Last Updated on July 20, 2020
The Likeliness of Insolvency and Applicable Procedures
The Directors of a company have various duties at law. One such duty is to maximise the returns in order to be able to pay all the company’s debts. This brings about a situation where if the company is viable and through adequate measures the business of the company can be saved, thus it will be in a position to honour and pay off all its debts, then such measures would be preferred from procedures leading to the insolvent liquidation of the company. Therefore, the Directors would be duty bound to seek the restructuring of a company, as opposed to its dissolution. This only applies if the company is viable.
By definition, viable companies are those which can be turned around to profitable business. It is advisable that such companies should attempt a restructuring process, rather than dissolution. If successful, apart from saving the business itself, it saves jobs, helps reduce non-performing loans, and is therefore beneficial to the economy. A key principle to successfully avert insolvency is to act at the early signs. The following procedures are contemplated in the Companies Act:
Compromise or Arrangement between a Company and its Creditors
This involves a procedure whereby the court orders a first meeting between the debtor and its Creditor/s (Art 327(1)(a) of the Companies Act). Negotiation of a compromise ensues out of court, and if it meets the approval of creditors and the debtor company, this would be binding, so court involvement is minimal. However, the court could be involved a second time, in order to cram down (order) the compromise over any dissenting Creditor/s.
Out-of-Court Voluntary Mediation
Another tool which aims at reaching a compromise or arrangement is through the intervention of a mediator chosen by the parties themselves (Art 327(1)(b) of the Companies Act). This is an out-of-court procedure, which requires unanimous agreement between the debtor company and its Creditor/s.
Company Recovery Procedure (CRP)
The last formal type of restructuring is a Court procedure known as the CRP (Art. 329B of the Companies Act). It is the most comprehensive tool, one which gives some breathing space to companies in the form of a moratorium against court actions. Through the appointment of a professional, or a person with experience in the administration of companies, referred to as the Special Controller (SC), a restructuring plan would be to drawn up for the recovery of the company in order to avert dissolution in view of its insolvency or likeliness of insolvency.
If a director becomes aware that the company is unable or imminently likely to pay its debts, such director shall call a meeting of the company to discuss whether the company should be dissolved or, whether the company should make a company recovery application in terms of Article 329B.
A company recovery procedure in terms of Article 329B may therefore be initiated even if there is a likeliness of insolvency. The insolvency tests are the same as those for Dissolution by the Court, that is the Liquidity Test and the Balance Sheet Tests, with the slight difference that the Court would investigate the likeliness of the company to become insolvent.
The Director is duty bound to send a notice to the shareholders calling a General Meeting of the company (Article 329A of the Companies Act), by not later than 30 days from when the insolvency or likeliness of insolvency became known to him. The meeting would be called for a date not later than 40 days from the date of the notice, and the purpose of the meeting would be that of reviewing the company’s position and of determining what steps should be taken to deal with the situation, including consideration as to whether the company should be dissolved or, where applicable, whether the company should make a company recovery application in terms of Article 329B.
If a company recovery application made to the Civil Court (Commercial Section) is acceded to, the appointed SC would take over, manage and administer the business of the company for an initial period not exceeding 4 months, although this may be extended twice by further periods of 4 months each time (Art 329B (1) (d) of the Companies Act), if good cause is shown. The SC will decide on the extent of control to be given to the Company itself, as much as possible leaving the debtor in possession, so long as no prejudice is created to creditors.
The SC appointed by the Court would be an individual from the list of individuals eligible to occupy the office of SC held by the Official Receiver. Recent Regulations provide for the setting up of a Fund by the Malta Business Registry and administered through the Office of the Official Receiver, for the payment of fees due to SC up to a maximum of five thousand Euros per company. An additional sum of five thousand Euros may be used for the payment of immediate and necessary expenses of the company. These maximum amounts can be exceptionally extended in complex and in cross border cases.
The funds which are paid out in relation to a company are recoverable interest free from the company itself, if the company returns to profitable business, or if the procedure fails, from the liquidation proceeds.
One last feature brought about by these Regulations relates to the identification of a pool of professionals or experienced entrepreneurs (SC) to form part of a list of individuals held by the Official Receiver. The aim is to provide the Court with valid professionals or persons with hands-on experience for appointment as SC.
This document does not purport to give legal, financial or any other advice. Please be directed to seek appropriate advice from warranted professionals. Do not hesitate to contact the Office of the Official Receiver for further information if necessary or for any clarification.