The Subordination of Shareholder and Intragroup Loans in Italy. Shifting Perspective in the Wake of the Covid-19 Emergency Legislation

749 Amidst the COVID-19 outbreak, Italy as well as a number of other European states, including Austria, Germany and Spain, enacted emergency legislation suspending subordination of shareholders and intragroup loans in order to help companies stay afloat. While this measure was clearly prompted by extraordinary circumstances, it should be noted, however, that unlike jurisdictions which adopt automatic subordination, such as Germany and Spain, or where subordination is also based on quantitative criteria, such as Austria, subordination in Italy is based on flexible standards that may not strictly call for an emergency suspension. The COVID-19-related suspension of subordination provides the momentum for reassessing the scope of application of the subordination of shareholder and intragroup loans under Italian law. Although substantially unexplored in the international legal literature, subordination was introduced in Italy in 2003 and has now been applied for nearly twenty years. The system is quite sophisticated and also recognizes a variety of restructuring exemptions allowing priority to the loans. This paper examines subordination of shareholder and intragroup loans under Italian law, seeking to establish a workable construction of the standards of the excessive imbalance between debt and equity and of the reasonableness of a capital contribution on which the application of the remedy is predicated. Building also on relevant economic studies, the paper argues that the Italian subordination system has the potential to distinguish between desirable and undesirable shareholder and intragroup loans based on whether the loan is intended to finance positive net present value projects, restricting the latter while not deterring the former, so as to guarantee the goal of increasing the expected total value of the company and producing better satisfaction of creditors’ claims. 750