Improper Bankruptcy of Corporate Officers

Improper bankruptcy concerns acts committed by directors, general managers, statutory auditors and liquidators of companies subject to judicial liquidation. It is governed by Article 329 of the Crisis Code, which distinguishes two profoundly different levels.

The structure of Article 329

Paragraph 1: extension to other persons

The first paragraph extends to corporate officers the offences under Article 322: patrimonial, documentary and preferential fraudulent bankruptcy. The structure of the offence remains that of Article 322 and does not require proof of a causal link with insolvency.

Paragraph 2: insolvency as an element

The second paragraph provides autonomous offences in which insolvency is an element: on the one hand causing, or contributing to causing, insolvency through certain corporate crimes; on the other, causing insolvency intentionally or as a result of fraudulent transactions. In these cases the causal link between the conduct and the production or aggravation of insolvency must be established.

The persons liable

Formal office is not in itself sufficient. Liability must be assessed on the basis of the functions actually exercised, the system of delegated powers, the information actually available and the contribution personally made to the conduct.

Non-executive directors and de facto directors

For directors without operational delegated powers, the assessment concerns the information flows received, the existence of perceptible warning signals and the conduct adopted in response. For de facto directors, liability presupposes the continuous and significant exercise of management powers, which must be proven concretely and not inferred from isolated episodes.

Statutory auditors and control bodies

The position of members of the control body requires assessing the supervisory duties actually enforceable, the information available, the verification activities carried out and documented, and any causal contribution of the omission to the conduct charged.

Improper bankruptcy arising from corporate crime

The first case under paragraph 2 requires that insolvency was caused, or jointly caused, through the commission of one of the corporate crimes expressly referred to by the provision. The list is exhaustive: not every corporate irregularity can support the charge. False corporate communications and the other offences indicated by the provision are typically relevant.

The assessment therefore requires two distinct steps: the existence of the predicate corporate crime and its causal contribution to the production or aggravation of insolvency.

Improper bankruptcy arising from fraudulent transactions

The second case concerns causing insolvency intentionally or as a result of fraudulent transactions. Fraudulent transactions consist of management conduct characterised by abuse of powers or breach of duties, which impoverishes the company or aggravates its economic and financial situation.

Tax and social security debts as a form of self-financing

Systematic failure to pay taxes and contributions, used to finance the business, may be qualified as a fraudulent transaction where it progressively aggravates insolvency through penalties and interest. The defence must reconstruct the flows, the actual impact of ancillary charges, the existence of practically available alternatives and the distinction between liquidity difficulties and a deliberate self-financing choice.

The causal link

In the offences under paragraph 2 the causal link is an essential element. The assessment requires identifying when insolvency arose, reconstructing the pre-existing economic and financial situation, distinguishing autonomous or concurrent causes and quantifying the impact of the conduct charged. Even where the aggravation of an already compromised situation is alleged, the contribution of the conduct must be causally appreciable and not merely hypothetical.

Improper simple bankruptcy

Article 330 also extends the rules on simple bankruptcy to corporate officers. Requalification from improper fraudulent bankruptcy to improper simple bankruptcy affects the penalty, ancillary penalties, limitation and precautionary requirements, and is one of the main areas of defence work where the conduct charged concerns imprudence or gross management fault.

Corporate transactions during the crisis

• capital transactions and loss coverage in the presence of asset imbalance
• demergers, mergers and contributions carried out close to the crisis
• sales of business units and group reorganisations
• intra-group financing and guarantees granted in the interest of third parties
• continuing the business without documented going-concern prospects
• accounting representation of losses and doubtful receivables

Which rules apply

In proceedings connected with procedures still governed by the Bankruptcy Law, Article 223 may continue to apply, under the transitional rule of Article 390 of the Code and subject to the assessment required by Article 2 of the Criminal Code where substantive changes exist between successive provisions.

Defence strategy

1. identification of the paragraph and of the specific case charged
2. reconstruction of the functions actually exercised and of the system of delegated powers
3. verification of the existence of the predicate corporate crime, where charged
4. technical analysis of the causal link with insolvency and of concurrent causes
5. examination of corporate documentation and internal information flows
6. assessment of the correct qualification, including as against improper simple bankruptcy

Frequently asked questions

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