The crime of unlawful use of credit is recognised by article 325 of the new Code of corporate crisis and insolvency. Unlawful recourse to credit occurs when administrators, general directors, curators and professionals operating a commercial activity use or keep using credit, thereby dissimulating or hiding the company’s bankruptcy or insolvency. Penalties for such violations are particularly severe – those responsible for the company’s administration shall be punished with imprisonment from six months to three years, and the penalty increases for those societies ruled by Chapter II, Title III, Part IV of the Consolidation Act for provisions concerning financial brokerage. Moreover, the sentence barrs the defendant from carrying out a commercial activity and disqualifies them from holding a management position in any company for a period of up to three years.
The mechanism of the agreement among creditors in case of unlawful use of credit
However, the Code of corporate crisis and insolvency recognises a rewarding system for those entrepreneurs who promptly activate the necessary procedures to tackle and resolve the company’s state of financial crisis. Award measures are applied when debtors, in order to limit damages, avail themselves of the assistance of a company crisis management consultant, thus following the necessary alert procedures: filing a timely application to OCRI or to the Crisis management body, and then following their instructions in good faith.
The creditors’ agreement award system in case of unlawful use of credit
The award system is recognised in cases of unlawful use of credit to those who file a timely application to OCRI, an access request to one of the crisis regulation procedures, and obtaining the opening of judicial liquidation procedure, agreement among creditors, and registered agreement for the restructuring of debt.
Behaviours amounting to abusive granting of credit
It is not always the entrepreneur who holds a detrimental conduct towards the company by illicitly using credit. In fact, other than unlawful use of credit, a behaviour can amount to abusive granting of credit.
Abusive granting of credit. When banks threaten a company’s assets
The Court of Cassation has already stated the non-existence, in our set of laws, a norm that punishes banks for conduct amounting to abusive granting of credit. However, the rules protecting the banking industry impose typical behaviours that can lead to gross negligence and violation of duties should the bank not adhere to them. Therefore, sanctions shall be imposed to a bank incautiously granting credit to an entrepreneur going through a state of insolvency or declared crisis. Moreover, this conclusion is confirmed by article 1176 of the Civil Code ruling the diligent execution of professional service, and by the primary and secondary discipline of this sector.
Court of Cassation on the abusive granting of credit
The Court of Cassation has ruled that the activity of credit granting does not merely concern the private parts of the financing agreement. In fact, not only can such a contract lead to detrimental consequences for the credit institute and the financed subject, but also for a potentially large number of subjects that are in business with the latter.
Damage by loss of assets and further losses
Behaviours amounting to illicit use of credit and abusive granting of credit can lead to a damage by loss of company assets and further losses due to the continuation of the company’s operations. Despite the Code of crisis and insolvency recognising the award system for unlawful use of credit, the Court of Cassation has precised that the preventive creditors’ agreement mechanism to avoid bankruptcy and the award system designed to support corporations going through crisis are based on the meritocracy principle.
How to demonstrate that credit use or grant were not unlawful or detrimental
The company or third subjects, such as curators, might hold banks liable for the damages suffered if the financial and credit support is deemed unlawful. According to the Court of Cassation, this happens when the bank has wilfully or negligently kept alive an entrepreneur in state of bankruptcy, further damaging the assets and increasing the losses.
The dividing line between lawful and unlawful financing
It is the judge, then, who is called to delimitate the space of lawful financing. Positive judgment is based on the possibility to demonstrate that the credit allowance is justified by reasonable prospects of restructuring the company, despite it being in a situation of financial difficulty. The boundary between a lawful and meritorious credit and unlawful and illicit credit roots from the reasonability and feasibility of the business plan put forward by the company in crisis. To sum up, it is absolutely advisable to make the most of the system provided by the new Code of business crisis. If experited timely, the tools thereby supplied by the legislator allow the parties to solve situations amounting to abusive granting of credit or unlawful use of credit with mediation.