COVID-19 and the Cura Italia Decree


On March 17, 2020, the Italian Government enacted the so called “Cura Italia” law decree, with the aim of issuing urgent measures to address the economic and social impact of the COVID-19 emergency) (the “Decree”). The Decree was published in the Official Gazette on March 17, 2020 and became effective the same day.

The measures adopted by the Italian Government relates to the following areas:

Labor, Employment and Workplace Safety

Through the Decree, the Italian Government made available to Italian employers a number of tools to handle the current Covid-19 emergency.

1. PUBLIC SCHEMES

The Decree made available additional public schemes to employers operating in the whole of the Italian territory. Please, find below the most important schemes which may be used by Italian employers to face the current emergency.

A. General measures

Firstly, the general public schemes available to certain industrial and commercial companies (as specified below) are the following:

The Decree basically granted to employers operating all over the Italian territory a quicker access to the above social measures and made available additional schemes to grant all entrepreneurs operating within the Italian territory with a certain level of support as long as the health emergency is ongoing.

B. Public schemes made available in the whole of the Italian territory

- “Cassa Integrazione Guadagni Ordinaria”

Starting from 23 February 2020 and for a maximum period of 9 weeks (but in any event not later than August 2020), employers may apply for Cassa Integrazione Guadagni Ordinaria in case a suspension or reduction of business is determined by Covid-19 emergency.

No prior agreement with works council/trade unions is required. Nonetheless, the employer is supposed to carry-out an information and consultation procedure with works council/trade unions, which may even be conducted electronically or from remote.

Only employees hired by 23 February 2020 will be entitled to integration of their salary; executives are excluded. The employer is not required to pay any additional social contribution and the integration of the employees’ salaries covered by such public scheme will cover up to 80% of the salary relating to unworked hours and, in any case, cannot exceed € 1,127.87 per month for monthly salaries lower than € 2,159.48; and € 1,355.58 per month for monthly salaries higher than € 2,159.48.

Furthermore, it is worth mentioning that employers for which a Cassa Integrazione Guadagni Straordinaria is in course as at 23 February 2020 are entitled to suspend and replace it with the Cassa Integrazione Guadagni Ordinaria at hand.

Cassa Integrazione in Deroga will be granted to all employees hired by 23 February 2020; executives are excluded. The integration of the employees’ salaries covered by such public scheme will cover up to 80% of the salary related to unworked hours and, in any case, cannot exceed € 1,127.87 per month for monthly salaries lower than € 2,159.48; and € 1,355.58 per month for monthly salaries higher than € 2,159.48.

As a general remark, please be advised that it is a common use under the Italian labor law that employees enjoy all holidays accrued and still not spent before the public scheme becomes effective.

C. Further measures to support employers over the emergency

In addition to the public schemes mentioned above, the Decree has made available the following additional measures with a view to supporting employers:

1. MEASURESTOSUPPORTPEOPLE,BUSINESSES AND PROFESSIONALS

- Withholding taxes relating to wages and assimilated employment income.

- Social security contributions and mandatory insurance premiums (including fulfilments relating thereto).

VAT payments due in March 2020 by the same businesses are also deferred. The Italian tax authorities have listed the ATECO4 codes of the businesses that can benefit from this deferral5. The list is indicative and non-exhaustive. This is an automatic deferral, with no applications required. No penalties or interest for late payment will be charged in the deferral period. Businesses will be given until the end of May to pay any liabilities that have accumulated during the deferral period. The payments can be made in one lump- sum by 31 May 2020 or in up to five equal monthly instalments, starting from 31 May 20206.

Professionals and agents that opt for the deferral are given until the end of May to pay the withholding taxes that have accumulated during the deferral period. The payments can be made in one lump-sum by 31 May 2020 or in up to five equal monthly instalments, starting from 31 May 20209. No penalties or interest for late payment will be charged in the deferral period.

2. TAX PROCEDURAL DEADLINES AND STATUTE OF LIMITATIONS

- The terms for performance of any activity related to mandatory ADR proceedings already commenced before 9 March 2020 are suspended too.

The above measures do not apply to some proceedings indicated by the Decree, which, as far as civil proceedings are concerned, include the following:

In particular, the following measures may be adopted:

- Postponement of non-urgent hearings after June 30, 2020.

Finance

Among the measures issued by the Italian Government, it is worth mentioning the following.

1. CENTRAL GUARANTEE FUND FOR SMALL AND MEDIUM ENTERPRISE - ARTICLE 49 OF THE DECREE:

Notwithstanding the provisions currently in force, for a period of 9 months from the entry into force of the Decree, guarantees under the central guarantee fund for small and medium-sized enterprises (the “Fund” and the “Guarantee”) are granted free of charge and the maximum guaranteed amount for each enterprise is equal to Euro 5,000,000.00. In case of direct Guarantee, the maximum guarantee amount is equal to 80% for the transaction submitted to the Fund for an amount up to Euro 1.5 million for each enterprise; in case of re-insurance or counter guarantee the maximum guaranteed amount is equal to 90%. In accordance with Recommendation no. 2003/361/CE, small and medium-sized enterprises (“SMEs”) include enterprises employing less than 250 persons and having either an annual turnover not exceeding €50 million, or an annual balance sheet total not exceeding €43 million.

The Guarantee may also be granted to secure new loans aimed at refinancing existing debts of the beneficiary, if an additional loan facility, for not less than 10% of the outstanding amount of the refinanced loan, is granted to the beneficiary. If, due to the COVID-19 emergency, a moratorium with respect to the loan secured by the Guarantee is granted by a bank or a financial intermediary, the duration of that Guarantee is extended accordingly. The Guarantee may be combined with other guarantees aimed at securing loans utilized to finance real estate investments in the tourism and/or hospitality sectors having a maturity of 10 years and a loan amount higher than Euro 500,000.

SMEs owing debts classified as “non performing” under the applicable banking regulation or SMEs classified as “undertaking in difficult” under EU Regulation n. 651/2014 are not allowed to apply for the Guarantee. Additional measures to reinforce the financial condition of enterprises, also by way of subsidized rates financings and guarantees up to 90% granted in favor of the enterprises, or the banks or financial intermediaries granting new loans to the enterprises, may be adopted by decree of the Italian Ministry of Economy and Finance in consultation with the Italian Ministry of Economic Development.

2. FINANCIAL SUPPORT MEASURES IN FAVOUR OF MICRO-ENTERPRISE AND SMALL MEDIUM SIZE ENTERPRISE – ARTICLE 56 OF THE DECREE

Italian based SMEs certifying that, as a direct consequence of the Covid-19, they suffered a shortfall of liquidity, are allowed to benefit from the following financial measures in connection with debts owed to banks, intermediaries under Article 106 of the Italian Banking Act and/or other licensed lenders in Italy, provided that such debts are not classified as non-performing at the date of publication of the Decree (i.e. 17 March 2020):

Due to the novelty of the subject provision, it is not possible to safely assess to what extent it will be deemed applicable in the circumstances (the decision to declare dividends, adopted irrespective of the ongoing emergency, could indeed imply acceptance of the inherent risk by the company), or if the interpretation and construction of the expression “compliance with containment measures” will extend to include also financial difficulties indirectly occasioned by the lockdown.

Force Majeure

1. IMPOSSIBILITYOFPERFORMANCE

Pursuant to Art. 1256 of the ICC, “... an obligation is terminated when, for reasons beyond the debtor’s control, performance becomes impossible”. And “if impossibility is only temporary, the debtor, for as long as it is continuing, is not liable for late performance. However, the obligation is terminated if impossibility, having regard to the obligation’s title or the nature of its object, lasts until the debtor can no longer be deemed to be bound to perform, or the creditor is no longer interested in obtaining performance.”14

In the event a contractual obligation has been terminated for impossibility, the party which was entitled to receive performance under that obligation, will have the right to seek relief under Art. 1463 of the ICC, in that “the party released from due performance on grounds of supervened impossibility, cannot claim performance of the other party, and must return what it has already received ...”. If impossibility of one obligation is only partial, the other party will be entitled to a reduction of its obligation, or can withdraw from the contract, if he has no “appreciable interest” in partial performance.

Among the reasons that the judiciary in this country has deemed to constitute instances of impossibility, there are orders and prohibitions issued by Public Authorities (legislative, administrative and judicial), that specifically prevent one party from lawfully performing his obligations, i.e. the so-called “factum principis”. The containment measures recently issued by the Italian Government - and, in particular, the Prime Minister’s decrees (dPCMs) of 8, 9, 11 and 22 March 2020 - where they provide for mandatory closure of certain business activities, appear to meet the ‘impossibility test’ for obligations owed by businesses so affected, in that the “factum principis” constitutes an insurmountable impediment beyond the obligor’s control, at least insofar as the impeding circumstance was not foreseeable, as at the time in which the obligation was undertaken15.

Given the temporary nature of the emergency measures adopted by the Government (the subject decrees are meant to be applicable until the beginning of April, although their terms may be extended, depending on the epidemic’s evolution), a majority of the affected contractual relationships will likely fall within the scope of application of the second paragraph of Art. 1256 (temporary impossibility), therefore affording only temporary relief from non- performance, unless, of course, the nature or subject matter of the obligation (e.g. perishable goods), or the fading of the creditor’s interest to performance (e.g. supplies with a prevalent seasonal element) command otherwise.

But what if the obligor does not belong to any of the business categories affected by closure orders, and yet the health and sanitary emergency constitutes an insuperable impediment, beyond his control? In principle, the same remedies available in case of “factum principis” should be accessible, on condition that the ‘impossibility test’ (absolute impediment, beyond the obligor’s control and unforeseeable, applying normal diligence, as at the time in which the obligation was assumed) is met.

Notably, a recent orientation of the Italian Supreme Court16 has taken the view that a party entitled to receive performance of an obligation - performance of which is still entirely possible - may refuse it (and claim restitution of any consideration already paid), if, due to a change in circumstances, the contract’s actual function (“causa in concreto”) results frustrated. In other words, although performance of a contract’s typical obligation remains technically possible, if supervening and unforeseeable circumstances (beyond the party’s control) occur that make it impossible for one party to receive performance, that party will be entitled to refuse performance and consider the contract avoided, for subsequent lack of its “causa in concreto”. The relevance of this doctrine in the current scenario is apparent, at least in those circumstances in which - even in the absence of a “factum principis” preventing performance - the effects of the pandemic frustrate irreparably the very reason of the transaction.

2. HARDSHIP

A separate remedy provided under Italian law - even if the contractual obligations are still possible, nor has the contract lost its “causa in concreto” - entitles a debtor to trigger a revision of terms, or, absent that, terminate the contract, in cases where due to “extraordinary and unforeseeable” new occurrences, performance of his obligations has become “excessively burdensome” (Art. 1467 of the ICC).

The judiciary has construed the notion of “extraordinary and unforeseeable” new occurrence, to specify that while the “extraordinary” character needs to be of an objective nature, having to take into account measurable elements such as frequency, magnitude, intensity, etc., which therefore can be appreciated also from a statistical perspective, the “unforeseeability” needs to be considered from a more subjective standpoint, as it pertains to the parties’ typical prognostic ability, having regard to their professional status and industry17.

It is further specified that the remedy in question does not apply if the aggravation occasioned by the new occurrence remains within “the contract’s normal risk” (Art. 1467 of the ICC, second paragraph). As a consequence, those contracts which by their nature (e.g. insurance, gaming, betting), or by the parties’ express or implicit agreement are inherently resistant to change in circumstances, cannot be terminated on grounds of hardship. It is worth mentioning that some precedents have also taken the view that the remedies under Art. 1467 would not be available for those contracts that, for their particular legal regime or because of specific stipulations adopted by the parties, already contemplate ad hoc mechanisms for their rebalancing, in case of new occurrences affecting the original bargain. In the negotiating and drafting practice of share purchase agreements, for instance, the express qualification of the agreement as “aleatorio” (i.e. having an inherent ‘risky’ nature) is becoming increasingly common, thereby excluding at the outset relief under Art. 146718. Even more significantly, the parties to several M&A transactions which were being negotiated in the weeks immediately following the first news of the outbreak, took the view to expressly specify in their agreements that the consequences of the epidemic should not be regarded as “material adverse changes” triggering renegotiation mechanisms or termination rights, unless their consequences “disproportionately” affected either party’s business19.

Due to the remedy’s exceptional nature and its limited application by courts (usually, in instances characterized by lasting, structural and severe adverse effects on a macroeconomic level), it is perhaps still too early in the pandemic’s evolution to predict the magnitude of the prejudice that it will bring to the country’s economic fabric or some of its sectors and industries. Yet, in perspective, particularly so if the emergency or its effects on the economy lasted for several months, increasing recourse to Art. 1467 of the ICC can be envisaged.

3. THE “QUASI-MORATORIUM” ON OBLIGATIONS UNDER THE “CURA ITALIA” DECREE

Finally, it is worth mentioning an extraordinary legislative measure, adopted by the Government within the package of urgent provisions aimed at supporting families, workers and businesses, in the wake of the Covid-19 emergency.

Art. 91 of the Decree has introduced a “quasi-moratorium” for all obligations, performance of which is prevented or hindered as a consequence of the containment measures enacted to limit the spreading of the contagion.

Namely, the newly enacted provision stipulates that “compliance with the containment measures ... will always be considered for purposes of excluding, pursuant to and under Arts. 1218 and 1223 of the ICC, the debtor’s liability, also in connection with the application of any forfeitures or liquidated damages stemming from late or omitted performance”.

Arts. 1218 and 1223 of the ICC regulate respectively the conditions under which a non- performing obligor is liable for damages (failure to prove that performance was impossible, for reasons beyond the obligor’s control), and the constituting elements of indemnifiable losses (costs and loss of profit, to the extent they are immediate and direct consequence of non- performance).The above principles - the ordinary application of which imposes a particularly stringent test on obligors who seek to be exempted from liability - appear considerably mitigated as a result of the new emergency provisions. In particular, it is reasonable to opine that judges will be required to use a more liberal attitude in assessing the conduct and extension of liability of non-performing obligors, in all instances in which omitted (or late) performance was occasioned or affected by the need to comply with the extraordinary measures of containment enacted by the government. This appears to go way beyond the scope of impossibility for “factum principis” (see paragraph A, above), as the intensity of the containment measures ranges from closures of certain business activities (which, as outlined above, under certain conditions may qualify as ground of impossibility, under Art. 1256), to mere restrictions on people’s ability to move, and yet all of these measures appear potentially relevant - insofar as an aggravation of the obligor’s position originated thereby can be established - for purposes of mitigating the obligor’s liability.

Even more explicitly, the new provision expressly refers to “... application of any forfeitures or liquidated damages connected to late or omitted performance” among the matters that would need to be submitted to the judge’s appreciation in the light of these new exceptional parameters of liability, which leads us to believe that even enforceability of those typical expressions of the parties’ autonomy in determining the sanctions (and the allocation of risk) applicable to their deals, would be suspended.

Due to the novelty of the subject provision, it is not possible to safely assess to what extent it will be applied in practice by courts, or how liberal and potentially extensive the interpretation and construction of the expression “compliance with containment measures” will be. Yet, this is undoubtedly an example of legislative policy, which, under the spur of an extraordinary situation of emergency, expresses a clear favour to obligors in state of hardship.

1 Companies whose tax year ended on 30 June 2020, are in principle required to file their annual tax return by the end of May 2020 and, hence, benefit from a deferral until the end of June.

2 Businesses and professionals having their registered office or place of business in the Bergamo, Cremona, Lodi and Piacenza provinces can defer the VAT payments due on 16 March 2020 irrespective of the amount of their revenues.

3 The deadline is postponed to 1 June, since 31 May is a Sunday.

4  Classification of economic activities.

5  See Ruling 12/E of 18 March 2020 and Ruling 14/E of 21 March 2020.

6  The deadline is postponed to 1 June, since 31 May is a Sunday.

7  The red zone included the following municipalities: Bertonico, Casalpusterlengo, Castelgerundo, Castiglione D'Adda, Codogno, Fombio, Maleo, San Fiorano, Somaglia, Terranova dei Passerini, Vo’.

8  The deadline is postponed to 1 June, since 31 May is a Sunday.

9 The deadline is postponed to 1 June, since 31 May is a Sunday.

10 For taxpayers established in the eleven municipalities included in the first “red zone”, the deferral runs from 21 February 2020.

12 The solution set out in the Decree, appears to confirm the conclusions already reached by way of interpretation by the governing body of Milanese notaries (“Consiglio Notarile di Milano”), upon issuance of their latest guideline on corporate matters (Massima no. 187, of 11 March 2020), whereby the principle that shareholder meetings in Italian joint stock companies can be validly held even if all of the required participants are attending through means of telecommunications was upheld. The Milanese notaries’ interpretation - which addresses a long-standing uncertainty in the construction of art. 2370, paragraph 4, of the Italian Civil Code - appears to be of general application, even beyond the current and ongoing sanitary emergency. Some early commentaries have also opined - on the basis of an extensive interpretation of those provisions of the dPCMs requiring adoption “wherever possible in the holding of meetings, of connection modalities from remote”, that the principles expressed by the Milanese notaries with respect to shareholder meetings, would be generally applicable (during the state of emergency) to all other categories of corporate meetings, namely board of directors’ meetings and board of statutory auditors’ meetings.

13 It is worth noting that the derogation of the term for approval of financial statements does not exempt directors and auditors from their duties to monitor and look after the economic and financial conditions of the company and, if appropriate, take all necessary measures to safeguard their integrity.

14 Similar principles apply to commercial transactions governed by the United Nations Convention on Contracts for the International Sales of Goods (the so called “Vienna Convention” of 11 April 1980), Art. 79 of which stipulates that “A party is not liable for a failure to perform any of his obligations if he proved that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

15 But see the comments on the recently enacted “quasi-moratorium” on obligations, under paragraph 3 below.

16 Amongst others: Cass. no. 18047/2018. 17 Cass. nos. 2661/2001, 22396/2006.

18 Possible changes in circumstances, especially so when occurring in the interim period between signing and closing, will need to be carefully addressed with specific ‘MAC’ (acronym for Material Adverse Change) clauses. Other solutions to be considered when negotiating M&A deals may include reconsidering formulas applicable to net working capital adjustments, use of buyer’s stock as a part of consideration, as well as working on earnouts and deferred consideration to take into account future effects of the emergency on the target’s profitability.

19 The reference to “disproportionate” effects, is meant to trigger an evaluation of the magnitude of the adverse effect relative to the business as compared to other participants in the industry in which the concerned business operates.


Copyright 2024 K & L Gates
National Law Review, Volume X, Number 92