Italy: The Liability Of Non-Executive Directors

Last Updated: 26 January 2018
Article by Laura Lombardini

By judgment no. 17441 of 31 August 2016, the Supreme Court stated, that following the 2003 reform concerning corporations and in light of the provisions of Articles 2392 and 2381 of the Italian Civil Code, the liability of directors without specific operational powers cannot be gathered from a generic failure to supervise (should this be the case, it would embed an objective responsibility). On the contrary, liability should be connected to the breach of the duty to act in an informed way, on the basis of the information that said directors must receive from third parties or may obtain upon their own initiative.

* * *

The case

The receiver of a bankrupt joint-stock company sued its directors before the Court of Rome, in order to ascertain their liability, pursuant to Article 146 of Bankruptcy Law.

More precisely, the bankruptcy was considered the result of a transaction particularly burdensome with respect to the company's share capital and unjustified in relation to the economic value of the block of shares acquired.

The directors argued, in their defence, that the entire management of the company was delegated to the Chairman of the Board of Directors and that hence, despite their supervision, they could not have prevented the abovementioned transaction for having no delegated powers.

The decision of the court of first and of second instance were both in favour of the Receivership and, in particular, the Court of Appeal merely reduced the amount of compensation for damages jointly owed by the directors deeming their defence a kind of admission of guilt and tacit complicity with the Chairman.

The decision of the Supreme Court

By judgment no. 17441 of 31 August 2016, the Supreme Court has repealed the second instance judgement accepting the grounds of appeal proposed by the directors.

In particular, the Court stated that the liability of non-executive directors cannot be based on a general omission of supervision, to such an extent to effectively turn into a sort of objective liability, due to the fact that it must to be connected to a breach of their duty to act in an informed way.

The Court based its decision on Articles 2932, paragraph 2, and 2381, paragraph 6, of Italian Civil Code, pursuant to which non-executive directors would be liable for the detrimental consequences of the conduct of other directors (i.e. directors who performed the action) only if they were aware of facts that would require their intervention or failed to act in order to obtain the necessary elements to act in an informed way.

In a nutshell, the Court has interpreted said provisions to establish that non-executive directors may be deemed liable for the non-prevention of facts detrimental to the company, in the event that they are, or could become, aware of the same by exercising their power/duty to request information; this, in relation to the "diligence required by the nature of the role and their specific competences".

Arguing otherwise would confirm a general duty of supervision, which, on the contrary, the 2003 reform has deleted.

In the case at issue, the Court of Appeal had allegedly not properly (i) examined the evidence submitted to the same (i.e. the assessment of the information available to the directors, with particular reference to their plausibility), (ii) determined whether, on the basis of the foregoing, their inactive conduct was negligent and (iii) verified the existence of the etiological connection between the aforesaid conduct and the prejudice caused to the company, taking into account that the appoint of the directors occurred after the conclusion of the purchase agreement.

The liability of non-executive directors before and after the reform

The judgement at issue clarifies an issue raised during the reform of corporate law of 2003.

Indeed, while before the reform, Article 2392, paragraph 2, of the Italian Civil Code imposed on all the directors, including those without delegation, a general duty of supervision (on the basis of which they were jointly liable for the damages caused to the company due to their failure to supervise), after 2003, said directors had only the obligation to act in an informed way, pursuant to Article 2381, paragraph 6, of the Italian Civil Code.

Although the wording of the article appears to have decreased the liability of non-executive directors, it should be highlighted that the new wording of Article 2381, paragraph 6, of the Italian Civil Code can be interpreted in the sense that directors do not simply have to be informed by third parties, but must obtain information on their own initiative.

Hence, non-executive directors are nowadays required not to keep a purely passive conduct, so that the new form of liability introduced can be identified with the lack of information activity that has become subject to an active behavioural duty.

This Article was first published on www.nctm.it

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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