Covid-19 pandemic in spring 2020 has been described as a silent tsunami. Nowadays, its effects are striking world economic as a roaring tornado, reaching companies all around the world.
If your Italian subsidiary has suffered important losses in 2020, it might be concerned by a newly adopted regulation intended to release its directors and shareholders from the obligation to take irrevocable measures, which could affect the existence of the company itself.
Italian regulation on share capital losses
Italian Civil Code provides for special regulation in case of losses affecting share capital of companies.
It is provided that, in case of a loss diminishing company’s effective share capital more than one-third, the company shall either reduce the loss or reduce the nominal share capital in proportion to the loss occurred.
Those are rules aimed at maintaining a certain link between nominal and effective share capital of the company. Of course, this is intended to protect company’s creditors, who can rely on the information provided by company books.
Furthermore, in case the effective share capital falls below the legal minimum, the company must resolve to reduce the nominal share capital and, immediately after, increase the same, in order to bring it back above the legal minimum. If this is not carried out, the entity shall be dissolved, as its share capital is not compliant with legal requirements.
Directors are obliged to monitor financial stability of companies, and therefore they have to note relevant share capital losses and act accordingly. In case it is not possible for the company to fulfil the financial requirements, directors should carry out a conservative administration of the company until its effective dissolution. Should directors not comply with those obligations, they are directly liable vis-à-vis the company and its creditors.
Emergency regulation provided by Italian Law
As matter of fact, Covid-19 pandemic has had a tremendous impact on the financial situation of many companies. Italian legislator is worried that, because of losses provoked by the current situation, companies which are fundamentally sound would be obliged to diminish their share capital, or worse be dissolved.
To avoid such effect, Italian Budget Law for 2021 (Law 178/2020) provides for a “suspension” of the abovementioned rules on share capital decrease and companies’ dissolution. It has been provided that, in case of reduction of share capital because of losses occurred in the financial year ongoing on December 31, 2020, companies are not obliged to diminish the loss until 2025 and they are not obliged to decide for their dissolution.
A question has been raised as to whether the provisions are applicable to losses occurred in the years before 2020. In a recent opinion issued by the Italian Ministry of Economy this possibility has been excluded. Therefore, it is of utmost importance to duly identify the losses which are relevant for the application of Budget Law for 2021.
Nevertheless, it has to be considered that there are still some obligations on directors in case of capital losses. Directors shall in any case fulfill their duties and take the necessary countermeasures following the losses, duly informing shareholders.
Finally, the suspension at stake does not imply that companies are prevented from recapitalizing after losses occurred during 2020/2021 financial year. Also, the suspension provided by Budget Law for 2021 only applies to share capital decrease due to financial losses: in all other cases which require a reduction of share capital, directors are obliged to proceed as prescribed by the law.
Budget Law for 2021 has provided for a very useful instrument for companies. However, in order to use it, it has to be carefully considered whether the circumstances make such temporary regulation applicable to the specific case at stake. Directors might face liability towards creditors for improper application of the rules on share capital losses and recapitalization.