Crisis and insolvency: the differences according to the Business Crisis and Insolvency Code
Foreword
In the business landscape, two words often used are“crisis” and“insolvency.” Although they may seem synonymous, the Code of Corporate Crisis and Insolvency (CCII) provides precise definitions of both concepts, and these take on fundamental importance for businesses and their creditors.
Crisis: a sign of trouble
According to the CCII, crisis represents a stage when a company begins to show signs of financial or operational difficulties. It is defined as the“state of economic and financial distress that makes insolvency likely.” In other words, this is a situation in which the company faces obstacles in the regular payment of its debts, but is not yet permanently compromised.
Crisis indicators
The law identifies some indices that may presage a corporate crisis, including:
- Payment delays
- Liabilities to suppliers past due
- Debt exposures to the credit system
- Interest on arrears
Insolvency: the lack of ability to pay
Insolvency, on the other hand, is the“state of a debtor’s definitive and irreversible inability to fulfill its enforceable obligations.” In this case, the company is no longer able to meet its debts and a judge’s intervention is needed to handle the situation. It is important to note that insolvency can be declared either voluntarily by the debtor himself (declared insolvency) or coercively by a creditor (court-declared insolvency).
Differences between crisis and insolvency
The main differences between crisis and insolvency can be summarized as follows:
Crisis
- Temporary difficult situation
- Possibility of rehabilitation
- Application of preconcessional procedures
Insolvency
- Situation of ultimate inability to pay
- Impossibility of rehabilitation
- Application of bankruptcy procedures
Tools for crisis prediction provided by CCII
The Code of Crisis and Insolvency (CCII) devotes ample space to crisis prediction tools to enable early intervention and prevent the deterioration of the company’s situation. Among the tools provided by CCII are:
- Indicators of the crisis:
The CCII identifies a number of indices that may presage a corporate crisis, divided into:
- Income indicators: show imbalances in the company’s economic management, such as a decline in turnover or an increase in costs.
- Balance sheet indicators: measure the financial strength of the company, such as the ratio of debt to equity.
- Financial indicators: assess the company’s ability to generate sufficient cash flow to cover its debts.
Analysis of these indices can help the entrepreneur identify early signs of trouble and take appropriate corrective measures.
- Third-party reporting:
The CCII provides the possibility for creditors and shareholders to report crisis situations of which they are aware to the Corporate Crisis Resolution Body (OCRI). The OCRI, in turn, may summon the entrepreneur to invite him or her to take appropriate measures to overcome the difficulties.
- Budget analysis:
Balance sheet analysis is a fundamental tool for assessing the financial health of a company. Through the analysis of specific indicators, possible imbalances and risks of insolvency can be highlighted.
- Early warning tools:
There are several early warning tools that can be used to monitor the business situation and identify early signs of crisis, such as the ContractSuite platform. These, may be developed in-house or acquired from specialized companies.
The use of these tools is crucial for early detection of the crisis and appropriate recovery measures. The CCII, in fact, emphasizes the importance of prevention and early intervention in order to prevent company failure and safeguard jobs.
