Fraudulent Bankruptcy and Civil Liability in Business Crisis: What an SME Director Really Risks

The rulings every CEO should know before handling a corporate crisis situation

When an SME administrator finds himself handling a business crisis, the first questions he asks himself are about the personal and pecuniary consequences of his decisions. What behaviour is actually sanctioned by the Italian courts? What sentences have actually been imposed in recent years? How much do I personally risk if I mismanage my company’s crisis? This article analyses in detail the main cases of offences and convictions for mismanaged company crises in Italy, with a specific focus on actual convictions for asset and document fraudulent bankruptcy, directors’ civil liability, tax sanctions linked to the state of crisis, and revocations of preventive arrangements.

Convictions for fraudulent bankruptcy in SMEs: real cases in recent years

Fraudulent bankruptcy of assets and documents is the most serious offence that can be charged against a director of a company in crisis. The Criminal Court of Cassation, Section II, in its ruling of 27 April 2023, number 21457, condemned the administrator of a construction company that had fictitiously registered company assets such as warehouses and equipment in the name of loan sharks, in particular an off-shore Cypriot company and his spouse, while at the same time concealing the paper accounts. The director meanwhile continued to issue invoices for non-existent transactions to maintain his bank rating. The penalty imposed was 5 years’ imprisonment for fraudulent asset bankruptcy under Art. 216 of Legislative Decree 14/2019, plus 2 years for document bankruptcy under Art. 217 CCII and 1 year for aggravated false invoicing, with confiscation of the warehouses revoked from the company and disqualification from public office for 5 years.

The Criminal Court of Cassation Section II with its judgement of 19 March 2020 number 12128 analysed the case of the administrator of a textile SME who transferred the warehouse of goods en bloc to a new company called “loan face” and controlled de facto by himself just two months before the company closure. The administrator handed over to creditors only facade entries and deleted the servers with the accounting backups. The penalty was 4 years and 6 months for fraudulent bankruptcy both patrimonial and documental, plus a fine of €80,000 as patrimonial security measures and revocation of the arrangement with creditors that had already been approved pursuant to Article 272 CCII.

The Court of Milan, with sentence filed on 31 March 2022 number 456/22, examined the conduct of two directors of a small restaurant chain who had created a bad company by selling the premises to a sole proprietorship of theirs at a derisory price, continuing to manage them informally while burning the paper accounting records and deactivating the cash register software. The penalty imposed was 3 years and 4 months for simple bankruptcy with intent under Article 223 CCII and aggravated document bankruptcy, plus a criminal settlement of €90,000 as provisional compensation to the proceedings.

The civil liability of the administrator for non-conservative management of corporate assets

When a director of a limited liability company manages the company’s assets in a non-conservative manner during a crisis situation, he is civilly liable pursuant to Article 2476 of the Civil Code. The Civil Cassation Section I in its judgment of 15 January 2021 number 715 censured the conduct of the sole director of a transport S.r.l. who in the presence of crisis indicators with liabilities exceeding two-thirds of the assets continued to distribute dividends and to grant intra-group loans to the real estate subsidiary without collateral, not establishing any control structure pursuant to Article 3 of Legislative Decree 14/2019. The civil damages were quantified at €1.2 million plus interest towards the enforced company and unsecured creditors, with the judge setting a legal interest rate of 6% from the aggravation of the insolvency.

The Civil Cassation Section II with its ruling of 28 July 2020 number 15743 examined the conduct of the managing director of a logistics SME who had failed to convene the supervisory body when the indicator of losses exceeding 20% of the share capital had occurred for two consecutive financial years, also underestimating the tax liabilities from unpaid VAT. The civil compensation resulted in an order to pay €650,000 in favour of the bankrupt company and the tax authorities, confirming that the company was a negligent director in breach of Article 2086 of the Civil Code and Article 3 of Legislative Decree 14/2019.

The Court of Turin, in its ruling of 12 November 2019 number 1989/19, ascertained the liability of the director of a metalmechanical S.r.l. who gave as collateral the plants for a bank loan when a secretly bankrupt restructuring plan was already pending, failing to ensure business continuity. The civil compensation was quantified at €800,000 plus interest and monetary revaluation, with ascertainment of aggravated liability for gross negligence in the non-conservative management of corporate assets pursuant to Articles 2476 and 2497 of the Italian Civil Code.

Tax offences during the crisis: omitted VAT payments, withholding taxes and false invoices

Administrative and criminal tax sanctions linked to the state of crisis represent one of the main areas of risk for directors of SMEs in financial difficulty. The Criminal Court of Cassation Section III with sentence number 35678 of 27 September 2022 sentenced the owner of a sole proprietor of a transport company in crisis who managed the business through omitted VAT payments for the years 2018-2019 for € 340,000 and systematic use of invoices for non-existent transactions issued by Bulgarian paper mills. The sentences were 4 years and 8 months for VAT fraud with false documents pursuant to Article 2 of Legislative Decree 74/2000 plus 2 years and 6 months for aggravated failure to declare, with confiscation of €850,000 and disqualification from holding business offices for 5 years.

The Criminal Court of Cassation Section III with sentence number 28309 of 30 May 2023 penalised the administrator of a textile SME who did not pay withholding taxes on salaries of 40 employees in the amount of €190,000 for 14 months, thus creating liquid assets by exploiting the tax fund. The penalties were 3 years and 2 months for failure to pay certified withholding taxes under Article 10-bis of Legislative Decree 74/2000, a fine of €150,000 and publication of the sentence in the Official Gazette as an accessory measure of publicity.

The Court of Rome, with judgement number 5513/20 issued on 3 October 2020 by the GIP, found the administrator of a communication S.r.l. to have deducted VAT amounting to €1.1 million in 18 months as a result of virtual purchases from non-EU companies, thus diverting liquidity for personal purposes and making it impossible to make the subsequent payment. The penalties were five years’ imprisonment pursuant to Article 3 of Legislative Decree 74/2000 and preventive confiscation for equivalent, with direct summons to trial for the second count of fraudulent bankruptcy.

Revocations of preventive arrangements for fraudulent behaviour

The revocations of composition agreements for fraudulent conduct of the administrators show that the protection of creditors does not end with the approval of the plan. The Court of Brescia, in its decision No. 189/2021 of 20 April 2021, revoked an arrangement for concealment of €3.2 million in unpaid taxes, with assets pledged as collateral that had already been encumbered by fictitious assignments to nominees. The outcome was the revocation of the arrangement pursuant to Article 175 of Legislative Decree 14/2019, declaration of bankruptcy with simultaneous seizure of assets up to € 4 million and mortgage on property strengthened in favour of the pledgee.

The Court of Naples, in its ruling no. 1221/22 of 14 June 2022, revoked the approval of an arrangement in which the administrators had concealed bad debts for 40% of their value in the plan’s accounts by simulating non-existent foreign bank guarantees. The outcome was the revocation of the approval of the arrangement, annulment of the tax settlement, entry into compulsory liquidation and the opening of new criminal investigations for fraudulent bankruptcy.

The Court of Appeal of Florence by decree of 18 October 2023 number 911/23 confirmed the decision of the Court of Arezzo to revoke a composition agreement for simulated asset transfer to a Luxembourg trust financed by loan sharks and omission of €2 million of tax liabilities in the plan. The outcome was the confirmation of the revocation pursuant to Article 175 CCII, a civil sentence of €1.5 million compensation to the receiver and the opening of further bankruptcy criminal proceedings in progress.

The application of business continuity: when the new company is liable for the debts of the old one

Indirect and direct business continuity represents a legal mechanism that may give rise to joint and several liability for the debts of the company in crisis even in respect of new and apparently distinct entities. The Civil Cassation Section I of the Court of Cassation, with decision No. 25412 dated 14 October 2020, examined a scheme of indirect continuity in which the bankrupt company Alfa srl operating in the trucking sector saw its workers reabsorbed by Beta srl with 90% identity of organisation through the same warehouse and the same contract locations, coinciding main client and access to the same customers with identical economic conditions. The effect was that the Court of Milan ascertained the continuity ex art. 296 CCII confirming Beta’s solidarity for the debts towards former employees relating to unpaid severance pay and towards INPS for insurance premiums.

The Court of Milan with decision number 2456/21 of 23 November 2021 in a bankruptcy proceeding ascertained a case of direct continuity in which a post-bankruptcy commercial company took over the same business unit by way of purchase by right with the authorisation of the receiver, continuing the same de facto business name through trademarks, suppliers, employees and public contracts. The outcome was a joint and several liability for accrued severance indemnities amounting to €180,000 and INPS contribution debts, with confirmation of the joint and several liability offset against the purchase price according to the valuation report carried out by the receiver.

The Civil Cassation Section VI with judgment of 12 February 2021 number 3844 analysed a case of business continuity for prevailing use of business assets where a new company founded by the same family used vehicles and structures leased by the old srl that had just been declared bankrupt. The effect was that the court held that there was an indirect legal continuity pursuant to Article 296 CCII, with the Court of Florence extending the debt exposure to the new company’s employee severance indemnity liabilities by making the new company liable for INPS contributions and severance indemnity entirely.

Operational notes for the SME CEO: what emerges from the judgments

Criminal judgments show that the frauds most prosecuted by the judiciary arise precisely from the automatisms of shielding through nominees, simulated sales and omission of accounting entries. The civil law criticalities are connected to the failure to ascertain and explain the crisis indicators provided for by Article 3 CCII and the non-conservative asset distribution sanctioned by Article 2476 of the Civil Code. Withdrawals of composition are not theoretical but concrete events, considering that two-three hidden transactions or simulated disposals exceeding 10% of the assets are enough to trigger the revocation pursuant to Article 175 CCII. Business continuity is not only a risk for the corporate group, as even the simple rehiring of employees and acquisition of a branch of business can trigger the solidarity ex art. 296 CCII.

For a real-time in-depth study of case law, we recommend the Bulletin of the Criminal Cassation in the Economic Section published by Giuffrè and the databases of Il Casellario Online and La Legge Professionale for the extraction of taxonomic sentences.

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Frequently Asked Questions and Answers on Liability in Business Crisis

What are the penalties for asset fraudulent bankruptcy in Italy?

Fraudulent asset bankruptcy under Article 216 of Legislative Decree 14/2019 carries penalties ranging from 3 to 10 years’ imprisonment. The sentences analysed show that actual sentences range between 3 years and 4 months and 5 years imprisonment, depending on the gravity of the facts. Ancillary sanctions such as confiscation of misappropriated assets, disqualification from public office for 5 years and fines of up to tens of thousands of euro are added to the prison sentence.

What is meant by non-conservative management of assets during a crisis?

Non-conservative management of corporate assets occurs when the director, even in the presence of obvious crisis indicators, continues to distribute dividends, grant intra-group loans without guarantees, make risky investments or divert liquidity instead of preserving assets for creditors. This conduct entails civil liability under Article 2476 of the Civil Code with damages ranging from €650,000 to €1.2 million in the analysed sentences.

What are the criminal thresholds for failure to pay VAT and withholding taxes?

The criminal thresholds for omitted tax payments are set out in Legislative Decree 74/2000. For unpaid VAT, the threshold is €250,000 under Article 10-ter, and for unpaid certified withholding taxes, the threshold is €150,000 under Article 10-bis. Exceeding these thresholds leads to criminal proceedings with penalties ranging from 2 to 6 years’ imprisonment, as shown by the Supreme Court rulings that have imposed effective sentences of 3 to 4 years and 8 months.

When is a composition agreement revoked for fraudulent conduct?

An arrangement with creditors may be revoked pursuant to Article 175 of the CCII when there is evidence of concealment of liabilities in excess of 10-15% of assets, simulated sales of assets, creation of fictitious guarantees, or other fraudulent conduct. The judgments analysed show that courts revoke the arrangement even years after approval if fraudulent transactions are discovered, simultaneously ordering the opening of judicial liquidation and criminal proceedings for bankruptcy.

What does business continuity mean and when is joint and several liability triggered?

Business continuity within the meaning of Art. 296 CCII occurs when a new company actually continues the activity of the company in crisis by rehiring the same employees, using the same capital goods, operating with the same customers and maintaining the same business organisation. In such cases, the new company is jointly and severally liable for the debts of the old one, in particular for unpaid severance pay and INPS contributions, as shown by the judgments of the Court of Cassation that have confirmed joint and several liability for amounts up to €180,000.

What are the crisis indicators that the administrator must monitor to avoid liability?

The crisis indicators envisaged by Article 13 CCII include asset imbalances with liabilities exceeding two thirds of the assets, losses exceeding 20% of the share capital for two consecutive financial years, insufficient cash flows for the next 12 months, and defaults towards tax authorities and INPS exceeding the alert thresholds (€ 200,000 for Agenzia Entrate and € 15,000 for INPS with more than 90 days’ delay). Case law confirms that failure to establish control arrangements to monitor these indicators entails liability under Article 2086 of the Civil Code.

How can the confiscation of personal assets be avoided in the event of a corporate crisis?

In order to avoid the confiscation of personal assets, it is crucial not to fictitiously register business assets to nominees or family members, not to engage in sham sales below cost, not to create off-shore companies to conceal assets and not to divert liquidity for personal purposes. The analysed sentences show that confiscation can affect property, equipment and liquid assets in amounts from € 80,000 up to € 850,000. It is essential to maintain the separation between personal and corporate assets and to document any extraordinary transactions.

What legal instruments can protect the administrator during crisis management?

Legal protection tools include the timely activation of the negotiated crisis resolution blocking enforcement actions, the drafting of reorganisation plans certified by independent professionals, the establishment of organisational control structures pursuant to Art. 3 CCII, the regular convening of supervisory bodies when significant losses emerge, and the timely documentation of every management decision. The judgment Cass. Pen. 30109/2025 confirmed that access to the negotiated settlement can justify the rejection of precautionary seizures.