Shareholders loan repayment: general journal entries as evidence

Italian Supreme Court Decision n. 4261 on the 19th of February 2020 (see the attached file – Italian)

According to a recent decision by the Italian Supreme Court, general journal records are documentary evidence admissible in court, but such records alone are not enough to prove the debit of the company to be real. There should also be further evidence to establish a point put forward by a shareholder (in order to prove they are also a creditor of the company) on the grounds that he had entered into a transaction with the company as a result of which he granted a loan to the company. To win the case and obtain judgement against the company, the claimant (which is the shareholder) shall give «further specific information regarding the legal treatment, and terms and conditions of the financial instrument» which they are claiming the existence of. Such information is to be gathered in order to verify «the real intention» of the parties to the contract (the company and its shareholder). It is the Judge’s duty to closely analyse all the information gathered regarding the initial payment and then state which type of contract was entered into between the shareholder and the company. In arriving at this decision, the Court mentions several previous decisions where the Court had already explained the difference between:

a. loan payments (related to a loan contract); and

b. equity investment (attributable to an atypical contract by which the shareholder is aiming to «increase the company’s assets»).

In carrying out the interpretative reconstruction of the «contractual intention of the parties», the Judge must take into consideration (i) the «way in which the contractual intention was concretely implemented», (ii) the «practical purposes to which it appears to be directed» and (iii) «underlying interests».

Instead, during the judicial proceedings which led to the above-mentioned decision n. 4261/2020, both in the first instance and in the second instance, the application for repayment of the loans had been accepted (with reasoning considered insufficient by the Court of Cassation) since

1) the loan resulted from the general journal and the defendant failed to dispute the validity of the accounting records of the journal; and

2) the payment was «not for a specific consideration».

The defendant (the company), was therefore unsuccessful in both the first and second instance, and appealed to the Supreme Court of Cassation by arguing that the accounting results, although not contested, could not be the sole reasonable ground to qualify the payment as a “loan”, and exclude that it could actually be an “equity investment”. The Court upheld the claims, due to incorrect legal interpretations by previous Judges of articles 1813 (loan contract) and 2697 (burden of proof) of the Italian Civil Code.