Italy is on its Way to Implement a Deep Reform of its Bankruptcy Law

Following the approval by the Parliament of Law No. 155/2017 setting forth the principles for a thorough reform of bankruptcy law, the Italian Government is now working on the delegated law that is bound to replace the more than 70-years old Bankruptcy Act (1942).

The new law will consolidate in one single act the various changes to the Bankruptcy Act that have been made since 2005 and will provide a more efficient and modern set of rules for insolvency. In an effort to mark the distance from the 1942 Bankruptcy Act and to remove the social stigma that has been traditionally associated with the idea of bankruptcy, the new law will even replace the term “bankruptcy” with “judicial liquidation”. The distance with 1942 Bankruptcy Act, however, is far from being limited to a semantics. The principles driving the Government in reshaping Italian bankruptcy legal framework include the following:

(i) the new law will draw a clear distinction between “crisis” and the “insolvency” in order to provide businesses that are not in state of insolvency with a specific set of tools designed to allow recovery of the business (as opposed to liquidation and termination) so as to give honest but bust entrepreneurs a second chance;

(ii) on the assumption that the earlier the debtor can detect its financial difficulties and can take appropriate action, the higher the chances of recovery are, the new law will provide for a system of early warnings aimed at ensuring that action is taken before the debtor defaults on its payment obligations. This will include the power of statutory and external auditor to report the existence of risks of insolvency to a facilitating body (the so-called OCC – Organismo di Composizione della Crisi) and a system of incentives for the debtor who takes action in a timely fashion;

(iii) it will possible for groups of companies to issue proceedings for court composition schemes as groups:

(iv) there will be one single pre-bankruptcy judicial proceedings (as opposed to the several different proceedings of the 1942 Bankruptcy Act) aimed at establishing the occurrence of a state of insolvency or crisis and to issue the relevant ruling (whether it be the declaration of bankruptcy or the opening of a procedure of court composition scheme). Law No. 155/2017 is available at this link.