This guidance note summarizes Italian legal framework and other rules relating to claw back actions. International companies should be particularly familiar with these rules and domestic laws before purchasing Italian assets.
Italian legal framework for claw back actions
Claw back actions (revocatoria ordinaria in Italian) are regulated by Article 2901 of the Italian Civil Code.
Under this Article, whether in the course of an insolvency proceeding or otherwise: “even if a claim is subjected to a term or condition, a creditor can demand that acts by which the debtor disposes of his assets to the prejudice of such creditor’s rights be declared ineffective as to the creditor, under the following conditions:
- the debtor was aware of the prejudice that the act would cause to the rights of the creditor, or, if such act was prior to the existence of the claim, that the act was fraudulently designed for the purpose of prejudicing the satisfaction of the claim, and
- in the case of a non-gratuitous act, the third person involved was aware of the prejudice, or, if the act was prior to the existence of the claim, that the third person participated in the fraudulent design”.
Claw back actions must be initiated within five years following the date of the deed of transfer.
Parties to a claw back action
In a typical Italian claw back action involving a disposal or sale of assets to an international company, three parties are involved:
- the creditor (the party that has a credit to claim against the debtor),
- the debtor (the Italian company that is disposing of the assets), and
- the third party (the international company that is acquiring the assets).
The debtor and the third party are contracting parties; the creditor is not a contracting party.
Requirements for a claw back action
- Who may initiate a claw back action? Art. 2901 states that the claimant in the claw back action must be the creditor. Case law clarifies that a person or entity may qualify as a creditor for the purposes of initiating a claw back action even if the alleged amount due from the debtor is under contention (a so-called “contentious credit”, which is not certain and enforceable). See, for example, Italian Supreme Court, decision no. 1893/2012. Therefore, it is common to have a claw back action contemporaneously with a separate proceeding involving the same parties aimed at assessing the amount and enforceability of the creditor’s claim.
- Who are the defendants in a claw back action? Claw back actions must be brought against both the debtor and the third party. In relation to the debtor, the claimant would need to prove that the debtor was aware that the disposal under challenge had a prejudicial effect on the creditor’s rights (scientia fraudis). In order to prove this, the claimant would need to produce evidence relating to the sequence of events around when the credit was granted and when the disposal was agreed. The court will evaluate the state of mind or intention of the debtor in relation to the disposal being challenged.
- In the case of a disposal which took place before the existence of the creditor’s claim, for a claw back action to be successful, the claimant must prove that the disposal was fraudulent in that it was made with the aim of prejudicing the satisfaction of a claim against the debtor. The claimant would try to demonstrate that the disposal was in fact designed to cause the debtor to enter into an insolvency situation, rendering the debtor incapable of paying its debts to its creditors.
- In the case of a disposal which took place after the credit was provided to the debtor, for a claw back action to be successful, the claimant must prove that the debtor was aware that the disposal would result in a reduction of the debtor’s assets, or worth, such that the debtor would be incapable of repaying its debt to the creditor, thereby prejudicing the rights of the creditor.
- As regards the position of the third party, if the disposal was gratuitous (a gift), then the claimant in a claw back action must only prove the debtor’s awareness of the prejudicial effects of the disposal as regards the creditor’s rights. The psychological status or intent of the third party would be entirely irrelevant in this scenario. If the disposal was non-gratuitous, by contrast, then the claimant must prove consilium fraudis, which is that both the debtor and the third party were aware of the prejudicial effects of the disposal. Furthermore, similar to the debtor’s position described above, in the event of a non-gratuitous transfer entered into prior to the existence of the creditor’s claim, the claimant must prove that the third party participated in the fraudulent design aimed at prejudicing the satisfaction of the claim, whereas in the event of a subsequent non-gratuitous transfer, the claimant only needs to show that the third party and the debtor were aware that the disposal would have reduced the debtor’s assets, or worth, so as to jeopardize the capability of the debtor to satisfy its creditors’ claims.
- An objective requirement of a claw back action is the eventus damni, which is the prejudice to the creditor’s rights caused by the disposal of assets that caused prejudice to the creditor’s rights. The eventus damni must be a direct consequence of the disposal and must exist until the time the claw back action is brought. In order to meet this requirement, the claimant in a claw back action has to show that the creditor has suffered current and actual damage as a consequence of the disposal of the debtor’s assets. According to case law, it may be sufficient for the claimant to prove that disposal rendered the satisfaction of the creditor’s claim uncertain or difficult (not necessarily impossible), by impoverishing the debtor’s assets. See, for example, Italian Supreme Court, decision no. 1896/2012.
Effects of a successful claw back action
A claw back action is aimed at ensuring the satisfaction of the creditor’s claim, which is affected by the reduction of the debtor’s assets due to a challenged disposal.
A successful claw back action does not render the disposal being challenged null and void. Rather, it implies that the disposal is ineffective as regards the creditor who brought the claw back action. Accordingly, even if the claw back action has a successful outcome for the creditor, the disposal is still valid; the assets which were transferred do not get returned to the debtor. Rather, the assets that were the subject of the transfer become subject to a subsequent enforcement action, which must be commenced by the creditor against the third party who now owns the asset, to the extent necessary and sufficient to satisfy the creditor’s rights. See, for example, Art. 2902 of the Italian Civil Code, which states: “a creditor, after having obtained a declaration of ineffectiveness of the act, can bring enforcement proceedings or proceedings to secure precautionary measures on the asset against third parties, which is the object of the act clawed back.”
In light of the Italian legal framework and relevant case law and rules regarding claw back actions, an international company that intends to purchase an asset from an Italian seller should consider the following points in order to protect against potential claw back actions and disputes with creditors of the seller:
- Is the price of the transfer fair and in line with the market? If yes, then the purchaser is better protected against a potential claim by a creditor for any prejudicial effects of the sale on the creditor’s rights.
- At the time of the sale, what was the financial condition of the seller/debtor? Would the residual assets of the company, post-sale, be large enough to cover the amounts claimed by creditors? If yes, then the argument could not be made that the sale rendered the satisfaction of a creditor’s claim uncertain or more difficult.
- When negotiating the sale and purchase contract, the buyer should request a representation and warranty provision in the sale and purchase contract, which provides that, in case of a successful outcome of a claw back action, the seller agrees to indemnify the buyer for any damages suffered as a consequence of the declaration of ineffectiveness of the transfer and the subsequent enforcement action that the creditor may decide to pursue.
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