The introduction¹ of the non-possessory pledge followed the release of the World Bank’s ‘Doing Business’ report in 2016², which highlighted Italy’s poor ranking in terms of the ‘ease of doing business’. We described this security briefly in a previous article. The regulations regarding security significantly impacted the rates for ‘enforcing contracts’ and ‘getting credit’, considering several factors: (a) the lack of non-possessory security for movable assets, (b) the absence of security automatically extending to assets acquired or arising in the future, (c) the lack of a centralized registry for filing security with an electronic database accessible online, and (d) the inability for lenders to enforce their security rights outside of court.

We describe below the two pre-existing forms for the creation of security over moveable goods³:

Both forms of security detailed above require a specific description of the assets charged. This includes assets which are acquired or come into existence during the life of the loan, but this requires some form of identification or documentation of the goods charged from time to time.

Key features of the non-possessory pledge

Scope of application

The non-possessory pledge is accessible to all types of businesses (imprese), including companies and personal firms (ditte) registered with the Italian business register (registro delle imprese). This includes branches registered in Italy under foreign legal entities.

As regards the type of claims that can be secured, the pledge covers all types of liabilities (including financial and commercial indebtedness), as long as they relate to the to the pledgor's business.

Eligible goods

The ITA has published⁴ an official classification categorizing the goods that can be charged with a non-possessory pledge into 25 distinct classes, including textiles, livestock and animal products, chemical goods, as well as two general classes: intangible goods (beni immateriali) and financial assets (beni finanziari).

All types of assets which pertain to the business can be pledged, except registered moveable goods (beni mobili registrati) such as road vehicles, aircraft and ships. These types of assets which can be charged by way of non-possessory mortgage (ipoteca), which can be created by filing in dedicated public registries.

The new pledge can extend to certain assets which are subject to separate registration regimes. This could include for example the corporate capital of a “società a responsabilità limitata” (where a traditional pledge requires filing with the business register), or a registered patent or trademark (enrolled with the Central Patents and Trademarks office for enforceability in Italy). These forms of security and registration steps are not displaced by the non-possessory pledge or filing in the Registry of Non-possessory pledge (the “RNP”), rather the two security can co-exist in parallel.

An additional innovation is the relaxation of requirements concerning the identification of charged assets, although in practice the ITA requires a description of the goods to be charged with a certain degree of accuracy – meaning that the mere asset category of the charged goods is not sufficient⁵. The pledge can encompass future assets not yet in existence or owned by the pledgor, eliminating the necessity for specific identification at a later stage. For any assets which are not in the pledgor's ownership when the pledge is created, a non-possessory pledge in effect works as a 'reservation' of security over those assets for when the pledgor acquires them in future.

Also, the pledgor is permitted to process and transform the charged goods in the ordinary course of business. Where this is allowed, the pledge extends to the processed goods by operation of the law. In the event of enforcement, the creditor must ensure a fair valuation of the processed goods and return to the pledgor the value added by the processing (including labor or the combination with other materials) exceeding that of the originally charged goods.

Increase and replacement of the charged inventory

The non-possessory pledge enables the parties to generally identify the pledged goods, charging all goods within a given class or category up to the specified value upon registration. Additionally, the pledge may encompass assets that replace those initially charged, even if they were not specifically identified but fall within the same category.

Similarly to a possessory pledge or a special lien, a non-possessory pledge can also be 'revolving'⁶, and the pledge agreement can include a 'revolving clause' (patto di rotatività) to have the security extend to assets acquired by the pledgor during the life of the security, or acquired by way of replacement of any of the pledged goods which are disposed or destroyed. Unlike a possessory pledge or special lien, this does not require a further description or confirmation of the assets charged, as long as they fall into the description, class (and any agreed limitations in value or quantity) as registered in the RNP.

The pledgor can also be permitted to sell or otherwise dispose of the pledged goods, in which case the disposed goods are released from the pledge, which transfers to the proceeds from the sale or disposal, by operation of law. This mechanism works best as an alternative to a revolving clause, which would usually leave the proceeds from the disposal unencumbered.

Priority by time

A non-possessory pledge takes priority on its entry into the RNP, which affords enforceability vs. any third parties, as well as in enforcement and insolvency proceedings.

There is an exception for loans granted explicitly to finance the purchase of a specific asset linked to the pledgor’s business. These loans, either secured by reservation of title or a pledge (be it ordinary or non-possessory), hold precedence over pre-existing non-possessory pledges, provided the secured lender duly registers its pledge in the RNP and notifies earlier secured parties accordingly. This is to ensure that a non-possessory pledge will not disrupt a borrower's ability to fund instrumental assets by way of reservation of title, or other funding techniques used in supply chain finance.

In fact, this limitation should not infringe the value of the new security for lenders, as the sources of funding for a borrower's capital expenditure would in each case be regulated in the loan documentation, and creditors appearing in the RNP would in effect be put on notice of any assets acquired in this way.

Protection afforded by a non-possessory pledge must take into account the position of third-party purchasers who acquire assets in good faith. As such purchasers should obtain an excerpt from the RNP to confirm if the goods on offer are charged with a pledge, and obtain a formal release if that's the case. However as mentioned, the pledged goods could be identified generically or by category, meaning that it can be challenging in fact to confirm specifically whether a given asset is included in the scope of an existing pledge registered in the RNP. In the event of a conflict, Italian law would probably uphold the purchase by a third-party acquiror acting in good faith.

It is possible in theory that an asset charged with a non-possessory pledge is also encumbered with ordinary security, such as a possessory pledge or a special lien. Conflicts between holders of a non-possessory pledge and another form of security is based on priority, and so in this case, one will look at the date of registration in the RNP, and whether this pre-dates or follows the creation of the other security.

Digital registry

The RNP is administered by the ITA, with offices in Rome, under the supervision of the Italian Ministry of Justice. The RNP is held by a 'conservator' appointed by the general director of the ITA.

The RNP serves as a comprehensive registry for all filings throughout Italy and is accessible on line. To register a non-possessory pledge, each party may apply by submitting a request electronically together with a digital copy of the pledge agreement. This agreement must be authenticated by a notary or executed digitally⁷.

The request for registration must also be executed digitally, and set out the maximum monetary amount secured by the pledge, a description of the secured claims, the charged goods (in detail or generally, for example by category, quantity or value). It must specify whether the goods pledged are existing or future, and the class of the goods as per the ITA's taxonomy. Furthermore, the request must specify whether the pledgor is permitted to dispose of the pledged goods, or to process them including by transformation or commingling with other materials. The request must specify whether the creditor can take enforcement by leasing out the goods to third parties, or taking possession of them in the event of a default or other enforcement event.

The request for registration must set forth whether there is existing security in other form on the assets charged. The parties are permitted to specify in the request for registration such further information as they may deem useful to identify the goods or claims charged, or the legal relationships which affect them. This may help identify the assets charged with certainty, which can be important for the strength of the security as discussed.

For registration, each secured creditor must hold an Italian certified email address (PEC) and an Italian tax code. From the initial interpretation of the RNP office, this detail is required for all creditors which appear as registered holders of this security, not just an agent or security agent appointed for this purpose.

Upon the completion of registration or annotation, the holder of the RNP verifies and certifies the date and registration number of the request, which establishes the chronological order of priority. The law does not prescribe a specific timeframe for effecting the registration or annotation but these formalities are typically processed daily and in the order of receipt by the office.

Each registration remains valid for a period of ten years and may be extended by submitting a new request within this timeframe. If the deadline is missed, the creditor still has the option to apply for registration in the RNP using the initial file; however, the subsequent non-possessory pledge will only take precedence from the date of this later filing.

The RNP is accessible to the public for digital consultation and for obtaining excerpts, copies, and certificates, with charges ranging from 3 to 35 euros (and which are updated every two years). The office can issue certificates indicating the absence of charges or provide certified copies of registration requests. Each request for documentation must include details of the debtor and/or pledgor, as well as the requester's own identification.

Registration tax

The agreement creating a non-possessory pledge must be filed with the ITA's registration tax office and therefore accrues registration tax in its fixed amount of 200 euros (where the pledge secures the pledgor's own obligations only), or at a rate of 0.5% of the value secured by the pledge where the pledge secures also third parties’ obligations. Furthermore, stamp duties will be due at 16 euro every 4 pages (or, in any case, 100 lines) of the relevant agreement.

For loans and debt notes of a medium- or long-term maturity (i.e. exceeding 18 months) which meet certain eligibility requirements, it is possible to opt for the payment of a one-off 'substitutive tax', due at a rate of 0.25% on the principal amount of the financing, which replaces all registration tax and stamp duties payable in connection with the creation, transfer, confirmation or release of all security.

Enforcement

The new security is innovative in relation to the requirements and process for enforcement, which should allow a creditor to take enforcement without resorting to court proceedings, although a court bailiff must still be involved in instances where the creditors cannot access the pledged goods directly.

If a default or other trigger for enforcement occurs, the creditor can proceed after issuing notice to the debtor (and the pledgor, if different), and providing a written notice to any holders of another registered non-possessory pledge. In cases where enforcement pertains to claims, a written notice of enforcement must also be served to the debtor who owes the pledged claims.

Then, without the need to wait five days as prescribed for an ordinary pledge, the secured creditor may:

• sell the charged assets in a competitive procedure through a specialised intermediary. There is no need for a public tender but the sale must be adequately marketed, and published on the portal of judicial sales (portale delle vendite pubbliche). The value must be determined by an independent expert appointed by the parties (e.g. in the pledge agreement) or by the court on the secured creditor's request
• collect or sell the claims pledged for an amount sufficient to discharge the secured claims
• if agreed, lease out the pledged assets to third parties, and apply the rent collected in discharge of the secured claims. The pledge agreement must specify the methods and criteria to determine the rent and the secured claims
• if agreed, retain the pledged assets by acquiring their ownership (appropriazione) up to an amount sufficient to discharge the secured claims. Again, the agreement must specify in detail how the value of the pledged assets and secured claims are determined

In all cases the pledgor must be promptly informed in writing of the proceeds or value so realised. The creditor applies that amount in discharge of the secured claims, and must pay the excess to the pledgor.

The pledgor (and debtor, if different) can object to the enforcement before the court within five days of receipt of the notice of enforcement. The objection is heard in short-track proceedings on the merits, and will not suspend enforcement unless so determined by the court.

If the pledgor does not deliver the pledged goods within fifteen days of receipt of the notice of enforcement, the creditor can request a bailiff to take enforcement in accordance with the code of civil procedure. Unlike all other security, there is no need for a formal title for enforcement (titolo esecutivo, such as a court judgment or payment injunction) to engage the bailiff. The creditor can present a verbal request with evidence of registration in the RNP and the notice of enforcement.

The bailiff can appoint an expert valuer or accountant to identify the pledged assets, taking into account any incurred transformations and disposals. Where the pledge is transferred on the proceeds from a sale as discussed above, the bailiff can search the pledgor's own monetary claims vs. other parties, which can then be collected by the secured creditor.

In case of insolvency of the debtor or the pledgor, the secured creditor must wait until the secured claims are admitted in the insolvency proceedings. Once this is achieved the secured creditor can proceed as described above. Unlike an ordinary pledge, the creditor must not wait an order from the insolvency court to set the terms and date of the sale, and the insolvency administrator has no authority to step into the enforcement process.

The debtor owing the secured claims has three months from receipt of the notice of enforcement to claim reimbursement for damages in case of breach of the agreed valuation criteria, or proceeds inconsistent with the market value of the assets. Clearly a risk of judicial review is inherent in any enforcement out of court, and the short time frame available to bring this challenge should work in favour of the secured creditors.

Authored by Carlo Massini and Isoken Obayagbona.

References

1 By law decree No. 59 of 3 May 2016, amended and converted with law No.119 of 30 June 2016. The main secondary framework is set out in decree No. 114 of 25 May 2021 of the Ministry of the Economy and Finance

2  https://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB16-Full-Report.pdf

3 There are other forms of non-possessory security available for specific types of goods as set out in including (i) pledge over ham having a protected designation of origin (DOP) under law No. 401 of 24 July 1985, (ii) pledge over dairy products under article 7 of law No. 122 of 27 March 2001, and (iii) revolving pledge on DOP and IGP agricultural and food products, wine and spirits under article 78 of law decree No. 18 of 17 March 2020.

4 measure No. 262734 of 12 October 2021

5 For example if a company intends to create a pledge over the furniture in its offices at a given location, it will have to identify at least by quantity and type (e.g. a given number of chairs, desks, computers), rather than a generic description (e.g. “all furniture”).

6 The law requires applicants to specify in the request for registration whether the pledge agreement includes a patto di rotatività.

7 In accordance with article 47-bis of Law No. 89 of 1913 and article 25 of Legislative Decree No. 82 of 2005 (the "Digital Administration Code")