Criminal Insolvency Law
Criminal insolvency law governs criminal liability arising from business distress, insolvency and the opening of formal insolvency proceedings. Although the expressions “bankruptcy offences” and “criminal bankruptcy law” continue to be commonly used in Italian legal practice and research, the subject is now regulated by the Italian Business Crisis and Insolvency Code, enacted through Legislative Decree No. 14 of 12 January 2019, which replaced the former concept of “bankruptcy” with that of “judicial liquidation”. Criminal insolvency law therefore encompasses offences committed by entrepreneurs subject to judicial liquidation, directors and other corporate officers, as well as further offences connected with arrangements with creditors, debt restructuring agreements and other instruments designed to address business distress.
Pozzi – Castronovo Law Firm provides legal advice and representation in criminal insolvency matters, assisting entrepreneurs, directors, general managers, members of boards of statutory auditors, liquidators, professionals and other persons involved in investigations and criminal proceedings arising from business distress. The defence requires a detailed reconstruction of the company’s economic, financial and asset position, the causes of its insolvency, the transactions carried out by its corporate bodies and any relationship between those transactions and the prejudice allegedly caused to creditors.
A business crisis and the commercial failure of an undertaking do not, in themselves, constitute criminal conduct. The operation of a business necessarily entails the assumption of commercial risks and may result in financial losses even where decisions were made in good faith, on the basis of the information available at the time and in accordance with reasonable business criteria. The task of the defence is therefore to distinguish unsuccessful management decisions, errors of judgement and matters giving rise solely to civil liability from conduct which actually satisfies the objective and subjective elements of the offences established by the Business Crisis and Insolvency Code.
Fraudulent bankruptcy is one of the principal criminal insolvency offences and may involve conduct affecting the assets of the undertaking, its accounting records or the equal treatment of creditors. Fraudulent bankruptcy affecting assets includes, in particular, the diversion, concealment, simulation, destruction or dissipation of the entrepreneur’s property, as well as the recognition or recording of non-existent liabilities for the purpose of prejudicing creditors. The proper classification of the conduct requires an examination of the use made of the assets or financial resources, the existence of an economic justification for the transaction, any benefit obtained by third parties and the actual effect of the transaction upon the assets available to satisfy creditors.
The concept of diversion of assets may encompass transactions of a widely differing nature, including transfers of money, disposals of property, waivers of receivables, payments without an adequate legal or commercial basis, intra-group transactions, the granting of security and the assumption of obligations unrelated to the company’s interests. However, not every reduction in a company’s assets constitutes fraudulent bankruptcy. It is necessary to reconstruct the economic purpose of the transaction, the time at which it was carried out, the company’s circumstances at that time, the existence of any corresponding consideration and the alleged offender’s awareness of the destination of the assets and of the effects of the transaction upon the company’s estate.
Allegations concerning transactions between companies belonging to the same corporate group are particularly complex. A transfer of resources or a transaction benefiting another group company cannot be assessed solely by reference to the overall interests of the group. The position of the individual company concerned must also be examined, together with any compensating benefit actually received or reasonably foreseeable at the time of the transaction. The defence in proceedings concerning intra-group bankruptcy offences therefore requires an analysis of the ownership structure, contractual relationships, financial flows, commercial reasons for the transaction and any direct or indirect benefits attributable to the company subsequently placed into judicial liquidation.
Fraudulent bankruptcy concerning accounting records involves the removal, destruction or falsification of books and accounting documents, as well as the keeping of records in such a manner as to prevent the reconstruction of the company’s assets or business transactions. The mere existence of irregularities, omissions or delays in the accounts does not automatically establish the more serious offence. It is necessary to determine the nature and extent of the irregularities, whether the company’s transactions can be reconstructed from other sources, the role actually performed by the person under investigation in maintaining the records and the state of mind required for the particular conduct alleged.
The allocation of responsibilities between directors, administrative departments, external consultants and professionals entrusted with maintaining the company’s accounts is particularly relevant in proceedings concerning accounting-related bankruptcy offences. Entrusting the accounts to third parties does not necessarily relieve a director of the duties inherent in that office. It remains necessary, however, to establish whether the director had actual access to the documentation, was aware of the irregularities and exercised the supervisory powers attached to the position. Similarly, where several directors held office in succession, the relevant period must be identified and the incoming director’s actual ability to obtain and reconstruct the earlier documentation must be assessed.
Preferential bankruptcy arises where, in the circumstances prescribed by law, payments are made or preferential claims are simulated for the purpose of favouring one or more creditors to the detriment of the others. The offence protects the equal treatment of creditors and requires careful consideration of the purpose pursued by the alleged offender. Not every payment made while a company is experiencing financial difficulty is preferential, particularly where it is intended to preserve business continuity, secure essential supplies or prevent greater prejudice to the company’s assets. The defence must therefore reconstruct the reasons for the payment, the circumstances in which it was authorised and the result which the director intended to achieve.
Criminal insolvency law also encompasses simple bankruptcy, which concerns conduct involving seriously imprudent management of assets, the aggravation of insolvency, culpable delay in seeking the opening of insolvency proceedings, or the failure to maintain accounting records properly and within the periods required by law. The distinction between fraudulent and simple bankruptcy does not depend solely upon the seriousness of the financial consequences. It also depends upon the nature of the conduct and the state of mind required by the particular offence. The proper legal classification of the facts therefore requires a detailed assessment of the management decisions, the information available when those decisions were made and the foreseeability of their consequences.
Where judicial liquidation concerns a company, the provisions governing bankruptcy offences may apply to directors, general managers, members of the board of statutory auditors and liquidators. Criminal liability nevertheless remains personal and cannot be inferred solely from the office formally held by the person concerned. For each individual, it is necessary to establish the period during which the relevant functions were actually exercised, the powers effectively available, the degree of participation in the disputed transactions, knowledge of the company’s circumstances and any causal contribution made to the alleged offence.
The Firm also represents non-executive directors, members of supervisory bodies and professionals accused of participating in offences committed by corporate officers. In such proceedings, it is necessary to determine whether the person was aware of specific warning signs, possessed the powers required to intervene and made an effective and conscious contribution to the commission of the offence, whether through an omission or positive conduct. Liability cannot be based upon a general supervisory role, but must be established through specific facts individually attributable to the person under investigation.
Further offences concern the abusive use of credit, the reporting of non-existent creditors, the failure to disclose assets which should be included in the inventory, breaches of the duties imposed upon an entrepreneur subject to judicial liquidation and unlawful conduct committed by creditors or persons external to the proceedings. The Business Crisis and Insolvency Code also regulates offences committed in connection with arrangements with creditors, debt restructuring agreements, standstill agreements and over-indebtedness procedures, as well as false statements made in reports or certifications by professionals appointed to verify the truthfulness of corporate information or the feasibility of restructuring plans.
The position of an independent expert providing a formal certification or report must be assessed separately from that of the entrepreneur and the company’s directors. The fact that a forecast contained in a restructuring plan subsequently proves inaccurate is not, in itself, sufficient to establish that the certification was false. A distinction must be drawn between corporate information capable of objective verification and forward-looking assessments. Consideration must also be given to the information available when the engagement was performed, the checks actually carried out and whether the professional was aware of any falsity in the information reported.
The investigation of bankruptcy offences frequently extends to periods substantially preceding the opening of judicial liquidation. The authorities may examine transactions carried out when the company was still formally operating and the crisis had not yet become apparent. It is therefore essential to reconstruct the development of the company’s economic and financial position over time, identify when the relevant imbalances emerged and determine what information was actually available to the directors. A retrospective assessment cannot automatically transform every transaction preceding insolvency into a diversion of assets or an act of imprudent management.
Accounting, banking and corporate documentation plays a central role in these proceedings. Financial statements, management accounts, bank statements, minutes of corporate bodies, contracts, business correspondence, invoices and financial flows must be examined as a whole in order to reconstruct the disputed transactions and their actual effect upon the company’s assets. Where necessary, the Firm coordinates the defence with accounting and financial experts to review the analysis prepared by the insolvency practitioner, the judicial police or the public prosecutor and to develop an alternative reconstruction supported by documentary evidence.
Legal assistance in criminal insolvency law may begin before formal insolvency proceedings are opened. During a period of business distress, decisions concerning the continuation of operations, disposals of assets, payments, shareholder financing, intra-group transactions and access to restructuring instruments may have significant criminal-law consequences. A preventive assessment makes it possible to verify whether proposed transactions are consistent with the company’s interests, record their economic justification and preserve the evidence required to demonstrate the decision-making process followed by the company’s governing bodies.
Pozzi – Castronovo Law Firm represents clients throughout every stage of criminal proceedings concerning bankruptcy and insolvency offences, from the insolvency practitioner’s report and the opening of the criminal investigation to any precautionary measures, trial and subsequent appeals. The Firm’s work includes examining the documents obtained during the insolvency proceedings, assisting clients during interviews, preparing written submissions and expert reports, conducting defence investigations and providing representation in proceedings concerning seizures, confiscation and disqualification orders. The purpose of the defence is to reconstruct the actual economic and corporate context in which the transactions were carried out and to determine, in relation to each person involved, whether all the elements required by criminal law have been established.
