The "new" liability of directors of limited liability companies (S.r.l.) in light of the Coronavirus emergency

10th September 2020  

by Giorgia Antolini

With Legislative Decree no. 14 of 12 January 2019, the Council of Ministers issued the Code of Business Crisis and Insolvency (hereinafter, the "Code"), implementing a bankruptcy reform that aims to make it easier for companies to use legal institutes of alert and assisted settlement of the crisis. The fundamental rationale of the provisions introduced with the Code is to allow companies in financial difficulties to continue their business activities. The entry into force of the Code is based on two different time horizons: 16 March 2019 and 15 August 2020.

The amendment made to art. 2476 of the Italian Civil Code.

Among the provisions that came into force on March 16, 2019, we would like to analyse the amendment that art. 378 of the Code makes to art. 2476 of the Italian Civil Code, adding a sixth paragraph, which provides that "Directors are liable to corporate creditors for non-compliance with the obligations inherent to the preservation of the integrity of the company's assets. The action may be brought by creditors 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 contested by the company's creditors with the claw-back action when the conditions of the action are applicable." The Code, therefore, while on the one hand is concerned with safeguarding the assets of companies, on the other hand puts a brake on the business activity itself, eliminating the perfect asset separation that characterizes the limited liability companies and discouraging the directors not so much from acting according to unfair practices, but rather from making entrepreneurial choices.

Do workarounds exist?

The so-called Business Judgement Rule, reconstructed through the rulings of the Supreme Court of Delaware, is a rule that allows to assess the actions of the directors assuming that they have acted on an informed basis, in good faith and in the corporate interest. More precisely, it consists in exempting from liability the directors, if they have made correct decisions, assessed through a series of fiduciary duties, such as: a) the duty of care; b) the duty to monitor; c) the duty to inquiry; d) the duty of loyalty. Therefore, if the trustees have made a decision that is consistent with the right amount of information and qualifies as reasonable/rational, they will be relieved of any liability, as they have some discretion in deciding whether a project is appropriate.

The Business Judgement Rule in Italian law

The Civil Code, following the 2003 reform, imposed a slightly higher level of diligence than previously required. In the current panorama, the directors, in addition to complying with legal obligations and the provisions of the by-laws, must act according to the diligence dictated by the nature of the assignment and the possession of professional expertise in the sector. The level of diligence has therefore been deepened and calibrated to the nature of the activity to be performed and the professional experience of the directors. The Business Judgment Rule is a principle of common law developed in the course of an evolution of jurisprudence, also applied in our legal system, as confirmed by the undisputed case-law marked by Cass. Sez. I, n. 3652/1997 and Cass. Sez. I, 3409/2013.

These rulings confirm that the directors cannot be held liable for choices proved ex post to be uneconomic, since this is an assessment pertaining to the sphere of entrepreneurial discretion, and as such not subject to review by a judge. In fact, the judgement on the diligence of the director in fulfilling his mandate can never invest management choices. The only limit is given by the ex-ante evaluation of the reasonableness of the management choices themselves, taking into account the parameters of the diligence of the agent and the obligation of the director to act on the basis of informations. Therefore, the application of the Business Judgement Rule allows the directors, who have acted in an ex ante perspective and according to the diligence related to the nature of their mandate, to discretionally manage the company, placing in an ex post perspective the principle of irresponsibility for any negative results of the economic activity. Even in Italian law, therefore, the power of the judge to assess the reasonableness and convenience of the decisions taken by the directors is excluded.

Contingency plan & Coronavirus

With the introduction of the Code, the Business Judgement Rule takes on greater importance as administrators are now obliged to take action and choose the most suitable instrument set up by the law to overcome the crisis. The Business Judgement Rule, therefore, represents a parameter for the assessment of the actions of administrators also when facing a business crisis, a very current scenario in the panorama that is emerging due to the spread of Coronavirus. The situation we are experiencing, in fact, will put make things difficult for many companies, and, even in a crisis situation, likely reducing administrators' scope for action. Given these assumptions, now more than ever directors will have to act on an informed basis, putting in place business choices that are both reasonable and consistent with the nature of the task they perform in the light of the current situation. Without prejudices to the ex post unquestionableness of the business choices they have made (on a correct ex ante assessment).