Italian law formally recognises only specific types of contractual security which grant preferential rights in favour of a creditor over the assets of the grantor. The main kind of security typically granted in the context of a real estate financing is the following:
1. ‘ipoteca’: a mortgage in respect of immovable property (land and buildings) and certain classes of registered movable property (cars, ships, aircrafts). A mortgage must be executed by a written deed before a Notary public and it must be deposited and registered with the competent Land Registry (Conservatoria dei Registri Immobiliari) to be validly created;
2. ’pegno’: a pledge in respect of movable property, receivables or other assets. For example, it is common for the shareholder(s) in a borrower company to grant a pledge over the shares in the financed propco or, for borrowers, to grant a pledge over, inter alia, each bank account held by the borrower itself in relation to the relevant transaction;
3.‘privilegio speciale’ (under Article 46 of the Decree No. 385 of 1 September 1993 of the Republic of Italy (‘Banking Law’): a floating charge over present and future movable properties (not registered in a public registry), belonging to a company, in order to secure debt claims under a medium or long-term financing (with a duration exceeding 18 months) granted by authorised banking entities. The classes of goods which can be subject to a privilegio speciale are:
4. ‘cessione di crediti in garanzia’: an assignment of claims by way of security is not technically a security, but an absolute transfer of title. In the context of a real estate financing transaction, an assignment by way of security typically concerns all rights and receivables arising from insurance policies, occupational leases and/or construction contracts (in the case of real estate development).
Under any such scheme, the debtor(s) of the assignor typically continue to pay to the borrower the amounts due to it until an event of default occurs, and the assignor undertakes to channel any relevant proceeds on a bank account pledged in favour of the lender.
The security mentioned above can be created by separate security documents or within the loan agreement itself (except for the security that must be executed by a written deed before a Notary public). The market standard for structured transactions, however, usually provides for separate documents.
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Real estate includes the land, buildings erected on it and fixtures which form part of those buildings and, as a general rule, are permanent anchored to the soil.
It is also possible to take security over fittings, furniture and moveable objects (although these assets are not considered real assets).
Title to land can either be absolute (proprietà) or limited (so called diritti reali minori) and may concern both the land and buildings and fixtures built on it or only one of them (as in the case of the ‘diritto di superficie’, which splits the ownership of the land from that of the buildings and fixtures built on such land). Note that for the purposes of Italian law a real right (diritto reale) is different from other rights granting only the right to use an asset (such as an occupational lease or locazione which is categorised as a right to use and enjoy a real asset – diritto di godimento).
Italian law
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The concept of a trust is not contemplated by Italian laws, other than in the limited circumstances provided under the Hague Convention on the Law Applicable to Trusts and on their Recognition (which has been ratified by Italy).
Except in limited cases (such as the issue of notes), security governed by Italian law needs to be perfected and enforced directly by the relevant creditors (that is, each lender), not by a security trustee acting on the lenders' behalf.
A security agent is often used by syndicates, acting as an agent of the other banks (mandatario con rappresentanza), but this does not negate the requirement that all security needs to be granted in favour of each of the syndicate banks.
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Pursuant to Article 1260 of the Italian Civil Code, a creditor (ie, a lender) can transfer its claim vis-à-vis a debtor (ie, a borrower) even without its consent, provided that the claim does not have a strictly personal nature or that the transfer is not forbidden by law. The transfer of the claims has effect against the assigned debtor only when, if it has not been accepted by the debtor, it is notified to the debtor in writing. Therefore, the transfer has no effect against the debtor prior to notification, although it is possible to prove that the debtor was aware of the transfer.
Pursuant to Article 1263 of the Italian Civil Code the execution of the transfer agreement will carry out a valid transfer of both the portion of loan and of the relevant security or guarantees between the parties. However, as a general rule, the transfer of the security or guarantees will not be effective or enforceable against third parties until the transfer formalities for the relevant security are complied with. In addition, pursuant to Articles 1263, sub-paragraph 2, and 1264 of the Italian Civil Code the assignor may not transfer to the assignee possession of the pledged item without the prior consent of the assigned debtor; in the event of disagreement, the assignor retains custody of the pledged assets.
Syndication of a loan may have an adverse fiscal impact because it will be necessary, on syndication, to transfer the existing security to all the new lenders and further registration taxes could be payable, so the tax implication of a transfer will need to be carefully assessed.
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In principle, no restrictions to the granting of security over real estate assets apply in relation to foreign landers. There are, however, certain kinds of security which can be granted only in favour of certain categories of lenders, the main one being the floating charge (privilegio) under Article 46 of the Banking Law which can only be granted in favour of banks.
However, please note that pursuant to the current Italian legal rules, only banks and other authorised financial institutions are entitled to carry out lending activities on a professional basis in the country.
In particular, lending vis-à-vis the public (together with certain other financial activities, including the acquisition of receivables) is reserved to:
EU Banks and Non-EU Banks (as well as EU financial companies under paragraph (e) above) can operate either (x) by establishing a branch office in Italy or (y) on a cross-border basis, without the need to establish any legal structure in the Italian territory.
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The following taxes and fees are payable in relation to the granting of security over real estate:
To avoid paying registration tax, mortgages and cadastral tax, stamp duties, governmental duties and other tax and duties (other than income tax and withholding taxes), which are otherwise payable in connection with a facility agreement and (subject to the exception listed below), connected finance documents, including security documents, it is possible to apply Substitute Tax (imposta sostitutiva).
Substitute Tax is an umbrella tax (currently) at a flat rate of 0.25% of the principal amount of the loan from time to time effectively drawn down (Substitute Tax is normally retained by the bank from the advance) but only applies where certain conditions are met and only to particular types of financial transactions, as follows:
The enforcement costs are substantially limited to the following charges:
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Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.
Financial assistance by an Italian company for the acquisition or the subscription of its own shares, for a joint stock company (società per azioni), or quotas, for a limited liability company (società a responsabilità limitata), is prohibited by:
These articles prohibit an Italian company from, directly or indirectly, providing financial assistance (whether by granting loans, security, guarantees or credit support in other forms) for the purchase of (or subscription to), respectively, its own shares or quotas of its direct or indirect parent companies.
Any agreement in direct/indirect violation of financial assistance rules may be considered invalid and unenforceable and the directors of the company might face liability actions. Additionally, an Italian company, either directly or indirectly, may not grant loans or provide security for the subscription or the acquisition of its own shares/quotas by third parties, nor can it accept its own shares as a collateral security.
The prohibition on financial assistance, following a conservative approach, includes:
which are made in order to facilitate the purchase or subscription of the Italian company's own shares or quotas.
In relation to joint stock companies (S.p.A.) only, if the assistance is granted for an amount not exceeding the profits payable and the reserves available for distributions, a ‘whitewash’ procedure is in principle available through a shareholders’ resolution. In this respect, by virtue of Legislative Decree No. 142 of 4 August 2008, which came into force on 30 September 2008 enacting Directive 2006/68/CE, Article 2358 of the Italian Civil Code has been amended.
In particular, Article 2358 of the Civil Code now states that a company, either directly or indirectly, cannot make loans or provide security for the purchase or subscription of its own shares by third parties nor can it accept its own shares as a collateral security unless the following requirements are satisfied:
1. the transaction shall be approved by the extraordinary meeting of the shareholders;
2. the directors shall prepare a written report indicating:
3. the aggregate financial assistance granted to third parties shall not at any time exceed an amount equal to the profits payable and reserves available for distribution as resulting from the latest balance sheet approved by the company; and
4. the company shall include among the liabilities in the balance sheet a reserve unavailable for distribution equal to the amount of the aggregate financial assistance.
However, given its strict requirements which are normally not in line with leverage transactions, it is rarely (if at all) used in practice.
In leveraged finance transactions, the issue is addressed in practice by way of a debt push down which is achieved through the merger of the acquisition vehicle with the target. The merger shall comply with specific requirements provided for by Article 2501-bis of the Italian Civil Code.
Article 2501-bis of the Italian Civil Code remains applicable ‘in any case of merger between companies, one of which has incurred debt in order to acquire the control in the other, if, as a result of the merger, the assets of the latter company constitute general collateral (garanzia generica) securing, or source for, the repayment of such debt’ and this provision regulates mergers occurring, typically, in the course of leveraged buy-out transactions, where one company assumes financial indebtedness (‘leverage’) for the purposes of acquiring the shares of a target company.
One of the conditions for the application of Article 2501-bis of the Italian Civil Code is that the assets of the target company constitute:
In particular, the merger plan shall identify the financial resources to be used by MergeCo for the repayment of its debt and an independent expert shall certify the sustainability of the debt. In that scenario the acquisition loans are advanced to the acquisition vehicle (either by bridge and term loans) but until the merger is effective, target shall not guarantee or grant any security to secure the acquisition facility. Refinancing facilities or ‘RCF’ or capex can be granted to target for its corporate purposes (the relevant loans can be secured by target’s assets) in the bridge phase (ie before the merger). Generally, within 6-12 months from closing, the acquisition vehicle and target shall merge (both direct and indirect merger can be implemented) pursuant to Article 2501-bis of the Italian Civil Code and, after the merger is effective, it is generally deemed that MergeCo can provide securities over its assets without breaching the financial assistance rules.
To the extent that security or guarantees (downstream, upstream or cross-stream guarantees) are provided by companies belonging to a group, each Italian company must itself have a specific and economic interest in guaranteeing/securing the financial obligations of its parent company.
Such an interest must be:
Moreover, as the subsidiary must have an autonomous interest in granting a security, the granting of such security is limited to the subsidiary's net worth. This is measured in terms of the potential total payments under any guarantee and/or security not causing the net worth of the Italian grantor to fall below zero (leading to the Italian grantor’s insolvency).
From a corporate law perspective, the following should also be verified:
If there are any restrictions on the grant of security or guarantee, the security or guarantee must be limited accordingly.
Although Italian law recognizes the interest of the group taken as whole and that a parent company may exercise ‘direction and coordination activities’ (direzione e coordinamento) over its subsidiaries, Italian directors (and the parent company) are never exempted from liability towards third-party creditors and the company itself, in case of failure to comply with their fiduciary duties. In certain circumstances, also third parties lenders might be held jointly liable for unlawful influence.
Please note that in certain instances, the granting of a guarantee or related security may trigger the company's directors to be liable to the company and its creditors.
In addition, in a declaration of the company's bankruptcy, the directors could incur liability, and therefore be subject to criminal sanctions, if it is ascertained that they had wilfully caused the misuse of corporate assets to the detriment of the company's creditors.
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In principle, interest on loans paid by an Italian resident borrower to a non-resident lender are subject to source taxation in Italy. The Italian borrower must apply a final withholding tax at a rate that varies depending on the residency of the lender (ie within or outside the European Union), levied on the gross amount of the interest paid. The final withholding tax is not applicable if the foreign lender has an Italian permanent establishment. In such case, interest received by the foreign lender through its Italian permanent establishment is qualified as 'business income' and taxed accordingly in Italy.
Please note that – save for the regulatory Italian rules concerning the reserve for carrying out lending activities – interests paid by Italian companies under medium- and long-term facilities made available by:
are exempt from any withholding tax.
Moreover, the abovementioned withholding tax can be reduced to zero in case of payment to EU resident lender if the conditions provided by the Interest and Royalty EU Directive (ie Directive 49/CE dated 3 June 2003) are met.
If the abovementioned exemptions are not applicable, the domestic withholding tax can be reduced according to the provisions set forth by the relevant double-tax treaty (ie DTT). Usually, DTTs signed between Italy and other countries reduce the amount of the withholding tax applicable to a reduced rate where certain conditions are satisfied.
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The general rule is that a right created or registered (where that is required) earlier has priority over a right created or registered (where that is required) subsequently.
However, various claims, collectively, referred to as privileges (privilegi) are given statutory priority by operation of law against the claims of other creditors in relation to the proceeds of a debtor’s property, for example the state in respect of direct and indirect taxes.
In principle, pledges prevail over privileges on movables, and special privileges on real estate assets and immovable properties prevail over mortgages. However, it is possible to create obligations in which all 'bondholders' are treated equally in case of insolvency, therefore, without the application of any special privileges.
A creditor can agree to subordinate its security interest to that of another creditor. Contractual subordination created under the terms of an agreement is binding between the parties and it is recognised by Italian market practice. However, subordination provisions, in particular clauses referring to subordination on insolvency, may be disregarded by a receiver or liquidator in bankruptcy or liquidation proceedings, and may be held not to be binding.
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Pursuant to Article 51 of law no. 218 of 31 May 1995, which regulates Italian private international law and relevant conflicts of laws, security over Italian assets or real estate (which includes mortgages, privilegio speciale, pledges of shares or quotas, pledges of bank accounts and pledges of receivables or claims), and the creation, assignment and release of such security, must be governed by Italian law. Article 51 is a rule which cannot be varied by agreement between the parties.
An assignment of receivables is governed by Section 12 of the Rome Convention of 1980 (ratified by Italy in 1984), and accordingly the parties are free to choose the applicable law. While technically remaining an assignment, the assignment of receivables by way of security is normally treated as a security in Italy, and it is often seen as preferable for it to be governed by Italian law.
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The holder of the security is treated as an unsecured creditor.
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A lender can only be liable under environmental laws if it exercises step-in rights. For example, if a lender enforced its security over the land and became a legal owner of the land.
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This question is answered assuming that the debtor is not insolvent.
An event of default under a finance document (including security documents) will entitle a secured creditor to enforce its security, in the following ways:
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The main Italian legal framework for insolvency proceedings is provided by the Italian legislative Decree no. 14 of 12 January 2019 (as amended from time to time, the ‘Italian Crisis and Insolvency Code’) which regulates the treatment of commercial enterprises in financial distress by setting forth various procedures (collectively known as ‘procedure concorsuali’), which apply in those situations where creditors seek to collect from a debtor that has insufficient resources to satisfy its debts. Strictly speaking, in the Italian context, the term ‘fallimento’ that has been replaced by ‘liquidazione giudiziale’, refers exclusively to the liquidation of insolvent commercial entities or entrepreneur. Actually, other than bankruptcy, the Italian Crisis and Insolvency Code also provides for different insolvency proceedings, including (inter alia):
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Generally, the onset of a borrower's insolvency does not affect security interests. As is the case in most jurisdictions, security which has been granted during an applicable hardening period may be clawed back to the bankruptcy estate in certain circumstances.
In determining the assets of the bankruptcy estate certain pre-petition acts of the bankrupt are considered void per se. These include gratuitous acts and payment of certain debts (namely those becoming due after the bankruptcy date) executed by the bankrupt during the two years preceding the bankruptcy declaration. In other instances, clawback actions (details of which are set out below) may lead to the setting aside of certain other actions and payments carried out by the debtor prior to its formal insolvency.
Pursuant to the Italian Crisis and Insolvency Code, the suspect periods are:
It is important to underline the difference between situations provided by (a) and (b) above, where, in order to rebut any claw-back actions, the third party must demonstrate that it was not aware that the debtor was insolvent; whereas in (c) it is the receiver that must prove that the other party knew the debtor was insolvent.
Pursuant to Article 165 of the Italian Crisis and Insolvency Code, all transactions for no consideration or at an undervalue are ineffective against creditors if entered into by the debtor in the two-year period prior to the declaration of bankruptcy.
According to Article 166 of the Italian Crisis and Insolvency Code, the following transactions may be set aside by the receiver, unless the other party proves that it did not know that the debtor was insolvent:
The following transactions, if entered prior to the filing of the request which was then followed by the beginning of the bankruptcy or in the six-month period before, may also be set aside, if the receiver proves that the other party knew or ought to have known of the debtor’s insolvency.
Evidence can be supplied in any form. Quite often, however, this is done by recourse to presumptions relating to the occurrence of certain circumstances which are deemed symptomatic of insolvency and which are freely evaluated by the courts in terms of whether these may be sufficient for the purpose of assessing whether the defendant had, or should have reasonably had, knowledge about the distressed status of the debtor. These provisions may be relevant to the purchaser in the event that security is also given with respect to the transfer.
Pursuant to Art. 165 of the Italian Crisis and Insolvency Code, in the event of a favourable judgment on the clawback action, the relevant payment and/or act could be revoked. As a consequence, the relevant third party would be obliged to return to the bankruptcy proceedings any payment, asset or good received from the bankrupt company and it might only lodge its claim with the relevant court as an unsecured creditor of the bankrupt company.
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Creditors are equally entitled to be satisfied over the assets of the debtor, with the exception of the rightful claims of pre-emption, ie liens, pledges and mortgages. In particular, creditors who have liens over real estate assets are preferred to mortgagees if the law does not state otherwise. Pursuant to Article 2777 and ff. of the Italian Civil Code, the liens may be:
In an insolvency procedure, claims generally rank in the following order:
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If a security interest has not been validly perfected, what is the position of the holder of that security if the borrower becomes insolvent?
The holder of the security is treated as an unsecured creditor.
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