The effects of the economic crisis resulting from the current health emergency are visible to all and will lead to a short and medium term general liquidity crisis for all enterprises.
In order to cope with this effect, in Decree Law no. 23/2020 (the so-called “Liquidity Decree”, published in the Official Gazette’s extraordinary edition on 8th April 2020), the Italian Government has provided for a series of measures aimed at ensuring the continuity of companies’ production throughout the emergency and post-emergency phases, with particular regard to those enterprise which, before the onset of the crisis, were in good health and presented a regular prospect of business continuity.
In particular, such measures include:
- the complete neutralization of legal duty to intervene on significant losses, for financial statements closed by 31 December 2020 (art. 6 of Decree Law 23/2020, as we are pointing out shortly herein below);
- the possibility of assessing, when drafting the 2020 financial statements, the recurrence of the ongoing concern assumption only on the basis of the results of the previous year (art. 7 of Decree Law 23/2020); as well as
- exemption from subordination for loans made by shareholders between April 9 and December 31, 2020 (Article 8 of Decree Law 23/2020).
The first of the above mentioned provisions, which essentially freezes – at least until 31 December 2020 – the obligation to balance significant losses (those resulting in a reduction of the share capital beyond the thresholds set by the law), is an important exception to the rules that, in our system, regulate the functioning of share capital companies and the subsequent directors’ liabilities.
As it is well known, in fact, our Law sets a general obligation for all the companies’ management and control bodies to promptly react whenever, due to operating losses, the share capital is reduced by more than 1/3.
The reference is to the Article 2446 of the Italian Civil Code. (art. 2482-bis, for limited liability companies), which provides that “when it appears that the share capital has decreased by more than one third as a result of losses, the directors or the management board, and, in the event of their inaction, the board of statutory auditors or the supervisory board, must promptly convene the shareholders’ meeting in order to take the appropriate measures“.
The abovementioned rule regulates the case in which the erosion of the share capital is greater than 1/3, without, however, reducing it below the legal minimum.
In this case, in fact, the Law provides that the loss may be reduced within the following financial year (the so-called “year of grace“), and that, only when this effect does not occur, the share capital must be reduced accordingly by the Shareholders’ Meeting (or, in the event of their inaction, by the directors and supervisory bodies, through the Court’s intervention).
However, if, as a result of the loss, the share capital is reduced below the legal minimum, in order to avoid the automatic dissolution of the company (Article 2484, paragraph 1, no. 4 of the Italian Civil Code for “S.p.A.” and Article 2545-duodecies for “S.r.l.”), “the directors or the management board and, in the event of their inaction, the supervisory board must without delay convene the shareholders’ meeting to deliberate the share capital reduction and its simultaneous increase to an amount not lower than the said minimum, or the transformation of the company” (Article 2447 of the Italian Civil Code for the “S.p.A.” and Article 2482-ter for the “S.r.l.”).
These, therefore, are the ordinary rules, to which the Government has intended to allow a temporary derogation, due to the extraordinary nature of the disruptive and unpredictable economic effects caused by the lockdown.
The Article 6 of Decree Law 23/2020 literary states that “from the date of entry into force of this decree until 31 December 2020, for the cases that occurred during the financial years closed by the aforementioned date, Articles 2446, second and third paragraphs, 2447, 2482-bis, fourth, fifth and sixth paragraphs, and 2482-ter of the Italian Civil Code shall not apply. For the same period, the company shall not be dissolved due to reduction or loss of the share capital as per articles 2484, first paragraph, number 4), and 2545-duodecies of the Italian Civil Code“.
The rule has already been widely commented on, even critically, because of its unclear formulation, which unfortunately leaves areas of shadow on its application.
Therefore, just to mention the most relevant ones, it is possible to recall the doubt as to the meaning to be attributed to the expression “cases that occurred during the financial years closed by the aforementioned date” (31 December 2020).
In this regard, it is particularly discussed whether the “cases” should include all those situations in which significant losses emerge in the bonus period (8 April/31 December) regardless of their maturation (with the possibility, thereby, to include losses resulting from statements for financial years closed before 8.4.2020, if drafted and brought to the shareholders’ attention after that date and, moreover, excluding the financial statements for the years ending on 31 December 2020, since drawn up and brought to the shareholders’ attention after the final date), or if it is necessary to refer only to those losses relating to financial years or fractions of financial years included in the bonus period (with the exclusion, therefore, of losses emerging from financial statements relating to financial years closed by 8.4.2020 even if drawn up and brought to the attention of shareholders in the bonus period).
It is also discussed whether, for the application of the rule, the origin of the loss and/or, if preferred, of the “cases” (according to the words of the provision at issue), is relevant or not. In fact, the question about whether the preferential regulation concerns only the losses induced by the pandemic and the consequent stop of the company’s activity, or also those losses which, although developed during the bonus period, derive from other pre-existing factors, is still unsolved.
in order to avoid uncertainty, such doubts should be solved by the Legislator during the conversion process.
However, having said that, it is reasonable to wonder: will such discipline yield the expected results? In other words, will it really help to give the entrepreneur more time to try to achieve a recovery of the business?
The question is justified because, in order to attempt the recovery, a company that significantly reduces or, even worse, loses its capital, unless it is timely recapitalized, can only hope to use the debt finance.
When the company will approve its financial statements showing the full loss of the capita, and also, perhaps, declaring that in the evaluation of its business as a going concern it is not considering the effect of the COVID period, giving full illustration of this situation to the shareholders, and consequently to third parties (this being expressly provided for in the explanatory report to the aforementioned Decree-Law), will it be able to convince the third party to pay out new debt finance, without new contribution by the shareholders?
On the other hand, it is also questionable if the directors and the control bodies will be available, respectively, to develop and allow the development of the company’s activities, even if there is a risk of aggravating the disruption, with the threat of possible future insolvency proceedings.
If the rule had expressly provided for exemptions from liability for directors, auditors and third parties (for instance, the lending banks) in such cases, for sure it would have been extremely useful to remove operational limitations that would necessarily arise from such situations of fear.
The outcome is the need to evaluate the company’s situation and the prospects for its recovery very carefully, identifying the best measures for the concrete needs, not believing that the rules in question can serve, ex se, to postpone the problem to the future.
The problems of enterprises, including those arising from emergency situations, must be approached seriously and promptly in order to avoid that time might make efforts vain and aggravate liabilities.
Author: Avv. Iacopo Bissi
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