Background
On July 15, 2022, Legislative Decree no. 14 of January 12, 2019 (the Insolvency Code) entered into full force and the former bankruptcy law (Royal Decree no. 267/1942, as amended) was formally repealed. The Insolvency Code was designed, inter alia, to ensure implementation of Directive (EU) 2019/1023 (the Restructuring Directive).
One of the most significant features of the Insolvency Code was the introduction - in lieu of the former “automatic stay” from creditors’ actions - of an entirely new set of rules allowing for a debtor to be able to petition the Court for “protective and/or precautionary measures” (misure protettive e cautelari, herein Protective Measures and/or Precautionary Measures). There is a broad possibility for the debtor to be granted Protective and/or Precautionary Measures even during negotiations with creditors (i.e. before having requested formal admission to specific insolvency proceedings).
Protective Measures were defined by the Insolvency Code in terms of stays on the ability of creditors to commence or continue enforcement proceedings on the debtor’s assets and/or to terminate executory contracts, and allow for “other temporary measures to avoid that actions or conduct taken by one or more creditors may prejudice, as from the negotiation phase, the positive outcome of the initiatives undertaken to resolve the crisis or insolvency”. Precautionary Measures are those “temporary provisions issued by the judge to protect the debtor’s assets or business, which appear, according to the circumstances, most suitable to ensure the successful outcome of negotiations and the effects of restructuring tools”. Protective and Precautionary Measures may last for a maximum of 12 months and can be requested (for a maximum amount of 240 days) even in the context of negotiated compositions (composizione negoziata).
Impact of Decree 136
Decree 136 introduced, inter alia, a change to the provisions of Article 18(1) of the Insolvency Code, in particular by stating that, in the context of negotiated composition (composizione negoziata), Protective Measures may be directed towards “specific initiatives undertaken by creditors by way of protection of their rights”. Decree 136 has also modified the definition of Precautionary Measures, including measures that appear most suitable to ensure “the successful outcome of negotiations, the effects of restructuring tools and the implementation of the related decisions”.
Even prior to the adoption of Decree 136, some Italian lower courts[1] presiding over negotiated composition (composizione negoziata) had held that Protective Measures could result in a stay on the ability of creditors to call on a guarantee issued by a separate legal entity. It appears that the guarantors in question were shareholders of the debtor and/or had declared an intention to support the restructuring. It is not clear whether the Court was addressing “guarantees” in the form of an autonomous first demand guarantee (contratto autonoma di garanzia a prima richiesta).
While these decisions may certainly be questioned on the basis of their imposition of stays for a wholly separate entity to the debtor, which separate entity is not the subject of any insolvency proceedings, it appears that creditors did not seek to appeal these results. Moreover, the amendment to Article 18(1) of the Insolvency Code may well be interpreted as providing a statutory basis for such a result going forward. We refer to this development as the Guarantee Restriction.
The Guarantee Restriction, embodying a rule of Italian insolvency laws (lex fori), is of potential application to all guarantees regardless as to their governing law.
While the Guarantee Restriction could be seen as potentially disruptive to normal financial transactional practices in Italy, it is essential to consider the broader context. The new provisions aim to create a more structured and predictable environment for restructuring negotiations, which can ultimately benefit both debtors and creditors by fostering successful outcomes and preserving economic value. Foreign investors should be aware of the changes introduced by Decree 136 and the potential implications of the Guarantee Restriction. However, these developments also reflect Italy's commitment to enhancing its insolvency framework to support effective restructuring processes, since the amount/asset subject to the Guarantee Restriction should still be made available to the guaranteed creditor within the context of the restructuring.
Implications for derivatives trading under the ISDA documentation
Impact on netting enforceability
Notwithstanding the very broad language used in the amended version of Article 18(1) of the Insolvency Code, we do not believe that the imposition of Protective Measures could result in an override of the protection for close-out netting where collateral is exchanged pursuant to an ISDA Credit Support Document, as discussed in our published opinion for ISDA on the enforceability of the early termination and close-out netting provisions of the ISDA Master Agreements (the Italian ISDA Netting Opinion). This is because the ISDA Credit Support Documents allow for specific protection of close-out netting rights for qualifying “financial collateral agreements”.
Where a party is relying on a parent or other entity guarantee for the obligations of an Italian counterparty as a form of credit support, then the Guarantee Restriction could certainly have an impact on the exposure. However, the position concerning enforceability of guarantees is not the subject of discussion in the Italian ISDA Netting Opinion.
Impact on CDS
For the CDS purposes, we do not believe that the Guarantee Restriction would result in guarantees of an Italian entity failing to meet the Not Contingent requirement for Deliverable Obligations, since the inability to enforce the guarantee would stem from a set of statutory rules interpreted by court order, as opposed to the terms of the guarantee itself.
Implications of the Guarantee Restriction for recognition as unfunded CRM
There is no specific requirement under the CRR for insolvency advice in relation to unfunded credit risk mitigation, the premise being that the protection will be triggered precisely when there are solvency issues affecting the primary debtor. The intention of the CRR is that the regulated institution will be able to rely on its claim against the “eligible protection provider”.
While the CRR framework therefore relies on eligible credit protection providers having an appropriately sound financial standing, the Guarantee Restriction can impact enforceability precisely where no issues of solvency arise in relation to the guarantor.
The position introduced by the Guarantee Restriction may be considered by regulated institutions to render Italy a “relevant jurisdiction” for the purposes of ensuring the legal effectiveness and enforceability of a guarantee, in order to provide appropriate certainty as to the credit protection achieved (Articles 194(1), 194(6)(d) and 213(3) CRR) in all circumstances where the primary debtor is an Italian commercial corporation, thus complicating recognition of the guarantee as a form of unfunded CRM.
In any case, given the very recent entry into force of Decree 136, the specific case law of the decisions published as of today and the absence of decision from higher courts, the position outlined here could undergo rapid changes, which we will continue to monitor.
Footnotes
[1]. See Tribunal of Mantua, June 28, 2024,Tribunal of Venice February 6, 2023 and Tribunal of Chieti dated October 10, 2024.
