The Court of Cassation (13 June 2016, No. 12120) confirmed that a limited liability company can be declared bankrupt, if it is found that the company is a partner of an insolvent de facto partnership

The case

The Court of Florence declared bankruptcy of a de facto partnership found to be existing among a limited liability company (a small corporation which had been previously declared bankrupt), an individual and another limited liability company.

The Court of Appeals revoked the declaration of bankruptcy of the de facto partnership by reaffirming the principle of limited liability of corporations.

The receiver appealed to the Supreme Court.

The issue

Italian insolvency laws provide that the declaration of bankruptcy of a partnership can be extended to all of its partners being liable without limitation for the partnership’s debts. Case law consistently provides that a de facto partnership (and all of its partners being liable without limitation) can be declared bankrupt when the existence of the partnership is ascertained, after one of its partners has already been declared bankrupt as a sole entrepreneur.

The issue addressed by the Supreme Court concerned the possible declaration of bankruptcy of a limited liability company as a partner of de facto partnership.

The decision of the Court

First, the Supreme Court ruled that a limited liability company can be declared bankrupt, as a partner of a de facto insolvent partnership, pointing out that the participation of a company to a partnership does not require – as far as the participation does not result in a significant change of the corporate purpose – the prior authorization by the shareholders, pursuant to Art. no. 2479, co. 2, No. 5, ICC.

Secondly, the Supreme Court stated that the use of de facto partnerships including several companies – in order to diversify and delimit investments and liabilities arising therefrom, under a direction and coordination scheme – does not constitute an abuse in itself. The benefit of limited liability is not lost when principles of good governance and management to pursue interests contrary to those of the companies involved, since the remedy provided by law is an action allowing to recover damages pursuant to Art. 2497 ICC. The declaration of bankruptcy is not therefore the only or main remedy to the abuse of the corporate structure. Instead, it requires a strict assessment that in the specific case all the conditions are met according to which a partnership was indeed formed.

Based on these assumptions, the Supreme Court reversed the decision of the Court of Appeals of Florence and sent the case back to the lower Courts to make this assessment, including in particular the existence of an affectio societatis and of a specific insolvency referred to the de facto partnership.

Commentary

The Court expressly referred to its recent decision No. 1095 on 21 January 2016, which ruled that a de facto partnership – to which a limited liability company participates as a partner – can be declared bankrupt if all the conditions are met, namely a state of insolvency of the partnership, participation to equity and common activities by the partners, effective sharing in the profits and losses.

About de facto partnerships, the Court confirmed that an abuse of the corporate structure, pursuing interests contrary to those of the companies involved and violating principles of good and sound management, determines a direct liability of those taking part to the abuse for the financial damage caused to the companies involved and to their creditors. From this point of view, it must be then ascertained whether there is actually a true de facto partnership (with the consequence that liability can be based on the status of partner and not limited to damages, thereby also leading to the declaration of bankruptcy of the partnership and of its partners) or if, otherwise, liability remains limited to damages pursuant to art. 2497 ICC.