Alert: Coronavirus hits the Business Crisis Code

Article 11 of Legislative Decree No. 9 of March 2, 2020 (“Urgent supportive measures for families, workers and businesses related to the epidemiological emergency from COVID-19”) states that “the reporting obligation referred to in Articles 14, paragraph 2, and 15 of Legislative Decree No. 14 of January 12, 2019, operates from February 15, 2021.

This implies that, due to the current medical and healthcare emergency and the serious impact that it is going to have on companies’ lives, the entry into force of the obligation for companies’ supervisory bodies, auditors, and auditing firms “to immediately report to the administrative body the existence of well-founded evidence of the crisis,” as set forth in para. 2 of Article 14 of the Business Crisis and Insolvency Code (Legislative Decree No. 14 of January 12, 2019: “BCIC“),[1] originally scheduled for August 15, 2020, will be delayed for six months.

However, the postponement does not concern the obligation of the same subjects “to verify that the administrative body constantly assesses, taking the consequent appropriate initiatives, whether the organizational structure of the company is adequate, whether the economic and financial balance is in place, and what the foreseeable trend of management is,” as per para. 1 of Article 14 BCIC, which will therefore enter into force—except for subsequent interventions—on August 15, 2020.

On the same date, the general duty for companies to “adopt an adequate organizational structure pursuant to Article 2086 of the Italian Civil Code, in order to promptly detect the state of crisis and take appropriate initiatives,” introduced by Article 3 of the BCIC, will also become fully effective.

These provisions are becoming more and more important in the time of the coronavirus emergency:  the slowdown of business activities may put financial stability of businesses at strain.  It is crucial that companies be not caught off guard if and when they will be hit by a new wave of financial stress.

On the other hand, it should be kept in mind that the amendments made by the BCIC to certain provisions of the Civil Code already entered into force one year ago (on March 16, 2019), including those affecting corporate governance and related directors’ liability:

para. 2 of Article 2086 of the Italian Civil Code, which requires all companies (both partnerships and corporations) and, consequently, all directors to:

  • (i) establish an organizational, administrative, and accounting structure appropriate to the nature and size of the company, also (but not only) aimed at the timely detection of any company crisis and the loss of its status as a going concern, as well as
  • (ii) take action without delay for the adoption and implementation of one of the instruments provided in the legal system to overcome the crisis and restore business continuity;

para. 6 of Article 2476 of the Italian Civil Code, which, by reproducing for limited liability companies (“s.r.l.”) the provision already set forth in Article 2394 of the Italian Civil Code for joint stock companies (“s.p.a.”), overcomes previous doubts about interpretation and resolves jurisprudential contrast, establishing that

  • (i) the directors are liable toward the company’s creditors for failure to comply with the obligations inherent in the preservation of the integrity of the company’s assets;
  • (ii) a claim may be brought by creditors when a company’s assets are insufficient to satisfy their claims;
  • (iii) the waiver of the claim by the company shall not prevent the company’s creditors from exercising it;
  • (iv) the settlement can only be challenged by the company’s creditors by means of a revocatory action when extenuating circumstances so require;

para. 3 of Article 2486 of the Italian Civil Code, which—with the objective stated in the Explanatory Report of resolving, potentially via a deflating function, the existing jurisprudential contrast regarding determination of damage—establishes that, in the event that the directors’ liability is ascertained in connection to acts and omissions carried out in violation of an obligation to manage the company for the sole purpose of preserving the integrity and value of the company’s assets in the event of occurrence of a cause for dissolution of the company, the recoverable damage:

  • (i) is presumed to be equal—unless a different amount is proven—to the difference between the shareholders’ equity on the date on which the director ceased to hold office (or on the date of commencement of the bankruptcy proceedings) and the shareholders’ equity as determined on the date when a cause for dissolution pursuant to Article 2484 occurred, minus the costs incurred and to be incurred after the occurrence of the cause for dissolution and until the completion of the liquidation (known as the net equity criterion);
  • (ii) is liquidated in an amount equal to the difference between assets and liabilities established in the proceedings, if bankruptcy proceedings have been opened and either there are no entries in the accounting books or, due to the irregularity of the latter, net assets cannot be determined (known as the difference between assets and liabilities criterion).

To date, it is not possible to predict the extent of the economic impact that the coronavirus emergency will have on businesses, and our hope is that national and supranational governments will intervene with appropriate measures to avoid critical situations as much as possible.

However, the possibility that the new regulatory framework—aimed at extending directors’ duties (no longer simply with the aim of preventing the continuation of business activities in the face of disruption scenarios, but also of taking action to overcome the crisis and recover business continuity) and, consequently, their responsibilities (with a clear allowance in raising liability claims and a simplification of the relative damage determination) — will soon be subjected to a harsh trial by fire cannot be excluded.

[1] Article 14 (“Obligation of the company control bodies to report”), para. 2, BCIC: “The report must be justified, made in writing, by certified e-mail or in any case by means that provide proof of receipt, and must contain the scheduling of a reasonable time limit, not exceeding thirty days, within which the administrative body must report on the solutions identified and the initiatives taken. In the event of omitted or inadequate response, or failure to adopt the measures deemed necessary to overcome the state of crisis within the next sixty days, the persons referred to in paragraph 1 shall inform the OCRI without delay, providing all useful information for the relevant determinations, also by way of derogation from the provisions of Article 2407, first paragraph, of the Civil Code with regard to the secrecy obligation.

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