Prepared by Cristian Sgaramella, Michele Carminati and Erika Andreani
The negotiated settlement procedure for the solution of the business crisis (the “Negotiated Settlement”) governed by Law Decree 118/2021 converted with amendments into Law 147/2021 (hereinafter the “Decree”) and which entered into force on 15 November 2021, assigns a prominent role, in the identification of the business crisis, to the supervisory body (i.e., in the case of joint stock companies, the board of statutory auditors of the traditional system, the supervisory board of the dualistic system and the management control committee of the monistic system; in the case of limited companies, the board of statutory auditors or the sole auditor).
Art. 15 of the Decree entrusts the supervisory body with the task (i) of reporting the administrative body of the existence of the prerequisites (i.e. the conditions of equity or economic-financial imbalance that make the crisis or insolvency likely, see art. 2 of the Decree) for the appointment of the expert negotiator (the “Expert”), as well as (ii) of supervising the same administrative body on the progress of the negotiations.
The provision at stake, while entailing a setting aside of the role of the supervisory body in the internal alert procedure, as per art. 14 of the Code of Business Crisis and Insolvency (hereinafter “CCII”), in relation to the obligation to report hints of crisis to the OCRI, is in continuity with the path traced by the same CCII in the part in which art. 375, in reformulating art. 2086 of the Italian Civil Code, placed the obligation on all companies, as from 16 March 2019, to set up an organizational, administrative and accounting structure appropriate to the nature and size of the business, also in relation to the timely detection of the crisis.
In fact, in the Decree, the function of the supervisory body to promptly report to the administrative body the circumstances that have led the company to a condition of crisis or so-called pre-crisis remains firm, i.e., in the latter case, in the so-called twilight zone prior to the onset of the actual crisis, in view of the close correlation between this reporting function and the duty of supervision on the same supervisory body pursuant to the combined provisions of art. 2403 of the Italian Civil Code and the second paragraph of art. 2086 of the Italian Civil Code, as amended by art. 375 of the Italian Civil Code.
Art. 15 of the Decree therefore assigns the supervisory body two different roles, to be exercised in two distinct temporal phases:
- the role of prevention and timely emersion of the crisis in the phase preceding the submission of the petition;
- the role of control and supervision, exercised according to the traditional rules set forth for the board of statutory auditors by art. 2403 of the Italian Civil Code, in the phase following the access to the procedure and throughout the negotiations.
With reference to the role of prevention and timely emersion of the crisis, the supervisory body, in practice, must identify the prerequisites for the submission of the petition, essentially consisting of the conditions of economic, equity and financial imbalance that make the crisis or insolvency of the company likely: the supervisory activity is crucial to the detection of the aforementioned conditions of instability that the supervisory body must carry out on the adequacy of the administrative, organizational and accounting structures, detecting any symptoms of instability generated by inadequate structures for the timely detection of risks, in order to urge the administrative body to activate remedies aimed at predicting the worsening of the crisis or its occurrence and not already implemented for this purpose by the administrative body.
Therefore, the supervisory body, pursuant to art. 15 of the Decree, plays a central role, both in terms of prevention, by supervising the adequacy of the administrative, organizational and accounting structures and their functioning in order to promptly detect the crisis and the loss of continuity, and in terms of emersion of the crisis, should the supervisory activity detect symptoms of economic, equity and financial imbalance due to the use of structures that are inadequate for the prompt identification of risks.
Once the prerequisites for the submission of the petition have emerged, the supervisory body must report them to the administrative body by means of a report which is of a purely internal nature, in that it has its effects within the company, carrying out the function of an information flow between the supervisory body and the administrative body by virtue of mutual collaboration in the search for suitable solutions: it is not up to the supervisory body, therefore, as anticipated above, to report externally or to activate the procedure, which is the exclusive responsibility of the directors.
In order to allow for the administrative body immediate activation at the Chamber of Commerce, the report must be timely, i.e. it must take place as soon as possible after the supervisory body becomes aware of it, and this is only possible if the body constantly monitors the management of the company, also by means of specific checks, required to the administrative body for the preparation of interim financial and economic situations aimed at a careful evaluation of the economic and financial performance.
With regard to the methods for reporting to the administrative body, art. 15, paragraph 1 of the Decree establishes that the report must be made in writing and addressed to the board of directors or to the sole director in such a way as to ensure proof of receipt; it must also be justified and contain an appropriate deadline of no more than 30 days, by which the administrative body must provide information on the measures taken to deal with the situation reported by the supervisory body.
With reference to the role played by the supervisory body once the administrative body has entered into the procedure and throughout the negotiations, as anticipated, the control and supervisory activity must be carried out according to the traditional rules set forth in art. 2403 of the Italian Civil Code.
In particular, the advisory and reporting function carried out by the supervisory body vis-à-vis the Expert is significant: the latter, after having accepted the assignment following the presentation of the petition by the company, must assess the possibility or otherwise of restructuring the company and, to this end, makes use of the information provided by the supervisory body (as well as that provided by the auditor, when in force): as inferred from section II of the Ministry of Justice’s Executive Decree of 28 September 2021, in the phase following access to the Negotiated Settlement, the function of supervising the correct administration and the adequacy of the administrative and accounting structures exercised by the administrative body translates, in substance, into supporting the Expert, who makes use of the accounting situation drawn up by the administrative body for the preparation of the recovery plan, informing him if this accounting situation proves to be unreliable or inadequate for the purposes of formulating a feasible plan, so that the directors take steps to remove the critical points that have emerged in terms of liabilities or expected cash flows.
The control body must also be available to provide any other type of information that may be of assistance to the Expert in understanding the causes of the crisis or asset, economic and financial imbalance and in identifying intervention strategies. Throughout the negotiations, in which the corporate bodies continue to carry out their functions and the administrative body to carry out ordinary management and the Expert facilitates the negotiations between the company and the other parties involved, the supervisory body continues to carry out its traditional tasks, i.e. supervising the correct administration and the adequate administrative and accounting structure, which is also expressed in the supervision of the progress of the negotiations, as well as the timely reporting of financial imbalances to the administrative body.
In addition to informing, the control body must, in turn, receive information from the administrative body on the initiatives taken by the latter following the notification of the conditions of imbalance, i.e. the submission of the request and the appointment of the Expert, whose compliance with the independence requirements provided for by the Decree must be verified by the control body and who must report any irregularities found. It must also be informed, by the Expert, if acts are carried out in the management exercised by the directors that jeopardize the interests of creditors, the negotiations and the prospects for recovery.
The Negotiated Settlement procedure has imposed the duty of timely reporting solely on the supervisory body and no longer on the auditor or the auditing company, as was instead foreseen by art. 14 of the CCII: this implies that the information flow between the two corporate functions, together with that to the Expert, must be constant within the scope of the Negotiated Settlement procedure.
A brief digression on the textual elements from which the above can be deduced may be useful.
In addition to the provision of art. 5, I co, of the Decree (according to which the Expert’s analysis regarding the assessment of the feasibility of the reorganization is also based on the information gathered by both the supervisory body and the statutory auditor, when in force) some of the provisions contained in the afore mentioned Executive Decree of the Ministry of Justice, through which “the content of the platform, the detailed checklist, the indications for the drafting of the reorganization plan and the methods for carrying out the practical test” are defined, in compliance with the provisions of the II paragraph and III paragraph of article 3 of the Decree.
See in this regard, by way of example:
- par. 3.2 of Section I of the Executive Decree where, in the activity of verifying the reasonable pursuit of recovery to be carried out by the Expert, it requires the latter to verify whether or not the supervisory body and the auditor, when in force, have information on the basis of which the accounting situation of the company is reliable or adequate for the drafting of the recovery plan;
- par. 3.3 of the same Section I of the Executive Decree where, in the activity to be carried out by the Expert to identify intervention strategies aimed at removing the causes of the crisis, it requires the same Expert to ask himself whether “The supervisory body and the auditor, when in force, believe that the picture provided by the entrepreneur is complete and adequate”; and also
- par. 4.2 of Section III of the Executive Decree which, with reference to the Expert’s analysis of the consistency of the recovery plan with the data provided by the entrepreneur through the check list referred to in the platform governed by the same Executive Decree, provides that the same Expert may ask the entrepreneur, his controlling body and the statutory auditor, when in force, for “any useful and necessary information”.
As mentioned above, another key element that characterises the conduct of the supervisory body within the Negotiated Settlement procedure, also for the purposes of assessing any liability profiles, is the duty to supervise the progress of negotiations.
This duty constitutes a corollary of the supervisory duties sanctioned on a civil law level by art. 2403.
In fact, taking into consideration the need for the Negotiated Settlement procedure to draw up a recovery plan and for this to be based on a truthful and up-to-date accounting basis, in accordance with the accounting principle OIC 30, it is clear that the supervision pursuant to the aforementioned article 2403 of the Italian Civil Code, i.e. the supervision expressly referred to therein, cannot be omitted with regard to the adoption by the administrative body of an organizational, administrative and accounting structure that is also adequate for the timely detection of the company’s crisis.
Again by virtue of the reference to the combined provisions of art. 2403 and art. 2086 of the Italian Civil Code, it is possible to affirm that the participation of the supervisory body in the first convocation, as per art. 5, fifth paragraph, of the Decree, between the Expert and the administrative body, as well as in the subsequent meetings between the same subjects, should not be excluded, even though such participation is not expressly provided for by the provisions of the Decree. In this context, the duties of confidentiality and privacy of the supervisory body provided for by art. 2407, first paragraph, of the Italian Civil Code, can be interpreted in this way, which, by constituting an explication of the duties of diligence and professionalism on the same body, are perfectly consistent with the same duties of confidentiality and privacy that inform the Negotiated Settlement procedure.
The timely reporting to the supervisory body as well as the supervision of the progress of the negotiations, pursuant to art. 15, paragraph 2 of the Decree, are assessed for the purposes of its liability pursuant to art. 2407 of the Italian Civil Code. It should be noted, in this regard, that in the version of the Decree converted into law, the reference to the words “for the purposes of the exemption or mitigation” of the liability is no longer provided for in art. 15, paragraph II, but a more direct and immediate reference has been made to the assessment of the promptness for the purposes of the liability of the supervisory body pursuant to art. 2407 of the Italian Civil Code.
The fulfilment by the supervisory body of its duty to report promptly cannot in itself be considered a cause for excluding liability, if the administrative body, following the report, has behaved inertly or taken anomalous initiatives.
In this regard, as is well known, the legal system provides the supervisory body with further instruments of protection – i.e. the convocation of the assembly pursuant to art. 2406, second paragraph, of the Italian Civil Code or, as a last resort, the denunciation to the court pursuant to art. 2409 of the Italian Civil Code – which cannot be avoided by the supervisory body in the performance of its duties, on the basis of the obligations of diligence, correctness and good faith underlying it.
Finally, it must be pointed out that many commentators, who have welcomed the new procedure governed by the Decree, at the same time have not hesitated to criticize the rule set out in art. 1 bis of the Decree which, in once again revising art. 379 of the CCII, allows the small sized limited liability companies and cooperative companies that have not already appointed the supervisory body as of 16 December 2019, to postpone the mandatory appointment of this body, even if monocratic, or of the legal auditor (natural person), to the date of approval of the financial statements for the year 2022 and, therefore, to 2023, thus de facto weakening the effectiveness of the tools for resolving the business crisis set forth in the Decree.
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PwC TLS Avvocati e Commercialisti
PwC TLS Avvocati e Commercialisti
PwC TLS Avvocati e Commercialisti