Italy: The new law on corporate crises as a “work in progress”

The reform
A new law on company crises has significantly changed the rules applicable to limited liability companies in this respect Among other things, the liability of the company’s management was tightened.

Internal supervisory body
The prerequisites for the mandatory appointment of an internal supervisory body have also been adapted. Accordingly, such a supervisory body is now required whenever, in two consecutive financial years, the assets or turnover exceed four million euros or an average of 20 employees are employed. These thresholds were initially drastically lowered in the course of the reform, but then raised again, partly due to being fiercely criticised. “Early adopters”, i.e. companies that have already implemented a supervisory body can initiate a dismissal by a court of this body, although this is no longer necessary due to current values.

Furthermore, the tasks of the supervisory body were expanded: After the supervisory body reports “justified signs” of a company crisis, the management must make a report addressed at this body within 30 days. The report must refer to proposed solutions and measures already taken to eliminate the crisis. If the management does not become active or becomes insufficiently active, the supervisory body must report the crisis to the state “crisis resolution body” This sets in motion negotiations between the company and its creditors.

Crisis indicators
A draft of the leading indicators has been available since September. The most important indicator is the “debt service coverage ratio” (DSCR), i.e. the ratio between the amount of the company’s liabilities and the budget at their disposal over an observation period of six months. Default in agreed payment terms shall also be taken into account.

Where the DSCR cannot be determined, five other indicators shall be used in an overall assessment: The portability of financial charges, the valuation of the cash flow and the amount of liabilities for social benefits and taxes.

Evaluation of the reform
The new Crisis Code is expected to lead to noticeable changes in corporate management. In the future, the company’s internal organisational and financial structure will require ongoing examination for appropriateness. The fact that there is still no consolidated practice makes the matter just as challenging as ongoing legislative changes.

The introduction of early warning systems also entails the risk of incorrect “sick reports”. By means of a “self-fulfilling prophecy”, healthy companies could themselves only enter the actual crisis by triggering the crisis (elimination) mechanisms. This may be the case, for example, when business relations with creditors or financing banks deteriorate as a result of the crisis instruments.

Therefore, the reform’s true impact remains to be seen: Will there be a change in corporate culture or will there be an increase in corporate crises?

Author: Valentina Montanari