Company distress: a new code protecting business owners

An interview with Pier Nicolò Cecchin in Italian magazine Panorama, issue 19.

In an economic situation significantly distorted by the effects of the health emergency, the new Corporate Distress Code, which comes into force on the 1 September this year, represents a tool to prevent crises through appropriate early-warning systems.

But what changes compared to current Bankruptcy Law?

“Whilst the substance of bankruptcy crimes remains unchanged, the lexical amendments introduced by the new Corporate Distress Code will nevertheless have a certain weight”, highlights lawyer Pier Nicolò Cecchin, of Legal Firm BBCZ Associates in Vicenza, who works primarily in the sphere of Corporate Criminal Law.

“In fact, we no longer speak of “fallimento” (lit. collapse) but “court-appointed liquidation”. The Italian term “bancarotta” (lit. bankruptcy), for example, refers to a business owner subject to court-appointed receivership who adopts illicit conduct to save their assets. An important distinction has to be made, however, between “bancarotta semplice” (lit. simple bankruptcy) and “bancarotta fraudolenta” (lit. fraudulent bankruptcy): in the first case the business owner commits the crime due to negligence, imprudence or incompetence, whilst in the latter case, the crime is committed as fraud, it is a deliberate and conscious decision. “Fraudulent bankruptcy” then has three basic types: “Documentale” (lit. documentary), “per distrazione” (lit. by misappropriation) and “preferenziale” (lit. preferential). “Documentary” refers to cases where the offences are committed through corporate documentation, e.g. by falsifying financial statements or hiding or destroying accounting records. “Fraudulent bankruptcy by misappropriation” refers to cases where a business owner attempts to illegally appropriate personal or company assets from creditors. Finally, the “preferential” category includes bankruptcy that goes against the principle of par condicio creditorum or equal treatment of creditors, simulating preferential rights that in reality do not exist. Then, depending on whether the bankruptcy crime is committed by the business owner or other parties in the ownership structure (e.g. directors or members of the board of auditors), there is a distinction between “propria” and “impropria”, respectively.

It should be noted that it is important to act before, and not after— as often happens in the criminal context — the act informing the relevant party of the outcome of proceedings, such as a notice of motion or a notice of completion of preliminary investigations, or the date of a hearing. “At that point, the judge finds themselves before a file of clearly documented evidence, against which it is very hard to defend oneself”, confirms Mr Cecchin.

“We must remember that “simple bankruptcy” is associated with sentences ranging from six months to a maximum of two years, but for fraudulent cases, this rises to up to ten years, and there is the mandatory step of a preliminary hearing, so it is a far longer process, which will certainly demand a greater investment of time and money. It is therefore very important that business owners seek targeted professional consulting prior to the events that can later lead to corporate distress, also from a criminal perspective, with the aim of ensuring all formal aspects are correct and proper. Particular focus is placed on compiling and updating all mandatory accounting records, and preparing financial statements in accordance with the criteria and formalities of the Civil Code. What may appear to be mere formalities could translate into the safeguarding of company assets.”

PDF > PANORAMA maggio 2021