Reforming Italy’s Old Insolvency Regime

The long-awaited radical overhaul of Italy’s arcane insolvency regulations came into force when in 2006, parliament replaced a once notoriously cumbersome body of procedures with one resembling key provisions of Chapter 11 in the United States. The new process favors corporate restructuring over the finality of liquidation and strengthens lenders’ rights to stimulate freer flow of credit to small and medium sized firms.

With momentum for reform languishing on the parliamentary agenda for over five years, the financial crises that rocked some of Italy’s leading corporate giants—highlighted by Parmalat’s near overnight demise in 2003—finally brought to bear sufficient political pressure to significantly revisit the bankruptcy law for the first time since 1942. Comprehensive reform saw the light of day when the final set of 2006 regulations demolished the old law’s outdated criminal liability provisions.

In general, the most important change introduced by the new law provides distressed firms a set of tools to overcome internal crises, either through out-of-court debt restructuring agreements or through a formal rescue procedure in the framework of composition with creditors proceeding. The law provided immediate relief by allowing firms that were in the middle of liquidation proceedings to set up reorganizations. The new system also limits the ability of government regulators to interfere by strengthening the role and responsibilities of creditors’ committees, establishing a clear priority scheme for creditors, and discharging the debtor from its remaining unpaid obligations following liquidation.

The new law foresees a dramatic cut in the time it takes firms to close, preserving more of a company’s value and allowing creditors to recoup more from their claims. However, not enough time has passed for the impact of the reforms to emerge in our data on closing a business.While the jury remains out, anecdotal data already suggests that the new provisions injected greater confidence in the Italian lending community in a more efficient system that can embrace forward-thinking risk takers with the capital they need to make new businesses flourish.