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Not a ‘family’ business: enterprise or professional debts cannot be paid by the patrimonial fund constituted for the needs of the family

IBA Litigation Committee 

 

Wednesday 4 August 2021

 

Maurizio Vasciminni

Giada Russo

Giovanni Gigliotti

 

The matter of asset protection is growing in importance, especially for massive assets, since the Italian 2017 Budget Law introduced the so-called ‘flat tax’.

The flat tax regime allows non-Italian resident high net worth individuals to transfer their tax residence to Italy to elect for a flat substitutive tax. The transfer of residence required for the application of the flat-tax regime has implications in terms of jurisdiction: in this view, the Italian case law on asset protection is an important guideline for non-residents wishing to move their assets-related interests to Italy.

The patrimonial fund constituted ‘for the needs of the family’ under Article 167 of the Italian Civil Code

According to Article 167 of the Italian Civil Code, each spouse, both spouses or even a third part can constitute a patrimonial fund, destining immovable property or movable property inscribed in public registers or negotiable instruments to a specific purpose: these assets, and their fruits, must be used to meet the needs of the family.

The spouses’ assets registered in the patrimonial fund are separate from the personal assets of each spouse and must be used only to satisfy the needs of the family. As a consequence, unless consented to in the act of constitution, the property in the patrimonial fund cannot be alienated or mortgaged, pledged or however encumbered except with consent of both spouses – or, if there are minor children, with the authorisation of the court and only in cases of necessity or evident usefulness.

Such ‘bond of destination’ implies that forced foreclosure on property of the fund cannot be effected for debts that the creditor knew to have been contracted for purposes other than the needs of the family.[1] In other words, creditors can only take recourse on assets belonging to the patrimonial fund for debts related to the needs of the family.

The protection granted to the patrimonial fund represents an exception to the general principle laid down in Article 2740 of the Italian Civil Code, according to which the debtor is liable with all their present and future property for the performance of their obligation.

The ‘needs of the family’ and the enterprise or professional debt

The essential purpose of the patrimonial fund is to prevent specific property from being subject to enforcement actions by creditors. However, the patrimonial fund protects the assets included therein only if the debts arise from reasons related to the family needs and if the creditor was aware of it when the obligation arose. In the light of the above, it is crucial to determine which debts fall within the ‘family needs’ definition.

According to judgment no. 2904/2021 of the Corte di Cassazione, the highest court in civil matters in Italy, the needs of the family do not include merely the needs that are essentials for the existence of the family, but also include such needs aimed at the full maintenance and harmonious development of the family.

In other words, the needs of the family must be understood in a broad sense that is not limited to the essential or indispensable needs of the family. Anything deemed necessary and functional for the development of the family’s life and for the improvement of the family’s wellbeing (including its economic wellbeing) falls within the definition provided for in the Italian Civil Code.

Having particular regards to debts deriving from professional or business activities, the Corte di Cassazione stated that such debts cannot be considered tout court incurred to meet family needs.  On the contrary, common experience suggests that obligations incurred in the course of business or professional activities have a purpose which is normally extraneous to the needs of the family.

The obligations concerning the exercise of business or professional activities are usually directly and immediately connected with the needs of the business or professional activity itself.  Such obligations may be indirectly able (also) to satisfy the needs of the family if and to the extent that the spouses use the income of the related activity to fulfil their mutual obligation to materially support the family.

Therefore, as a general rule, enterprise or professional debts cannot be paid by the patrimonial fund constituted for the needs of the family.

Burden of proof

The protection granted to the patrimonial fund’s assets operates exclusively against those creditors who are aware that the debt they wish to collect was incurred under a contract which was not aimed at meeting the needs of the family. The Corte di Cassazione emphasised that such awareness must exist at the time when the act giving rise to the obligation is performed.

The burden of proving the applicability of Article 170 of the Civil Code rests on the debtor who claims the non-enforceability of the patrimonial fund against the creditor’s action.

The opposing debtor must prove that the patrimonial fund has been properly constituted and that the creditor was aware that the debt was incurred for purposes unrelated to family needs. Evidence of such extraneousness and awareness can be provided by mere presumptions.[2]​​​​​​​

It is sufficient for the debtor to prove that the purpose of the obligation appeared, at the time of its assumption, to be extraneous to the family’s needs. In other words, it may be assumed that the creditor, using the ordinary due diligence, must have been aware of the reason for which the debt was incurred. If it is clear that the debt was not incurred out of family necessity, the creditor may not be satisfied by taking recourse on the assets of the patrimonial fund.

The patrimonial fund protection is effective even for debts assumed prior to the transfer of assets to the fund. In this case, if the debtor transfers the assets affecting the guarantee, the creditor has recourse to the general remedy of the revocation action, claiming the fund to be declared ineffective against them.

To obtain this, the creditor must prove that the debtor was aware of the prejudice that the constitution of the fund would cause to the creditor’s rights. Such a remedy is available even when the debt is assumed after the transfer of the assets to the fund, but the creditor must also prove that the fund was fraudulently designed to prejudice the satisfaction of the claim.

Conclusion

In the light of judgment no. 2904/2021 of the Corte di Cassazione, the assets included in the patrimonial fund – as a general rule – will be protected against the creditor’s enforcement action grounded on enterprise or professional debts of the spouse(s).

Such recognition is important because it widens the protection guaranteed by Italian law on the assets of the patrimonial fund constituted for the needs of the family and, in general, shows the Italian judges’ tendency to strengthen the guarantees provided by asset protection instruments.

Therefore, the issue must be taken into account both by lenders and by banks on the credit side, and – for the purposes of asset protection – by those who intend to transfer their residence to Italy and possibly submit to Italian jurisdiction.

 

[1] See Article 170 of the Italian Civil Code.

[2] In the Italian legal system, a presumption is an inference that the law or a court draws from a known fact to arrive to an unknown fact. The law expressly establishes some presumptions. Mere presumptions are not established by the law and are therefore left to the prudence of the judge, who only admits them when they are material, precise and consistent.

 

 

 

 

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