With Legislative Decree no. 14/2019, named “Code of Crisis and Insolvency” (the “Code”), published in the Official Journal no. 38 of 14 February 2019, the Italian legislator put in place a wide-reaching reform of the legal framework governing financial crises and insolvency procedures, which was originally regulated by the Italian Bankruptcy Law of 1492.
The main purpose of the Code is to reform the discipline of bankruptcy procedures in a comprehensive way, with the aim of preserving the company’s continuity and preventing bankruptcy, favouring more effective ways to both tackle the crisis and satisfy the creditors (e.g. by introducing a new “alert procedure” to allow for the crises to be rapidly identified).
In this context, the Legislator did also modify a number of provisions of the Italian Civil Code (“ICC”) with the intent to ensure that a more responsible approach to corporate crisis is embraced at all levels of the corporate structure of Italian companies.
The majority of the provisions of the Code will enter into force after 18 months from the publication date, i.e. on 14 August 2020.
However, the main provisions amending the ICC have been effective since 16 March 2019, with relevant implications for the corporate structure of Italian companies.
Below is a brief overview of the provisions of the Code amending the ICC which are already in force:
(i) New criteria for the appointment of the supervisory body in limited liability companies (società a responsabilità limitata)
The Code amends Article 2477 of the Italian Civil Code (“ICC”), which lays down the criteria and thresholds in the presence of which limited liability companies must appoint a controlling/auditing body.
In particular, according to the reformed Article 2477(3) ICC, the appointment of a controlling/auditing body is compulsory if a limited liability company:
- is obliged to draft consolidated financial statements; or
- controls another company which is subject to the accounting audit; or
- for two consecutive financial years has exceeded at least one of the following limits:
- total assets: EUR 2,000,000 [prior to the reform: EUR 4,400,000];
- revenues from sales and services: EUR 2,000,000 [prior to the reform: EUR 8,800,000];
- average number of employees during the financial year: 10 [prior to the reform: 50 employees].
The new thresholds are much lower and the very fact that only one of them is sufficient to trigger Article 2477 ICC implies that a larger number of limited liability companies are now under the duty to appoint the supervisory body.
The new framework further states:
- the duty to appoint a controlling/auditing body ceases if none of the conditions listed Article 2477(3) ICC is exceeded for three consecutive financial years, while the previous wording mentioned a shorter period of just two consecutive years;
- in the event of inertia of the Quotaholders, the controlling body can be appointed by any person with a qualified interest or by an official of the Companies’ Registry at the Chamber of Commerce.
What to do (and when to do it)?
The Code gives a 9-month timeframe to implement the new legal framework.
- By 16 December 2019, limited liability companies must appoint a controlling body if the new thresholds were met during the last two financial years (this including, if approved before 16 March 2019, the 2018 financial statements);
- By 16 December 2019, limited liability companies must assess whether it is necessary to align their By-laws to the reformed provisions of Article 2477 ICC and implement such amendments, if necessary;
- By 16 March 2019, the controlling/auditing bodies appointed by the limited liability companies that have not met the new thresholds in the last two financial years:
- will automatically expire, if the By-laws of the company do not allow the Quotaholders to voluntarily appoint controlling/auditing bodies;
- the appointed Statutory Body will continue its mandate until the natural expiration of their term if the By-laws allow the Quotaholders to voluntarily appoint controlling/auditing bodies.
What if you don’t comply?
From a civil law perspective, to the extent that there is a legal obligation to appoint a controlling/auditing body, the directors who fail to call a Quotaholders meeting to resolve on such appointment are committing a serious breach of their obligations and duties and might also be sanctioned with administrative fines.
In addition, any resolution adopted by the company and which implies an activity from the controlling/auditing body (including, for example, those resolutions relating to the approval of the financial statement or the reduction of the corporate capital) might be contested and held invalid.
(ii) Wider responsibilities for Directors
Starting from 16 March 2019 the following amendments to the ICC have also been in full force and effect:
- Any person/entity conducting a business has the duty to: (i) establish an organizational, administrative and accounting structure that is appropriate to the nature and size of the business “also in relation to the timely detection of the crisis of the business and the loss of business continuity”; as well as to (ii) take action without delay for the adoption and implementation of the tools provided by the law for overcoming the crisis and the recovery of business continuity (please see new Article 2086(2) ICC);
- The management of the company must be carried out in compliance with the provisions of Article 2086(2) ICC and it is the exclusive responsibility of the Board of Directors, which carries out all the activities that are necessary for the implementation of the corporate purpose (please see new Article 2475(1) ICC);
- The Directors are liable vis-à-vis the company’s creditors for the failure to comply with the obligations concerning the preservation of the integrity of the company's assets. In particular, a claim against the Directors may be brought by the creditors when the company's assets are insufficient to satisfy their claims (please see new Article 2476(6) ICC);
- New Article 2486(3) ICC sets forth the criteria to determine the compensable damages payable by the directors that, in case of a cause for dissolution of the company, did not limit the management activity to the preservation of the company’s assets (illecita prosecuzione dell'attività sociale).