Insolvency law and corporate governance: a view from Twentieth-century Italy

or How to sink a firm to save a family?

P. Di Martino, School of Arts, Histories, and Cultures, Manchester University

M. Vasta, Department of Economics, University of Siena (Italy)

Prologue: a country with no “firms”

Italy: the absence of “Coesian” firms • Rapid turnover, small and young joint-stock companies • inefficient technologies and business practices; absence in strategic sectors• Governance: family-dominated

Contrary to firms, dominating families tend to be stable

The Historical problem

Are bankruptcy and insolvency laws and procedures guilty as well?

• bankruptcy laws and practices fundamental to firms’ selection and restart after failure• Risks: excessive exposition to shocks• Italian law and practices inefficient in this regard

Evidence and methodology: Quantitative sources (macroeconomic data 1920-1970), archival sources (failures in Milan 1920-1930s) plus some complementary sources for 1924 and post WWII.

Introduction

Presentation structure:

I. The institutional framework

II. Quantitative overview

III. Qualitative analysis

IV. Conclusions

I. The institutional framework

Available insolvency procedures Before 1942• Fallimento (liquidation and assets distribution)• Concordato fallimentare (agreement with creditors to

ease liquidation)• Concordato preventivo (composition with creditors

alternative to bankruptcy)• Voluntary liquidation: allowed but unregulated

After 1942• Amministrazione controllata (one year moratorium and

appointment of new management)

I. The institutional framework

Hypothesis: no efficient instrument to allow a real “re-start” ever available.

• Concordato: selection based on “moral” considerations; very strict conditions (guarantee of paying 40% unsecured debts to be paid; no assets relinquishment) limited its usage and often led to liquidation. •Voluntary liquidation: no restarting plan; no creditors lock-in = dead of the company• Amministrazione Controllata: Not a solution for small companies; no selection based on future viability; no restarting plan

Percentage of concordato preventivo and amministrazione controllata on total procedures (1904-1980)

0.0

2.0

4.0

6.0

8.0

10.0

% concordato preventivo % amministrazione controllata

Percentage of concordato preventivo and amministrazione controllata on total procedures (joint-stock companies only, 1947-1980)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

1947194819491950195119521953195419551956195719581959196019611962196319641965196619671968196919701971197219731974197519761977197819791980

% concordato preventivo % amministrazione controllata

Percentage of joint-stock companies using any kind of insolvency procedures (1947-1980)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979

concordato preventivo fallimento amministrazione controllata

II. Quantitative analysis - results

1) Fallimento (and concordato fallimentare) the most used procedures (Before 1942 they accounted for about 96-98%)

2) The introduction of the amministrazione controllata. changed little (only in the 1970s amministrazione controllata and concordato together covered about 10% of cases)

3) A.c. was mainly used by S.p.a. (joint-stock limited-liability companies) (up to 20% of cases)

4) However only about 1% the S.p.a population ever used any insolvency procedure.

III. Qualitative analysis

Main Sample:

• 135 companies failed in Milan between 1923 and 1932

• about 2/3 of all joint-stock companies failed in Milan

• Milan = about 1/3 of Italian companies)

Insolvency in Milan by outcomes

BankruptcyConcPrev

Noinf

Tot.

Fraud.

Bankr.and/orBfraud.

Bankr. Bankr. and/or Conc. Fall.

Conc.Fall.

Insuf.Att.

Tot

2 6 110 4 18 4 144 3 6 153

III. Qualitative analysis

Most of companies failed because of structural problems and/or frauds; however other problems appear:

• Concordato preventivo was difficult to get• No attention for innovative entrepreneurs and/ or

viable companies• Companies used voluntary liquidation, but no re-

launch plan was linked to it (or creditors lock-in mechanism);

• voluntary liquidation often resulted in bankruptcy, even because of the action of one single creditor

III. 1 Concordato preventivo

1) Ex-ante guarantee 40% (12 out of 17 concordato fallimentare paid more than 25%, the English treshold).

Court’s screening (complicated procedure and imperfect information)• Società Anonima Circes (1924) “encountered many difficulties, essentially of procedural nature.” • Cartiera Albano Franchini: better information available during liquidation than before.

Creditors’ screening (coordination problem)• Fonderia di Desio, friendly agreement (50% of debts), turned down by self-interested creditors “Everyone looking after their own interest”

III.1 Concordato preventivo

Courts’ decisions: no relevance of innovativeness or viability

• Number of concordati preventivi: 3• Innovative: 31 traditional: 111 Unknown 9.

• Viable: (bankruptcy of their own debtors, lack of capital, mismanagement, exogenous short-term shocks) 27, Unviable 96, Unknown 30

III.1 Concordato preventivo

• Giglio, ‘Schumpeterian’ company: early 1920s it first produced a prototype of side lights for cars; bankruptcy

• De Capitani & F.lli Progresso Agricolo Ferraniense (concordato allowed) formal guarantees provided and the modality of payment, no other criteria considered

III. 2 Voluntary liquidation

Inefficient formal institutions = rush into voluntary liquidation1924: hundred and sixteen joint-stock companies disappeared, but only 12 official procedures were opened

hard to get creditors to agree on a re-launch program • Magazzini 33 and Industrie Meccaniche Servadei Benetti agreement with creditors tried only after that an earlier attempt to liquidate failed.

III. 2 Voluntary liquidation

Moreover, liquidation often led to bankruptcy of solvent companies; 37 companies failed during liquidation, including:

• Bacapa assets exceeding the nominal value of liabilities

• Società Anonima Cooperativa “La Casa” able to pay all debts but technical mistakes during the liquidation

• Industria Dattilografica and the Federazione Casearia Italiana condemned to bankruptcy by one single creditor (thirty thousands lira against capital of two millions)

III.3 Amministrazione Controllata

No direct evidence, counterfactual; Two questions: was it useful? Was it easy to access?

Was AC useful?• Management replacement main of sole cause of failure in 7 cases, among the causes in 18.• However, need to re-capitalise main problems among viable companies: AC was no solution

III.3 Amministrazione Controllata

Was AC available?

• Ac based on replacement of management• Failed companies were small: no separation

between management and property • About 1/3 of Italian companies larger than 1

Million lira capital, about only 10% in the sample of bankrupted companies, 13% in the one of disappeared companies.

III.3 Capital of companies bankrupted in Milan (thousands of Lira)

 

Size

Up to 10

11-50

Tot.under

50

51-100

101-

300

301-

500

501-

999

1000 or

above UnknownTot.

sample

Numberof

companies

33 31 64 13 18 16 5 14 23 153

Conclusions (I)

1) official procedures: failure to provide efficient restarting mechanisms. • Concordato preventivo was hard to get and not selective pro viable/innovative firms • AC: only applies to few big companies with management problems

2) over-use of voluntary liquidation often leading to firms’ death

3) our view; Italian joint-stock companies overexposed to “natural” instability died more often and younger.

Conclusions (II)

• Why an inefficient legislation?• Fuzzy law = legitimisation of business

consultants, often operating as receivers during insolvencies

• Business consults helping asset-stripping by “families”, (De Cecco).

• Especially during liquidation and restarting? Companies die, families survive?

Conclusions (III)

• La Porta et al. (2000): corporate governance and exploitation of minority stockholders; Guinnaine et al.: legal regimes allow different systems of governance.

• Italy: all forms of governance were allowed (and used), but exploitation was based on informal bending of inefficient formal institutions.