COVID-19: special rules on reduction of corporate capital, business continuity, and extension of the term for approval of financial statements as provided by the Italian Law Decree (Decreto Liquidità)
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Law Decree No. 23 issued on April 8, 2020, known as the Decreto Liquidità (the “Law Decree”), provides, among other things, measures aimed at ensuring the business continuity of companies incorporated in Italy.

1. Reduction of corporate capital

Article 6 of the Law Decree provides that for losses through December 31, 2020, the provisions[1] of the Italian Civil Code on the following matters will not apply:

  • reduction of corporate capital due to losses of more than one third;
  • reduction of corporate capital below the minimum provided by law;
  • mandatory winding-up of the company due to the reduction of corporate capital below the minimum provided by law.

The abovementioned articles of the Italian Civil Code provide that (i) if corporate capital decreases by more than one third as a result of losses incurred by the company, then directors are required to call an equityholders’ meeting as soon as possible to adopt the relevant resolutions; and (ii) if corporate capital is eroded by losses to the point at which it falls below the minimum required by law, the equityholders’ meeting is required to vote on (a) the reduction and a simultaneous increase in corporate capital to an amount at least equal to the minimum required by law, or (b) the transformation of the company (e.g., from joint stock company (società per azioni) to limited liability company (società a responsabilità limitata).

As a result of the provision of Article 6 of the Law Decree, for losses occurred in the above-mentioned period directors are not required to call an equityholders’ meeting to adopt the relevant resolutions in case of losses as of December 31, 2020. The aim is to avoid forcing directors to choose between winding up the company or bearing the risk of exposing themselves to liability for non-conservative management of the company as required by Article 2486 of the Italian Civil Code.

Notwithstanding the above, directors are required to inform shareholders about the occurrence of losses through the close of the fiscal year on December 31, 2020.

The Law Decree is poorly written and does not specify some circumstances that could easily happen. For example, it doesn’t specify that the losses in question must be due to the Covid-19 emergency situation; therefore, all losses incurred through December 31, 2020 can benefit from this particular regime. Further, it is not clear wether losses occurred before April 9 benefit from this legislation, and it is not clear how that will work. Further still, the Law Decree governs only cases of companies that close their fiscal year sometime before December 31, 2020. What happens to companies whose financial statements close as of February 28, 2021 but that nevertheless incurred losses as of December 31, 2020? Might some companies perhaps consider changing their fiscal year calendar? Last but not least, we appreciate the efforts of the government to sustain companies that have incurred losses without exposing them to recapitalization or winding up procedures.

2. Drafting 2020 Financial Statements

Article 7 of the Law Decree provides that items in financial statements drafted during the 2020 fiscal year may be evaluated under the business continuity rule, provided that the same rule was applied to the last financial statements closed before February 23, 2020 (even if not approved yet by the equityholders’ meeting), thus excluding companies that had already lost business continuity, regardless of the Covid-19 emergency.

The above provision of the Law Decree allows directors drafting 2020 financial statements the possibility to evaluate relevant items under the business continuity rule; otherwise the evaluation of the same items would be affected by the Covid-19 emergency. The evaluation rule must be duly illustrated in the explanatory notes to the financial statements, including via reference to the previous financial statements.

Article 7 of the Law Decree also confirms the application of Article 106 of Law Decree No. 18 of March 17, 2020, according to which the quotaholders’ meeting may be held within 180 days (and not 120 days) from the end of the financial statements for approval of the same. This exception applies regardless of any limitation provided in company bylaws. Hence, directors are not required to vote on extending the term for the approval of 2019 financial statements.

[1] Articles 2446, second and third paragraph, 2447, 2482 bis, fourth, fifth and sixth paragraph, and 2482 ter, 2484, first paragraph, No. 4), and 2545 duodecies of the Italian Civil Code.

Articolo inserito in: COVID-19
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