Italy: New Crisis And Insolvency Code: What Will It Mean For Insurance?

A look at the new code, which replaces the Italian Bankruptcy Law and modifies elements of the Italian Civil Code, and comes into force in August 2020.
We focus on key questions such as:

• What's new in the code?
• Who is concerned and how?
• What are the consequences for insurance?
• What opportunities does it create?

Legislative Decree no. no. 14/2019 implements the Crisis and Insolvency Code, applying to crisis and insolvency situations of large companies.

The code, which replaces the Italian Bankruptcy Law and modifies certain provisions of the Italian Civil Code, will enter into force on 14 August 2020 with the exception of the amendments to articles 2086, 2257, 2486 and 2477 of the Italian Civil Code, which entered into force since 16 May 2019.

What's new?

The code creates early warning mechanisms to detect companies' crises, that are aimed at preventing insolvency and liquidation.

The main goal is to make bankruptcy, now called judicial liquidation (liquidazione giudiziale as the word fallimento has been repealed) applied for only when no viable alternative is possible (i.e. when the company's insolvency/liquidation cannot be prevented as the going concern of the business cannot be safeguarded by means of any other procedure of composition with creditors).

For this purpose, the code:

a) introduces the new concept of crisis, defined as "a state of financial difficulty which is likely to result in the company's insolvency"

b) identifies warning signs of companies' crisis

c) provides for alert duties in case of detection of such warning signs

d) creates an out-of-court confidential procedure, presided over by new bodies to be created within the competent Chambers of Commerce (Organismo di Conciliazione della Crisi (OCRI)), to assist companies in finding the more suitable solution to emerge from the crisis. The members of the OCRI will be appointed within a register (established by the Minister of Justice) accessible, inter alia, by lawyers, accountants and labour consultants.

Who is concerned and how?

New obligations and duties are imposed on companies' D&Os and supervisory bodies. Further, the quantification of damages is now regulated in favour of the claimant.

D&Os must now adopt appropriate organizational models – commensurate with the company's size and business – aimed at, inter alia, detecting the company's crisis at the earliest opportunity in order to promptly take action and safeguard the going concern of the business.

Supervisory bodies (i.e. statutory auditors, auditors and auditing firms) are now under a duty to:

a) constantly monitor over the suitability of the organizational models adopted by D&Os

b) promptly inform D&Os in case of detection of warning signs of the company's crisis. In case of failure by D&Os to respond and/or take action within 60 days, supervisory bodies shall alert the OCRI in a timely manner. Compliance with such alert rule implies exemption from liability in relation to the prejudice caused to the company and its creditors by D&Os' failures.

According to new article 2486 of the Italian Civil Code, damages shall now be quantified – unless contrary evidence is provided by D&Os – based on the criterion of the incremental loss rule (i.e. the difference between the company's net assets at the time it was to be wound up and the company's net assets at the insolvency declaration date).

So far, the incremental loss rule has been applied by courts only when the identification of the defendants' unlawful actions is impossible.

Besides the OCRI members, D&Os and supervisory bodies, are there other subjects involved in the early warning mechanisms?

Specific alert duties are imposed on subjects typically coming into contact with companies: 

• tax and pension authorities (so-called qualified creditors) are under a duty to inform D&Os about companies' outstanding liabilities exceeding certain thresholds provided by law; failure by the company to pay the debt and/or apply for crisis resolution proceedings within 90 days shall be promptly reported by qualified creditors to OCRI
• banks and financial intermediaries shall inform companies' statutory auditors whenever loans are withdrawn and/or the relevant terms and conditions revised.

Consequences for insurance?

Greater responsibilities involve greater risks.

The new set of duties on D&Os and supervisory bodies increases the risk of claims under D&O policies and/or PI policies providing coverage to directors, statutory auditors and auditing firms. In addition, damages quantified on the basis of the incremental loss rule might greatly impact policies' limits.

Legislative changes also affect risk assessment as underwriters should be interested in learning whether an insured takes/took a role in a company where the code early warning mechanisms have somehow been triggered.

Appropriate questions should be included in proposal forms with a view to better defining the scope of coverage: as known, according to certain Italian court precedents, proposal forms mirror the scope of coverage. Thus, should the proposal form not contain questions relating to the new early warning mechanisms, failure by the insured to report them at the inception of the policy would not be relevant for the purpose of prior knowledge/non-disclosure.

Further, it will be necessary to adapt policies' wording to the new language introduced by the code (as said, the word fallimento has been replaced with liquidazione giudiziale), with particular reference to coverage exclusions concerning companies' insolvency. In this respect, underwriters should consider the opportunity to expressly rule out claims deriving from companies in crisis.

New insurance opportunities?

The code creates new liabilities which might result in new risks.

Insurance coverage in relation to claims deriving from the office as a member of the OCRI might be requested in the future. The answer might be given by creating tailor-made insurance products or by offering a specific coverage extension in PI policies for lawyers, accountants and labour consultants.

"New" liabilities might also be faced by qualified creditors, banks and financial intermediaries for failure to comply with the alert duties imposed on them by the code. Reviewing the relevant policies might then be needed in order to clarify whether they intend to provide coverage in relation to such claims or not.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.