Italy: Bankruptcy Act improves private equity's position

Mareen Goebel
08 June 2010

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Like other European nations, Italy has enacted a number of emergency measures to respond to the market crisis. This goes far beyond the тЌ24bn emergency budgetary measures: one particularly interesting addition by the Italian government is an attempt to protect its economy by improving the countryтs bankruptcy legislation. Mareen Goebel reports.

Up until 2003, Italy's bankruptcy proceedings were governed by a law passed in 1942. Effectively, then, for over 60 years, the legal framework governing company bankruptcies was more suitable for an agrarian and early-industrial society. After 2003, the government passed acts in short order to modernise the law, gradually, but significantly improving the situation. Landmark cases like the restructuring of Parmalat or yacht builder Ferretti provided further impetus to modernise.

The current provisions are not the end point of this drive towards modernisation: two more acts are currently being discussed in the Italian parliament and are expected to be passed by year-end and there are two important changes to the current Bankruptcy Act which have become effective last week.

The first one is that 80% of any shareholder financing provided to a debtor in the framework of financial restructuring under the rules of the Article 182-bis or Concordato Preventivo will be treated as a priority claim in case the debtor is filed into insolvency.

"This measure protects investors and shareholders, such as private equity firms, who at this stage opt to inject fresh liquidity by giving them priority over the pre-existing debt of the company. This improvement should increase the willingness of investors to invest in a company to turn the situation around," comments Bruno Cova of law firm Paul Hastings' Milan office. "In addition, other new legislative measures can free up the assets of the company which can be used to obtain additional financing from third parties."

Injecting fresh liquidity will, however, mean that the investor will not be allowed to vote on the restructuring proposal under Concordato Preventivo rules to prevent a conflict of interests.

The second important amendment extends the debtor's automatic stay, under the Article 182-bis restructuring procedure, to cover the negotiation phase and also to cover the phase before the publication of the agreement between debtor and creditor. Before that, protection was only granted after the publication of the agreement. This added protection should encourage companies to adopt the new framework.

These amendments represent an under-reported but vital step to protect Italian companies during the crisis. They also encourage private equity to inject fresh liquidity into their portfolio companies as well as provide an incentive for distressed investors to take an active part in restructurings.