Insolvency Proceedings
What are the main insolvency procedures for voluntary and compulsory liquidations?
Compromise or Arrangement between a company and its creditors;
Creditors’ Voluntary Winding Up;
Dissolution and Winding Up by the Court.
A company may be dissolved voluntarily, but it may also be dissolved by order of the Court. (‘Dissolution’ under Maltese law refers to the decision to start the liquidation process, which is consequently followed by winding up). A voluntary winding up occurs when the shareholders of the company resolve to dissolve a company which, in the opinion of the directors, is solvent. This would be referred to as a members’ voluntary winding up. However, the shareholders of a company may also decide to dissolve the company in instances where the directors of the company do not certify that the company is solvent. In this case the winding up is conducted under the control of a liquidator appointed by the creditors of the company. Voluntary dissolution in view of the insolvency of the company therefore can only take the form of a creditors’ voluntary winding up following the decision of the company to be dissolved.
Dissolution and consequential winding up may also take place by order and under the control of the court. A company may be dissolved and wound up by the court for a number of reasons, with the most common being if the company is unable to pay its debts and is therefore insolvent. All forms of liquidation have the same aim, that of concluding the operations of the company, liquidating its assets and settling its liabilities when possible and a liquidator is appointed in all instances. However, there are procedural differences depending on whether the winding up was initiated voluntarily or imposed compulsorily.
The decisive criteria for adopting one form of dissolution and winding up rather than any other form relates to the solvency of the company. In the case of a voluntary winding up, the liquidator will have enough company assets to pay off all the debts of the company, and any excess would be distributed amongst the shareholders, pro rata to their shareholding.
On the other hand, in the case of a creditors’ winding up or a dissolution and winding up by the court for insolvency reasons, the assets of the company would not suffice to satisfy all the debts of the company. The assets would be distributed according to the security and ranking enjoyed by each creditor in terms of various laws within the Maltese legal system.
Dissolution and Winding Up
Members’ Voluntary Winding Up
A members’ voluntary winding up takes place after an extraordinary resolution is passed by the members to put the company in dissolution. The dissolution, that is the decision of the company to start the liquidation process and it triggers the winding up of the company. In a members’ voluntary winding up, the liquidation takes place under the control of a liquidator appointed by the shareholders, and only in cases where the company is solvent. For insolvent liquidations, there are specific procedural rules which need to be followed, including rules on the appointment of the liquidator by the creditors.
Declaration of Solvency
In the case of a members’ voluntary winding up, a Declaration of Solvency (Form B2), which must be signed by the majority of the directors, must be filed at the Malta Business Registry. This Declaration of Solvency is a very important statement in which the majority of the directors declare that they have made a full inquiry into the affairs of the company, and that they have formed the opinion that the company will be able to pay off its liabilities in full within the period specified in the declaration, but not exceeding 12 months (Art 268 (1) of the Companies Act). This declaration should not be older than one month prior to the resolution taken to dissolve the company, and it must be filed at the Malta Business Registry together with the Notice of Dissolution (Form B1). The Declaration of Solvency should also contain a statement of the company’s assets and liabilities made up to a date not earlier than the date of the declaration by more than 3 months (Art 268 (2) of the Companies Act).
Declaration of Solvency – No Reasonable Grounds for Opinion
The law places safeguards aimed at ensuring that the declaration of solvency is made in good faith and given its due importance. In fact, if the winding up starts off as a solvent winding up through the appointment of a liquidator by the company, in view of the opinion by the directors that the company is solvent, and it later emerges that the liabilities of the company will not be settled within the period stated in the declaration of solvency, then it may be presumed, unless the contrary is proved, that the directors did not have reasonable grounds for opinion. In other words, it would be presumed that the declaration was wrongly made, and such an act would be a criminal offence punishable with up to 3 years imprisonment and a fine (multa) of up to €46,587.47 (Art 268 (4) of the Companies Act).
Procedure in the case of a Solvent Winding Up
The first effective step in a voluntary winding up is the appointment of a liquidator. A company may be dissolved by an extraordinary resolution, and that same resolution may appoint the liquidator (Art 270 of the Companies Act). The appointment of a liquidator by the company is only possible if the directors file a declaration of solvency. Otherwise, the liquidator may be appointed either through a meeting of the creditors in a creditors’ voluntary winding up (Art 279 (1) of the Companies Act), or by the court (Civil Court (Commercial Section)). Once the liquidator is appointed, he must notify his acceptance to the Registrar of Companies, at the Malta Business Registry (Form L1).
The Liquidator
Following a decision for the dissolution and winding up of a company, the powers of the directors are shifted upon the liquidator, who takes control over the entire company and its representation with a view to winding up its affairs. During the winding up process, the focus of the company shifts to settling the debts due. The liquidator would proceed to draw up an exhaustive list of the assets and liabilities. He has the authority to carry on the business of the company for its beneficial winding up in the best interests of the body of creditors, and in doing so to institute or defend any action or other legal proceedings in the name of the company. The main task of a liquidator would be to liquidate the assets of the company, pay the creditors, if necessary, having regard to the ranking in terms of applicable law, and distribute any proceeds to the shareholders according to their shareholding.
Powers of a Liquidator
In the case of a voluntary winding up, with the sanction of an extraordinary resolution, the liquidator will have the power to (Art 288 of the Companies Act):
Pay Creditors according to their ranking at law;
Make compromises with Creditors; and
Make calls on contributories.
When the liquidator, at any time during the Winding Up process becomes aware that the company will not be able to pay its debts within the period stated in the declaration of solvency by the Directors, he must summon a meeting of the creditors (Art 272 (1) of the Companies Act) and in this case the procedure becomes that of a creditors’ voluntary winding up.
As soon as the affairs of the company are wound up, the liquidator will render an account of the winding up process and draw up a Scheme of Distribution. These accounts are audited and all documents (the accounts of the winding up, the scheme of distribution and the auditor’s report) will be laid before the general meeting of the company (Art 274 of the Companies Act).
These are then sent to the Registrar of Companies and there will be a 3 month period from the date of the publication in the Government Gazette or on a website maintained by the Registrar (Art 401 (e) of the Companies Act) that the formalities for the company to be struck off have been satisfied, within which creditors may bring an action before the Civil Court (Commercial Section) to defer the striking off of the company. If no such action is brought, then the company will be struck off (Art 275 (1) of the Companies Act).
If the winding up is not concluded within 12 months from the Dissolution date, the liquidator is to file a statement with the Registrar of Companies showing the progress and position of the winding up proceedings (Art 273 of the Companies Act). Subsequently the said statement is to be signed at intervals of 6 months.
Winding Up
Creditors’ Voluntary Winding Up
A voluntary winding up in which a Declaration of Solvency has not been made is to be considered as an insolvency proceeding and is referred to as a creditors’ voluntary winding up (Art. 268(5) of the Companies Act). One should clarify that, although it is referred to as a ‘Creditors’ Voluntary Winding Up’, it is not the creditors who initiate the winding up process. A creditors’ voluntary winding up may be initiated by the shareholders through a resolution of the company (Art. 278 of the Companies Act), or by the liquidator in a members’ voluntary winding up if it turns out during the course of the liquidation that the company will not be able to pay its debts within the period stated in the declaration of solvency (Art. 272(1) of the Companies Act).
In a creditors’ voluntary winding up, it is the creditors who nominate and appoint the liquidator. However, in those cases where the creditors fail to nominate a liquidator during the meeting of creditors, which would have been called for such a purpose, the person nominated by the company would serve as the liquidator (Art. 279(1) of the Companies Act). If a liquidator is not nominated by either the creditors or the company, an application for the appointment of a liquidator shall be filed in court by any director of the company within 14 days, and the appointment will be made by the Court (Art. 279(2) of the Companies Act).
With the exception of the appointment of liquidator, the procedure in a creditors’ voluntary winding up is the same as that of a members’ voluntary winding up. In the case of a creditors’ voluntary winding up, the company would however be insolvent, and therefore there will not be enough assets to satisfy all the debts. This brings about another difference, that is the ranking of creditors. The main purpose of the liquidation process, irrelevant of the type of winding up procedure, is to settle the debts of the company. If there are insufficient assets to settle all the debts, as is the case with insolvent liquidation, then the debts are settled in accordance with the ranking in terms of any preference granted at law.
As soon as the affairs of the company are wound up, the liquidator will render an account of the winding up process and draw up a scheme of distribution. These accounts must be audited, and all documents will be laid before the general meeting of the company and a meeting of the creditors (Art. 274 of the Companies Act). These documents are then sent to the Registrar of Companies and there will be a 3-month period within which creditors may bring an action before the Civil Court (Commercial Section) to defer the striking off of the company (Art. 275(1) of the Companies Act). If no such action is brought, then the company will be struck off.
Court Winding Up
An action for the dissolution and winding up of a company may be filed in court for various reasons, such as in the case of insolvency. A court winding up application may be filed by:
The company itself, following a decision of the General Meeting or the Board of Directors;
A shareholder;
A creditor/s;
The Registrar of Companies;
The Official Receiver.
A company MAY be dissolved and wound up by the Court:
If an extraordinary resolution for dissolution and consequent winding up by the court is passed (Art 214(1)(a) of the Companies Act);
If the business of the company is suspended for an uninterrupted period of twenty-four months (Art 214(2)(a)(i) of the Companies Act);
If the company is unable to pay its debts (Art 214(2)(a)(ii) of the Companies Act).
A company SHALL be dissolved by the Court and wound up either voluntarily or by the Court:
If there are less than 2 members for more than 6 months (does not apply to single member companies);
If there are less than 2 directors in public companies or 1 in private companies;
If there are grounds of sufficient gravity;
If the period fixed for the duration of the company expires.
An application in terms of 1 above may be made by the company following a decision of the general meeting, or by its board of Directors, or by any debenture holder, creditor/s, or by any contributory/ies.
An application in terms of 2 to 7 may be made by the abovementioned and also by any shareholder or director of the company.
An application in terms of 6 and 7 may be made by the abovementioned and also by the Registrar if it is expedient and in the public interest.
The court will consider the application, and in the process, it shall consider the views of all the interested parties. In the interim, before arriving at a decision whether to dissolve the company or otherwise, it may provide for the appointment of a provisional administrator who would take over the overall administration of the company’s business, oversee and preserve the assets of the company and prevent anyone from taking any unfair priority or advantage. The court also has the authority, before deciding whether to dissolve the company or otherwise, to stay any procedures against the company (Art 220 of the Companies Act). When the company is insolvent, the directors have an obligation towards the creditors. Any prejudice to their rights may lead to serious consequences, including personal liability, fines and in cases where there is deliberate fraud, even imprisonment. Therefore, in brief during the winding up process, the court will:
Consider any preliminary pleas;
Allow the parties to bring forward evidence in accordance with their application;
Allow the directors, company secretary, contributories, or creditors to make submissions upon their request;
Allow the lawyers to make final submissions;
Decide the case;
Appoint a liquidator;
Appoint sittings to monitor the winding up procedure;
Approve the scheme of distribution, if any;
Release the liquidator of his appointment as soon as the court is satisfied that he has completed his task;
Order the Registrar to strike off the name of the company from the Register.
Following an order by the court for the dissolution of the company, the powers of the directors cease and representation of the company becomes solely vested in the liquidator (Art 295 of the Companies Act).
Duties
Duties of Directors during Insolvency or in the likelihood of Insolvency
When a company faces financial difficulties and is veering towards insolvency, the Directors cannot remain passive and hope for the best, as this may result in personal liability, administrative penalties and possibly lead to claims of fraud, fines and imprisonment.
The Companies Act is the legal instrument which determines the directors’ liability for insolvency related duties. Certain fiduciary duties however may even be found in the articles of the Civil Code.
Duty to File for Insolvency
Article 329A of the Companies Act provides that where the directors become aware that the company is unable to pay its debts or is imminently likely to become unable to pay its debts, they shall convene a general meeting of the company to review the company’s position and to determine the next steps that should be taken. The next steps would usually involve either the dissolution of the company or some form of restructuring.
Fraudulent Preference
In terms of the Companies Act, any act which dispossesses the property or rights of the company made within 6 months prior to the dissolution of the company, shall be deemed to be a fraudulent preference against its creditors if it is made gratuitously or at an undervalue or if preference to any creditor is given. A person who benefits from such disposition shall be liable personally in terms of the Companies Act (Art 303 of the Companies Act).
Duty to Keep Proper Accounting Records
Directors may incur liability when proper accounting records are not kept by the insolvent company (Art. 314 of the Companies Act). Whenever a company is dissolved, if it is shown that:
Proper accounting records were not kept by the company throughout the 2 year period immediately preceding the dissolution, or the period between the registration of the company and the dissolution, whichever is the shorter; and
The company was, at the moment of its dissolution, unable to pay its debts; every officer of the company who is in default shall, unless he shows that he acted diligently and that in the circumstances in which the business of the company was carried on the default was excusable, be guilty of an offence and liable on conviction to a fine of not more than €46,587.47 or imprisonment for a term not exceeding 3 years, or to both such fine and imprisonment.
Fraudulent Trading
Fraudulent trading may be defined as the carrying on of any business of the company with intent to defraud:
creditors of the company; or
creditors of any other person; or
for any fraudulent purpose.
Directors of a company may be held responsible for fraudulent trading (Art 315 of the companies Act) if any business of the company has been carried on with intent to defraud creditors. One of the preconditions for responsibility to arise is the knowledge of the directors that they were parties in the carrying on of the business with intent to defraud creditors. If the court is satisfied of such fraudulent behaviour, it may order that the directors be personally liable for all or any of the debts or other liabilities of the company, as the court may direct.
In order for such an act to be classed as a fraudulent act, it must have been performed prior to the dissolution of the company. An claim for fraudulent trading may be brought before the court during the winding up procedure, whether such procedure is a members’ or creditors’ voluntary winding up, or a winding up by the court.
An application for fraudulent trading may be filed by:
the Official Receiver;
the liquidator; or
any creditor or contributory of the company.
Wrongful Trading
An action for wrongful trading may be instituted on the basis of Article 316 of the Companies Act. It applies to both directors as well as to shadow directors, being persons who would have taken the role and performed the functions attributable to a director, without having been formally appointed as director. Claims pursuant to this provision bring about personal liability of the directors to make a payment towards the company’s assets of a contribution in the amount as the court may order.
Liability under this provision arises when a company has been dissolved and is insolvent, and it appears that the director/s (i) knew, or (ii) ought to have known, prior to the dissolution of the company that there was no reasonable prospect that the company would avoid being dissolved due to its insolvency.
An action for wrongful trading may only be initiated by the liquidator of the company, and therefore by implication may only be brought during the winding up process.
One last consideration which becomes relevant in view of the wording of this article is the term ‘ought to have known’. The law specifies that the facts which a director of a company ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take, are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both:
the knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by or entrusted to that director in relation to the company; and
the knowledge, skill and experience that the director actually has.
Other Offences
Article 309 of the Companies Act provides for certain offences by officers of the company (therefore including directors are included) during the winding up procedure. For instance, such officers may be held liable for not revealing to the liquidator all the assets of the company and not delivering the accounts and records to the liquidator. Directors of a company may also be found guilty of committing fraud either in anticipation of dissolution or during the winding up itself. Any person found guilty of any one of these offences may be liable on conviction to a fine (multa) of not more than €232,937.34 or imprisonment for a term not exceeding 5 years, or to both such fine and imprisonment.
Ranking of Creditors
When a company is insolvent the liquidator should distribute the assets of the company in a pro rata manner among its creditors. This is known as the pari passu principle (Art. 287 of the Companies Act). This notion is subject to various exceptions, such as when there are secured creditors who lawfully enjoy a preference over other creditors. The whole process is referred to as the Ranking of Creditors. The liquidator faces no easy task when it comes to establishing such ranking of creditors since the laws which give preference to one creditor over another, even if both enjoy a right of preference, are scattered throughout various chapters of Maltese law. There is no one single piece of legislation which lists the causes of preference and how these are to be ranked. Liquidators do enjoy the additional guidance derived from court judgements which throw some light on how such preferences are to be ranked. Even though our system does not abide by the principle of binding precedent, decisions of Superior Courts are bound to be upheld at least by the Inferior Courts. Below is a review of how certain causes of preference are likely to be treated.
With regards to claims from employees, such as claims for salaries, holiday pay or pension contributions, these would be treated with preference over other claims. This rule emerges from Article 20 of the Employment and Industrial Relations Act, Chapter 452 of the Laws of Malta, which provides that a claim by any employee shall constitute a privileged claim over the assets of the employer and shall be paid in preference to all other claims. Claims which rank higher are usually the ones listed below. However, it is up to the court to decide in view of the fact that in ranking such debts the wording of the law gives some leeway to the court in setting the order of priority.
expenses properly chargeable or incurred by the Official Receiver or the liquidator in preserving, realising or collecting any of the assets of the company;
any other expenses incurred or disbursements made by the Official Receiver or under his authority, including those incurred or made in carrying on the business of the company;
the remuneration of the provisional administrator, if any;
any necessary disbursements by the special controller in the course of his office in terms of Articles 329A and 329B of the Companies Act;
the remuneration of the special controller;
the costs of the applicant and of any person appearing on the application whose costs are allowed by the court;
the remuneration of the special manager, if any;
any amount payable to a person employed or authorised to assist in the preparation of a statement of affairs or of account;
any allowance made by order of the court, towards costs on an application for release from the obligation to submit a statement of affairs, or for an extension of time for submitting such a statement;
any necessary disbursements by the liquidator in the course of his administration, including any expenses incurred by members of the liquidation committee or their representatives and allowed by the liquidator;
the remuneration of any person employed by the liquidator to perform any services for the company, as required or authorised by the provisions of the Companies Act;
the remuneration of the Official Receiver and of the liquidator;
any new financing granted to the company for the purpose of a recovery procedure in terms of articles 329A and 329B of the Companies Act.
The ranking of other creditors remains as established within the various applicable laws.
Disclaimer
This document does not purport to give legal, financial or any other advice. Please be directed to seek appropriate advice from accredited professionals. Do not hesitate to contact the Insolvency and Receivership Service for further information if necessary or for any clarification.