NEW RESPONSIBILITIES FOR ENTREPRENEURS AND COMPANY ADMINISTRATORS: HOW THE NEW "CODE OF BUSINESS CRISIS AND INSOLVENCY" WILL CHANGE THE WORLD OF ITALIAN S.R.L. (LIMITED LIABILITY COMPANY)
The Italian Legislative Decree no. 14 of January 12th 2019, the "Code of Business Crisis and Insolvency", has introduced significant innovations in the field of the prevention and resolution of business crisis [complete text on the following link, in Italian language].
It must be immediately said that, for the Italian company law system, this is a truly epochal innovation. A special Commission - established in 2015 at the Ministry of Justice and chaired by Dr. Renato Rordorf, a long-standing judge among the leading experts in the field - first prepared the draft of the legislative delegation, which resulted in Law no. 155 of October 19th, 2017, and then produced the legislative structure containing the new rules of the business crisis: a code divided into four parts and made up of 391 articles.
The reform, essentially, addresses the issue of the regulation of bankruptcy proceedings, with the aim of implementing a reorganisation of the matter in order to avoid that the delay of the company, in perceiving the signs of crisis, could lead to an irreversible worsening of the company's situation and a consequent impossibility of the satisfaction of creditors.
Some articles of the new corporate crisis code came into force 30 days after the enactment of the Legislative Decree 14/2019. For others, instead, given their considerable scope for change, the enforcement has been staggered and postponed until mid-2020.
Among the most interesting changes there is a considerable revolution made by the reform with regard to the figure and responsibilities of entrepreneurs and company administrators in LLC, related to articles 2462 et seq. of the Italian Civil Code.
In fact, in the field of LLC the new code has totally changed the corporate governance rules.
The first amendment concerns art. 2086 of the Italian Civil Code, which has been amended after the reform "business management". Article 375, paragraph 2 of the Legislative Decree 14/2019 added a second paragraph to the said article, which reads as follows: "The entrepreneur, whether operating in a corporate or collective form, has the duty to establish an organizational, administrative and accounting structure appropriate to the nature and size of the company, also in function of the timely detection of the crisis of the company and the loss of business continuity, as well as to take action without delay for the adoption and implementation of one of the instruments provided for by the law for overcoming the crisis and the recovery of business continuity".
It was introduces the new and fundamental obligation for the entrepreneur - whether operating in a corporate or collective form - to adopt organisational, administrative and accounting structures aimed at monitoring every phase of the "physiological" externalization of the business activity, as well as to detect any "pathological" situations of the same, which could lead to a crisis.
The duties and responsibilities of the entrepreneur, who, while in the past had only the obligation to prevent the continuation of the business in the face of economic disruption of the company, are greatly extended, with the addition of the new second paragraph of Article 2086 of the Italian Civil Code, where it will also be required to take action to overcome the crisis and to restore the company's continuity and, conversely, the entrepreneur will be liable if it can be inferred that he has not done in this way.
On this point, it was noted that "an innovative and different approach to the management of enterprises will have to be adopted. In addition to the existing discipline, there will be the need to monitor with appropriate organizational models the cash flows and the weight of debts, as well as the evaluation indexes of the crisis. It is ultimately a question of activating an adequate monitoring system. The approach of the legislator, which denotes a trend of rigour and management of the business crisis, is to punish and define the situations in which the company administrators have not acted in time to bring out the crisis and ask for help, with a view to protecting the business continuity". [into Marcello Pollio, La riforma del Fallimento, "Guida Giuridica" of Italia Oggi, serie spec., n. 2, 24.01.2019, in Italian language]
The reform tends towards a general empowerment of the company as such but, from this point of view, it has not neglected the decisive role of corporate management.
One of the most important and, undoubtedly, most controversial innovations is that provided by Article 378 of the Legislative Decree n. 14/2019 which, between the fifth and sixth paragraphs of the previous Article 2476 of the Italian Civil Code, added the following: "The administrators are liable to the company's creditors for failure to comply with obligations relating to the preservation of the integrity of the company's assets. Creditors may bring the action when the company's assets are insufficient to satisfy their claims. The waiver of the action by the company does not prevent the exercise of the action by the company's creditors. The transaction can only be challenged by the company's creditors by means of a revocation action when the extremes of the action are applicable".
This new paragraph in fact takes over an orientation existing before the amendment of company law pursuant to Legislative Decree no. 6 of 17 January 2003, the so-called Vietti Reform, which came into force in 2004.
The liability of administrators of LLC before the amendment of 2004 was in fact governed by the same rules as those applicable to joint stock companies (JSC), because article 2487, paragraph 2 of the Italian Civil Code, in its original wording, referred directly to articles 2392 and 2393 of the Italian Civil Code on corporate liability actions, as well as 2394 of the Italian Civil Code on corporate creditors' liability actions, thus determining a "personal" liability of the administrators of the LLC, for compensation of the damages suffered by creditors due to the violation of the duties to preserve the integrity of the company's assets.
This reference to the articles relating to the JSC had been subject to numerous criticisms by the doctrine, because the liability of the company administrators of the LLC was greatly widened, calling into question the very essence of this type of company, which is characterized by a very limited nature of the liability of both shareholders and company administrators.
The subsequent amendment of company law in 2004 completely overturned this situation, given that, while pursuant to article 2394, paragraph 1, of the Italian Civil Code, for the JSC, creditors continued to have the right to take action against the administrators, for the LLC there was no longer any provision for direct protection of creditors, with the only rule about the corporate liability action.
The absence of specific regulations on the subject had caused, the day after the reform of 2004, a big contrast in jurisprudence, accompanied by a lively doctrinal debate, on the applicability of article 2934, paragraph 1 of the Italian Civil Code also to the administrators of the LLC, so as to allow the company's creditors to take action against them, in order to defend their financial interests damaged by the company's mismanagement.
The entry into force of Legislative Decree 14/2019 and the addition of the new paragraph to article 2476 of the Italian Civil Code has therefore resolved the doubts on this point, explicitly introducing the personal liability of the company administrators of the LLC, so, in the first sentence of that article is expressly reported the provision of Article 2934, paragraph 1 of the Italian Civil Code, referred, instead, to the administrators of the JSC, according to which: "The administrators are liable to the company's creditors for failure with the obligations inherent in the preservation of the integrity of the company's assets".
It is not difficult to imagine that the important novelty in question will return to produce criticism and discussion, in doctrine as in jurisprudence, because it cannot be denied that, to date, holding the role of company administrators of the LLC in Italy has certainly become more risky than in the past, given the personal responsibility towards creditors, which makes all corporate management more complex.
Finally, in confirmation of the strict line taken by the reform of the law of the small and medium enterprises, Article 2477 of the Italian Civil Code, concerning the control body of the LLC, has also been profoundly modified by Legislative Decree 14/2019, specifically lowering the thresholds for the appointment of the control body, with the effect of increasing the number of qualified persons who may be recipients of such control appointments.
This last amendment, given the excessively low size limits it sets, was immediately the subject of a lot of controversy and, soon afterwards, was made an amendment with the so-called "Sblocca Cantieri" Decree (Decree Law 32/2019, converted with amendments into Law no. 55 of June 14th, 2019), which once again doubled the parameters in question.
In fact, before the reform of the Business Crisis Code, the limits required for the appointment of the control body referred to total assets exceeding €4.4 million, or total revenues exceeding €8.8 million, or the number of employees employed during the year exceeding 50.
With Legislative Decree 14/2019 there had been a sharp reduction in the parameters, not only from the point of view of the size of the company but also from the quantitative point of view, since it was considered sufficient, for the purposes of the mandatory appointment of the control body, to exceed only one of the following limits: total assets in the balance sheet exceeding just 2 million euros, or revenues from sales and services exceeding 2 million euros; or employees employed during the year exceeding 10 units.
The strongest criticisms of this approach was based on the circumstance that forcing into election of the auditor also the limited assets LLC were in fact imposed huge management costs to be borne by smaller companies.
The "Sblocca Cantieri" amendment has therefore solved this problem, doubling all the parameters compared to those originally dictated by the new Code of the Business Crisis, thus reducing the number of LLC actually obliged to the appointment of the control body.
Today, therefore, Article 2477 of the Italian Civil Code states that "The appointment of the control body or auditor is mandatory if the company: a) is required to draw up consolidated financial statements; b) controls a company required to carry out a statutory audit; c) has exceeded for two consecutive financial years at least one of the following limits: 1) total assets in the balance sheet: 4 million euros; 2) revenues from sales and services: 4 million euros; 3) employees employed on average during the year: 20 units".
As pointed out by the President of the National Council of Certified Public Accountants and Accounting Experts, Dr. Massimo Miani, "the Decree Sblocca Cantieri has managed to make the right compromise between the need for control - which was implemented with parameters that were too low - and the streamlining of the administrative management of the company, achieving in a more balanced way the objective of Legislative Decree 14/2019, namely to use the alert tool - which has in the activities of the Board of Statutory Auditors its central element - to anticipate the crisis and try to rescue the company.” [into I. Bellucco e M. Marciano, Il Decreto Sblocca Cantieri: nuova disciplina sulla nomina degli organi di controllo nelle srl, in Diritto 24 de Il Sole 24 Ore, 10 luglio 2019, available on the following link, in Italian language].
Therefore, the articulated series of novelties described, of absolute importance, place the companies and their consultants face to the commitment to reorganize the company management with a view to safeguarding the company itself, in its patrimonial essence, with the ultimate, obvious aim of protecting third party creditors.
A noble intent, which in the long term could have the positive effect of consolidating the Italian entrepreneurial fabric, making it even more reliable. However, in the short and medium term, it is legitimate to wonder how much such rigidity can benefit the world of small and medium-sized Italian enterprises, which is increasingly in distress in times of global economic crisis.
Without omitting, then, to point out that, on a technical-legal level, the pursuit of the objectives that the reform has set itself entails a real upheaval of what is the very essence of the most typical corporate vehicle of, namely the limited liability company. Assuming that it is essentially correct to continue to define it as such.
All that remains is to wait and see "on the ground" what the real effects of the implementation of this epochal reform will be.