How can a company survive a crisis? The entry into force of the Corporate Crisis and Insolvency Code, starting from July 15, 2022, has highlighted the importance of proper strategic planning and quality business consultancy. In this scenario, Harpalis, thanks to the knowledge and experience of its professionals, provides valuable support to entrepreneurs and managers in adopting appropriate measures, creating an effective organizational structure, and identifying early signs of crisis.

To delve deeper, we asked our partner, Michele Vendrame, Chartered Accountant at Logos Commercialisti Studi di Venezia, to explain the main innovations of the new legislation and its implementation

What is meant by “business crisis”?

In accordance with the code, a business crisis is the state of the debtor that makes insolvency likely and manifests itself with the inadequacy of prospective cash flows to meet obligations in the following twelve months In other words, When the company is unable to adequately cover its debts in the following twelve months, it finds itself in a state of crisis

To promptly identify a business crisis, Article 3 of the new Code prescribes certain measures and arrangements that entrepreneurs must adopt:

• The individual entrepreneur must adopt suitable measures to promptly detect the state of crisis and promptly take the necessary initiatives to address it
• The collective entrepreneur must establish a suitable organizational, administrative, and accounting framework in accordance with Article]. Article 2086 of the Civil Code, for the purpose of promptly detecting the state of crisis and taking appropriate initiatives

What makes an organizational framework suitable?

An organizational framework is considered suitable when it possesses the following characteristics:

• Hierarchical organization of roles;
• An organizational chart indicating functions, tasks, and responsibilities;
• Direction and coordination of activities by the Chief Executive Officer (CEO), as well as by the individuals to whom relevant powers are delegated;
• Introduction of internal procedures ensuring the efficiency and effectiveness of risk management and control system, as well as the timeliness and reliability of information flows
• Adoption of procedures ensuring the presence of professionally qualified personnel to perform assigned functions;
• Continuous updating of company procedures and their dissemination within the organization.

In order to promptly anticipate the emergence of a business crisis, these measures and arrangements must allow for:

• Detecting any imbalances of a patrimonial or economic-financial nature, related to the specific characteristics of the company and the entrepreneurial activity carried out by the debtor;
• To verify the sustainability of debts and the prospects of business continuity, at least for the following twelve months, and to identify relevant signals as described below;
• To obtain the necessary information to use the detailed checklist and carry out the practical test for verifying the reasonable feasibility of recovery as prescribed in Article 13 co. 2 of DLgs. 14/2019 and the ministerial decree of the Ministry of Justice dated 28.09.2021

What are the signs of a crisis?

• The existence of overdue salary debts for at least 30 days, amounting to over half of the total monthly salary amount;
• The existence of debts to suppliers overdue for at least ninety days, with an amount exceeding that of non-overdue debts
• The existence of exposures to banks and other financial intermediaries that have been overdue for more than 60 days or have exceeded the credit limit obtained in any form, provided that they represent at least 5% of the total exposures
• The existence of one or more of the debtor exposures indicated in Article 25-novies co 1 of DLgs. 14/2019.

Adopting suitable measures and arrangements can allow companies to anticipate and address the crisis promptly, increasing the chances of recovery and the continuation of entrepreneurial activities

It is crucial for entrepreneurs and professionals in the sector to fully understand the implications of the Code and implement the necessary measures to ensure timely detection and adoption of appropriate initiatives. Only through conscious and proactive management of a business crisis, it will be possible to ensure a sustainable future for companies and the economy as a whole.

As explained by Dr. Vendrame:

The legal provision refers to those of a patrimonial or economic-financial nature that are interrelated with each other (Article 12 of Legislative Decree 14/2019). Indeed, only the simultaneous existence of all three equilibriums (economic, financial, and patrimonial) ensures the maintenance of sustainable conditions for the long-term continuity of the business.

The term ‘income imbalance’ refers to the inability of current revenues to cover all costs and ensure adequate remuneration of risk capital

The term ‘financial imbalance’ refers to the inability of cash flows generated by revenues to cover all monetary outflows for the payment of operating or financial debts and for the remuneration of risk capital

In such a case where the economic imbalance results in operating losses, the relationship with the patrimonial dimension becomes immediately noticeable, as the losses lead to the erosion of net equity

Even in the absence of economic and patrimonial imbalances, it may be challenging for companies that generate profits to fulfill their obligations if customer receivables are not collected or if they have a significant net equity invested in slow inventory turnover activities and/or difficult-to-liquidate assets.

To effectively implement such measures, it is essential for entrepreneurs and professionals in the sector to equip themselves with the necessary skills and knowledge In this context, the importance of resources and tools that provide guidance and support becomes fundamental.

For more information and to discover the solutions and services offered by Harpalis, please contact .info@harpalis.it.