By means of Law Decree no. 23 of April 8, 2020, (effective as of April 9, 2020), the Italian gov-ernment adopted certain bankruptcy measures in order to support companies following the cri-sis caused by the current epidemic emergency.

Specifically, the “Liquidity Decree” introduced several specific measures directly affecting the bankruptcy and the civil law, besides the effective adoption of the Crisis and Insolvency Code.

1. Deferral of the introduction of the Crisis and Insolvency Code pursuant to Legislative Decree No. 14 of January 12, 2019 – Article 5

Firstly, the measures adopted include the deferral of the Italian bankruptcy law reform, as pro-vided for in Legislative Decree No. 14 of January 12, 2019, which was originally scheduled to enter into effect on August 15, 2020.

The coming into effect of the Crisis and Insolvency Code is now postponed to September 1, 2021 (except for certain rules that are already immediately effective).

The aim of this postponement is to prevent the current situation from distorting the reasons of the introduction of the Crisis and Insolvency Code. The purpose of the bankruptcy law reform is mainly to handle a company crisis via an early identification of the insolvency risks. In order to achieve such a goal, the bankruptcy law reform outlines, respectively, the crisis alert instru-ments (“indicatori della crisi”) and the assistance resolution facilities (“strumenti di composizione assistita della crisi”).

However, such new instruments and facilities rely on a steady economic framework and not on a volatile one (as we are currently living through due to the epidemiological crisis). It is worth remembering that certain issues had already been identified in the projections outlined before the COVID-19 epidemic emergency (for instance, the number of companies in Italy regarded as potentially distressed under the new measures).

Given the current lockdown, the key drivers of the Crisis and Insolvency Code could not properly play their role, and would consequently fail to meet their purposes and could even generate potentially disruptive effects.

Moreover, it could be very difficult to deal with such a wide-ranging economic crisis with these new legal measures, which normally require a “running-in” period.

The Italian government also envisaged such a deferral in order to bring the Crisis and Insolven-cy Code into compliance with the EU Directive no. 1023/2019, with respect to the preventive re-structuring frameworks.

2. Temporary measures on equity reduction – Article 6

By means of the “Liquidity Decree”, the Italian government set out a temporary suspension of the equity civil law framework. With this respect, Article 6 provides for a suspension of the pro-visions relating to equity recapitalization (referred to in Article 2446, Paragraph 2 and 3, in Arti-cle 2447, 2482-bis, Paragraph 4, 5 and 6 and Article 2482-ter of the Italian Civil Code) from April 8, 2020, to December 31, 2020. Likewise, during the same period, liquidation of a company due to the reduction or the loss of the share capital below the legal minimum (pursuant to Articles 2484, paragraph 1 no. 4 and 2545-duodecies of the Civil Code) shall not apply.

As already mentioned, the economic crisis caused by COVID-19 will inevitably affect also those companies that were in good standing before the epidemic and will involve a certain eq-uity loss for many.

Therefore, through this measure, the Italian government aims to stop directors of companies from being forced either to declare the immediate termination of their company (and the loss of going concern status for performing companies) or to face the liabilities arising from negli-gent management of the company (pursuant to Article 2486 of the Italian Civil Code) for failing to declare insolvency.

In light of all the above, the purpose of this measure is clearly to prevent an incorrect represen-tation of reality, twisted by an exceptional and temporary situation, and to prevent companies from being forced to make decisions set out in the "ordinary" law.

3. Temporary measures on accounting principles – Article 7

Article 7 of the “Liquidity Decree” aims at preventing certain side effects arising from the COVID-19 epidemic from having a severe impact on the ongoing business activity of many companies.

This provision sets out that companies may draw up their 2019 financial statement assuming business continuity (as per Article 2423, paragraph 1, no. 1 of the Italian Civil Code), if such continuity occurred in the last financial statement closed before February 23, 2020, (without prejudice to the provisions set forth in the "Care Decree" approved in February 2020).

Article 7 seeks to mitigate the effects of the current emergency situation and to protect com-panies that were in a business continuity situation before the epidemiological crisis occurred.

For this purpose, the reference date has been aligned with the situation on February 23, 2020, (i.e., the day on which the first COVID-19 related measures became effective).

Moreover, the measures shall also apply to the financial statements closed before February 23, 2020 (and not yet approved).

4. Temporary measures on shareholders’ loans – Article 8

In Article 8, the Italian government introduces a measure to provide companies with appropriate support for loans (even through shareholder loans).

The “Liquidity Decree” provides for a temporary suspension from April 8, 2020, until December 31, 2020, of the provisions subordinating shareholders’ loans in case of bankruptcy (set forth in Article 2467 and 2497-quinquies of the Italian Civil Code).

The shareholders’ loan subordination rule generally penalizes an undercapitalization scenario. In our current situation, such mechanisms (which would have been eventually amended by the Cri-sis and Insolvency Code) are a big disincentive for shareholders, especially at a time when it is necessary to encourage them to become more involved in boosting company finances.

As per the other measures, this provision is temporary and limited to the shareholders’ loans granted by December 31, 2020.

5. Measures regarding the composition of debt with creditors (“concordato preventivo”) and debt restructuring agreements (“accordi di ristrutturazione dei debiti”) – Article 9

The "Liquidity Decree" provides several relevant measures aimed at preserving the composition of debt with creditors or debt restructuring agreements, which could otherwise be seriously af-fected, or even irreversibly compromised, by the negative effects arising from the spread of the COVID-19 epidemic on the entire financial-production cycle of the company.

For this purpose, it sets out the following four provisions:

• A six-month extension of the terms for the fulfilment of the composition of debt with creditors, and of the debt restructuring agreements that received approval (“decreto di omologazione”) before the spread of the epidemiological emergency (and expire be-tween February 23 and December 31, 2020). This measure's effects also extend to the resolution procedure for the composition of debt with creditors pursuant to Article 186 of the Italian Bankruptcy Law, whose application shall be made within one year from the expiry of the term set out for the last fulfillment of the composition of debt with credi-tors.
• The right to file an application in order to obtain a new term for the filing of a new com-position of debt with creditors (or a new debt restructuring agreement) which will in-clude the economic and financial elements arisen because of the epidemic crisis.
• With respect to the composition of debts with creditors, the filing parties are excluded from such a right in case the original proposal was not approved by creditors (“voto dei creditori”). The term shall not exceed 90 days and cannot be further extended given its exceptional nature.
• The right to unilaterally amend the execution terms originally provided for in the com-position of debt with creditors proposal (or in the debt restructuring agreement) for those procedures still pending on February 23, 2020. The term shall not exceed six months, and shall be submitted in a notice together with the documents proving that the amendment is necessary.
• The right for the debtor subject to the term of Article 161, Paragraph 6, of the Italian Bankruptcy Law (so-called "in blank composition"), which has already been extended by the court (and also in case a petition for the declaration of bankruptcy has been filed), to apply for a further extension of 90 days. To qualify for this extension, the ap-plication must mention all the elements that made it necessary (and, mainly, the events that occurred in relation to the spread of the epidemic).

Such an application could also be filed by the debtor, who obtained the extension of the term referred to in Article 182-bis, Paragraph 7, of the Italian Bankruptcy Law (the so-called "pre-restructuring agreement"), provided that the court deems that the condi-tions for reaching a debt restructuring agreement in accordance with the provisions of Article 182-bis, Paragraph 1 of the Bankruptcy Law persist.

6. Temporary measures concerning the application for the declaration of bankruptcy and for the declaration of insolvency – Article 10

Finally, the "Liquidity Decree" provides for certain further measures to avoid the opening of procedures that are affected by external circumstances and which would have a serious effect on the efficiency of the judicial authorities (already jeopardized by the state of emergency).

Specifically, Article 10 deems inadmissible those petitions filed in the period between March 9, 2020, and June 30, 2020, aimed at declaring the bankruptcy, the state of insolvency within a compulsory administrative liquidation and a state of insolvency within the extraordinary admin-istration procedure. However, such measures shall not apply if the request is submitted by the Public Prosecutor (Pubblico Ministero) with an application for the measures referred to in Article 15, Paragraph 8, of the Italian Bankruptcy Law (i.e., precautionary and protective measures in order to protect the company).

Moreover, if such a declaration of inadmissibility is followed by the declaration of bankruptcy, such a period shall not be counted within the terms provided for in Article 10 (Bankruptcy of the entrepreneur ceasing the business) and Article 69-bis (Termination of the action and terms computation) of the Bankruptcy Law.

Simultaneously, during the same period, the expiration terms (termine di decadenza) provided for in Article 69-bis of the Italian Bankruptcy Law are suspended.

The provisions extend to all cases of petition, and therefore also to petitions filed by business owners themselves, in order to allow subjects in a state of economic and financial stress to as-sess the possibility of alternative instruments. This will help them solve their business crisis, while avoiding being exposed to the civil and criminal consequences related to a worsening of the already existing insolvency “status”.