Dealing with corporate crises in a timely way. Notes on the optimal design of an �Early warning and composition system�

Since the 2005 Bankruptcy Law reform, policymakers have set the goal to detect and manage corporate crises at an early stage, in order to both improve the chances of a company restoring its economic-financial equilibrium and of limiting the dispersion of its values. However, the tools developed over the years have not fully achieved the desired outcomes. We start by surveying the economic benefits stemming from timely action. Then, by using a law and economics approach, we map the disincentives to taking action that affect debtors and creditors, looking separately at the phases of detection and management. On the basis of our findings, the paper discusses the characteristics of effective regulatory strategies, taking into account recent changes in the law. We argue in favour of both strengthening the governance of distressed companies and fine-tuning the existing restructuring and liquidation tools. These objectives are also pursued, to some extent, by the Enabling Bill for the Bankruptcy Law. We highlight the critical issues related to the new �early warning and composition proceedings�, especially where they commence automatically if some economic and financial thresholds are breached.