- the principles of par condicio creditorum;
- the principle of universal liability of the debtor; and
- the general prohibition of appropriation of pledged assets.
As to the scope, the rules set out in Decree 170 apply to collateral arrangements over cash, financial instruments, or other assets which may be accepted as collateral in connection with transactions entered into through payments and settlements systems, provided that:
- the agreement is in writing (i.e. stored in any kind of durable medium, including electronic support);
- collateral is delivered to the collateral taker (or someone acting on his behalf); and
- delivery is evidenced in writing or in an equivalent legal manner and the evidence identifies the financial collateral to which it applies and shows the date of creation of the collateral (i.e. the date of registration of the charge in the account held by the intermediary or the date on which the cash collateral is noted in the relevant account held by the collateral taker or the person acting on his behalf).
Decree 170 reflects the language adopted in the EU Collateral Directive. Accordingly, collateral arrangements should be entered into with one of the following legal entities:
- public sector bodies and central banks;
- supervised financial institutions (credit institutions, investment firms, insurance undertakings, undertakings for collective investment in transferable securities and the like);
- central counterparties, settlement agents, clearing houses; or
- a person other than a natural person, including unincorporated firms and partnerships, provided that the other party of the collateral arrangement is an entity coming within one of the first three categories.
As to operational rules, article four of Decree 170 provides that in the case of an enforcement event, realisation will be possible either by sale or appropriation (if so agreed), without prior notice, court authorisation, public auction, or a waiting period. As such, the established principle set out in article 2744 of the Italian Civil Code, which prohibits appropriation, does not apply any further to financial collateral arrangements.
In an attempt to mitigate the arbitrariness of appropriation of the pledged assets, the Italian legislator has established certain limitations. The main one is that realisation of the security interests will occur within the frame of commercial reasonableness. As a result, appropriation will be permitted to the extent that it was previously agreed by the parties and where the parties have also provided for evaluation criteria of the collateral. The collateral taker should promptly notify in writing the collateral provider or the insolvency official, if any, with the details of the appropriation (article 4(2)).
Where the parties have not agreed on realisation methods, the debtor (and presumably any interested party) may challenge the realisation before a court within three months of the notification of appropriation made by the collateral taker.
Also, the insolvency bodies may challenge realisation and appropriation of the collateral to the extent that they are able to argue against the commercial reasonableness of the evaluation of either the realisation methods or the relevant financial obligations. This challenge may be taken within six months of the commencement of insolvency proceedings, provided that the evaluation has occurred in the year prior to the commencement of the proceeding itself (articles 8(2) and (3)).
The right to use and to substitute original collateral is permitted (article five of Decree 170) and re-characterisation (i.e. the legal name attributed to a financial collateral arrangement) may not jeopardise the validity of a title transfer transaction aiming at creating a security interest (article six of Decree 170).
‘Close-out’ netting clauses are valid and enforceable in accordance with their terms, notwithstanding the commencement or continuation of insolvency proceedings, or reorganisation measures in respect of the collateral provider or the collateral taker (article seven of Decree 170).
Moreover, the Italian legislator has also partially protected financial collateral arrangements from the effects of the commencement of insolvency proceedings. Financial collateral arrangements may not be declared invalid or void, or be reversed on the sole basis that they have come into existence on the day of the commencement of winding-up proceedings or reorganisation measures, or during the so-called suspect periods. The same rules apply to the obligations to provide additional financial collateral or to substitute the collateral (article nine of Decree 170).
Under article nine of Decree 170, financial collateral arrangements may not be revoked on the sole basis that they were entered into during the suspect period; however, they might be revoked in the event that the counterparty was aware of the debtor’s state of insolvency. In any case, uncertainties on the correct coordination of the provisions set out in Decree 170 and the strict rules concerning avoidance of transactions under the 1942 Bankruptcy Law still persist.
Finally, as to the applicable law, article 10 of Decree 170 confirms the principle set out in the so-called ‘finality Directive’ (and in Legislative Decree 9 April, 2001), by extending the PRIMA (place of the relevant intermediary) approach to any kind of financial collateral arrangement. In other words, all questions relating to book entry securities collateral and in respect to any of the matters concerning the legal nature of the security interest, perfection requirements, ranking issues and realisation will be governed by the law of the country in which the relevant account is maintained. Any agreement which provides otherwise will be deemed to be null (article 10(2)). As to this issue, Decree 170 seems to reject the solution of the Hague Convention adopted on December 2002, which provides that the applicable law may also be the law chosen by the account holder and its intermediary in the account agreement.
In conclusion, although some practical problems still call for a solution since its entry into force, Decree 170 has certainly helped to override the strictly formal approach previously applicable, hence allowing more flexibility and speed in the creation (and, where the case, realisation) of financial collateral to the benefit of banks and other financial institutions.
Giuseppe de Falco is a partner at Ughi & Nunziante in