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UNCLAS ROME 002109 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN IT
SUBJECT: ITALY'S 2005 BANKRUPTCY REFORMS: ONE STEP CLOSER 
TO CHAPTER 11 
 
 
¶1.  (U)  Summary.  Following Parmalat's financial crisis in 
December 2003, the Italian Parliament began the first 
comprehensive reform of Italian bankruptcy law since 1942. 
The bankruptcy reforms, first enacted as a Decree Law and 
later ratified by Parliament, bring Italian bankruptcy 
proceedings more in line with U.S. Chapter 11 proceedings. 
The reformed bankruptcy law seeks to preserve the integrity 
of the corporation through expanded use of the "concordato 
preventivo," ("preventive accord") under which companies 
facing bankruptcy can enter into debt restructuring 
agreements with their creditors.  The reform also shortens 
the "claw-back" period, during which transactions entered 
into by the corporation can be voided, and introduces an 
out-of-court restructuring procedure.  End summary. 
 
Italy's 1942 Bankruptcy Law 
--------------------------- 
 
¶2.  (U) Italy's previous bankruptcy law, enacted by Royal 
Decree in 1942, was based on the premise of "decotus ergo 
fraudator" ("bankrupt and therefore a swindler") and focused 
on making creditors whole through liquidation of the 
corporate assets and dissolution of the corporate body.  The 
1942 law was written at a time when corporations were rare 
and individual traders and small partnerships, whose main 
asset was land, dominated the Italian economy.  The law 
focused on liquidation of the debtor's assets because, when 
the main asset was land, it was the most effective way to 
make the lender whole. 
 
¶3.  (U) As the Italian economy developed, and corporations 
replaced individuals and partnerships as the main drivers of 
the economy, the 1942 law came under increased criticism from 
legal commentators for its emphasis on liquidation and 
cumbersome procedural rules.  The shortcomings of the law are 
best illustrated by the following statistics: 
 
- In 1998, out of bankruptcies valued at 5.5 billion euros, 
only 1 billion was actually paid to creditors.  Legal and 
liquidators' fees totaled 250 million euros.  Bank management 
fees totaled 750 million euros. 
 
- Italian bankruptcy cases could last as long as six years, 
compared to an average of six months in Germany, seven in the 
U K, and eight in France. 
 
- In 1999, creditors' claims accepted by liquidators totaled 
7.5 billion euros.  Of these, only 11 percent were actually 
paid out, leaving unpaid claims in the amount of 6.7 billion 
euros. 
 
The 2005 Law 
------------ 
 
¶4.  (U) Parmalat's 2003 financial crisis, in which the 
company was found to have overstated its assets by eight 
billion euros, made clear the need to reform Italian 
bankruptcy law.  Parmalat's bankruptcy was managed using an 
emergency decree by then-Industry Minister Antonio Marzano 
that allowed Parmalat to enter into a debt-equity swap with 
its creditors.  The aim of the "Marzano Decree" was to 
preserve the company's assets through the continuation or 
transfer of business activity.  This enabled the corporation 
to continue to do business, working its way out of 
bankruptcy, and in the process, preserved the livelihoods of 
many of Parmalat's 36,000 employees and the roughly 5,000 
dairy farms which depended on sales to Parmalat. 
 
¶5.  (U) The most important part of the 2005 bankruptcy law 
reform is an extension of the "Marzano Decree" principles to 
smaller companies, amending an existing procedure called 
"concordato preventive" ("preventive accord").  The 
"concordato preventivo" is a judicial procedure oriented 
towards the reorganization of the activity of the insolvent 
company through an agreement between the debtor and its 
creditors.  The new "concordato preventivo" allows smaller 
corporations to restructure their debt (as Parmalat did) 
rather than face liquidation.  Unlike the 1942 bankruptcy 
law, the debtor is no longer required to be insolvent to be 
admitted to the new "concordato preventivo," provided that 
the debtor is in a pre-default situation, such as a temporary 
financial crisis.  The debtor's proposal to creditors may now 
provide them with an assignment of assets or company shares 
in order to partially satisfy their claims.  The "concordato 
preventivo" allows for the division of creditors into classes 
and for the restructuring of debt in almost any form, 
provided that the restructuring plan is approved by the 
creditors holding the majority of the company's unsecured 
debt.  In fact, the secured creditors do not have the right 
to vote, although it seems that they must be fully satisfied 
by means of the debtor's restructuring plan.  Expanded use of 
 
the "concordato preventivo" should result in an increased 
willingness by lenders to extend credit to corporations, 
because there is less chance they may than face lengthy and 
expensive liquidation proceedings that do not result in the 
substantial recovery of their loans. 
 
¶6.  (U) The 2005 bankruptcy reform shortens the claw-back 
period of Italian bankruptcy law to a maximum of one year, 
down from two years under the 1942 law.  The shorter 
claw-back period strikes a balance between the company's need 
to solve financial and economic problems by selling a 
business or activity, and the principle of guaranteeing to 
all creditors equal treatment in case of future bankruptcy. 
This reduction of the claw-back period will reduce the number 
of pre-bankruptcy transactions which the insolvent 
corporation can have voided ("clawed-back"), lowering the 
administrative and legal costs associated with bankruptcy. 
It should also make vendors more confident in extending 
credit to customers since "ordinary course" transactions are 
exempt from the law's claw-back provisions unless the 
corporation can prove that the creditor knew of the debtor's 
insolvency at the time of the transaction. 
 
¶7.  (U) The last reform introduced by the 2005 bankruptcy law 
is an out-of-court restructuring process.  Under this 
provision, companies may ask the court to approve a 
 
restructuring plan provided that the plan is agreed to by 
creditors holding 60 percent of the corporation's debt and 
has been approved by an independent expert.  This procedure 
differs from the "concordato preventivo" (described in 
paragraph five) in that it does not provide for the division 
of creditors into classes, and requires approval by creditors 
holding 60 percent of all debt, as opposed to the simple 
majority of those holding unsecured debt required to approve 
a "concordato."  Like the other reforms in the 2005 law, the 
introduction of an out-of-court settlement procedure should 
lower the administrative costs associated with bankruptcy. 
There are some ambiguities in the law, however, and experts 
are divided on issues such as which party is responsible for 
paying for the cost of the independent expert's evaluation of 
the restructuring plan. 
 
Criminal Penalties 
------------------ 
 
¶8.  (U) The new law retains criminal penalties for 
bankruptcy.  If an individual's conduct has caused "actual 
damage" to creditors, that individual may be sentenced to six 
to ten years' imprisonment.  This provision of the law 
retains the 1942 law's view of bankruptcy as an offense 
against the economy.  Legal commentators expect these 
provisions to be abolished or narrowed in future revisions of 
the law.  Mario Draghi, Governor of the Bank of Italy, has 
noted that the penal provisions of the new law are "based on 
a punitive view of bankruptcy," and has argued for their 
modernization. 
 
Comment 
------- 
 
¶9.  (U) The 2005 revision of Italian bankruptcy law makes 
great progress in lowering the administrative, legal, and 
business costs of bankruptcy.  It is perhaps a good sign that 
some judges have complained that the 2005 law diminishes 
judicial power in bankruptcy procedures.  Even with the new 
law's streamlined procedures, debt recovery proceedings in 
Italy take five times as long as the OECD average, in large 
part due to the slow pace of judicial proceedings. 
Participants at a May 18 Rome conference on bankruptcy hosted 
by the Italian Banking Association generally gave the law 
favorable reviews, praising it for increasing the speed with 
which restructuring plans can be implemented and for 
increasing creditors' involvement in debt restructuring. 
Although critics of the new law are in the minority, there is 
a consensus that it needs fine-tuning.  Bank of Italy 
Governor Draghi, for example, has noted that the new law only 
applies to half of all businesses in Italy, and has urged 
that its scope be broadened.  Although it remains to be seen 
whether the new law will make financial institutions more 
willing to extend credit to small or start-up businesses, 
which are key to re-energizing the Italian economy, Italy now 
has a modern bankruptcy law which should increase creditors' 
confidence in their ability to recover their assets from a 
debtor facing bankruptcy. 
BORG