PIK (Payment In Kind) loans are loans
that typically do not provide for any cash flows from borrower to
lender between the drawdown date and the maturity/refinancing date. In PIK loans, interests
generally accrue period after period, thus increasing the
underlying principal. As an alternative, PIK Loans may include
provisions according to which, upon the occurrence of certain
events, interest payments due by the debtor become undue and the
corresponding amount is added to the principal amount, so that it
generates further interests. This latter type of provisions is
usually included in loans granted in the context of restructuring
proceedings where the borrower may not always be able to meet, in
whole or in part, its obligations to pay the agreed interests as
they become due.
The 2014 Italian Stability Law1 introduced material
amendments to the Italian banking regulation. With limited respect
to interest on banking transactions it mandated the Committee for
Credit and Savings (in Italian, "Comitato Interministeriale
per il Credito e il Risparmio"; the
"Committee") to detail2 the
terms and criteria for the accrual of interest in banking
transactions, but in doing so it also provided the following two
firm guidelines: 1. interest periods on bank accounts must be
the same for interest owed to and by the bank and 2.
"interests periodically capitalized cannot generate further
interests which in subsequent capitalization transactions must be
calculated exclusively on the principal amount" (new wording
of Section 120 of the Italian banking law as changed by the 2014
PIK Loans never had an easy life in Italy because the Italian
Civil Code prohibits the capitalization of interest other than in
limited circumstances3; so far PIK Loans survived thanks
to a favorable secondary regulation by the Committee and the Bank
of Italy that mitigated the rigidity of the Italian Civil Code but
which never really overcome the resistance of the courts that
ever since the early 2000s challenged the compounding of interest
practice of the banks4.
The 2014 Stability Law aimed at finally settling such
long-standing contrast and excluding once and for all any periodic
capitalization of interest but the banking system has so far
resisted the implementation of the new law based on the argument
that such law is incomplete until the Committee has enacted the new
rules on the capitalization of interest (rules not yet available).
PIK Loans have thus continued to be negotiated and applied
especially in the context of restructuring proceedings.
A few weeks ago however a new piece has been added to the puzzle
which may finally stop PIK Loans in Italy: the court of Milan in
two recent decisions5 has ruled that the changes
introduced by the 2014 Stability Law had the immediate effect of
prohibiting the compounding of interest in banking transactions. In
both cases (decided by the same panel of judges) the court has
clearly stated that starting from 1 January 2014 any capitalization
of interest in banking transactions is prohibited by law and has
quashed the argument of the banks about the incomplete nature of
the law on grounds that the Committee was mandated by the
2014 Stability Law only to enact secondary rules on the terms of
accrual of interest without prejudice to the anti-capitalization
principle set out in the law. The two cases were brought to the
attention of the court by consumer associations that in accordance
with their remit limited their petitions to the acknowledgment of
the legal prohibition on interest capitalization and to an adequate
publicity of such prohibition among the public. Yet it is fair to
predict that these two decisions have paved the way for direct
claims by borrowers requesting cancellation of PIK interest charged
following January 1, 2014.
The banking sector is dubious on the way forward and for the
time being continues to capitalize interest but "to the extent
permitted by law" (this is what the new clauses on interest
The next months will say whether PIK Loans will really die in
1 See Article 1, paragraph 629, of Law no. 147 of
December 27, 2013.
2 Execution of monetary policy has been usually vested in
the Interministerial Committee for Credit and Savings, which is an
entity headed by the Ministry for Economy and Finance.
3 Article 1283 of the Italian Civil Code allows only the
capitalization of interest due by at least 6 months and only
provided that the borrower consents thereto following accrual of
the interest or the bank starts a legal action against the
A trustee in bankruptcy's rights to obtain a possession order and order for sale against a bankrupt's property will not be suspended indefinitely even where there are exceptional circumstances.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).