A shareholder loan can be “immoral”, Italian Supreme Court affirms

In 2024 it may perhaps come as a surprise that the Supreme Court would tag a shareholder loan as ‘immoral’ because it is contrary to morality. Yet – although often overlooked – this is a principle written in black and white in the Italian Civil Code: it is Article 2035 that states that ‘whoever has performed a service for a purpose which, even on his part, constitutes an offence against common decency, cannot reclaim what he has paid‘.

In other words, if the financing is contrary to decency, the person who provided it is not entitled to demand its repayment.

The issue was dealt with in a very frequent context: the shareholder and director of a company that is – in fact – insolvent made several loans to the company, in order to provide it with the financial means to pay employees’ salaries and current debts.

In this context, the Supreme Court affirms, first of all, that the judge’s discretionary power to assess whether such a transaction is contrary to morality: “the question of the non-repetition of services rendered on the ground of contrariety to morality is removed from the availability of the parties (with the consequent irrelevance of any hypothesis of procedural preclusion or lapse), the relative ascertainment being entrusted to the judge’s ex officio relief.“

This means that the judge must proceed of his own motion, and on the basis of the findings of the trial, to assess the act or contract on the level of its contrary to morality, bearing in mind that the notion of a transaction contrary to morality includes (in addition to transactions that infringe the rules of sexual modesty and decency) also transactions that offend against the principles and ethical requirements of the collective conscience, elevated to the level of social morality, at a given time and environment.

The exceptions of the financing shareholder, opposed to the bankruptcy of the company that rejected its request for admission as a creditor, were of no avail: the non-interest-bearing nature of the financing; the allocation of the funds to the extinction of other debts (without aggravating, therefore, the company’s debt position); the absence of a ‘predatory’ purpose of the financing are factual elements that – not considered by the judges of first and second instance – cannot be assessed by the Court of Cassation (called upon to judge only on legitimacy).

Moreover, the Supreme Court added that the assumption of the non-interest-bearing nature of the loans made by the managing shareholder did not undermine the correct reasoning followed by the trial judge, for whom such financial disbursements lacked a ‘concrete entrepreneurial purpose‘ and were ‘not referable to a reasonable rescue plan‘, thus drawing the inevitable consequence that they ‘had no other purpose than to postpone the emergence of the company’s bankruptcy, even at the cost of aggravating its consequences‘.

Hence the assessment of immorality of the financing.

The Supreme Court specified that services contrary to morality are not only those that contravene the rules of sexual morality or decency, but also those that do not respond to the principles and ethical requirements constituting social morality in a certain environment and at a certain historical moment, therefore, the disbursement of sums of money in favour of a company already in a state of decadence, which is an integral part of it, must be considered contrary to morality, and as such unrepeatable; a true and proper financing, enabling the entrepreneur to delay the declaration of bankruptcy, increasing the company’s debt exposure, since this is conduct preordained to the violation of the rules of fairness governing market relations and to the creation of factors of uninhibited ‘predatory’ attitude towards economic subjects in a state of insolvency.

Moreover, if the loan is functional to a strategy of concealment of the bankruptcy for immoral purposes, there is no doubt – according to the Supreme Court – that the same must be judged unlawful and against morality, as supplemented by the rules of fair market relations.

In conclusion, the reprehensible aggravation of the financed company’s failure outweighs all other considerations and renders the financing uncollectable.

Supreme Court, Sec. I, 19 February 2024, No. 4376. Pres. Ferro, Rel. Amatore. (Italian version)

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