Within the financial system, increasing attention is being given to the concept of unlawful credit granting, a legal doctrine developed through case law and academic interpretation, which arises when a financial institution grants or maintains credit facilities, whether intentionally or negligently, in favour of a company facing structural financial distress.
While the granting of credit is, in itself, a legitimate activity and, under normal circumstances, an essential instrument for overcoming temporary financial difficulties, this must be balanced against the need to protect both creditors and the interests of the financed company itself.
The central risk of unlawful credit granting lies in artificially prolonging the business activity of a financially distressed company, thereby worsening its debt exposure and undermining the creditors’ ability to recover their claims.
To protect market participants and users of the financial system, banking activity is governed by the principles of sound and prudent management, which apply to the banking sector as a whole under Italian banking regulation. Financial institutions, as qualified market operators, are required to comply with these principles and to exercise the enhanced standard of care expected of professional lenders.
These principles, together with the duty of good faith in pre-contractual dealings, require banks and financial intermediaries to properly assess whether a borrower is genuinely creditworthy through a substantive and not merely formal analysis of its ability to continue operating, going beyond a simple evaluation of balance sheet strength.
Where a bank acts negligently, imprudently or without adequate diligence — or even intentionally — by failing to properly assess creditworthiness and by ignoring or underestimating the borrower’s inability to recover from insolvency, prevailing case law recognises the possibility of compensatory liability for damages caused to both the company and third parties.
More recently, however, lower courts have adopted a controversial approach, suggesting that unlawful credit granting may even affect the validity of the financing agreement itself, potentially leading to a declaration of nullity on the grounds of violation of mandatory rules or public economic order.
In an effort to resolve this conflict, the Milan Court intervened with judgment No. 437/2026.
The case arose from an opposition to insolvency proceedings brought by a bank whose claim had been excluded from the liabilities of the insolvent company. According to the insolvency judge, the financing had been unlawfully granted because it had enabled the continuation of business activity despite the company already being in an irreversible state of distress, while no adequate documentation supporting creditworthiness assessment had been produced.
The Milan Court, however, relying on the principles established by the Italian Supreme Court in Joint Chambers judgment No. 33719/2022, reaffirmed that deficiencies in the creditworthiness assessment process do not affect the validity of the financing agreement itself, except where the law expressly provides nullity as a consequence of violating mandatory provisions.
The Court clarified that, unless expressly stated by law, breaches of behavioural obligations — including obligations concerning diligence, prudence, good faith and creditworthiness assessment — cannot automatically result in contractual nullity.
Nullity must instead be linked to structural or substantive defects affecting the legal validity of the agreement itself.
Accordingly, unlawful credit granting remains primarily relevant from a compensatory liability perspective rather than as a ground for invalidating financing agreements.
The Court also emphasised that creditworthiness assessments must be evaluated based on the circumstances existing at the time the financing decision was made, including the conduct of the borrower.
Particular relevance should be given to restructuring initiatives undertaken by the company, such as negotiated crisis settlement procedures or continuity arrangements, which may demonstrate the existence of realistic prospects for business continuation.
As a result, insolvency practitioners, when preparing the statement of liabilities, must recognise the existence of financing agreements and admit the related claims where the legal requirements are met, while any liability of the lender must be pursued through separate ordinary proceedings for damages.
In such actions, the burden of proof remains on the insolvency practitioner, who must demonstrate the unlawful conduct of the bank, the damage event, the consequential worsening of insolvency, and the causal link between the lender’s conduct and the losses suffered.
Ultimately, excessive uncertainty regarding the boundaries of lawful credit granting risks undermining financial market stability and discouraging access to credit, potentially depriving companies in temporary distress of essential financial support precisely when it is most needed.
