Paying back Members Loan? Italian Court of Cassation decision n. 12994/19: “debt is generally subordinated”

After the Court of Cassation decision of May 15^th, managers chances to pay back loans which were financed by members of a limited company (see art. 2467 of the Italian civil code), appear to be significantly reduced. We are now considering such result as it can be inferred by looking at the decision, as well as the debate related to the interpretation of the relevant civil code provision.

Regarding limited liability companies, the Italian Civil Code provides that “repayment of members loans to the company, is subordinated to the repayment of loans the company got from other creditors, and if the members loan had been granted within one year preceding bankruptcy declaration of the company, then it shall be payed back”. Members loans consist in private arrangements where members provide financing to the company, instead of buying equity “quotas”. As a result, the company will have an income flow but members will not bear the risks related to increasing the payed-up (quotas of the) capital. The second part of article 2467 states that such debt-like financing is deemed as junior debt with respect to the “other creditors” but only when the financing is raised having the company an amount of debt which is way larger than its equity capital (the type business carried out shall be taken into consideration to correctly evaluate the financial situation of the company), or when issuing and paying in new quotas would have been considered a more suitable mean to raise financing.

According to a minor trend in case-law, article 2467 shall be interpretated as being intended to defer the repayment of members loans but only during the voluntary liquidation (or judicial insolvency) proceeding. This will mean that the subordination of the members debt would be just a procedural matter, limited to companies (which are already) under liquidation, rather than a general feature of the members loan. Then it would not work outside the proceeding, during the ordinary life of the company.

By contrast, according to the leading opinion in case-law, which is abided by and reported by the Court in this decision of May the 15^th, “the subordination provided by article 2467 works during the normal life of the company as well, since it is not limited to the liquidation proceeding timespan, in which creditors rights are evaluated and classified. In fact, such subordination represents a temporary legal condition to the maturity of the members credit, which is fulfilled after economic difficulties described in the article, are overcome”. According to the Highest Court, this means that “company must refuse to pay back members loans everytime economic difficulties arise as provided by the law, either at the time of the loan, and when members ask for repayment. Managers have the duty to detect such difficulties, by setting adequate management and accounting standards”. As a result, the above-mentioned article of the Italian Civil Code represents an addition imposed by the law, within the loan agreement entered into between the member and the company. The main purpose of such provision can be depicted as follows:

1.  not compromising the interests of the existing creditors, by creating more debt instead of increasing the equity capital, thus avoiding to worsen the economic difficulties;
2.  not causing (in a private way) a financial market distortion, that would occur if a company appear to be able to obtain loans, whereas a third subject would not have granted any loan to a company with such economic difficulties.

Furthermore, art. 2467 of Italian Civil Code has recently been amended by legislative decree n. 14 of 2019 (amendments effectiveness deferred to August 15^th2020), which repealed a part of the first paragraph of the article in a way that the Italian doctrine believes the law-maker is basically abiding by the leading case-law (also referred to as “substantial theory”). It is possible that such circumstance has been taken into consideration by the Court while issuing it decision.