ENTERPRISES – PREVENTING CRISIS AND INSOLVENCY: NEW OBLIGATIONS FOR APPOINTING THE AUDITING BODY AND ESTABLISHING A SUITABLE ADMINISTRATIVE AND ACCOUNTING ORGANISATIONAL STRUCTURE
OBLIGATIONS FOR ESTABLISHING A SUITABLE ADMINISTRATIVE AND ACCOUNTING ORGANISATIONAL STRUCTURE
On 14th February 2019, Legislative Decree no. 14/2019 implementing Law no. 155/2017 of the Consolidated Law of Business Crisis and Insolvency (CCII) was published on the Official Gazette of the Italian Republic that reforms the previous Bankruptcy Law of 1942, in force from 16 March 2019.
The main purpose of the reform is that of promptly detecting any state of business crisis before it reaches the stage of “irreversible insolvency” in view of finding a remedy and anyway of satisfying the creditors in the best possible way, through instruments that together form the so-called Early Warning system.
The new art. 2086 of the Italian Civil Code establishes, for the entrepreneur who operates as a company or collective, the duty of «implementing a suitable administrative and accounting organisational structure to the nature and dimensions of the enterprise, also in view of promptly detecting business crisis and loss of the going concern basis, as well as to swiftly adopt and implement one of the instruments envisaged by the law to overcome the crisis and recover the going concern basis».
The company auditing bodies must ensure that the administrative body constantly assesses whether the organisational structure is suitable, whether there is economic-financial balance and the operating performance, and if necessary point out the existence of justified evidence of the business crisis. If there is no suitable reply from the administrative body, the so-called “OCRI” must be informed of the situation. Indeed the early warning system is completed with the establishment of the OCRI (Business Crisis Settlement Body) to be formed at the Chamber of Commerce, and which must be informed of crisis situations both by the corporate bodies (directors and internal auditors) and by qualified creditors (Revenue Office – National Insurance Institute (INPS) – Collection Agencies).
Basically, the prompt disclosure of the crisis to the OCRI and the subsequent request for its assistance to implement out-of-court agreements and remedies may permit continuity as a going concern, if the conditions are met, and in any case the non-liability of the directors and the auditing body.
Failure to promptly disclose the crisis and the consequent request for assistance from the OCRI will, however, lead to following the normal bankruptcy procedures that usually lead to the termination of the business and the joint liability of the directors and of the auditing body both in respect of the shareholders of the company and in respect of the corporate creditors.
Start date of the reform (Art. 389)
Once in full operation, the early warning system will come into force on 14/08/2020 (18 months from the publication of Legislative Decree no. 14/2019 on the Official Gazette of the Italian Republic) with the effective formation of the OCRI and the establishment of the quantitative indices determining crisis which must be drafted by the CNDCEC (National Council of Chartered Accountants and Bookkeepers) and approved by the MISE (Ministry of Economic Development).
Some obligations have already arisen since 16/03/2019 (30 days from the publication of Legislative Decree no. 14/2019 on the Official Gazette):
- 375 – business organisation structures
- 377 – company organisation structures
- 378 – responsibilities of the directors
- 379 – appointing auditing body
Organisational structures – Responsibilities of the directors (Arts. 375 – 377 – 378)
The combination of the significant legal changes requires the adoption of organisational systems no longer focussed on providing historical data alone, whose analysis is only required to ascertain whether the enterprises is in a state of crisis, but also to provide fact-based forward-looking data that can prevent it.
Basically, to respect the requirements of the new art. 2086, the going-concern basis will no longer be limited to ensuring that the capital is not reduced under the legal limit, but also and above all to assessing the future strategic choices that will be implemented by the enterprise. The adoption of the following instruments and/or procedures thus becomes recommendable:
- budget and/or business plan;
- Planning and management control (P&C) system focussed not only on economic activity and assets, but also on financial control;
- monitoring financial trends (Risks Centre);
- correlated instruments like: cash pooling, contribution margin analysis, analysis of changes, etc.
While awaiting the issue of the quantitative indices of determination by the CNDCEC and the relevant approval by the MISE that will come into force on 14/08/2020, given the obligations envisaged by the decree from 16/03/2019 for monitoring the going-concern basis of the company, reference must be made to the general notion regarding the crisis indicators envisaged by the same indicated decree, which must highlight:
- the sustainability of the debts for at least the six following months (cash flows that the business is capable of generating – ratio between equity capital and third party equity);
- the assumption of the going-concern principle for the year in progress or, if the residual duration is less than six months, for the six subsequent months.
For these purposes, the following are considered significant indicators:
- those that measure the sustainability of the indebtedness with the cash flows that the enterprise is capable of generating and the suitability of the equity capital compared to that of third parties;
- repeated and significant delays in the payments (existence of debts for remuneration expired by at least 60 days, for a total of more than half the overall monthly amount of remuneration and the existence of payables to suppliers, expired by over one hundred and twenty days, for a total exceeding that of the expired payables).
APPOINTING AN AUDITING BODY (ART. 379)
Apart from the changes described above, art. 379 of the same Legislative Decree, changed by Law n. 55/2019 in force from 18 June 2019, is of significant importance because it modifies the parameters envisaged by art. 2477 of the Italian Civil Code regarding the obligation of appointing the auditing body for Limited Liability Companies. Therefore, from 16/03/2019 an auditing body or an independent auditor must be appointed if at least one of the following limits is exceeded for two consecutive years:
- Revenue € 4,000,000
- Assets € 4,000,000
- Employees average no. 20
The obligation of appointment loses effect if none of these limits are exceeded for three consecutive years.
Furthermore, for limited liability companies already established as at 16/03/2019, it will be necessary to ensure that the relevant deed of incorporation and the articles of association are in line with the new provisions mentioned. As a consequence the following situations may occur:
Limited Liability Company with articles of Association already in line – appointment of the auditing body or of the independent auditor starting from the first meeting approving the financial statements dated after 16/03/2019 (normally with approval of the financial statements as at 31/12/2018) and, in any case, by 16/12/2019;
Limited Liability Company with articles of association to be adapted – obligation to bring the statute into line within 9 months from 16/03/2019, thus by 16/12/19, and to appoint the auditing body or the independent auditor within the subsequent 30 days.
In the light of these changes in law, we will take care of ensuring that your company is in line with the necessary requirements, so that we can communicate and subsequently implement the required fulfilments.
LA NAIA DI ORONZO & PARTNERS remain at your disposal for any further or more thorough information regarding the matters described above.
Dott.ssa Monica DI Oronzo