From managing the business crisis to business management

The reform of the business crisis focused on the sustainability of debt as a condition for guaranteeing the going concern; the new forward-looking approach to the management of business crisis focuses on its prevention (risk monitoring and evaluation) and on timeliness (alert system) as the key elements of the legal model of business management.

The suitability of the organisational, administrative and accounting structures, also for this purpose, has become the new management paradigm, both as a legal obligation to which the liability of corporate bodies needs to be related in case of default and - more importantly - as an opportunity for the entrepreneur to guarantee the correct and efficient performance of operations, improving performances.

Of course, the legislator who worked on the new and laborious reform of Bankruptcy Law (Royal Decree n. 2626/1942) could not imagine that in the year of entry into force of the “Code of business crisis and insolvency” (Legislative Decree n. 14/2019) initially set for 15 August 2020 and now postponed to 1 September 2021, a pandemic would strike, disrupting the whole world in a few weeks.

In short, the rationale of the reform - already anticipating further postponements, amendments and updates - also with the implementation of the new (2019) EC directive on insolvency, is that of considering crisis as a physiological phase in the life of a business, to be detected before it degenerates into a pathological situation, considering that the sooner it is identified and dealt with, the higher is the possibility to overcome it and recover a going concern; the new regulation is thus based on prevention and alert tools, with a forward looking approach.

This with the express aim to preserve the value and the capacity to create value that businesses have, for the benefit of all the stakeholders involved and thus of the entire economic system.

It is worth reminding, nonetheless, that the postponement provided does not concern the provisions of Code of business crisis, already in force from 16 March 2019, i.e. since over two years, due to an initial exception to the general provision; among said provisions are the amendments to the Italian Civil Code such as, in particular, the business and corporate organisational structure (art. 2086, 2257, 2380-bis, 2409-novies and 2475 of the Italian Civil Code), Directors’ liability (art. 2476 and 2486 of the Italian Civil Code) and the appointment of supervisory bodies (art. 2477 of the Italian Civil Code).

In particular, the new para. 2 of art. 2086 of the Italian Civil Code on “Business management” provides for that an entrepreneur doing business as a company is liable to set up an organisational, administrative and accounting structure adequate to the nature and dimensions of the business, also with a view to a prompt identification of crisis and loss of the going concern, as well as to promptly adopt and implement one of the tools provided by the regulation to overcome the crisis and recover the going concern.

This provision has its effects on the topic of Directors’ and supervisory bodies’ liability, and there are already measures of the main Italian Courts sanctioning non-compliant businesses.

Therefore, if on the one hand the effects of the pandemic have led to the deferment of the introduction of alert measures and the remaining in force of the existing insolvency proceedings, on the other hand, they have set the conditions for a quicker enactment of the portion of the reform already in force and for the remaining portion.

This is particularly evident considering that in the current emergency phase, which has heavily impacted the financial and economic aspects within the management of businesses, companies needed to develop a contingency plan, implementing a planning tool and adopting strategies whose approach, techniques, and methodologies are adequate for a deep change of perspective imposed by the reform, to safeguard and reorganize companies in crisis, in order to take prompt actions and avert insolvency.

In the current context, it is clear that the requirement to promptly detect and notify the crisis is suspended, since every company is – or should consider itself – potentially in crisis and, therefore, should adopt and implement the instruments provided to overcome the crisis and safeguard the going concern, meant as capacity to create value; in a reorganization perspective and based on the relevant plan (if necessary, also supported by a proper procedure), the business model must be reviewed in the light of the changed context and different perspectives.

By revaluating the business model and the organizational structure, it is important to: elaborate strategies for the development of the business activity and the recovery of profitability, also by increasing the efficiency of business structures; re-formulate the financial structure, also through M&A operations; evaluate liquidating instruments, lacking any feasible alternatives. Therefore, in this phase, management strategies and instruments are necessarily those being typical of the reorganization and restructuring of companies in crisis.

In fact, the serious crisis caused by Covid has not yet led to insolvency cases, thanks to the combined effect of different government provisions supporting companies and the slowed down activity of courts.

According to a recent publication of the Bank of Italy, approximately 6,500 more bankruptcy procedures could be registered by 2022 compared to those registered in 2019 (and a large part of them are already expected in 2021).

According to the latest Cerved outlook, the number of companies at risk of becoming insolvent could reach 115 thousand at the end of 2021 (with projected job losses for 300 thousand people), with an estimated increase of the risk rate to 6% – compared to the estimated 4.5% in the pre-Covid era –, registering an increase by about 33%, which represents the prospective difficulties, which the entire system could incur.

However, further regulations, as well as tax and social security concessions have been introduced concerning business crisis settlement procedures and, particularly, with regard to arrangement with creditors procedure and to restructuring agreements (art. 3, para. 1-bis of Law Decree no. 125/2020 turned with amendments into Law no. 159/2020).

Amendments to articles 180 and 182-bis of the Italian bankruptcy law have been made, allowing the competent Court to approve the arrangement with creditors and debt restructuring procedures – by evaluating the higher advantage of the proposed procedure compared to bankruptcy – even lacking a vote or a consent by the Tax Authorities or by social security authorities, if their approval is necessary for the finalization of the crisis settlement procedure.

In conclusion, the current situation favours the adoption of a new qualitative approach in the management of businesses, which is the basis of the business crisis reform (adequacy of business structures), i.e. the shift from a traditional “how we performed / how we will perform” to a more developed “how can we perform better” way of thinking, and this will certainly award those companies that will be able to make this change, proving to be reactive and resilient, thus obtaining a competitive advantage and a preventively safeguad their corporate bodies against liabilities.