined by Article 38 of the Italian Banking Act), certain material advantages are granted to the lending bank, namely advantages against certain restrictions on enforcement and other advantages to the borrower.

Forms of personal guarantees

The following forms of guarantees are commonly used in financing transactions: joint and several guarantees; and first demand 'autonomous' guarantees.

A joint or several guarantee is an undertaking by a guarantor to pay a debt if the debtor fails to do so. These guarantees are usually given on a joint and several basis by the guarantor and the debtor, allowing the creditor to choose whether to pursue its claim against either or both of the guarantor and the debtor (unless the parties have agreed that the guaranteed creditor shall claim payment from the principal obligor first). When future claims are guaranteed, the joint or several guarantee shall indicate a cap.

A first demand autonomous guarantee differs from a joint or several guarantee in that it is an independent undertaking, and therefore the guarantor is obliged to pay under the guarantee as a principal obligor and on demand from the beneficiary, regardless of any defence of the primary debtor.

Other matters relevant to security

In a cash flow securitisation made pursuant to the Italian Securitisation Law, the assets relating to each securitisation transaction will, by operation of law, be segregated for all purposes from all other assets of the issuer company that purchased the receivables and from those relating to other separate securitisation transactions carried out through the same issuer company. More particularly, prior to a winding-up of the issuer company, the assets will only be available to holders of the notes issued to finance the acquisition of the relevant receivables and to certain creditors claiming payment of debts incurred by the issuer company in connection with the securitisation of the relevant assets.

In addition, the assets relating to a particular transaction will not be available to holders of the notes issued to finance any other securitisation transaction carried out by the issuer company or to general creditors of the issuer company.

Because of these provisions of the Italian Securitisation Law, it is not necessary for an issuer company created in accordance with Article 3 to grant security interests over the receivables purchased by it in favour of the holders of the notes issued by it.

However, under Italian law, any creditor of the issuer company would be able to commence insolvency or winding-up proceedings against the issuer company in respect of any unpaid debt, and the enforceability of 'non-petition' covenants is not clearly established.

The segregation-related provisions are enforceable before and after insolvency, subject to the limitations contained in the law generally. However, the provisions of the Italian Securitisation Law concerning the segregated assets are not likely to apply in circumstances where the cash flow referred to above is commingled with the assets of a subject other than the issuer (e.g., the originator). Thus, if any such subject becomes insolvent, the cash flow held by it could not be included in the segregated assets.

Quasi-security devices

Types of quasi-security devices include the following:

  1. the duty of care agreement. This agreement is entered into between the lender and the asset manager, whereby the latter undertakes, inter alia:
    • to duly manage the property in a manner that would not result in the borrower's violation of the terms of the mortgage loans;
    • to notify the lender of material breaches by any tenants of the leased assets, of any new lease and of the termination of any existing lease;
    • to notify the lender of any damage to the property; and
    • to notify the lender of any termination of the management agreement; and
  2. endorsement of the insurance policies whereby the lender is named as an additional insured party and is vested with certain additional rights in respect of the insurance policies, such as that of:
    • being notified of any failure by the borrower to pay insurance premiums and the related right to cure the borrower's default;
    • maintaining the insurance coverage until a given period has passed after receipt from the insurer of the above notification; and
    • being paid any indemnity otherwise due to the borrower (a loss payee clause) (this is less common in the case of third-party liability insurance).
ii Subordination

In general terms, subordination means that one creditor or group of creditors (the junior creditors) will not be paid by a borrower or other common debtor until another creditor or group of creditors (the senior creditors) have been paid.

In banking transactions, it generally takes the form of a contractual subordination, whereby the order and ranking of the debt is arranged by the creditors (usually through an intercreditor or subordination agreement).