Italy
Giving or taking guarantees
To be valid, a guarantee needs to be in writing and signed by the guarantor. It can be provided also in case the Relevant Debtor is unaware of its issue.
The issue of a guarantee by a company does have some limitations regarding, inter alia the:
- preservation of the assets of the guarantor and the preservation of the rights of the creditors and stakeholders;
- misuse of corporate assets;
- exclusion of liability in case of gross negligence (colpa grave) or willful misconduct (dolo); and
- accrual and liquidation of compound interest.
Giving or taking security
A security document may need to be executed through notarial deed should it:
- contain a mortgage;
- contain a pledge over quotas over a limited liability company;
- contain a privilegio speciale (special lien); or
- contain an assignment of receivables vis-à-vis public entities.
In all other cases, it may be entered into either in notarial form or via exchange of commercial letters. In particular, this latter form is mainly utilized when the registration of the relevant instrument is not required by law.
Once granted, security needs to be properly perfected before it is valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder or a custodian, registration of the security in a company’s books (as per the pledge of a company's shares) public registries and/or notice being given to (or, alternatively, acceptance being obtained from) third parties. Mortgages must be registered at the Land Registry, the pledges over a company's quotas must be registered in the Companies Registry, while the privilegio speciale (special lien) must be registered in the relevant book held at the competent courts. Failure to register means that the charge will be ineffective (non opponibile) against the liquidator, administrator or any creditor of the company and the money secured by the charge becomes immediately payable.
As for guarantees, for a period after a new security interest has been granted (known as the hardening period), there is a risk that such security is set aside in certain circumstances under insolvency laws.
Are there any restrictions on lending and borrowing?
Lending
In general terms, under Article 106 of the Consolidated Banking Act the granting of loans in any form is reserved to duly authorized financial intermediaries enrolled with a Register kept by the Bank of Italy.
Specific exclusions are set forth in Ministerial Decree No. 53 of 2015, as well as cases in which the granting of loans is not considered as performed vis-à-vis the public.
In addition, loans can be granted also by Italian special purpose vehicles incorporated pursuant to the Italian Securitization Law. Such SPVs can carry out lending activity in the context of securitisation transactions, both in performing and non-performing scenario, in accordance with the specific requirements and limits set out under the Italian Securitization Law.
Borrowing
While borrowers are generally not regulated, it is advisable for borrowers to consider whether the consumer-lending regime applies to their activities, in which case they will benefit from some additional protections and benefits (such as, for example, in terms of limitations to unilateral amendments by the finance party and transparency rules).
What are common lending structures?
Lending in Italy can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).
Syndicated facilities by their nature involve more parties (such as the agent which fulfils certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific purposes, eg mortgage loans (including credito fondiario in relation to the financing of real estate assets), working capital loans, equity bridge facilities, bridge to cash facilities, project facilitiesand, letter of credit facilities and export facilities.
Finally, loans can be 'in cash' (finanziamenti per cassa), when the lender makes available to the borrower cash, or through the issue of documental guarantees in favour of third parties in the interest of the borrower (finanziamenti per firma).
Loan durations
The duration of a loan can vary between:
- a term loan, provided for an agreed period of time but with a short availability period;
- a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn on a roll over basis;
- an overdraft, provided on a short-term basis to support short-term cash flow issues; or
- a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.
Loan security
A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security.
Loan commitment
A loan can also be:
- committed, meaning that the lender is obliged to provide the loan if certain contractual conditions are fulfilled; or
- uncommitted, meaning that the lender has discretion whether or not to provide the loan.
Loan repayment
A loan can be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or bullet (usually meaning the loan is repayable in full at maturity).
What are the differences between lending to institutional / professional or other borrowers?
Lending to institutional/professional borrowers entails a reduced set of protections and limitations in favour of the borrower.
Lending activities towards retail clients and consumers in particular are subject to stricter provisions and limitations.
Do the laws recognize the principles of agency and trusts?
In theory both principles are recognized as a matter of Italian law, although the trust concept is not yet commonplace in the Italian market and is seldom present in common lending structures.
From a practical perspective, in finance transactions with more than one finance party an agent is always appointed to act on behalf of the finance parties. It is extremely rare to have trustees appointed in connection with secured assets as generally trustees may encounter legitimacy issues in enforcing security interests. Parallel debt structure is not recognized/applicable in Italy.
Moreover, the agent usually is granted with reduced representation powers when such powers are granted by hedging banks which, for example, often have more flexibility in the management of the security interests assisting their claims (although subject to the restrictions of any intercreditor agreement).
Are there any other notable risks or issues around lending?
Generally
Loan agreements and other finance documents are subject to general contractual principles.
However, certain principles of law cannot be contractually derogated and any contrary provisions contained in the finance documents would be null and void. As an example, finance documents may not provide for the exclusion of liability in case of gross negligence (colpa grave) or willful misconduct (dolo), and there are limitations to accrual and liquidation of interest (the Italian Usury Legislation applies in this case) and compound interest.
Furthermore, the enforcement of obligations of a party or the binding effect of such obligations may be limited by laws regarding bankruptcy, receivership, insolvency, liquidation, reorganization and any laws generally affecting the rights of creditors. In particular any payment made in advance in respect of its due date as originally agreed between the parties, including as a consequence of the acceleration of such payment obligation or as a result of the operation of any mandatory prepayment provision contained in the finance documents, may, at certain conditions, be deemed ineffective vis-à-vis the bankruptcy administration of the payer, pursuant to Article 65 of the Bankruptcy Law, and accordingly the bankruptcy administration of such payer may request the restitution of such payment.
In addition, it is worth noting that:
- In banking transactions, a loan facility (from an accounting perspective) constitutes an asset of the lending bank rather than a liability but Directive 2014/59/EU (Bank Recovery and Resolution Directive or BRRD) and the relevant powers of the competent resolution authority may still be relevant eg in relation to a bank's potential liabilities to other syndicate members in a loan or an inter-creditor arrangement.
- If a financial institution happens to be a borrower, then its liabilities to repay debt may be subject to bail-in.
Specific types of lending
Specific to the area of mortgage lending is the issue of whether a lender falls within the recently formed Italian mortgage regime. The Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property, implemented in Italy through the Consolidated Banking Act and the Transparency Provisions, aims to prevent the irresponsible lending and borrowing practices that were exposed during the global financial crisis. The implementing regulations impose a number of requirements on lenders including the need to:
- conduct affordability tests before lending;
- provide standard information about the mortgage to enable borrowers to compare products; and
- ensure that staff are suitably trained.
Standard form documentation
It is quite common to see Italian law syndicated finance transactions governed by documentation based on forms published by the Loan Market Association (LMA), duly amended and integrated to be compatible with Italian law and Italian market standards. It is, however, also very common to see syndicated and bilateral finance transactions documented on bank standard form documentation prepared in-house or other simplified standard forms prepared by external legal advisors but diverging from the LMA.
Are there any other notable risks or issues around borrowing?
Borrowers should be aware of the potential implications of the BRRD, which outlines certain measures for dealing with failing financial institutions.
The BRRD applies to financial institutions incorporated in the European Economic Area (EEA), but does not apply to EEA branches of non-EEA incorporated entities.
Article 55 of the BRRD gives authorities the power to 'bail in' obligations of failed EEA financial institutions and also postpones the enforcement of early termination rights against the affected institution. 'Bail in' describes a variety of write down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of EEA law contracts, such powers override what the contracts says. In the case of non-EEA law contracts, there are requirements to incorporate such provisions into the contract.
Luciano Morello
Partner
DLA Piper LLP
[email protected]
T +39 338 690 73 96
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