Article 2467 of the Italian civil code sets out a general rule according to which the loan granted to limited liabilities companies (società a responsabilità limitata, "S.r.l.") by the relevant quotaholders shall be subordinated to any other creditor of the S.r.l., if at the time the loan is advanced:
- there is an imbalance between the company's indebtedness and its net asset value (also taking into account the corporate purpose of the company); or
- the company's financial situation would require an equity contribution instead of a loan.
Loans granted by quotaholders under the above-mentioned circumstances are subject to the equitable subordination principle and if repaid by the company during the year before the bankruptcy declaration shall be returned to the S.r.l.
The Italian civil code does not provide similar provisions for joint-stock companies (società per azioni, "S.p.A."), except for Article 2497-quinquies which extends the application of Article 2467 to inter-company loans made by a parent company or other group companies (whether to an S.r.l. or an S.p.A.) in the context of the so-called "direction and coordination activities" (i.e. loans made by entities which directly or indirectly control the relevant borrower and if the conditions provided by the law are met).
It has always been debated whether the provisions of Article 2467 should generally apply to loans granted to S.p.A. outside the cases set forth in Article 2497-quinquies. The predominant approach of the legal authors and case law so far has been in favour of the application of the provisions of Article 2467 to the S.p.A. in case the borrower is a company with a very limited number of shareholders (a.k.a. "close" company) and, therefore, its capital structure is very similar to an S.r.l.
Conversely, Article 2467 should not apply when the borrower is an S.p.A. whose shares are listed or held by many shareholders.
The above interpretation has been recently confirmed by the Italian Supreme Court (Corte di Cassazione) with the decision no. 16291 of 20 June 2018, which also identified some additional elements to be taken into account in evaluating the application of the equitable subordination rule to shareholders' loans made to an S.p.A.
The recent decision of the Italian Supreme Court
With the above decision, the Italian Supreme Court upheld the appeal filed by the bankruptcy receiver of an S.p.A. against the first-instance decision of the Court of Udine, which allowed the inclusion of a secured loan granted by the majority shareholder of an S.p.A. within the bankruptcy's liabilities as secured claim. The decision of the Court of Udine was based on a strict interpretation of Article 2467 of the Italian civil code, which, according to the Court, shall only apply to S.r.l. (and not to S.p.A.).
The Italian Supreme Court set aside the decision of the Court of Udine arguing that the latter should have assessed whether the position of the shareholder who granted the loan was equivalent to that of a quotaholder of an S.r.l., taking into account the equity structure of the company.
Notably, according to the Italian Supreme Court, the position of a shareholder of an S.p.A. shall be deemed equivalent to that of a quotaholder of an S.r.l. when the shareholder-lender is close to the management of the company, e.g. he/she is (or has a representative) sitting on the board of directors. In this case the shareholder would have access to all information concerning the business and the company in general and there would be the presumption that he/she is well aware of the financial situation of the company (and, therefore, whether there are imbalances between the company's indebtedness and its net asset value or the financial situation actually requires an equity contribution instead of a loan).
Conclusion
The decision of the Supreme Court adds some colour to the long-debated topic of equitable subordination of shareholders' loans made to an S.p.A. and significantly extends the range of application of the above principle. Hence, from now on investment structures involving shareholders' loans shall be carefully assessed on a case-by-case basis to detect and manage the risks associated.
Authors: Paolo Manganelli, Partner and Anna Giulia Chiarugi, Associate
