Modifications introduced by the crisis and insolvency code to directors’ liability: a change which impacts on the business management

On January 12th, 2019, the Italian Parliament promulgated the Crisis and Insolvency Code(“CIC”) through Legislative Decree no. 14. Through this, the legislator aimed to facilitate the swift exposition of any symptoms of crisis and the reform, in a unitary manner, of the procedures for insolvency. In order to achieve those goals, appropriate systems for detecting the signals of crisis have been designed, together with new obligations for the directors; as a matter of fact, the new rules introduced by the CIC in Italian company law bring a relevant amount of novelty that exceeds insolvency law and that immediately affects the activity of any director of an Italian company. This underlines that while the provisions regarding director’s liability came into force on March 16th, 2019, the articles focusing on the resolution of the crisis will only become effective as of August 15th, 2020 (Art. 389 CIC).

As detailed below, through this reform, the legislator not only creates new obligations for directors, but also extends and clarifies the scope of the application of certain types of liability. Those changes are aimed at the better and earlier prevention of an insolvency crisis and, subsequently, at more unified and simplified crisis management. As their duties and responsibilities change, it is important for directors to be aware of this evolution and to keep in mind that scrupulous compliance with the law will allow them, if necessary, not to be held liable.

1. Introduction: The Responsibilities of the Directors of Joint Stock Companies Under Italian Law

Before focusing on some of the changes brought by the CIC, it appears appropriate to briefly summarize the responsibilities that are held by the directors of joint stock companies under Italian law. Civil liability by directors exists vis-à-vis different entities: the company itself, the shareholders and third parties, or creditors. Firstly, directors are jointly and personally liable vis-à-vis the company, as members of the Board of Directors, for the violation of duties relating to the management of the company, set forth by law and under the by-laws. In the event of a delegation of competence, directors remain liable if they breach their duties of supervision and control. Finally, they can be exculpated from this liability if they demonstrate that they didn’t participate in the performance of the damaging action, or that they opposed to it.

Directors are also responsible, vis-à-vis the company, for delegated functions, if they did not act with diligence and the damage was a foreseeable consequence of their actions. Additionally, they can be held liable when they fail to adequately supervise the company’s business or, when aware of elements that may prejudice the company, if they did not take the necessary steps to prevent, eliminate or reduce such damage. Directors can further be held personally liable, vis-à-vis shareholders and third parties, for their fraudulent or negligent actions, if the aggrieved party proves that the damage is directly and exclusively attributable to that director.

Finally, liability, vis-à-vis the creditors, can be upheld against directors when the company’s assets are insufficient for the fulfilment of the creditor’s claims. In such a case, directors will be liable for the failure to comply with their obligation to preserve the integrity of the company’s assets.

It is worth specifying that directors can also be held criminally liable, and that their actions can infringe other legal duties, such as, inter alia, tax, labor, social security, data protection or bankruptcy law.

2. CIC’s Impact on Proper Business Management

The CIC brought many novelties to the area of corporate law, one of the main ones being introduced by Article 375 of the CIC, which adds a new second paragraph to Article 2086 of the Civil Code (“CC”), according to which any entrepreneur who acts through a company has the duty to: (i) provide such a company with an adequate structure for its organization, administration and accounting, a structure that is coherent with the company’s nature and dimension, and (ii) to take immediate action in case of crisis, in order to overcome this crisis and to return to business continuity.

The duty sub (i) is not new in the Italian civil code, since it is explicitly provided for the CEO of Joint Stock Companies (Società per azioni, “S.p.A.”), but the novelty is that this obligation has now been extended (a) to any kind of company under Italian law, as well as (b) to all of the members of the board of directors. Moreover, this duty entails that an adequate structure must be able to detect the company’s crisis and its loss of business continuity in a timely way, and this creates a new connection between the ordinary business activity and the duty to run a company in compliance with this specific obligation. By the same token, this new paragraph of Article 2086 CC links the way a company is run to the general rules that are established in the case of crisis, in particular, to Articles 12-13 of the CIC, concerning the timely detection of a state of crisis, and Articles 14-15 of the CIC, regarding how such a situation is managed.

As to the duty sub (ii) above, i.e., the obligation to take immediate action in the case of crisis, in order to overcome such crisis and return to business continuity, its novelty is evident: in the past, directors were expected to avoid further business in case of insolvency, and there was no liability for them in the case that they had not adopted the right measures in order to return to their ordinary business; as of March 16, 2019, directors are expected to take immediate action to protect and foster business continuity, and they will probably be held liable if they don’t react quickly enough, in a phase in which the company has not yet become insolvent.

In light of the above, the impact of this new rule will be very relevant, even before a company reaches a state of crisis: on one hand, it will immediately affect the ordinary activity of directors and, on the other hand, it will broaden the range of cases in which they may be held liable.

In this context, directors should promptly make sure to proceed (at least) as follows: (a) to complete the company’s organization with adequate procedures, ones that are aimed at the timely detection of any kind of crisis, and setting up an appropriate information flow from and to the board of directors, in order (inter alia) to protect themselves from any liability in case of crisis or insolvency; (b) to make sure that the information flow is at all times efficient and transparent, keeping in mind that such compliance procedures will be extremely relevant in the case where a company crisis leads to a lawsuit against the directors; finally, (c) to constantly monitor the business continuity and the coherency between the company’s organization and the economic context in which it operates, because directors will be judged also from this new perspective.

3. Other Aspects of the Responsibility Regime

The CIC provides for an equalization of the ‘responsibility vis-à-vis creditors’ that is held by the directors of a Limited Liability Company (Società a responsabilità limitata, “S.r.l.”) and the directors of a Joint Stock Company (Società per azioni, “S.p.A.”). As was already the case for directors of S.p.A., the directors of an S.r.l. are now liable for their failure to comply with the obligations that are inherent to the preservation of the integrity of the company’s assets when they are insufficient to satisfy the creditors’ claims (Art. 2394 CC for S.p.A.; Art. 2476 par. 6 CC as modified by Art. 378 par. 1 CIC for S.r.l.). This equivalence provides for an expansion of the liability that is held by the directors of an S.r.l.

Moreover, in the case of the dissolution of a company, the directors still have the power to administer the company with the purpose of preserving the integrity and value of the company’s assets. They can therefore be held liable for damages caused to the company (Art. 2486 paras. 1 and 2 CC). The CIC introduces a precise definition of the damage to be compensated for once it has been established that the directors have infringed their obligations (Art. 378 para. 2 CCI and Art. 2486 para. 3 CC ), providing that “When directors […] have been held liable, the damages – subject to proof of a different amount – shall be presumed to be equal to the difference between the net worth on the date on which the director left office or, in the event of the opening of insolvency proceedings, on the date of the opening of such proceedings, and the net worth determined on the date on which a cause for dissolution as referred to in Article 2484 occurred, less the costs incurred and to be incurred, in accordance with a standard criterion, after the occurrence of the cause for dissolution and until the liquidation is over. If insolvency proceedings have been initiated and the accounts records are missing or if, because of the irregularity of the accounts record or for other reasons, the net worth cannot be determined, the loss shall be settled to the extent of the difference between the assets and liabilities established in the proceedings”. The CIC therefore introduces an objective parameter within which to determine the damages caused by directors, accordingly facilitating the claim for liability against directors.

Finally, even though it does not directly fall within the directors’ liability, it is worth highlighting the lowering of the criteria that lead to the mandatory nomination of a panel of statutory auditors in S.r.l. (Art. 379 CIC; Art. 2477 CC). In addition, the CIC gives the Registrar of Companies the ability to report the lack of a nomination to the Tribunal. As this article entered into force on March 16th, 2019, an S.r.l. that is concerned with these changes will have to provide for a modification of their by-laws and the nomination of a panel of statutory auditors in time for the year 2019 audit.

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