## 3. Social Security Support to Extraordinary Administration Proceeding

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### Introduction
- Italy’s special insolvency regime for large enterprises: “extraordinary administration” (amministrazione straordinaria).
- Stated goals:
  - ensure continuation of the firm’s productive activity and preservation of the operational unity of businesses;
  - maintain employment and production levels during insolvency while designing restructuring or sale plans.
- Origins: introduced in response to the industrial crisis of the 1970s; aimed to address the liquidation focus of the legge fallimentare (1942).
- Use and signalling:
  - Ordinary insolvency cases in 2017: 12,009 bankruptcy liquidations (fallimenti) and 589 bankruptcy reorganizations (concordati preventive).
  - Special insolvency regime cases in 2017: 10.
- Criticisms:
  - reduces role of judiciary vis-à-vis the Ministry of Economic Development (MED);
  - creditors play a passive role while bearing most losses from forced continuation of business activity;
  - maintains employment temporarily at the expense of private and public creditors and, more generally, investment and competitiveness.
- Empirical summary conclusions:
  - regime is rarely successful in restructuring companies; most cases lead to sale of the business after 2–3 years of administration;
  - viable parts are sold; remaining assets disposed during a liquidation phase which is lengthier than the general regime;
  - creditors’ rights are sidelined and investments are eroded;
  - lack of public information on credit recoveries and direct costs complicates empirical cost assessment;
  - paper attempts an estimate finding the combined loss to creditors and the state could translate to a cost per transferred employee of about 14 times GDP per capita.
- Policy conclusion highlighted:
  - consider folding the special regime into the general insolvency regime, with added provisions to allow for state intervention in specific well-defined circumstances.

### Overview of the Regime: origins and evolution
- Prodi law (1979):
  - Decree Law n.26, of 30 January 1979 converted into law n. 95 of 3 April 1979.
  - Aimed at protecting enterprises and employment through continuity of business activities and restructuring.
  - Criticized for discretion in admitting companies, delays, and excessive powers to administration.
- Prodi-bis (1999):
  - Legislative decree of 8 July 1999, n. 270 amended Prodi law after incompatibility with European state aid rules (ECJ Piaggio decision).
  - Intended to address EC/ECJ concerns about automatic access to state aid.
- Marzano law (2003, converted 2004):
  - Introduced special regime for very large enterprises after Parmalat insolvency.
  - Based on Prodi-bis with special rules for very large enterprises: more flexible, less cumbersome, reduced liquidation likelihood, more powers to administration.

### Key structural distinctions: standard versus extraordinary insolvency
- Major differences:
  - Minimum group size:
    - Prodi-bis: enterprises employing at least 200 workers; debt must represent at least 2/3 of the value of the groups’ assets or income.
    - Marzano: minimum of 500 people and having at least €300 million in debt (initially 1,000 employees and €1 billion in debt).
  - Objectives:
    - Preserve the enterprise despite insolvency through restructuring or reconversion, typically via a sale.
    - Admission requires companies that “present concrete prospects for the recovery of the business activity”.
    - Purchaser undertaking requirement: “the purchaser must undertake to pursue the business activity [of the company] for at least two years and to maintain the employment levels established at the time of the sale for the same period.”
  - Structure and stakeholder roles:
    - Defined as “quasi-administrative” or “quasi-judicial”; prominent role for the MED and its commissioners.
    - Creditor protection and participation minimized; creditors’ interests are “taken into account” rather than determinative.

### Extraordinary administration for large groups (Prodi-bis)
- Access criteria:
  - Quantitative: at least 200 workers; debt at least 2/3 of the value of group assets or income.
  - Enterprise must be declared insolvent (unable to meet obligations) and present specific prospects for economic recovery.
  - Procedure affects all enterprises within the group.
- Judicial (observation) phase:
  - Court declares insolvency; may be at request of debtor, creditors, public prosecutor or ex officio.
  - Court gives MED a hearing before declaring insolvency, including invitation to indicate one or three judicial commissioners.
  - Court appoints overseeing judge and one or three judicial commissioners; deadline set for creditor claims; debtor may continue managing business or commissioner may manage.
  - Judicial commissioner must deliver a report within thirty days from date of insolvency declaration assessing causes, recovery prospects, enterprise value and liabilities; copy delivered to MED.
  - MED submits its opinion regarding admission to procedure.
  - Court declares commencement of extraordinary administration or declares bankruptcy if requirements not met.
- Operational (administrative) phase:
  - Admission requires good economic recovery prospects achieved through:
    - Restructuring plan (should not last more than two years; MED may grant one-year extension and possibility of additional one-year extension).
    - Transfer plan (sale as going concern after continuing business activities no longer than one year; may be extended by one additional year).
  - MED appoints one or three extraordinary commissioners and a surveillance committee (three or five members).
  - Special authorizations by MED and surveillance committee required for:
    - Sale and lease of enterprises or economic units; sales/leases/encumbrances of real estate assets; block sales of movable assets; pledges or transactions of indeterminate value or for a value higher than €2,065,682.
  - Legal protections for continuation:
    - Stay of creditor actions without exceptions.
    - Avoidance actions restricted and only the extraordinary commissioner can undertake them when sale program exists.
    - Extraordinary commissioner can interfere with executory contracts but not with labor contracts or lease contracts where debtor is lessor.
    - Claims related to continuation of business are expenses of the procedure and have priority over existing creditor claims.
  - Program obligations:
    - Commissioner must present a program within 60 days after commencement (MED can grant extension for additional 60 days).
    - Program drafted under MED supervision, conforming to MED industrial policy guidelines and “taking into account the interests of the creditors”.
    - Program contents required: business activities continued/discontinued; plan for liquidation of non-essential assets; financial and economic projections; mechanisms to cover financial needs including possible state assistance; if sale contemplated, whether offers received and expected recovery for creditors; if restructuring contemplated, recapitalization, structural changes, and timeline/modalities for satisfaction of creditors’ claims (may include composition with creditors).
    - MED authorizes execution after hearing surveillance committee; program involving state aid requires EC decision.
  - Implementation:
    - Commissioner implements program and presents progress report every three months; final report at completion.
    - Program sale requires prior valuation; acquirer must commit to continue activity for at least two years and maintain employment levels agreed at sale.
    - Partial transfer of employees possible; workers not transferred can receive state support through the Cassa Integrazione Guadagni Straordinaria (CIGS).
  - Termination and conversion:
    - Process can transform into bankruptcy if programs fail or chances of success become low.
    - Procedure can close if enterprise recovers solvency before program end or if composition agreed by creditors and authorized by MED.

### Extraordinary administration for very large groups (Marzano)
- Access criteria:
  - Coverage for very large enterprises; insolvency is a requirement but not assessed at commencement; no express requirement of “specific prospects of economic recovery”.
  - Thresholds:
    - Initially: at least 1,000 workers and €1 billion of debt.
    - After 2005: lowered to 500 workers and €300 million of debt.
- Initiation:
  - Initiation is administrative: debtor applies to MED and simultaneously submits insolvency application to court.
  - Minister initiates extraordinary administration by decree without waiting for court resolution.
  - Court issues insolvency declaration within five days of Minister’s decree communication.
- Role and timing:
  - MED appoints one or three extraordinary commissioners, who perform the judicial commissioner role and manage company until insolvency declaration.
  - Commissioner must produce a report within sixty days of appointment (extension once for additional sixty days).
  - Commissioner may extend procedure to other enterprises in the group.
  - Commissioner must present a program within 180 days following appointment (deadline can be extended by Minister for additional 90-day period).
- Program features:
  - Originally only allowed restructuring program; after Alitalia amendments (2008) sale-of-business program possible.
  - Restructuring program can include a composition with creditor classes; classes require “homogenous economic interests”.
  - Composition proposal authorized by MED after assessing correctness of creditor classes; approval requires majority of creditors representing majority of claims in every class.
  - Abstention by creditors deemed equivalent to positive vote.
  - If one or several classes vote against composition, MED can disregard negative vote if majority of classes vote in favor; dissenting classes treated at least as under other practicable alternatives.
  - If creditors do not approve composition, commissioner will introduce variations; commissioner can present sale plan to MED.
  - If plan authorized, one-year term for sale can be extended another year.
- Other Marzano special rules:
  - Enterprises providing essential public services and strategic enterprises:
    - Legislative changes after 2008 allow sale at market value in private negotiations to maintain essential services.
    - Advantageous treatment regarding anti-trust and licensing included.
  - Transactions during process:
    - MED can authorize sale or lease of assets, businesses or economic units for restructuring goals.
    - Until restructuring program authorization, MED can authorize transactions necessary for continuation; acts of ordinary administration or acts below €250,000 do not require authorization.
  - Avoidance actions:
    - Extraordinary commissioner under Marzano can undertake avoidance actions even after authorization of restructuring program if conducive to program objectives.

### Data sources and scope
- Data collected for both Prodi-bis and Marzano regimes starting in 1999.
- Main source: Ministry of Economic Development (MED).
- Coverage period stated as from 2000 until [content truncated at end of provided excerpt].
- 2017 data statement:
  - “The data contain information on the 120 groups intervened under the Prodi-bis procedure (representing a total of 329 companies) and the 25 groups intervened under the Marzano procedure (representing a total of 231 companies). The total number of observations is 145 groups, representing 560 companies.”

### Data and Methodology
- Sample composition:
  - 120 groups intervened under the Prodi-bis procedure representing a total of 329 companies.
  - 25 groups intervened under the Marzano procedure representing a total of 231 companies.
  - Total observations: 145 groups, representing 560 companies.
- Data sources:
  - Balance sheet and income statement information matched from the Orbis database (Bureau van Dijk, sourcing Italian company data from Cerved Group).
  - Orbis coverage: every Italian company with a tax ID that files at the Chamber of Commerce; total active and inactive Italian companies in the database close to 7 million.
- Matching and control group:
  - Prodi-bis and Marzano firms compared against the universe of Italian firms—excluding financial firms—with more than 200 employees.
  - Statistics considered at the company group level.
  - For group-level control data, Orbis sample restricted to union of firms with consolidated accounts (C1 and C2) and firms with unconsolidated accounts not part of a larger group (independence indicators A+, A, A-, B+, B, B- and U). Duplicates resolved by selecting account with highest degree of consolidation.
- Limitations:
  - Financial data available up to one or two years before application for extraordinary administration; no post-admission financial performance in database.
  - Identification of insolvent firms in Orbis problematic, preventing comparison with general insolvency regime.
  - Recovery rates for creditors post-procedure are not publicly available.

### Non-Financial Characteristics of Companies Undergoing Special Insolvency
- Sectoral and employment patterns:
  - Manufacturing sector predominant among applicants.
  - Top sectors by employment share (almost 60 percent of the population): transportation and storage, utilities, and administrative support.
  - Many admitted companies are in non-strategic sectors such as publishing, textile, and private security services.
- Group-level reporting:
  - Employment shares based on the year prior to application (or last year available).

### Financial Characteristics of Companies Undergoing Special Insolvency
- Pre-application financial condition:
  - Companies tend to file after experiencing 2–3 years of negative earnings.
  - Group median interest-coverage-ratio (ICR) under Prodi-bis close to -0.5 percent 2–3 years before start of procedure, compared to a median ICR above 2 for firms with more than 200 employees.
  - Two years before procedure, groups admitted have 10–15 percentage points less net worth-to-assets than the population of Italian firms with more than 200 employees.
  - About 25 percent of Prodi-bis groups and 20 percent of Marzano groups are already insolvent two years before start of procedure; comparison group insolvency rate is 2 percent.
- Key summary statistics (group-level, year before start of insolvency or last year available; measures in euros deflated to 2015):
  - Prodi-bis (No. of Obs. varies by variable):
    - Employees (No. Obs. 111): Median 338, Mean 508, Std. Dev. 725
    - Net worth (€ thousand) (No. Obs. 111): Median 18,822, Mean 29,8138,000 (note: preserve source formatting)
    - Total assets (€ thousand) (No. Obs. 111): Median 108,000, Mean 207,000, Std. Dev. 469,000
    - Operating revenue (€ thousand) (No. Obs. 111): Median 71,500, Mean 121,000, Std. Dev. 203,000
    - Interest Coverage Ratio (No. Obs. 101): Median -1.31, Mean -3.21, Std. Dev. 28.82
    - Profit margin (%) (No. Obs. 103): Median -6%, Mean -11%, Std. Dev. 22%
    - Debt/Assets (%) (No. Obs. 103): Median 53%, Mean 58%, Std. Dev. 42%
    - Debt/Equity>4 or <0 (% of firms) (No. Obs. 111): NA; Mean 79%, Std. Dev. 41%
    - Debt/EBIT>4 or <0 (% of firms) (No. Obs. 111): NA; Mean 95%, Std. Dev. 23%
    - Net Worth/Assets (%) (No. Obs. 103): Median 2%, Mean -14%, Std. Dev. 52%
    - Net Worth/Assets< 0 (% of firms) (No. Obs. 111): NA; Mean 39%, Std. Dev. 49%
    - Interest/Debt (%) (No. Obs. 100): Median 5%, Mean 18%, Std. Dev. 96%
  - Marzano (No. of Obs. varies by variable):
    - Employees (No. Obs. 22): Median 611, Mean 2,096, Std. Dev. 4,597
    - Net worth (€ thousand) (No. Obs. 22): Median 39,400, Mean 241,000, Std. Dev. 664,000
    - Total assets (€ thousand) (No. Obs. 22): Median 335,000, Mean 1,630,000, Std. Dev. 409,000
    - Operating revenue (€ thousand) (No. Obs. 22): Median 134,000, Mean 880,000, Std. Dev. 2,090,000
    - Interest Coverage Ratio (No. Obs. 22): Median -0.25, Mean -1.17, Std. Dev. 9.22
    - Profit margin (%) (No. Obs. 22): Median -1%, Mean -9%, Std. Dev. 29%
    - Debt/Assets (%) (No. Obs. 22): Median 54%, Mean 91%, Std. Dev. 195%
    - Debt/Equity>4 or <0 (% of firms) (No. Obs. 22): NA; Mean 50%, Std. Dev. 51%
    - Debt/EBIT>4 or <0 (% of firms) (No. Obs. 22): NA; Mean 95%, Std. Dev. 21%
    - Net Worth/Assets (%) (No. Obs. 22): Median 11%, Mean -42%, Std. Dev. 198%
    - Net Worth/Assets< 0 (% of firms) (No. Obs. 22): NA; Mean 23%, Std. Dev. 43%
    - Interest/Debt (%) (No. Obs. 22): Median 4%, Mean 5%, Std. Dev. 4%
  - Comparison groups (All >200 employees and average 2000-2015) statistics are provided in the source for benchmarking.

### Uses of the Special Regime and Its Efficiency
- Temporal patterns:
  - Admissions peaked after the global financial crisis and the Euro zone debt crisis, with group admissions peaking in 2009 and 2013.
  - Utilization frequency of both procedures positively correlated, indicating macro shocks affect medium and large companies.
- Outcomes and durations:
  - Approximately 95 percent of cases lead to the sale of the company or its divisions rather than stand-alone restructuring.
  - Average duration for execution of restructuring or selling program: about two years for Prodi-bis and about three years for Marzano.
  - Extensions and program changes can lengthen procedures; under Marzano, one third of groups undergo the selling phase for longer than three years.
  - The subsequent liquidation phase (disposal of remaining assets) usually takes longer than 8 years, above the average length of the ordinary bankruptcy procedure (fallimento).
  - As of 2016, companies still in special administration: Prodi-bis 240, Marzano 126; percent of companies involved still in procedure: Prodi-bis 80, Marzano 88.
  - Restructured companies: Prodi-bis 11, Marzano 17; Converted to bankruptcy: 50 (aggregate figure given).
- Employment preservation:
  - Transfer of employees via sales or restructuring averages 60 percent under Marzano and 50 percent under Prodi-bis at time of application.
  - In about 20 percent of cases, more than 90 percent of employees are transferred.
- Cost proxy estimates (2000–15):
  - Combined cost for creditors and the state could have reached at least €19 billion, composed of:
    - €12 billion: cumulative net income losses incurred during reorganization phase.
    - €7 billion: net wealth needed to recapitalize company groups to a viable net worth-to-assets ratio.
  - Cost of immediate liquidation estimated at €3 billion (total negative net worth loss to creditors and original shareholders).
  - Additional metric: average cost per transferred employee of €420,000, equivalent to about 14 times GDP per capita.
- Caveats:
  - Proxy excludes some attendant costs (e.g., contributions from wage supplementation mechanism, CIGS). No data on CIGS use for extraordinary administration cases available.
  - Lack of published recovery rate data and sparse information on state aid/public funds limits precise cost assessment.
- Recovery context:
  - For standard reorganization procedures (Danovi et al., 2018): repayment of creditors takes less than a year and usually results in full recovery for secured creditors; recovery rate for unsecured creditors ranges between 1 and 25 percent in limited observed cases.

### Assessment of the Regime
- Rarity and scope:
  - Special regime for insolvency of large enterprises is rare in the EU; aside from Italy, only Croatia enacted similar law in 2017 for systemic enterprises.
- Achievements and trade-offs:
  - Regime can preserve employment and enable coordinated group resolution; some parts sold quickly while others liquidated gradually, potentially avoiding fire sales.
- Shortcomings and distortions:
  - Admission criteria allow deeply insolvent and illiquid companies into the procedure; debts representing at least two thirds of value of assets or revenues can admit businesses already deeply insolvent.
  - Creditors’ rights are sidelined: continuation of business accumulates new liabilities that take priority over pre-existing claims, potentially causing large losses to pre-existing creditors.
  - High cost of the procedure and prioritization of job preservation can impose large collective costs and hamper worker reallocation.
  - Cases frequently connected with state aid; instances of illegal state aid observed (e.g., EC Decision concerning ILVA concluding illegal state aid for guarantees and public loan).
  - MED decisions influenced by industrial and social policy; creditor protection plays marginal role; political influence concerns remain.
  - Thresholds cover medium-sized enterprises (e.g., 200 workers) inconsistent with European definitions; debt-based criteria bear no relation to enterprise size and are not standard distress metrics.
- Deviation from international standards:
  - Objectives skewed toward preserving enterprises at the expense of creditor rights and viability assessment.
  - Role of public administration (MED) decisive and not aligned with UNCITRAL/World Bank standards envisioning court oversight and independent insolvency representatives.
  - Deficit in creditor participation rights: creditors do not participate in commencement, selection of commissioners/experts, have limited role in surveillance committee, and generally lack vote over restructuring/sale program.

### Lessons and Recommendations
- Strategic direction:
  - Consider folding extraordinary administration into the general insolvency regime (repeal or align special regime to general regime) to ensure court control and creditor decision power over economic outcomes (liquidation, sale as going concern, or reorganization).
  - Maintain limited special rules to protect public interest while aligning procedural safeguards with general insolvency law (e.g., MED entitled to receive reports; MED may nominate from a restricted list of highly qualified insolvency professionals to be appointed by courts).
- Specific legal and procedural reforms:
  - Ensure insolvency of large enterprises subject to enterprise courts and that creditors decide economic outcome.
  - Align rules so insolvency administrator can renegotiate all contracts, including labor contracts, to achieve restructuring.
  - Remove indefinite stay on secured creditors: allow secured creditors to request lifting the stay when their interests are not adequately protected.
  - Raise quantitative thresholds for special regime to exclude medium-sized businesses and better distinguish very large enterprises, listed companies, and providers of essential public services.
- Transparency and data:
  - Publish credit recovery data in extraordinary administration cases to assess private creditor losses and procedural efficiency.
  - Improve transparency on MED decisions and internal processes, including appointment and remuneration of extraordinary commissioners.
- Labor market and social policy adjustments:
  - Improve active labor market policies, strengthen social safety nets, and align wages with firm-level productivity to facilitate reallocation and mitigate long unemployment spells following downturns.
- Reform pathway:
  - Use improvements in the general insolvency regime (including post-October 2017 enabling reform) to provide a modern, flexible framework for reorganization applicable to large enterprises; follow through with legislative decrees no later than end-2018 for reform effectiveness.
  - Consider retaining coordinated group resolution innovations from extraordinary administration within the general regime.

### Box 1. EU State Aid Rules and the Italian Special Insolvency Regime
- Legal definition and conditions for state aid:
  - Article 107(1) of the EU Treaty: "any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market".
  - Conditions to classify a measure as state aid:
    - (a) the beneficiary of the aid is an entity that engages in an economic activity;
    - (b) the measure is financed by State resources and is imputable to the State;
    - (c) the measure confers an economic advantage;
    - (d) this economic advantage is selective;
    - (e) the measure distorts or threatens to distort competition and may affect trade between Member States.
  - During insolvency, state aid can create moral hazard and distort competition.
- EC and ECJ scrutiny of the original Prodi law:
  - ECJ case law cited: Ecotrade vs AFS (Case C-200/97, [1998] ECR 1-7907); Industrie Aeronautiche e Meccaniche Rinaldo Piaggio SpA and International Factors Italia SpA (Ifitalia), Dornier Luftfahrt GmbH, Ministero della Difesa (Case C-295/97, 17 June 1999).
  - ECJ concluded the original Prodi law was incompatible with EU state aid rules; Piaggio conclusions include examples of advantages not available under ordinary insolvency law.
  - Commission’s decision of May 16, 2000 analyzed distortions to competition created by the original Prodi law.
  - Prodi law amended by removing automatic admission into the procedure and the use of financial privileges.
- Persistent risks of state aid under Prodi-bis and Marzano regimes:
  - Current model continues to provide opportunities for provision of state aid.
  - Enterprises under extraordinary administration often receive special financial assistance through (bridge) loans or guarantees.
  - If financial transactions conducted at more favorable conditions than market, they may constitute state aid and require EC authorization.
- Commission guidelines for aid to distressed companies:
  - Enterprises are eligible for state aid only when they have exhausted all market options and where the aid is necessary to achieve a well-defined objective of common interest.
  - State aid should help the enterprise return to viability, include burden-sharing, and contain distortions to competition.
  - Less stringent conditions apply for liquidity assistance, especially for SMEs.
  - State aid to the steel and coal sector is excluded from the scope of the EC guidelines.
  - Reference: Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.7.2014.

*Source: wp18218*

### REFERENCES ______________________________________________________________28

### REFERENCES ______________________________________________________________28

### BOXES
- 1. EU State Aid Rules and the Italian Special Insolvency Regime  ____________________25
- 2. The Marzano Law Through the Parmalat and Alitalia Case ________________________26

*Source: wp18218 - REFERENCES ______________________________________________________________28*

### 3. Social Security Support to Extraordinary Administration Proceeding ________________27

### 3. Social Security Support to Extraordinary Administration Proceeding ________________27

### Introduction
- Italy has a special insolvency regime for large enterprises known as the “extraordinary administration” (amministrazione straordinaria).
- Stated goals: ensure continuation of the firm’s productive activity and preservation of the operational unity of businesses; maintain employment and production levels during insolvency while designing restructuring or sale plans.
- Origins: introduced in response to the industrial crisis of the 1970s; originally aimed to address the liquidation focus of the legge fallimentare (1942).
- Use and signalling:
  - Ordinary insolvency cases in 2017: 12,009 bankruptcy liquidations (fallimenti) and 589 bankruptcy reorganizations (concordati preventive).
  - Special insolvency regime cases in 2017: 10.
  - The regime has an important signaling effect regarding authorities’ willingness to intervene in saving large enterprises and corporate groups.
- Criticisms of the special regime:
  - Reduces role of judiciary vis-à-vis the Ministry of Economic Development (MED).
  - Creditors play a passive role while bearing most losses from forced continuation of business activity.
  - Maintains employment temporarily at the expense of private and public creditors and, more generally, investment and competitiveness.
- Empirical summary conclusions:
  - The regime is rarely successful in restructuring companies; most cases lead to sale of the business after 2–3 years of administration.
  - Viable parts are sold; remaining assets disposed during a liquidation phase which is lengthier than the general regime.
  - Creditors’ rights are sidelined and investments are eroded.
  - Lack of public information on credit recoveries and direct costs complicates empirical cost assessment.
  - Paper attempts an estimate finding the combined loss to creditors and the state could translate to a cost per transferred employee of about 14 times GDP per capita.
- Policy conclusion highlighted:
  - Consideration should be given to folding the special regime into the general insolvency regime, with added provisions to allow for state intervention in specific well-defined circumstances.

### Overview of the Regime: origins and evolution
- Prodi law (1979):
  - Decree Law n.26, of 30 January 1979 converted into law n. 95 of 3 April 1979.
  - Aimed at protecting enterprises and employment through continuity of business activities and restructuring.
  - Criticized for discretion in admitting companies, delays, and excessive powers to administration.
- Prodi-bis (1999):
  - Legislative decree of 8 July 1999, n. 270 amended Prodi law after incompatibility with European state aid rules (ECJ Piaggio decision).
  - Intended to address EC/ECJ concerns about automatic access to state aid.
- Marzano law (2003, converted 2004):
  - Introduced special regime for very large enterprises after Parmalat insolvency.
  - Based on Prodi-bis with special rules for very large enterprises: more flexible, less cumbersome, reduced liquidation likelihood, more powers to administration.

### Key structural distinctions: standard versus extraordinary insolvency
- Major differences:
  - Minimum group size:
    - Prodi-bis: enterprises employing at least 200 workers; debt must represent at least 2/3 of the value of the groups’ assets or income.
    - Marzano: minimum of 500 people and having at least €300 million in debt (initially 1,000 employees and €1 billion in debt).
  - Objectives:
    - Preserve the enterprise despite insolvency through restructuring or reconversion, typically via a sale.
    - Admission requires companies that “present concrete prospects for the recovery of the business activity”.
    - Purchaser undertaking requirement: “the purchaser must undertake to pursue the business activity [of the company] for at least two years and to maintain the employment levels established at the time of the sale for the same period.”
  - Structure and stakeholder roles:
    - Defined as “quasi-administrative” or “quasi-judicial”; prominent role for the MED and its commissioners.
    - Creditor protection and participation minimized; creditors’ interests are “taken into account” rather than determinative.

### Extraordinary administration for large groups (Prodi-bis)
- Access criteria:
  - Quantitative: at least 200 workers; debt at least 2/3 of the value of group assets or income.
  - Enterprise must be declared insolvent (unable to meet obligations) and present specific prospects for economic recovery.
  - Procedure affects all enterprises within the group.
- Judicial (observation) phase:
  - Court declares insolvency; may be at request of debtor, creditors, public prosecutor or ex officio.
  - Court gives MED a hearing before declaring insolvency, including invitation to indicate one or three judicial commissioners.
  - Court appoints overseeing judge and one or three judicial commissioners; deadline set for creditor claims; debtor may continue managing business or commissioner may manage.
  - Judicial commissioner must deliver a report within thirty days from date of insolvency declaration assessing causes, recovery prospects, enterprise value and liabilities; copy delivered to MED.
  - MED submits its opinion regarding admission to procedure.
  - Court declares commencement of extraordinary administration or declares bankruptcy if requirements not met.
- Operational (administrative) phase:
  - Admission requires good economic recovery prospects achieved through:
    - Restructuring plan (should not last more than two years; MED may grant one-year extension and possibility of additional one-year extension).
    - Transfer plan (sale as going concern after continuing business activities no longer than one year; may be extended by one additional year).
  - MED appoints one or three extraordinary commissioners and a surveillance committee (three or five members).
  - Special authorizations by MED and surveillance committee required for:
    - Sale and lease of enterprises or economic units; sales/leases/encumbrances of real estate assets; block sales of movable assets; pledges or transactions of indeterminate value or for a value higher than €2,065,682.
  - Legal protections for continuation:
    - Stay of creditor actions without exceptions.
    - Avoidance actions restricted and only the extraordinary commissioner can undertake them when sale program exists.
    - Extraordinary commissioner can interfere with executory contracts but not with labor contracts or lease contracts where debtor is lessor.
    - Claims related to continuation of business are expenses of the procedure and have priority over existing creditor claims.
  - Program obligations:
    - Commissioner must present a program within 60 days after commencement (MED can grant extension for additional 60 days).
    - Program drafted under MED supervision, conforming to MED industrial policy guidelines and “taking into account the interests of the creditors”.
    - Program contents required: business activities continued/discontinued; plan for liquidation of non-essential assets; financial and economic projections; mechanisms to cover financial needs including possible state assistance; if sale contemplated, whether offers received and expected recovery for creditors; if restructuring contemplated, recapitalization, structural changes, and timeline/modalities for satisfaction of creditors’ claims (may include composition with creditors).
    - MED authorizes execution after hearing surveillance committee; program involving state aid requires EC decision.
  - Implementation:
    - Commissioner implements program and presents progress report every three months; final report at completion.
    - Program sale requires prior valuation; acquirer must commit to continue activity for at least two years and maintain employment levels agreed at sale.
    - Partial transfer of employees possible; workers not transferred can receive state support through the Cassa Integrazione Guadagni Straordinaria (CIGS).
  - Termination and conversion:
    - Process can transform into bankruptcy if programs fail or chances of success become low.
    - Procedure can close if enterprise recovers solvency before program end or if composition agreed by creditors and authorized by MED.

### Extraordinary administration for very large groups (Marzano)
- Access criteria:
  - Coverage for very large enterprises; insolvency is a requirement but not assessed at commencement; no express requirement of “specific prospects of economic recovery”.
  - Thresholds:
    - Initially: at least 1,000 workers and €1 billion of debt.
    - After 2005: lowered to 500 workers and €300 million of debt.
- Initiation:
  - Initiation is administrative: debtor applies to MED and simultaneously submits insolvency application to court.
  - Minister initiates extraordinary administration by decree without waiting for court resolution.
  - Court issues insolvency declaration within five days of Minister’s decree communication.
- Role and timing:
  - MED appoints one or three extraordinary commissioners, who perform the judicial commissioner role and manage company until insolvency declaration.
  - Commissioner must produce a report within sixty days of appointment (extension once for additional sixty days).
  - Commissioner may extend procedure to other enterprises in the group.
  - Commissioner must present a program within 180 days following appointment (deadline can be extended by Minister for additional 90-day period).
- Program features:
  - Originally only allowed restructuring program; after Alitalia amendments (2008) sale-of-business program possible.
  - Restructuring program can include a composition with creditor classes; classes require “homogenous economic interests”.
  - Composition proposal authorized by MED after assessing correctness of creditor classes; approval requires majority of creditors representing majority of claims in every class.
  - Abstention by creditors deemed equivalent to positive vote.
  - If one or several classes vote against composition, MED can disregard negative vote if majority of classes vote in favor; dissenting classes treated at least as under other practicable alternatives.
  - If creditors do not approve composition, commissioner will introduce variations; commissioner can present sale plan to MED.
  - If plan authorized, one-year term for sale can be extended another year.
- Other Marzano special rules:
  - Enterprises providing essential public services and strategic enterprises:
    - Legislative changes after 2008 allow sale at market value in private negotiations to maintain essential services.
    - Advantageous treatment regarding anti-trust and licensing included.
  - Transactions during process:
    - MED can authorize sale or lease of assets, businesses or economic units for restructuring goals.
    - Until restructuring program authorization, MED can authorize transactions necessary for continuation; acts of ordinary administration or acts below €250,000 do not require authorization.
  - Avoidance actions:
    - Extraordinary commissioner under Marzano can undertake avoidance actions even after authorization of restructuring program if conducive to program objectives.

### Data sources and scope
- Data collected for both Prodi-bis and Marzano regimes starting in 1999 (when amendments to comply with EU recommendations were introduced).
- Main source: Ministry of Economic Development (MED).
- Coverage period stated as from 2000 until [content truncated at end of provided excerpt].

*Source: wp18218 - 3. Social Security Support to Extraordinary Administration Proceeding ________________27*

### 2017. The data contain information on the 120 groups intervened under the Prodi-bis

### wp18218 - 2017. The data contain information on the 120 groups intervened under the Prodi-bis procedure (representing a total of 329 companies) and the 25 groups intervened under the Marzano procedure (representing a total of 231 companies). The total number of observations is 145 groups, representing 560 companies.

### Data and Methodology
- Sample composition:
  - 120 groups intervened under the Prodi-bis procedure representing a total of 329 companies.
  - 25 groups intervened under the Marzano procedure representing a total of 231 companies.
  - Total observations: 145 groups, representing 560 companies.
- Data sources:
  - Balance sheet and income statement information matched from the Orbis database (Bureau van Dijk, sourcing Italian company data from Cerved Group).
  - Orbis coverage: every Italian company with a tax ID that files at the Chamber of Commerce; total active and inactive Italian companies in the database close to 7 million.
- Matching and control group:
  - Prodi-bis and Marzano firms compared against the universe of Italian firms—excluding financial firms—with more than 200 employees.
  - Statistics considered at the company group level.
  - For group-level control data, Orbis sample restricted to union of firms with consolidated accounts (C1 and C2) and firms with unconsolidated accounts not part of a larger group (independence indicators A+, A, A-, B+, B, B- and U). Duplicates resolved by selecting account with highest degree of consolidation.
- Limitations:
  - Financial data available up to one or two years before application for extraordinary administration; no post-admission financial performance in database.
  - Identification of insolvent firms in Orbis problematic, preventing comparison with general insolvency regime.
  - Recovery rates for creditors post-procedure are not publicly available.

### Non-Financial Characteristics of Companies Undergoing Special Insolvency
- Sectoral and employment patterns:
  - Manufacturing sector predominant among applicants, likely due to large size and exposure to shocks.
  - As a share of employment, top sectors (accounting for almost 60 percent of the population) include transportation and storage, utilities, and administrative support.
  - Many admitted companies are in non-strategic sectors such as publishing, textile, and private security services.
- Group-level reporting:
  - Employment shares based on the year prior to application (or last year available).

### Financial Characteristics of Companies Undergoing Special Insolvency
- Pre-application financial condition:
  - Companies tend to file after experiencing 2–3 years of negative earnings.
  - Group median interest-coverage-ratio (ICR) under Prodi-bis close to -0.5 percent 2–3 years before start of procedure, compared to a median ICR above 2 for firms with more than 200 employees.
  - Two years before procedure, groups admitted have 10–15 percentage points less net worth-to-assets than the population of Italian firms with more than 200 employees.
  - About 25 percent of Prodi-bis groups and 20 percent of Marzano groups are already insolvent two years before start of procedure; comparison group insolvency rate is 2 percent.
- Key summary statistics (values are group-level, year before start of insolvency or last year available; measures in euros deflated to 2015):
  - Prodi-bis (No. of Obs. varies by variable):
    - Employees (No. Obs. 111): Median 338, Mean 508, Std. Dev. 725
    - Net worth (€ thousand) (No. Obs. 111): Median 18,822, Mean 29,8138,000 (note: preserve source formatting)
    - Total assets (€ thousand) (No. Obs. 111): Median 108,000, Mean 207,000, Std. Dev. 469,000
    - Operating revenue (€ thousand) (No. Obs. 111): Median 71,500, Mean 121,000, Std. Dev. 203,000
    - Interest Coverage Ratio (No. Obs. 101): Median -1.31, Mean -3.21, Std. Dev. 28.82
    - Profit margin (%) (No. Obs. 103): Median -6%, Mean -11%, Std. Dev. 22%
    - Debt/Assets (%) (No. Obs. 103): Median 53%, Mean 58%, Std. Dev. 42%
    - Debt/Equity>4 or <0 (% of firms) (No. Obs. 111): NA; Mean 79%, Std. Dev. 41%
    - Debt/EBIT>4 or <0 (% of firms) (No. Obs. 111): NA; Mean 95%, Std. Dev. 23%
    - Net Worth/Assets (%) (No. Obs. 103): Median 2%, Mean -14%, Std. Dev. 52%
    - Net Worth/Assets< 0 (% of firms) (No. Obs. 111): NA; Mean 39%, Std. Dev. 49%
    - Interest/Debt (%) (No. Obs. 100): Median 5%, Mean 18%, Std. Dev. 96%
  - Marzano (No. of Obs. varies by variable):
    - Employees (No. Obs. 22): Median 611, Mean 2,096, Std. Dev. 4,597
    - Net worth (€ thousand) (No. Obs. 22): Median 39,400, Mean 241,000, Std. Dev. 664,000
    - Total assets (€ thousand) (No. Obs. 22): Median 335,000, Mean 1,630,000, Std. Dev. 409,000
    - Operating revenue (€ thousand) (No. Obs. 22): Median 134,000, Mean 880,000, Std. Dev. 2,090,000
    - Interest Coverage Ratio (No. Obs. 22): Median -0.25, Mean -1.17, Std. Dev. 9.22
    - Profit margin (%) (No. Obs. 22): Median -1%, Mean -9%, Std. Dev. 29%
    - Debt/Assets (%) (No. Obs. 22): Median 54%, Mean 91%, Std. Dev. 195%
    - Debt/Equity>4 or <0 (% of firms) (No. Obs. 22): NA; Mean 50%, Std. Dev. 51%
    - Debt/EBIT>4 or <0 (% of firms) (No. Obs. 22): NA; Mean 95%, Std. Dev. 21%
    - Net Worth/Assets (%) (No. Obs. 22): Median 11%, Mean -42%, Std. Dev. 198%
    - Net Worth/Assets< 0 (% of firms) (No. Obs. 22): NA; Mean 23%, Std. Dev. 43%
    - Interest/Debt (%) (No. Obs. 22): Median 4%, Mean 5%, Std. Dev. 4%
  - Comparison groups (All >200 employees and average 2000-2015) statistics are provided in the source for benchmarking (medians, means, and standard deviations).

### Uses of the Special Regime and Its Efficiency
- Temporal patterns:
  - Admissions peaked after the global financial crisis and the Euro zone debt crisis, with group admissions peaking in 2009 and 2013.
  - Utilization frequency of both procedures positively correlated, indicating macro shocks affect medium and large companies.
- Outcomes and durations:
  - Approximately 95 percent of cases lead to the sale of the company or its divisions rather than stand-alone restructuring.
  - Average duration for execution of restructuring or selling program: about two years for Prodi-bis and about three years for Marzano.
  - Extensions and program changes can lengthen procedures; under Marzano, one third of groups undergo the selling phase for longer than three years.
  - The subsequent liquidation phase (disposal of remaining assets) usually takes longer than 8 years, above the average length of the ordinary bankruptcy procedure (fallimento).
  - As of 2016, companies still in special administration: Prodi-bis 240, Marzano 126; percent of companies involved still in procedure: Prodi-bis 80, Marzano 88.
  - Restructured companies: Prodi-bis 11, Marzano 17; Converted to bankruptcy: 50 (aggregate figure given).
- Employment preservation:
  - Transfer of employees via sales or restructuring averages 60 percent under Marzano and 50 percent under Prodi-bis at time of application.
  - In about 20 percent of cases, more than 90 percent of employees are transferred.
- Cost proxy estimates (2000–15):
  - Combined cost for creditors and the state could have reached at least €19 billion, composed of:
    - €12 billion: cumulative net income losses incurred during reorganization phase.
    - €7 billion: net wealth needed to recapitalize company groups to a viable net worth-to-assets ratio.
  - Cost of immediate liquidation estimated at €3 billion (total negative net worth loss to creditors and original shareholders).
  - Additional metric: average cost per transferred employee of €420,000, equivalent to about 14 times GDP per capita.
- Caveats:
  - Proxy excludes some attendant costs (e.g., contributions from wage supplementation mechanism, CIGS). No data on CIGS use for extraordinary administration cases available.
  - Lack of published recovery rate data and sparse information on state aid/public funds limits precise cost assessment.
- Recovery context:
  - For standard reorganization procedures (Danovi et al., 2018): repayment of creditors takes less than a year and usually results in full recovery for secured creditors; recovery rate for unsecured creditors ranges between 1 and 25 percent in limited observed cases.

### Assessment of the Regime
- Rarity and scope:
  - Special regime for insolvency of large enterprises is rare in the EU; aside from Italy, only Croatia enacted similar law in 2017 for systemic enterprises.
- Achievements and trade-offs:
  - The regime can preserve employment and enable coordinated group resolution; some parts sold quickly while others liquidated gradually, potentially avoiding fire sales.
  - Shortcomings and distortions:
    - Admission criteria allow deeply insolvent and illiquid companies into the procedure; debts representing at least two thirds of value of assets or revenues can admit businesses already deeply insolvent.
    - Creditors’ rights are sidelined: continuation of business accumulates new liabilities that take priority over pre-existing claims, potentially causing large losses to pre-existing creditors.
    - High cost of the procedure and prioritization of job preservation can impose large collective costs and hamper worker reallocation.
    - Cases frequently connected with state aid; instances of illegal state aid observed (e.g., EC Decision concerning ILVA concluding illegal state aid for guarantees and public loan).
    - MED decisions influenced by industrial and social policy; creditor protection plays marginal role; political influence concerns remain.
    - Thresholds cover medium-sized enterprises (e.g., 200 workers) inconsistent with European definitions; debt-based criteria bear no relation to enterprise size and are not standard distress metrics.
- Deviation from international standards:
  - Objectives skewed toward preserving enterprises at the expense of creditor rights and viability assessment.
  - Role of public administration (MED) decisive and not aligned with UNCITRAL/World Bank standards envisioning court oversight and independent insolvency representatives.
  - Deficit in creditor participation rights: creditors do not participate in commencement, selection of commissioners/experts, have limited role in surveillance committee, and generally lack vote over restructuring/sale program.

### Lessons and Recommendations
- Strategic direction:
  - Consider folding extraordinary administration into the general insolvency regime (repeal or align special regime to general regime) to ensure court control and creditor decision power over economic outcomes (liquidation, sale as going concern, or reorganization).
  - Maintain limited special rules to protect public interest while aligning procedural safeguards with general insolvency law (e.g., MED entitled to receive reports; MED may nominate from a restricted list of highly qualified insolvency professionals to be appointed by courts).
- Specific legal and procedural reforms:
  - Ensure insolvency of large enterprises subject to enterprise courts and that creditors decide economic outcome.
  - Align rules so insolvency administrator can renegotiate all contracts, including labor contracts, to achieve restructuring.
  - Remove indefinite stay on secured creditors: allow secured creditors to request lifting the stay when their interests are not adequately protected.
  - Raise quantitative thresholds for special regime to exclude medium-sized businesses and better distinguish very large enterprises, listed companies, and providers of essential public services.
- Transparency and data:
  - Publish credit recovery data in extraordinary administration cases to assess private creditor losses and procedural efficiency.
  - Improve transparency on MED decisions and internal processes, including appointment and remuneration of extraordinary commissioners.
- Labor market and social policy adjustments:
  - Improve active labor market policies, strengthen social safety nets, and align wages with firm-level productivity to facilitate reallocation and mitigate long unemployment spells following downturns.
- Reform pathway:
  - Use improvements in the general insolvency regime (including post-October 2017 enabling reform) to provide a modern, flexible framework for reorganization applicable to large enterprises; follow through with legislative decrees no later than end-2018 for reform effectiveness.
  - Consider retaining coordinated group resolution innovations from extraordinary administration within the general regime.

*Sources: MED, Orbis, and IMF Staff calculations.*

### Box 1. EU State Aid Rules and the Italian Special Insolvency Regime

### Box 1. EU State Aid Rules and the Italian Special Insolvency Regime

### Legal definition and conditions for state aid
- Article 107(1) of the EU Treaty: "any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market".
- Conditions to classify a measure as state aid:
  - (a) the beneficiary of the aid is an entity that engages in an economic activity;
  - (b) the measure is financed by State resources and is imputable to the State;
  - (c) the measure confers an economic advantage;
  - (d) this economic advantage is selective;
  - (e) the measure distorts or threatens to distort competition and may affect trade between Member States.
- During insolvency, state aid can create moral hazard and distort competition.

### EC and ECJ scrutiny of the original Prodi law
- The original Prodi law was subject to scrutiny by the Commission (EC) and the European Court of Justice (ECJ).
- ECJ case law cited:
  - Ecotrade vs AFS (Case C-200/97, [1998] ECR 1-7907).
  - Industrie Aeronautiche e Meccaniche Rinaldo Piaggio SpA and International Factors Italia SpA (Ifitalia), Dornier Luftfahrt GmbH, Ministero della Difesa (Case C-295/97, 17 June 1999).
- The ECJ analysis in Ecotrade and Piaggio concluded the original Prodi law was incompatible with EU state aid rules.
- Piaggio case conclusions (as stated in source):
  - 1) the undertaking has been permitted to continue trading in circumstances in which it would not have been permitted to do so under the rules governing ordinary insolvency law, or
  - 2) has enjoyed one or more advantages, such as a State guarantee, a reduced rate of tax, exemption from the obligation to pay fines and other pecuniary penalties or a de facto waiver of public debts wholly or in part, which could not have been claimed by another insolvent undertaking under the rules governing the ordinary insolvency law.
- The Commission’s decision of May 16, 2000 also analyzed the distortions to competition created by the original Prodi law.
- As a result of the ECJ decision, the Prodi law was amended by removing the automatic admission into the procedure and the use of financial privileges.

### Persistent risks of state aid under Prodi-bis and Marzano regimes
- The current model of extraordinary administration in the Prodi-bis and Marzano laws continues to provide opportunities for the provision of state aid.
- Frequent decisions of the EC and judgments of the ECJ refer to specific cases of extraordinary administration.
- Connection to industrial policy: enterprises subject to extraordinary administration often receive special financial assistance through (bridge) loans or guarantees.
- If these financial transactions are conducted at more favorable conditions than prevailing in the market, they may constitute state aid and require the authorization of the EC.

### Commission guidelines for aid to distressed companies
- The EC has a set of guidelines for the approval of state aid measures in favor of distressed companies.
- The Communication from the Commission (as summarized in source) outlines requirements for legal state aid:
  - Enterprises are eligible for state aid only when they have exhausted all market options and where the aid is necessary to achieve a well-defined objective of common interest.
  - The state aid should help the enterprise return to viability, include burden-sharing, and contain distortions to competition.
- Notable exceptions and special provisions:
  - Less stringent conditions apply for liquidity assistance, especially for SMEs.
  - State aid to the steel and coal sector is excluded from the scope of the EC guidelines.
- Reference guideline cited: Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty, OJ C 249, 31.7.2014.

*Source: wp18218 - Box 1. EU State Aid Rules and the Italian Special Insolvency Regime*

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_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp18218.pdf_