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Directors’ Liability in Italy

28-10-2014
 
 
 
 
1. Are directors liable for management decision?
In our legal system the director can be liable for his/her conduct towards the company, the members and the creditors.
 
The article 2392 of the Italian Civil Code, with respect to the liability towards the company, states that “the directors must carry out their duties, imposed by the law and the bylaws, with the diligence required by the nature of the task and by their specific skills. The directors are jointly liable towards the company for the damages caused by the non-observance of these duties, unless they must be carried out by the Executive Committee or represent functions concretely committed to one or more directors”.
The breach of such duties, both specific (established by the laws and/or by-laws, such as the call of the meeting, the submission of the balance sheets or the prohibition of undertaking new operations in particular cases) and general (such as the duty of diligence without conflict of interests) implies the liability of the director towards the company and the members and the extra contractual liability towards the creditors and third parties. On one side, the mere diligent conduct of the director is able to prevent the non-fulfillment of general duties; on the other side, regarding the specific duties, the liability can be excluded only if the non-fulfillment was caused by facts not imputable to him/her (which could not avoid the diligence requested to the debtor).
The action can be filed by the company or by the shareholders (only if they own 1/5 of the stock capital or another share, in any case not exceeding 1/3, set forth in the by-laws) and the contractual nature of the liability entails that the plaintiff has the burden to prove the breach of the duty of diligence, the damages and the causal nexus.
In any case, the directors are jointly liable towards the company if are they acquainted with prejudicial facts but did not do all they could in order to avoid such facts or mitigate or erase their consequences.
In short, the law provides a general duty of supervision over the management, which persists even in case of competence awarded to the executive committee or to one or more directors. The breach of this duty entails a joint liability of all the members of the Board of Directors, unless one of them proves that the conduct of the other directors did not allow the supervision to be performed.
Such joint liability is provided towards the company only: then, it can be claimed only by the company, but not by the creditors and third parties.
Eventually, the liability of the director is based on:
1. The non-compliance with the duties set forth by the law or the by-laws;
2. The non-compliance with the general duty to supervision;
3. The non-compliance with the general duty to take preventive or subsequent measures.
 
2. What are the general criteria for being liable? Ex. To cause a damage, to act with minor or soft guilt, imprudence, negligence, bad faith, fraud, malice…)
The reference to the nature of the task means that the status of the director in the Board of Directors is to be considered (i.e. president, director with powers of representing the company in general or specific issues, director without powers other than the general power of control).
The reference to the specific skills allows us to graduate the liability taking into consideration the specific technical knowledge of the director. Although specific skills do not mean running business with mastery: nobody can hold a director liable for inappropriate economic choices, because such consideration is at the discretion of the entrepreneur. In short, the analysis over the diligence cannot deal with economic decisions, even if they involve a great risk, but only with the diligence shown by the director in considering the margin of risk linked to the business at hand and also with the no caution and the control requested for such a choice in the specific circumstances involved.
In other words, the director should refrain from making transactions that no wise entrepreneur would have made, considering the dimension and the features of the company.
Achieving a full awareness of the financial and patrimonial assets on which the company can count and of the book-keeping tools at the disposal of the company, can be considered part of the diligence requested.
According to article 2392 of the Italian Civil Code, the diligence should be applied to:
1. the duty of carrying out the tasks imposed by the law or the by-laws on the director;
2. the duty of supervision over the management;
3. the duty to prevent prejudicial facts or mitigate or erase their consequences.
The director should compensate both the damages (for instance, the fine for non-filing an income tax return) and the loss of profit (for instance, a cancellation in favor of the client).
 
3. Can directors be directly liable for company debts in front of the company creditors without proving that directors have been guilty? In which case?
The director’s liability towards the company creditors holds an extra contractual nature and arises  when the director does not comply with the duties concerning the preservation of the capital stock integrity and the action can be filed only when such stock capital is insufficient to pay off their credits (2394). 
The requirements to file suits against the director are:
1. his/her unlawful conduct (contrary to the duties established by the law or by the by-laws);
2. a prejudice for the creditors represented by the insufficiency of the stock capital in order to satisfy their credits (and the insufficiency does not mean insolvency: there can be insolvency when there is not liquidity, but the assets could however be sufficient);
3. a causal nexus between the prejudice and the conduct.
 
 
4. Can directors be liable in case of insolvency of the company? Is this situation of responsibility frequent in your jurisdiction in insolvency cases?
In case of bankruptcy or “procedura concorsuale” the actions for liability are filed by the “curatore fallimentare, commissario liquidatore or commissario straordinario”.
The actions for liability towards the company (articles 2392 and 2393 of the Italian Civil Code) and towards the creditors (article 2394 of the same Code) converge in a unitary action, filed by the official receiver, according to article 146 of the Italian Bankruptcy Law. Accordingly, the creditors lose the right to sue the director.
In such circumstances, on one hand the plaintiff must only prove the breach of the duties established in the law or the by-laws, the damages and the causal nexus; on the other hand, the director has to demonstrate that the fact is not ascribable to him/her and that he/she performed without negligence or willful misconduct.
Such action cumulates the requirements and the scopes of the action provided by articles 2393 and 2395 of the Italian Civil Code, and has the purpose of bringing all the resources taken away from the stock capital by the unlawful behavior of the director.
 
 
5. Are directors liable in case of closure of the business without filing for insolvency?
The entrepreneur can apply for insolvency only if the company is in the conditions specified by article 1 of the Italian Bankruptcy Law (dimensional requirements) and is in a state of insolvency (which means it is not able to regularly pay its debts).
With regards to the application for insolvency, the article 14 of the Italian Bankruptcy Law does not specify who, in a company, is entitled to apply for insolvency. However, article 152 of the Italian Bankruptcy Law provides that the company’s person vested with the right to apply for the “concordato fallimentare” is the director: this could mean that the application for insolvency is up to the director, even though a call of an extraordinary meeting before such application seems appropriate.
Article 14 of Italian Bankruptcy Law is about “the duty of entrepreneur (director in a company) of filing the insolvency; although it is not a real duty, it is more a discretion. It becomes a real duty, criminally relevant, in the case of “simple bankruptcy” provided for by article 217 of the Italian Bankruptcy Law.
The crime is fulfilled when the director has aggravated the disarray of the company, non-filing the insolvency or with other gross negligence.
 
6. Do you have a specific action to sue a director when he/she produces damages not to the company but to the creditors or the shareholders? Is this legal action successful for recovering the damage suffered by the claimant?
The provisions of articles 2393 and 2394 of the Italian Civil Code do not affect the right of the shareholders of the company or a third party to file an action for liability against the director, in order to get compensation for the damage suffered, but only if they are damaged directly by guilty or fraudulent acts of the director (article 2395 of the Italian Civil Code).
This action requires that the damage does not only represent the consequence of the damage caused to the stock capital, but has also to be directly caused to the shareholder or the third party as an immediate consequence of director behaviour.
The liability holds an extra contractual nature, so the plaintiff must prove that the director carried out an illegal act fulfilling his/her tasks with negligence or willful misconduct, the direct damage and the cause nexus.
 
7. Can persons other than directors/board members be liable (for instance. managers, officers)?
In a company the provisions which regulate the liability of directors are applied also to the “managing director”, with regards to the tasks conferred by the meeting or the Board of Directors. The “managing director” is authorized to represent the company and can be liable only if he/she is formally appointed as such.
 
8. How long would you deem necessary for obtaining an enforceable judgment in a legal action before Court against the directors? For example a temporary enforcement pending of a Court of Appeal decision?
Interim orders (i.e suspension of a board director decision) can be obtained in one month (sometimes in 7 days “inaudita altera parte”). First degree decision from 3 to 5 years (it depends from the Tribunal).
 
9. Is it feasible / convenient to include in the by-laws of the company the arbitration clause for claiming to the directors? What is the expected time for an arbitration award?
The action for liability filed by the company or the shareholders concerns a right (the compensation of damages) which is admitted to the arbitration; so, the action for liability can be referred to an arbitration Committee pursuant to article 806 of the Italian Civil Procedure.
Generally speaking it is more convenient to refer this matter to an arbitration, because it entails three advantages:
1. The arbiter is liable for the no compliance with the time limit specified by the parties for issuing the award, unlike the judge.
2. The arbitration takes place in chambers, so the privacy is guaranteed, unlike the judgment.
3. You can choose the arbiter and this could mean a superior expertise.
Besides, article 34, 4th paragraph, of Law No. 5 of 2003 allows inclusion in the by-laws of the company an arbitration clause, which refers the disputes settled against directors to arbitration and such a clause is compulsory when the director accepts the task (as far as the company at stake is not a capital risk company)[1].
This clause must specify the way to nominate the arbiters and, in any case, the power to appoint such arbiters must be conferred to one or more people who are external to the company, on pain of invalidity.
The company arbitration regulated by Law No. 5 of 2003 can be a more convenient choice for judging the director’s liability than the arbitration regulated by the Italian Civil Code, in the light of Law No. 5 of 2003. Indeed, such Law provides that the power to appoint arbiters must be conferred to one or more people who are external to the company, on pain of invalidity, and this is fundamental to guarantee the neutrality of the judging authority. In fact, neutrality could really be affected if one or more appointed arbiters are members of the company: in this case the conflict of interests is unavoidable.
Besides, in the classic arbitration, the intervention of the third party is allowed only if the arbiters give consent to it and if the parties and the third party agree with each other; on the contrary, in the company arbitration the intervention of a member of the company until the first hearing is always allowed and this can be essential in order to clear the liability.
Furthermore, in such arbitration the judge can also adopt precautionary measures in order to protect the right of the parties while the cause is still pending.
In cases of an administered arbitration a further benefit is represented by contained, certain and predetermined costs and the certainty of the process are guaranteed by the organization of the arbitral institution.
 
10. What are the expected fees and costs for a law suit like this?
It may vary from the amount of the claimed liability and the complexity of the relevant issues also related to the need to involve an important number of witnesses. Tentatively we could expect a range between a low liability case with no complex issues with respect to the facts to be ascertained (10/12.000 euros) to big liabilities connected to many documents and facts to be examined and appraised, if the case by court experts for instance in the field of tax or accounting. In such a situation the fees and costs are rather unpredictable but likely beyond 50.000,00 euros.
 
11. What is/are the usual systems for estimating the fees? For instance hourly rates, cap fixed, budget, success fee-quota litis)?
For these kinds of cases, we normally charge hourly fees: 200 euros for partners, 100 euros for associates. Other kinds of assessment are discussed and agreed on a case to case, basis.

[1] In the sense that if you want to include an arbitration clause, you have to include this particular one.
DFA - Studio Legale Associato
Roberto Santoro
Viale Riviera Berica 105
36100 Vicenza
00390444541884