Daniele Ferretti participates in the IR Global Insolvency Virtual Series – Force Majeure: Insolvency and Restructuring in Uncertain Times

Foreward by Andrew Chilvers

Sometimes events can be so unprecedented that even the canniest business people fail to comprehend what’s happening until it’s too late.

The COVID-19 “coronavirus” crisis is one such event. Businesses across the world have been plunged into shock dealing with the fall out of lockdowns, plummeting revenues and sales, unpaid bills and new ways of remote working for staff. And some sectors have been hit harder than others.

The first industry to be swept off its feet was tourism and the airline industry. The UKs regional carrier FlyBe was the first big casualty, while Virgin Atlantic applied for hundreds of millions of pounds in UK state aid to stay afloat. Meanwhile, in the US, United Airlines quickly grounded most of its fleet amid class action brought about by disgruntled passengers and employees. Boeing shut production of its 787 aircraft at its factory in South Carolina and in Germany Lufthansa decommissioned 40 jetliners and ceased operations at its Germanwings discount carrier.

The entire hospitality industry was at risk across North America, Europe and Australia with chains such as British pubs Wetherspoons laying off staff and Italian restaurant chain Carluccio’s going into administration. Countless other famous names were predicted to follow in the next few months. Big and small retail stores across the globe were similarly adversely affected.

But it wasn’t bad news for everyone. Companies that had invested in technology fared better and in some cases business boomed. Companies such as Walmart in the US and Tesco in the UK outpaced European discount chains such as Aldi by investing in online delivery services. Ocado, a UK online grocer, saw such a spike in activity with overloaded servers crashing in early March that the company assumed it was a cyberattack. In reality it was people stocking up for food and drink ahead of the lockdown.

Elsewhere, many firms in all sectors were quick to adopt new technology models for business operations, which included the use of mobile meeting apps, file sharing and using online apps and channels for sales, service delivery and marketing. What would probably have taken years to implement in old-fashioned brick and mortar industries (including the legal sector) suddenly appeared in a matter of days.

To help companies pull through this crisis, governments around the world unveiled packages to help shore up endangered businesses, providing damage limitation to their economies. In the UK, the government unveiled a £330 billion package of loan guarantees and other support for businesses. Meanwhile, the US Federal Reserve was asked by President Donald Trump to provide a $1 trillion economic stimulus package.

Everywhere, however, it was the small and medium-sized companies that were the most exposed. A survey by the US Chamber of Commerce reported 54% of businesses with fewer than 500 employees were closed or expected to close in the coming weeks and months. In the UK the corporate finance network predicted that one-fifth of small and medium-sized businesses were unlikely to survive the first few months of the lockdown despite promises of government support.

Unsurprisingly, legal professionals working in the insolvency sector in all jurisdictions suddenly had to keep up with new legislations being rushed through by different governments.

What impact has the COVID-19 crisis had on insolvency tests in different jurisdictions?

According to Italian Bankruptcy Law, insolvency occurs whenever the business fails to fulfill its obligations or certain external factors show the inability to regularly satisfy its debts. Thus, a temporary cash flow shortage or financial distress that can be overcome quickly should generally not give grounds to creditors for filing for insolvency.

Although no insolvency test is defined by law, certain provisions of the new Code of Corporate Crisis and Insolvency should become effective in September 2021, including those setting forth a specific crisis/distress definition, which occurs when “an economic and financial issue is likely to make the debtor insolvent”. As for enterprises, a forward-looking approach has been adopted, as distress is evidenced whenever the company’s cash flows are not enough to fulfill its obligations.

According to article 13 of the Code, a business distress situation could be identified if the revenues or the assets of the company are unbalanced in relation to the specific characteristics of the business. Furthermore, certain tests and critical thresholds that may trigger a dedicated alert process aimed at preventing the company’s default, will be introduced accordingly. These include, among others (i) the debt’s sustainability over a period of 6 months, (ii) the prospects of business continuity, and (iii) the existence of significant and repeated delays in making payments; all these to be evaluated according to sector-specific indicators that will be provided by the Italian National Council of Chartered Accountants and Accounting Experts. Specific benefits will be also provided for debtors who take prompt action to tackle the crisis and avoid insolvency.

What steps could and should companies take to survive the pandemic crisis and the economic downturn?


Following the downturn caused by the COVID-19 pandemic, small and medium-size businesses (which represent the majority of Italian companies) can take advantage of several support measures regarding part of their debts towards banks and other intermediaries. Specifically, pursuant to Decree Law n. 18/2020, until September 30, 2020 creditors will be not allowed to revoke/cancel credits granted until revocation and short-term loans. Moreover, subject to certain conditions: (i) non-installment loans expiring before September 30, 2020 will be extended until September 30, 2020 and (ii) refunds of installment loans (including leasing installments) due before September 30, 2020 will be suspended until September 30, 2020.

Further provisions have also been enacted to support companies facing a turnover reduction, including forms of public guarantee that can help them to find liquidity through more favorable loan conditions. However, it is very likely that further measures will be taken in the coming weeks and significant changes could be made. From a general point of view, it is strategic that debtors in distress handle their problems at a very early stage to take action ahead of a default and prevent formal insolvency proceedings. Compliance with article 2086 of Italian Civil Code, which has been recently amended, is important too. The company is now required by law to adopt organisational, administrative and accounting structures tailored to its own business, so that (i) any loss of the business continuity or any state of distress can be detected in a timely manner and (ii) appropriate measures can be taken in order to solve the crisis and restore the ordinary business.

What business sector will need the most support during and after the global pandemic?

With a likely global-scale crisis ahead, it is extremely important to share our expertise.

COVID-19 is affecting many Italian companies, especially those operating in the tourism sector, which contribute considerably to the national economy. The impact of the pandemic on manufacturing industry (including automotive, fashion, etc.) is very significant as well, since certain companies have been working at a reduced capacity for many weeks, while others are expected to resume their operation in the short term.

As the majority of Italian enterprises are SMEs, an extended drop in revenues could undermine their financial stability and it will be crucial to provide them with grants and loans in order to mitigate the risks of default in the following months.

Contributing Advisors