Italy Update: Coverage of material operating losses: hierarchy of equity reserves

Court of Cassation, judgment no. 15087 of 12 May 2022

The Court of Cassation reiterated that for the identification of the items of available equity, other than share capital, to be used to cover operating losses that would affect the capital itself, it is necessary to proceed “according to a rigid progression: from the less constrained and more available reserve, to the less constrained reserve and, therefore, less available “. The reserve formed by entering in the balance sheet the capital gains deriving from the application of the so-called “equity method” to the valuation of fixed assets, consisting of investments in subsidiaries or associates, can also be used.

However, since this reserve is qualified by law as “unavailable”, its allocation to rescheduling losses can only be carried out once all other reserves that are not burdened by non-distributability constraints have been used.

This is in order to avoid the risk of undue spills of wealth from the company’s assets on the grounds that it would, in fact, be the distribution of only hoped-for profits, since the capital gains in question are mere estimates.

In essence, according to the Court of Cassation, this is a hypothesis similar to that of the reserve formed with the capital gains recorded in application of the fair value criterion, also burdened by a distribution constraint. Even in this case, in fact, it is possible to use them to cover losses only after any other equity stakes, including the legal reserve, have been exhausted.

By Quorum, Italy, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact italy@transatlanticlaw.com

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