Italy: Repaying creditors without imprisoning debtors

Authors: Mema Beye and Joanna Nasr
Publication: Celebrating Reforms 2008
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In 2003 Italy’s bankruptcy law was over 60 years old—not ideal to keep up with economic transformation. Judges, lawyers, businesses, and creditors all knew that the law needed to change, but the process was slow. Then, in 2003, the wake of the crisis caused by Parmalat’s demise, the Italian government finally shifted focus to implementing structural reforms to enhance Italy’s competitiveness.

Italy’s new bankruptcy law aimed to create a process similar to Chapter 11 in the United States, transferring the focus of proceedings from liquidation to corporate reorganization and restructuring. This framework strengthened creditors’ rights, stimulating the flow of credit to small and medium-size firms. This case study looks at the process and results of Italy’s long overdue bankruptcy reform.

Main Findings

  • With the new laws, the bankruptcy process no longer took up 7 years, as before. Doing Business estimates that creditors are now repaid in less than 2 years.
  • The new laws better preserves the value of the company with the recovery rate at €0.62 cents per Euro owed—almost double the €0.38 in 2002, according to the Italian Bankers Association.
  • About 85–90% of companies in financial distress now enter an informal workout with creditors, without court involvement.