A crisis is a particular form of imbalance in a company’s financial and capital structure, caused by significant losses and reductions in the value of its capital, large asymmetries in cash flows and difficulties in accessing the credit market due to a loss of trust, not only by the financial community but also by customers, suppliers and staff in general.

While the issue certainly assumes importance from an economic standpoint (with all the indicators providing evidence of this), it is also relevant from the point of view of a company’s reputation. It is an event that makes it difficult to carry out operations that were once less complicated.

In order to attempt to overcome the impasse, it is not only necessary to put the accounts and the company itself in order, perhaps by using the services of an external professional capable of providing skilled support in dealing with (and hopefully also overcoming) the moment of discontinuity; it is also important, when the conditions exist, to initiate a revival plan following the recommendations of the legislation governing such situations.

For businesses in crisis, it is moreover essential to win back that credibility on the market that is needed to regain access to credit and reinstate business continuity and economic and financial productivity.

A new language

The language in the Business Crisis and Insolvency Code, which became effective in July 2022, reflects a more up-to-date narration, one in line with the need to avoid the stigma and the contrast between the parties involved.

The word “failure”, for example, has been replaced by other definitions (such as “judicial liquidation”), and in particular the emphasis has been placed on preventive measures, on warning systems and on negotiated resolution procedures.

The legislator has made the effort to create a collaborative framework to enable debtor and creditor to cooperate in the greater common interest: even, if necessary, with the intervention of third parties. Unfortunately there is no “instruction manual” that holds in all cases.

The good news, though, is that the Code begins with a number of general provisions addressed to the players involved in managing the crisis or insolvency, and these can act as a basis.

These paragraphs are dedicated to principles that encourage the use of specific tools, where previously the formulation of these was often left open to interpretation. For example we are talking about the “values” that should underlie the steps to be taken and act as general guidelines in the management of a crisis.

The debtor’s duties

The debtor is required to obtain tools (including those of a digital nature) that are capable of anticipating the crisis to the greatest extent possible or, at the very least, that can help identify the crisis on a timely basis, so that the necessary initiatives may be taken without delay. But that is not all: the debtor must obviously also act in accordance with the principles of good faith, propriety and collaboration.

One obviously wants to make the assessment of the state of crisis objective, and remedy the “natural” asymmetry in information between the debtor and the creditor, avoiding situations where the crisis is only identified when it is too late to act; also because the business owner’s emotions, fears and hopes for being able to resolve the situation through the passage of time often play an important role.

It can be very complicated to obtain key information. The literature, however, shows that early intervention and full disclosures increase the possibility of success and a pick-up in economic activity.

The creditor’s responsibility

“Creditors too have specific responsibilities, though, and these can be directly inferred from the text”, stresses Francesca Giani, Head of UTP Management in neprix, “and their virtuous conduct can undoubtedly help a successful outcome of the operation to be reached”.

What are these responsibilities? “Creditors are required to act in good faith and with propriety, and to ‘collaborate loyally’ and promptly with the business owner and all the other parties that may be involved. In addition, compliance with the ‘requirement for confidentiality about the debtor’s situation, the initiatives taken by the debtor and the information obtained is also required’.

The same principles of good faith and propriety, to be found at the beginning of the text, must therefore underlie all the measures taken, either by the business, its owner or the creditors.

“It is the legislator’s intention to put an end to operations that are potentially risky and harmful for all the stakeholders. Given the difficult situation, business owners and management might, in fact, be tempted to carry out operations with a higher margin of risk in the hope of resolving the problems. On the other hand the debtor, the legislation reiterates, is required to manage the capital or the business in the overriding interest of the creditors”, Giani recalls.

“On their side the creditors”, Giani continues, “have a duty to ‘cooperate loyally’ with the debtor and not act in such a way as to delay or obstruct progress. Jurisprudence will tell us the scope of these obligations but it can be assumed that in any case, as well as encouraging the avoidance of neglectful conduct, the text may also be interpreted as recommending positive behaviour designed to foster the interests of the others”.

The search for a point of balance

“The practical difficulty obviously lies in striking a balance in the negotiations carried out to avoid insolvency. These may involve a whole series of different creditors who must be equally protected and obtain satisfaction. Forcing or hindering must therefore be avoided, as well as procedures – by the creditors with the greatest exposure – that may potentially harm the other entitled parties”.

“As can be seen, the legislation is complex and has yet to be ‘tested’ in the field”, Giani concludes. “A few months after its inception it can certainly be stated that for certain aspects the new Code represents a step forward. It appears clear, though, that despite this, time will be needed before jurisprudence can clarify the key concepts and before the players involved are suitably equipped”.