Avoidance actions: Italy is prepared

The European legislator intends to harmonise the avoidance actions in the member states. Italy, however, already has comprehensive legislation in place that covers this issue.

European legal framework for insolvency

The EU is seeking to harmonise the laws of its member states, as evidenced by its continuous efforts to issue new directives. After the issuance of Directive (EU) 2019/1023 on insolvency, which led to the enactment of the new Italian Bankruptcy Code (IBC), member states are now faced with a new proposal with Directive (EU) 2022/0408, which differs from earlier directives in its scope and contents.

This proposal by the European Commission, which was presented on 7 December 2022, aims to fill some of the gaps in European insolvency Directive (EU) 2019/1023 and Regulation (EU) 2015/848. The new proposal for the Directive focuses on maximising the recovery of assets from liquidated estates by increasing procedural efficiency and ensuring a fair and predictable distribution of recovered value to the creditors. The proposed improvements cover various aspects, such as avoidance actions.

If the proposal is approved by the European Parliament, Italy – like the other member states – will be required to implement the Directive by amending its national legislation, paying attention to the regulation of avoidance action, which in Italy is currently governed by Articles 163-171 of the IBC.

Italian legislation on avoidance rights

In general terms, the Italian legislator has had a strict regulation on avoidance actions in place for decades. In fact, under Italian law, when the debtor performs an act of disposal of assets in a distressed situation, an action (known as "azione revocatoria" or claw-back action) can be brought about to have this act declared ineffective. In a nutshell, claw-back action is meant to prevent certain creditors from getting preferential treatment detrimental to other creditors. As a consequence, such acts are declared ineffective and the assets called back for the satisfaction of all the creditors in the framework of the bankruptcy procedure (i.e. “judicial liquidation”) and distributed based on the ranking of creditors. Through “azione revocatoria”, the following occurs:

• assets or rights that have left the debtor's estate during the "suspect period" can be clawed back;
• bankruptcy creditors see an increase in the assets receivership; and
• clawed back assets and rights will be used to satisfy creditors’ claims.
• Therefore, based on the above, under Italian law the receiver, who acts in the exclusive interest of bankruptcy creditors, can petition for the following acts to be declared ineffective by the court:
• "gratuitous acts" ("atti a titolo gratuito", art. 163 of the IBC), which are acts performed by the debtor after the filing of the petition directed at the opening of the judicial liquidation or during the prior two years;
• "acts for consideration" ("atti a titolo oneroso" - Art. 166 of the IBC), which represent a category that includes different types of acts, such as acts in which the services performed or obligations assumed by the debtor exceed by more than one-fourth what was given or promised to him, if performed after the filing of the petition followed by the opening of the judicial liquidation or in the one year or six months before, or for liens and voluntary mortgages established after the filing of the bankruptcy petition or in the preceding one year for pre-existing debts that have not expired. This category does not include, for example, payments made by the debtor as consideration for work performed by its employees;
• acts committed between spouses or cohabitants (Art. 169 of the IBC), which are acts for consideration performed between spouses or de facto cohabitants during the time when the debtor was operating a business and gratuitous acts performed between the same persons more than two years prior to the filing date of the application followed by the opening of the judicial liquidation.  In such cases, the spouse's knowledge of the debtor's state of insolvency is presumed, but the contrary may be proved to avoid the ineffectiveness of the act;
• "acts detrimental to creditors" (art. 2901 of the Italian Civil Code), which are acts performed by the debtor with malice or even with mere knowledge of the prejudice that could have been caused to the creditor. Furthermore, in the case of acts for consideration, for the purposes of declaring the act ineffective, it is necessary that the third party is aware of the prejudice or has malicious intent.

Comparison between the proposed Directive and Italian law

Considering the draft of the proposal (EU) 2022/0408, the claw-back action could be brought against:

• "Preferences" (Art. 6), which are those payments or acts made in favour of only some creditors, preferred over others, made in the "suspect period" of three months prior to the submission of the request for the opening of the insolvency proceedings or after;
• “Legal acts against no or a manifestly inadequate consideration" (Art. 7), which are payments or transfers of assets (completed in the year prior to the request for the opening of the proceedings) made free of charge or with an excessively low price compared to the market value of the asset; and
• “Legal acts intentionally detrimental to creditors” (Article 8), which are those acts made up to four years prior to the filing of the request for the opening of the proceedings done for the pure purpose of causing prejudice to creditors.
• Making a comparison with the current Italian provisions:
• the "preferences" (Art. 6 of the proposal) can be identified in the "acts for consideration" and “acts committed between spouses or cohabitants” governed by Articles 166 and 169 of the IBC;
• the "legal acts against no or manifestly inadequate consideration" (Art. 7 of the proposal) correspond to "gratuitous acts" governed by the Italian legislator in Article 163 and 165 IBC; as well as to the gratuitous acts subject to ordinary revocatory action, pursuant to Article 2901 of the Italian Civil Code. In addition, "legal acts intentionally detrimental to creditors" (Art. 8 of the proposal), which are acts performed with malice on the part of the debtor, may be declared ineffective under Art. 2901 of the Italian Civil Code as intentional fraud to creditors.

It is clear that all the hypotheses of "acts that can be declared ineffective" contemplated by the European legislator are already covered by the Italian legislation.

For the sake of completeness, it should be noted that Italian law provides for a "suspect period" during which the act should have been performed in order to be able to declare its ineffectiveness that is longer than the one provided for in the proposal for the EU Directive.  For example, while the "preferences" (Art. 6 of the proposal) could – according to the European legislator – be clawed back if performed in the three months preceding (or following) the application for insolvency proceedings, the IBC provides for the claw back of acts put in place six months or even one year prior to the filing for insolvency, depending on the various cases governed by Art. 166 of the IBC.

Again, by way of example, the Italian legislation has for decades provided for a "suspect period" to declare certain acts ineffective. In fact, Legislative Decree No. 270 of 1999 in Article 91 provided that some acts made between companies in the same group, which may represent instruments to defraud the insolvency creditors, could be declared ineffective if made in the five years preceding the declaration of insolvency. Clearly, the Italian legislation not only provides stringent claw-back rules to protect the bankruptcy estate, but even provides for "suspect periods" that are already more extensive than those recently suggested by the European legislature.

Aspects to be “harmonised”

Article 5 of the proposed Directive states that member states may provide for a higher level of creditor protection than the minimum guaranteed at the European level.

Therefore, the Italian legislature could choose to keep unchanged the rules that provide greater protection for the bankruptcy estate, such as those that guarantee a broader "suspect period” or amend the national rules by providing for the same European “suspect periods”.

Again, based on Article 5, the Italian legislator could choose to keep unaltered Article 2901 of the Civil Code, which in its current wording allows for claw back even for acts performed in "awareness" of the prejudice to creditors and without an actual fraudulent intent or – in application of Article 8 of the proposal – allows claw-back action only for acts that defraud creditors.

In addition, in the course of revising the rules governing avoidance actions in judicial liquidation (Articles 163 - 171 of the IBC), the Italian legislator might consider extending them to other insolvency/restructuring procedures, such as debt restructuring agreements (Article 57 of the IBC) and restructuring plans subject to approval for liquidation (Article 64 bis of the IBC).

For more information on the proposed Directive and avoidance actions in Italy, contact your CMS client partner or these CMS experts.