Negative net assets and undercapitalisation of limited liability company (Italian “S.r.l.”) and GmbH: differences between Italian and German law

In this respect, the present contribution aims to highlight the differences between the rules dictated by the Italian and German legislature on limited liability companies, which regulate the aforementioned situations of undercapitalisation. 

Pursuant to Article 2482-bis of the Italian Civil Code, when in a limited liability company (Italian "S.r.l.") the loss of the share capital exceeds 1/3 (i.e. when the value of the shareholders' net assets is less than 2/3 of the subscribed share capital), the administrators are required to convene the shareholders' meeting without delay for the adoption of appropriate measures. 

For this purpose, the administrators are required to draw up a report on the balance sheet, to be submitted to the shareholders' meeting, which must be prepared in accordance with the criteria of the annual financial statements (i.e. complete with balance sheet, profit and loss account and notes to the financial statements) and which must be communicated to the shareholders' meeting at least 8 days prior to the date of the convocation, together with the observations of the board of statutory auditors or the statutory auditor, if appointed.

The specially convened shareholders' meeting has three options to take into account: a) to pass a resolution for the immediate reduction of the share capital, adjusting the relevant figure to the current value as a result of the loss; b) to eliminate the loss in whole or in part (by reducing it below 1/3 of the subscribed share capital) by means of replenishment operations by the shareholders; c) to carry forward the loss if it is considered that there are premises for covering it by means of profits accruing in the following year.

A specific instance occurs when, as a result of a loss of more than 1/3 of the share capital, the latter falls below the statutory minimum. In the latter case, the directors must promptly convene the shareholders' meeting to resolve to reduce the share capital, at the same time increasing it to an amount not less than the minimum established by law or, alternatively, resolve to transform the limited liability company into another company (Article 2482-ter of the Civil Code). Moreover, a series of legislative provisions have provided that Article 2482-ter of the Civil Code does not apply to a whole series of cases (composition by agreement of company crises, composition with creditors and debt restructuring agreements, start-ups and innovative SMEs).

Specifically, the Italian legislation indicates to the directors and shareholders of the limited liability company (Italian: “S.r.l.”) a series of peremptory behaviours that they must adopt to cope with the company's undercapitalisation situation. On the one hand, the directors are required to convene a shareholders' meeting whenever the loss of share capital exceeds 1/3, obliging them to draw up a report on the company's net assets situation on the basis of the accounting criteria used to prepare the annual financial statements (without the possibility of adopting further assessments that take into account other aspects, such as the prospect of the company continuing as a going concern in subsequent years). On the other hand, the shareholders themselves have a spectrum of decisions predefined by the legislator, ranging from the coverage of the aforementioned losses to the reduction of the share capital (possibly with a simultaneous increase thereof above the legal minimum) to the liquidation or transformation of the company. All this is aimed at guaranteeing the company's ability to continue as a going concern, which would be jeopardised in a situation in which the net worth was negative, since in this case the company might not have adequate financial resources to meet its commitments or to guarantee protection for all creditors. 

It should be noted that the presence of a negative net assets does not exempt the directors from the implementation of the conduct described above even in the event that there is a shareholders' loan, which is potentially capable of reducing to zero or in any event bringing the liability below the aforementioned 'alarm' threshold. While it is true, in fact, that the repayment of a shareholders' loan is subordinated by law with respect to all other debts (Articles 2467 and 2497-quinquies of the Civil Code), its nature and cause nevertheless remains that of a loan. As the Court of Cassation has consistently held, the subordination of the shareholders' loan does not result in a loan’s "requalification" from a loan to a contribution with the exclusion of the right to repayment but affects (only) the order of satisfaction of the claims (see, ex multis, Civil Cassation, Section I, Order No. 30435 of 17/10/2022). Hence, the shareholders' loan is to be included in the company's liabilities and therefore contributes to determining the state of insolvency pursuant to Art. 5 of the Bankruptcy Law (now Art. 2 lit. b) of the Business and Insolvency Code). 

For the purpose of dealing with situations of undercapitalisation, German law takes a somewhat different approach from that adopted by the Italian Civil Code.

As a matter of fact, pursuant to § 49 para. 3 of the Limited Liability Companies Act (GmbHG), the directors are required to immediately call an extraordinary meeting of the company if the annual balance sheet or a balance sheet drawn up during the financial year shows a loss of at least half of the share capital. Notwithstanding the literal wording of the provision (which refers only to the share capital), according to the prevailing opinion the directors are required to convene the shareholders' meeting if the net assets of the company do not cover more than half of the share capital. The reference to the net assets therefore bears a resemblance to Italian law. 

The reference to the balance sheet or interim balance sheet should also not be taken literally, in the sense that a balance sheet does not necessary need to exist or to be drawn up. In fact, according to the prevailing opinion, the director must convene the shareholders' meeting if he or she becomes aware of a loss of half of the share capital even without any interim balance sheet having been approved or drawn up (in this sense, the so-called 'balance sheet in the director's head').

One aspect in which German law differs profoundly from Italian law is the way in which shareholders' net assets is determined. German administrators are first and foremost required to carry out a going concern test. As a matter of fact, under German law, the evaluation of the assets and liabilities entered in the annual balance sheet must be based, unless precluded by factual or legal circumstances, on the assumption that the company is a going concern (so-called Fortführungsprognose, § 252 para. 1 No. 2 German Commercial Code, HGB).

Therefore, if within the scope of the required examination pursuant to Section 49 para. 3 GmbH, the management expresses a positive opinion as to whether the company and the business can be continued as a going concern, the value of the company's shareholders' net assets can be determined accordingly by using going concern values as the basis for the calculation (the provisions of Sections 252a-256 HGB apply in this case). Conversely, if the directors' review reveals a negative business continuity forecast, the directors must calculate the company's net assets on the basis of (lower) liquidation values. The choice of which values (business continuity or liquidation) to base the calculation of the net assets is not arbitrary but depends in turn on precise criteria. If the company has made sustained profits in the past, it can draw on financial means without any problems and there is no threat of over-indebtedness, one already speaks of an 'implicit' expectation of business continuity (so-called implizite Fortführungsprognose). If, on the other hand, one of the aforesaid requirements is absent or there are indications to the contrary, it will be necessary to verify "explicitly" whether business continuity values can be adopted in addition to proving that the company is not in a situation for which there is an obligation to declare its insolvency (so-called explizite Fortführungsprognose).

In such cases, it becomes necessary to produce a financial plan and a business or reorganisation plan projected over the next 12 months from the date of the balance sheet. In addition, precise information must also be provided when preparing the financial statements on possible uncertainties and risks that could cast doubt on the preparation of the financial statements on a going concern basis. If the company is in a crisis situation, it is also required to draw up the financial statements within a short time after the end of the financial year. A further important difference from Italian law is the absence of precise requirements as to the decisions to be taken by the shareholders' meeting, convened pursuant to Section 49 para. 3 GmbHG, if the directors actually recognise a reduction in net assets below half of the share capital and therefore proceed to convene the shareholders. In addition, the shareholders themselves may waive the convening of the meeting if they are already aware of the circumstance and expressly waive the convening of the meeting (which would be the case, for example, if all shareholders are also directors of the company and, due to this position, have information about the financial situation of the company). A deep discrepancy with respect to Italian law also exists with regard to the role that shareholder financing plays in the context of a company's liabilities. In fact, in German law this financing is not considered in the same way as any other financing. Indeed, unlike other lenders, the shareholder who enters into a financing agreement with the company may exercise considerable influence on the company's business precisely by virtue of his role as shareholder. For this reason, in German law shareholder loans are considered, depending on the case, to be either an actual loan or a capital contribution. In particular, German law provides that, in the event of insolvency, repayment of shareholder loans (subject to exceptions) takes priority over all other claims (§ 39 para. 1 no. 5 InsO). However, for the purpose of determining the state of insolvency of the company, shareholder loans the repayment of which is to be subordinated to all other claims are not counted as liabilities, but as a net assets contribution to the company (Section 19 para. 2 InsO).

Italian legislation is concerned first and foremost with protecting creditors by requiring the recapitalisation of the company, liquidation or transformation of the company, already at a stage of mere alarm based solely on accounting data, not necessarily indicative of a company's true state of health, and regardless of whether the company is covered by substantial shareholder financing that can potentially compensate for asset losses. This protects more the creditors, but the very high rigidity imposed by the legislation also entails higher costs for companies. In fact, the accounting data is not always revealing the true state of health of a company (for example, there may be assets that cannot be accounted, but allow anyway the company to continue with the same financial and asset structure). Nevertheless, even in the latter case, Italian law requires shareholders to proceed with recapitalisation and/or in any case to tie up capital to the company that is surplus to its financial needs. On the other hand, German law, by allowing the evaluation of a company's net worth on a going-concern basis, offers greater flexibility and makes it possible to operate with a negative net worth, in a number of situations in which Italian law would instead require recapitalisation operations (and not to mention the fact that, for the purposes of ascertaining the company's possible state of insolvency, the repayment of a shareholders' loan subordinated to other credits is considered not as a liability, but as an equity contribution). These factors allow especially those corporations organised with a minimum share capital, in which it is not uncommon for losses of more than half the share capital to occur, to still be able to continue their business. On the other hand, the adoption of business continuity criteria must always be verified. For companies with risk or uncertainty factors, German legislature and case law require more detailed evaluations and more comprehensive reports from German administrators, as well as speeding up the preparation of financial statements.