Impact of the coronavirus on loans in Italy (UPDATE) | Hogan Lovells
The reactions have been mixed, with praise for the much-needed relief and widespread concern about the complexity of the regime and the disclosure and reporting obligations that flow from it. The Italian Banking Association and SACE SpA have published guidelines defining the procedure and forms for the SACE guarantee. This protection is limited to new money lending and cannot be used to finance business acquisitions or refinance existing debts, although up to 25% of secured loans can be used to pay off late principal repayments. that were prevented by the COVID-19 outbreak. . As of May 19, 2021, moratoriums still in force on loans for a value of 146 billion euros, while more than 168 billion euros corresponds to the value of requests addressed to the SME Protection Fund. 23.6 billion euros is the overall volume of loans guaranteed by SACE, which has certainly been greatly appreciated by companies struggling to raise funds.
The framework defined so far remains fluid, as Italian authorities continue to draft special legislation to restore the economy and contain the impact of the pandemic, while restrictions on the movement of people and goods are lifted. as the vaccination campaign progresses. The impact of COVID-19 on loan transactions must also be addressed under general contract law, and we look at the main implications below.
Absolute payment obligations
As a general rule, the obligations of a Borrower to pay interest and repay principal under a loan agreement are not subordinate to the financial position of the Borrower and must be performed as an absolute obligation, often backed by collateral available to the lender in priority over unsecured creditors.
Force majeure in Italian law
However, under Italian law1 a debtor is not liable for a breach of contract in cases where the performance of an obligation is prevented by the occurrence of an impossibility not attributable to the debtor (impossibilità sopravvenuta non imputabile al debitore), which is akin to largely to the concept of force majeure in international trade practice.
Italian courts have been reluctant to recognize this exemption from payment obligations, on the grounds that a lack of liquidity cannot strictly speaking be considered an objective impossibility. At least in theory, a debtor can finance itself from another lender or sponsor, the impossibility occurring thus being temporary (and not final, without prejudice to the contractual obligations in force). This traditional view has been debated in Italian courts over payment defaults by businesses affected by cash flow shortages as a result of COVID-19. Most judgments arise from short-lived proceedings for emergency or provisional measures, and it is too early to draw coherent guidance. Different courts have taken different views, as many have upheld the principle that pacta sunt servanda, while others have ruled in favor of the debtor’s right to renegotiate the terms of the contract in light of the contraction of business, in particular in connection with the rental of real estate engaged in trade and commerce. Some sectors also benefit from special legislation, such as the temporary moratorium and reduced rental prices for sports halls and leisure facilities.
Impact of the latest legislative measures on this analysis
The measures include general declarations of force majeure (in a government decree that probably does not have the legislative rank required to regulate lending to private sector companies) and “exceptional event” and “serious disruption” for purposes EU rules on aid.
It could be argued that the existence of this legislation supports the argument that a borrower should be exempt from fulfilling their payment obligations, at least in proportion to their loss of income as a result of COVID-19. The borrower would also be exempt from the need to demonstrate the causal link between the virus and his loss of income afterwards.
Italian courts generally regard a binding order of an authority which prevents the performance of a debtor’s obligation as a sufficient case of force majeure. Thus, the various containment orders issued by central and local authorities during this health emergency could alone provide sufficient grounds for affected borrowers to be exonerated from liability for their loans (in other words, their debt obligations). payment could be suspended without liability for interest overdue).
Obligation to renegotiate in light of the official intervention of the Supreme Court
With the advent of the crisis, some commentators have suggested the possible extension of an obligation to renegotiate the contractual content despite the absence of a specific clause authorizing it. Such a defensive approach had to be linked to the intention to better protect the borrower as a weak contractual party and to somehow rebalance the opposing obligations to be performed by the parties.
To an unprecedented extent, the Italian Supreme Court2 contributed to the debate3 on the treatment of contractual obligations in the face of disruptions brought about by the pandemic. In a report, the Court expressed its assessment of the general obligation, under Italian contract law, to apply good faith (buona fede) in all phases of negotiation, execution, execution and execution. execution of a contract. According to the Supreme Court, this principle should underpin the existence of an obligation to review an existing contract and renegotiate its terms to provide the parties with a balance of interests similar to that which existed at the time they were agreed.
Can a lender speed up?
Lenders would likely be prevented from accelerating or terminating loans due to the increased credit risk or loss of income resulting from COVID-19. As mentioned, in most circumstances a borrower can be exempted from complying with their payment and operating obligations due to the inability to comply with contractual obligations, and the same argument would likely apply in any form. major adverse effect (MAE) trigger, most financial ratios and other indicators of a borrower’s general solvency.
Termination for unlikely violation
Regardless of the force majeure debate, Italian courts are quite conservative when it comes to issues of contract termination for breach. It was found that an express termination clause (clausola risolutiva espressa, which in theory would allow a party to terminate a contract on the occurrence of a given event) should not allow termination when the occurrence of the sanctioned event n ‘is not attributable to the negligence (colpa) or willful misconduct (dolo) of the other party. Also, an express termination clause is not, on its own, sufficient to pronounce the termination of a contract upon the occurrence of the sanctioned breach, and the termination requires that the breach be significant with regard to the overall balance of interests ( economia del contratto) In the contract.
Cancellation of commitments
Recent government measures require lenders to meet their micro-business and SME loan commitments until June 30, 2021.
In the absence of this regulation, general contract law would allow lenders to cancel loan commitments or bank credit facilities in the event of a significant deterioration in the condition of the borrower’s assets or the guarantees provided. When COVID-19 measures allow, a lender could likely cancel a loan commitment under a term sheet or arrangement mandate that is still subject to documentation, syndication or due diligence. .
Again, where COVID-19 measures permit, for committed facilities made available under existing loan agreements, most lenders would have sufficient grounds to cancel (or at least delay) new uses on the basis of COVID-19. This is, however, subject to the doctrine of Italian law of unlawful breach of credit (interruzione abusiva del credito), preventing lenders from canceling available credit abruptly or unreasonably. Cancellation of an engagement during the health emergency should be limited to what is strictly necessary, supported by an analysis of the borrower’s financial situation, and must allow sufficient notice to the borrower to mitigate the impact on its business .
When considering potential contractual remedies, lenders and borrowers owe each other a duty to act in good faith. Italian law applies this obligation to the execution of all contracts, and even to pre-contractual negotiations, including at the mandate or term sheet stage. If a lender’s behavior were to be called into question, a court would look at this seriously in the context of the pandemic.
In each case, the impact of COVID-19 measures on existing contracts, as well as force majeure on loan commitments and contracts, depends on the documented conditions, the date of execution, as well as the location and date. status of the parties. We express our view above in very general terms, with the understanding that no single assessment can remedy the current uncertainty, and any review of the legal position of a lender or borrower requires specific analysis. from this position.
1 Articles 1218 and 1256 of the Italian Civil Code.
2 Supreme Court of Cassation, Ufficio del Massimario, Report n ° 56 of July 8, 2020.
3 Court of Milan, July 24, 2020 versus Court of Rome, January 15, 2021.