Debt finance

Some of the key areas affecting the granting of guarantees and security are as follows.

Capacity/Corporate Benefit

It is important to check the constitutional documents of a company granting a guarantee or security to ensure it has an express or ancillary power to do so and there are no restrictions on the directors' powers that would be preventative. Under Italian law, directors have a general duty to promote the success of the company for the benefit of its members as whole; as such, they will need to be able to show that adequate corporate benefit is derived from the company giving the guarantee or security. This is often more difficult in the case of upstream or cross-stream guarantees or security provided by a subsidiary to its parent or sister company.

Provided that the assessment of a corporate benefit is a matter of fact depending on a number of commercial and financial factors to be evaluated by the management body of the grantor of the guarantee and/or security, the market approach is often to have the members of the company approving the granting of the guarantee or security by written resolution and, if possible, to limit the guaranteed/secured amount to the direct monetary benefit arising to the issuer/grantor of the upstream or cross-stream guarantees or security (for example, the maximum guaranteed/secured amount would not exceed the amount of the intra-group/shareholders' loans made available to the issuer/grantor by the entity in the interest of which the upstream or cross-stream guarantees or security is issued/granted).

Insolvency

Guarantees and security may be at risk of being set aside under Italian insolvency laws if the guarantee or security was granted by a company within a certain period of time prior to the declaration of bankruptcy (dichiarazione di fallimento). For such a transaction to be set aside, certain statutory criteria would have to be met, including that the guarantee or security was given within six months (or one year in the event that the underlying guaranteed obligation was not undertaken prior to (and not at the same time as) the issue/granting of the guarantee/security) of the declaration of bankruptcy (dichiarazione di fallimento) of the affected party.

In case of mortgage lending transactions governed by Section 38 of the Consolidated Banking Act (the so called ‘Credito Fondiario’ providing for certain requirements and limitations for the lenders in the selection of the remedies against the borrower in case of default), the period within which the mortgage assisting the financing may be set aside is reduced to 10 days.

Financial assistance

Financial assistance is subject to stringent regulation and limitations and it is therefore quite rare in the market to encounter a company providing financial assistance for the purchase of its own shares as a complex “whitewash” procedure is required in order to legally carry out such a transaction. Financial assistance in this context would include giving a guarantee or security in connection with the share purchase.

Common forms of guarantees

Guarantees can take a number of forms.

A particular distinction worth remembering is between a personal guarantee (fideiussione) and an autonomous first demand guarantee.

• A personal guarantee (fideiussione) is a strictly regulated form of guarantee. Some of its main features are that:
  • it remains valid only if the underlying guaranteed obligation is valid;
  • the guarantor is entitled to object to a payment request by invoking the exceptions and objections which pertain to the debtor in the interest of which the guarantee was issued (the relevant debtor);
  • the guarantor may, before paying and under certain conditions, act against the relevant debtor to be released from the guarantee or to obtain due counter guarantees or counter security for the satisfaction of its claims after the payment; and
  • the guarantor is released if the guaranteed creditor has further financed the relevant debtor although it was aware of its difficult financial conditions.
• An autonomous first demand guarantee is intended as an instrument ensuring payment to the relevant creditor irrespective of the circumstances affecting the relevant debtor or the underlying guaranteed obligation if the contractual conditions/steps and procedures provided by the relevant agreement are met.

Both of the above described guarantees shall expressly provide for the maximum guaranteed amount should the guaranteed obligation be a future/conditional obligation.

Common forms of security

There are four basic types of security interest that can be created under Italian law:

• a mortgage;
• a pledge;
• an assignment by way of security; and
• a privilegio (general or special lien).

Different types of security are suitable for securing different types of assets.
Under Italian law it is not possible for a single security to cover all of the assets of an Italian company, but only individual assets or classes of assets. Granting security over all of a company's assets will tend to be achieved through the granting of the following multiple security interests:

• a pledge over movable assets (including shares/quotas of a company) or receivables;
• a mortgage over real estate assets or vehicles or ships;
• a privilegio (general or special lien) over movable assets different from vehicles and ships; and
• an assignment by way of security of receivables.

With respect to financial transactions it is customary to establish securities in the form of “financial collateral guarantees” according to Legislative Decree 170/2004 implementing in Italy Directive EC 2002/47. Financial collateral guarantees relating to financial transactions are documented as transfer-title pledge over assets granted by a transferor in favour of a transferee covering the exposure of one party to another under the relevant financial transactions.

In addition to the above, the following securities have been recently introduced in Italy:

• Security transfer of immovable asset; and
• Non-possessory pledge (not implemented).

SECURITY TRANSFER OF IMMOVABLE ASSET

A loan granted to an entrepreneur by a bank or another financial entity authorized to grant loans to the public in Italy can be secured by transferring to the creditor (or to a company in the creditor’s group authorized to purchase, hold, manage and transfer rights in rem in immovable properties) the ownership of an immovable asset of the entrepreneur or of a third party. Such transfer is subject to the condition precedent of the debtor defaulting. In such a case, the creditor is entitled to notify the pledgor its intention to enforce such security pointing out the amount of its credit; following such notification an independent valuer is appointed by the relevant Court in order to determine the value of the relevant immovable asset  and consequently the sale process is carried out. The creditor shall pay to the pledgor the difference (if any) between the transfer price and the amount of its credit towards the pledgor.

NON-POSSESSORY PLEDGE

A non-possessory pledge allows the pledgor (who shall be engaged in entrepreneurial activities) to continue to use, transfer or otherwise dispose of the pledged assets for business purposes, provided that in such a case, the pledge would extend to any asset resulting therefrom. A non-possessory pledge agreement requires a written form and shall indicate a maximum secured amount. However, the pledge is enforceable vis-à-vis third parties only upon registration on an electronic register of non-possessory pledges to be set up. In this respect, since such electronic register has not been implemented, such security is not currently effective.

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.