Bankruptcy (Bancarotta in Italian) is a process that allows creditors of an entrepreneur to be repaid from the entrepreneur’s assets, usually on an equal basis with respect to preferential rights. It is a ‘liquidation procedure’ that allows an entrepreneur’s creditors to be satisfied.
Among them creditors there are also the employees. They hold a unique position because, in addition to having an economic interest, they also have a further interest in stability and maintaining the employment relationship.
The Italian bankruptcy procedure requires two prerequisites, one subjective and one objective.
The rules on bankruptcy do not apply to public entities, agricultural entrepreneurs, and “small commercial entrepreneurs.” Small commercial entrepreneurs must meet specific criteria related to net asset value, gross annual revenues, and debts meeting the following three criteria:
- Had an annual net asset value in the three fiscal years preceding the bankruptcy petition (or since the start of the business if it has been operating for less time) not exceeding €300,000.
- Achieved gross annual revenues not exceeding €200,000 within the same time frame.
- Had debts, including overdue ones, not exceeding €500,000.
The objective prerequisite is insolvency, meaning the entrepreneur’s inability to meet their obligations regularly. Regular satisfaction includes punctual payments and the use of normal means of payment. Bankruptcy is not declared if the unpaid, overdue debts amount to less than €30,000. For instance, someone is considered insolvent if they sell their assets to obtain liquidity, while someone who relies on bank credit to fulfill their obligations is not considered insolvent. Bankruptcy is not declared if the unpaid, overdue debts amount to less than €30,000.
Italian Bankruptcy Process
The Bancarotta process is divided into several phases:
A) Pre-bankruptcy Phase
The bankruptcy procedure can be initiated by the entrepreneur, creditors (including employees), or the Public Prosecutor.
Creditors can initiate the procedure even without an enforceable title.
Automatic bankruptcy declarations have been eliminated since 2006.
The initiation document is a petition, and the competent court is where the entrepreneur’s primary business activities are based, which refers to the center for directing and administering the business. Relocating the business’s registered office in the year prior to initiating the procedure does not affect this jurisdiction.
If, during the pre-bankruptcy phase, the court determines the necessary conditions are met, it issues a judgment declaring bankruptcy, which takes immediate effect.
The court also appoints two key figures for the proceedings: the Delegated Judge and the Trustee. An appeal against this judgment can be made to the Court of Appeals. Conversely, if the court finds that the necessary conditions are not met, it may issue a dismissal decree. This decree does not prevent the possibility of re-filing the petition, and it can be appealed to the Court of Appeals.
B) Claims Verification Phase
This phase aims to determine which creditors have the right to claim debts from the assets and to what extent.
Creditors file claims for admission to the list of claims, indicating any privileged status of their claims and proving that their claims are valid within the bankruptcy proceedings.
The Trustee then prepares a draft statement of claims, which is declared enforceable by a decree issued by the Delegated Judge. This decree only affects the insolvency proceedings (it does not have external validity). Opposition to the statement of claims, challenging of admitted claims, and revocation are possible actions against this decree.
C) Asset Liquidation Phase
The company’s assets are converted into cash and distributed to creditors.
D) Asset Distribution Phase
The judge, during the distribution of the proceeds from the previous phase, satisfies preferential claims in priority. These are claims specified by law or “arising in the course and on the occasion of the proceedings” (e.g., those arising during temporary operation of the business). Subsequently, privileged claims, either legally privileged or secured by legal guarantees (such as pledges or mortgages), are satisfied. Finally, unsecured claims (chirography) are satisfied.
E) Bankruptcy Conclusion Phase
Bankruptcy concludes either through ordinary closure by a court decree or through a bankruptcy agreement. A bankruptcy agreement is an agreement with the majority of creditors in which they waive their rights to the assets of the bankrupt in exchange for the offer contained in the agreement. The agreement affects all creditors, including those who disagree or did not file claims. Initially, bankruptcy had punitive aspects, which, however, were eliminated in 2006.
Under specific conditions, the debt relief procedure, called esdebitazione, is applied at the end of the proceedings. Esdebitazione relieves the entrepreneur from repaying the unsatisfied portion of debts, making it unenforceable. This also applies to creditors who did not file claims, but only for the portion of debt exceeding the percentage allotted to equal-ranking creditors. In this way, the bankrupt entrepreneur is not permanently burdened by past debts and can start anew without being permanently excluded from the market. To benefit from esdebitazione, the bankrupt entrepreneur must meet certain conditions, such as cooperating with the proceedings, not causing delays or hindrances, delivering correspondence to the Trustee, having no convictions for fraudulent bankruptcy or related crimes, partially satisfying creditors, and meeting specific criteria related to financial behavior and other factors. Esdebitazione is only applicable to individual entrepreneurs.
If your Italian company is seriously risking bankruptcy, book a free consultation with ILF Italian lawyers. Their large expertise will help you in navigating the difficult sea of a process that must be dealt with attention!
Effects of Italian Bankruptcy
1) Effects on the foreign investor
The bankrupt individual or business undergoes asset dispossession. They do not lose ownership of their assets but lose the ability to manage and administer them. This dispossession applies to all assets in existence as of the bankruptcy declaration date, including movable and immovable property, rights with a financial interest, and potential vested rights. It also includes assets belonging to the bankrupt on a purely provisional basis, assets belonging to third parties with rights not subject to the proceedings, and assets acquired by the bankrupt after the bankruptcy declaration, excluding liabilities for their acquisition or preservation.
The only assets exempt from the bankruptcy declaration are strictly personal assets, necessary alimony, salaries, and pensions to the extent required for the support of the bankrupt and their family, family assets and their income, and assets that cannot be seized.
All actions taken by the bankrupt and payments made by them after the bankruptcy declaration are ineffective against the creditors. Similarly, payments received by the bankrupt after the bankruptcy declaration judgment are also ineffective.
The bankrupt cannot personally participate in legal proceedings related to financial rights; instead, the Trustee represents them. The bankrupt can only intervene when required by law or for issues that may lead to charges of bankruptcy against them.
The bankrupt is required to submit financial statements and mandatory accounting and tax records, as well as a list of creditors. They must also hand over all correspondence related to their business activities to the Trustee. Any change of residence or domicile must be reported, and they must appear personally before the proceedings’ authorities when requested.
2) Effects on Creditors
Acceleration of Debts
All debts become due and payable and are considered as such from the date of the bankruptcy declaration judgment (provided they existed before the declaration judgment).
Suspension of Interest
During the bankruptcy proceedings, no conventional or legal interest accrues, except for privileged debts.
Ban on Individual Actions
No individual enforcement or precautionary actions, even for debts arising during bankruptcy, can be initiated or continued on the assets included in the bankruptcy.
If creditors also owe the bankrupt, set-off may occur, unless the debt was acquired by agreement during the bankrupt’s lifetime after the bankruptcy declaration judgment or within the preceding year.
3) Effects on Pre-Existing Legal Relationships
Following the 2006 reform, Article 72 of the Bankruptcy Law, which initially governed the fate of only pending purchase contracts, has become a general provision applicable to all pending contracts, except for the specific provisions of the same section of the Bankruptcy Law (e.g., it is established that current account, mandate, and commission contracts terminate automatically, or that lease contracts continue automatically).
Pending contracts refer to those concluded before the bankruptcy declaration judgment but not entirely fulfilled by both parties as of that date. The provision states that contracts are automatically suspended, entering a “state of quiescence,” from the moment of the bankruptcy opening until the Trustee decides whether to terminate the contract or take over on behalf of the bankrupt, with the authorization of the Creditors’ Committee.
If the Trustee does not make any decision, the other party can request the Delegated Judge to issue a formal notice under Article 72(2) of the Bankruptcy Law. However, if the Trustee remains inactive after sixty days, the contract is deemed terminated.
If the Trustee chooses to take over, they will be in the same position as the bankrupt at the time of contract conclusion and must fulfill all obligations as specified in the previously concluded contract, including timing and terms.
4) Effects on Employment Contracts
The bankruptcy law does not have specific provisions addressing employment contracts. Attempts were made to regulate this matter through Article 10 of the draft law presented by the Trevisanato Commission in 2001 and Article 127 of the draft law from the Commission on February 27, 2004. These provisions proposed that employment contracts should be subject to automatic continuation instead of Article 72 of the Bankruptcy Law. However, these attempts did not pass into law, leading to differing interpretations regarding the application of Article 72 of the Bankruptcy Law to employment contracts. This is further complicated by the existence of another law, outside the Bankruptcy Law, that governs employment relationships during bankruptcy. According to Article 2119(2) of the Civil Code, bankruptcy, along with compulsory administrative liquidation, does not constitute sufficient grounds for terminating an employment relationship.
Currently, the prevailing opinion among legal scholars and the judiciary (both at the trial and appellate levels) is that Article 72 exclusively applies to the economic aspects of the employment relationship and does not cover termination procedures. Consequently, employment contracts are automatically suspended upon the declaration of bankruptcy. During this suspension period, employees are not obligated to perform their work unless temporary operation of the business has been ordered. Likewise, they are not entitled to receive remuneration.
Due to the existence of Article 2119(2) of the Civil Code, if the Trustee chooses not to assume the contract, they cannot terminate it freely as they would with other contracts. Instead, they can only terminate it through a dismissal process in compliance with the legal framework. This dismissal cannot be based on just cause, as prohibited by the Civil Code, nor on justified subjective reasons, as there is no employee misconduct.
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