Malta: The Company Recovery Procedure Under Maltese Law: A Lifeline For Companies In Financial Distress

When a company finds itself in financial hardship, and the interested parties, such as the shareholders, the directors, or even the creditors, of the company wish to safeguard the interests of the company and its creditors without proceeding directly to winding up the company, the Maltese Companies Act (Chapter 386 of the Laws of Malta) offers a lifeline by way of the Company Recovery Procedure under Article 329B of the same Act.  This concept is also known as 'company rescue' and was introduced into Maltese law in 2003, and considering it is a fairly recent addition to Maltese law, case law in this regard is not yet comprehensive, albeit available.  The concept, in general, is similar to that of 'administration' under English company law.¹

In fact, where a company is unable to pay its debts or is imminently likely to become unable to pay its debts, a company recovery procedure application may be made to the Maltese Court requesting it to place the company under such procedure and to appoint a special controller to take over, manage and administer the business of the company for a period of time. This application may be done by the company after an extraordinary resolution, by the directors upon a decision of the Board (specifically following a notice made once the company is unable to pay its debts or imminently so, or the general meeting may not convene or there is conflict therein), or creditors of the company representing more than half in value of the company's creditors or by creditors forming part of a class of creditors if such creditors represent more than half in value of the company's creditors in that class. Therefore, various stakeholders may proceed with submitting such application and this further protects the interests of all involved in the company in distress.  Showing proof of such valid submission at law is paramount.  In fact, in a 2014 case, the Court dismissed the application because the applicants did not provide the original or a legal copy of the extraordinary resolution of the general meeting of the company approving the application for the procedure.² The appointment of the special controller must be made for a period not exceeding four months and may by extended by the Court, upon good cause being shown, for further periods of four months, for a total aggregate of a further eight months.  The legislator clearly intended for such recovery procedure to be temporary and to find a balance between giving the company time to be able to recover but also, at the same time, proceed to winding up the company in due time if this is required and without further debilitating the company and leaving the stakeholders involved in limbo for too long of a time period.  As often quoted by the Court in decisions regarding this procedure,³ Prof Andrew Muscat specifies that:

"The primary aim of this far reaching procedure is to allow, if practicable, companies in financial difficulty to recover rather than to be put into liquidation.  The procedure is intended to be an alternative to the liquidation of a troubled business.  It is not however intended to make effective insolvency or to merely postpone the inevitable crash."⁴

Therefore, the application to the Court must give the full facts, circumstances and reasons which led to the company's inability or likely imminent inability to pay its debts, together with a statement by the applicants as to how the financial and economic situation of the company can be improved in the interests of its creditors, employees and of the company itself as a going concern. The application, in fact, would include attachments such as a list of creditors together with an indication of the amount due to each creditor and the security of the respective creditors, a statement of the company's assets and liabilities made up-to-date and in any case not earlier than two months prior to the application, and other related information which the applicants would view as relevant to their case. The Court will either dismiss the application or issue a company recovery order, and this is issued only if it is satisfied that the company is, or is imminently likely to become, unable to pay its debts and if it considers that the making of the order would achieve either the survival of the company as a viable going concern in part or in whole, or the sanctioning of a compromise or arrangement between the company and its creditors (or class of creditors) by way of a mediation process which is regulated by the same Companies Act. In making the order, the Court takes into consideration various aspects such as the best interests of the creditors, the shareholders and the company itself, the possibility of safeguarding employment as is reasonably and financially possible, and the cost to be incurred by adopting the said procedure.  The Court has up to forty working days to take its decision.

As already mentioned, the Court takes a decision as to whether the application should be dismissed or not based on the specific circumstances of the case at hand, and in consideration, and upon satisfaction, of all the elements present at law.  Therefore, the acceptance of placing a company under the procedure in question is not a foregone conclusion.  In the Sakaras Holding Limited⁵ case, the applicant had shown that the company could not repay its debts and was in a state of insolvency. It attempted to prove that they had a valid recovery plan, however, the Court was not convinced that its future financial prospects were so positive that even if presently it was in a state of insolvency they could return it to being a viable holding company.  The Court noted that the company needed a capital injection which the shareholders were vaguely open to but did not commit to.  Additionally, when the creditors were asked for their opinion by the Court, they made it clear that the recovery plan proposed by the company was not credible.  In its decision to dismiss the application, the Court pointed out that the attempt to place the company under the company recovery procedure was a desperate attempt to stay liquidation proceedings that were already initiated, and thus, the recovery plan was merely reactive and not proactive.  The Court made clear that such a procedure has the sole scope of saving the company and that with the proper cautionary steps the company would be able to return to a position of generating profit.  The plan proposed by the applicant would need to satisfactorily provide for such viability for the company.  In the More Supermarkets⁶ case, the Court reiterated the principles laid down in its decision two years prior, and explained that in this case, the proposed plan was merely verbal and the director of the shareholder of the company even declared that such plan was inexistent.  The Court provided that the intention for this procedure was a specific one and it could not be used by the directors as an attempt to avoid the complete and inevitable collapse of the company, to the detriment of its creditors.  The Court was convinced, in this case, that the state of insolvency of the company was irriversible and therefore it dismissed the application.⁷

In the more recent Executive Services Limited⁸ case, then, the applicant showed in its statement that the company started losing profit and operating badly because of fraudulent behaviour by a trusted director of the same company and once one of its biggest clients, also connected to the mentioned director, was no longer able to pay its debts.  The owner of the company was shown to be trustworthy and the application included a distinct and clear proposal for an agreement with its biggest creditors in order to be able to continue operating and pay its debts over a period of time.  The auditor of the company and the creditors themselves, when requested, declared that they agreed to the placing of the company under the procedure.  The Court explained that although the financial situation of the company was compromised, it saw that this procedure, instead of liquidation proceedings, was in favour of the creditors and the company itself and the proposed agreement as put forward by the applicant, and confirmed by the creditors themselves, was a viable one.  Therefore, it accepted the application and provided for the appointment of the special controller in order to administer the company for a period of twelve months (the maximum period allowed at law).

Upon the submission of an application and unless it is dismissed, or throughout the period during which the procedure is in force, amongst other effects of this procedure, any and all winding up related resolutions or applications are stayed or may not be given effect to, no steps may be taken to enforce any security over the property of the company, the execution of money claims against the company and any interest thereon are stayed, no precautionary or executive acts of warrants shall be made or continued against the company, or any of its property, no arbitration proceeding shall be made or continued against the company or any property of the company, and no judicial proceedings shall be commenced or continued against the company or its property.  Thus, the effects of such a procedure are quite wide-spread and the company is safeguarded from any event that might debilitate its financial situation further pending this procedure.

The special controller, as appointed by the Court, shall carry out the functions and powers in relation to the administration and management of the property and business of the company as the Court may entrust him with. The Court shall also fix the remuneration for the special controller, as it considers reasonable and appropriate, as well as determine the period (not exceeding ten working days) within which the company may deposit a sum of money with the Court, or come to another arrangement to the satisfaction of the Court, in order to secure the remuneration and charges of the special controller connected to his appointment. The special controller must be someone with competence and experience in business enterprises' management and the Court may appoint an individual from the list of eligible individuals for special controllers as held by the Official Receiver (which is a senior officer of the Malta Financial Services Authority responsible for companies).

The special controller must examine the financial situation of the company and verify whether there is a reasonable expectation for the company's recovery and continuation as a viable going concern, and he shall submit such report to the Court within two months from his appointment. Any power conferred upon directors, company and officers shall be suspended unless the special controller gives his consent for such power to be exercised, and no meeting may be convened without leave of the Court.  Therefore, it is clear that upon the company recovery procedure being in place, the company remains in the sole hands of the special controller under the authority of the Court.  The special controller is obliged to perform his functions fairly and equitably taking into account the best interests of the company, its shareholders and creditors together with the interests of any other interested party.  The special controller may remove directors, and call any meetings of the members or creditors of the company. He shall not engage the company into any commitment of more than six months, he shall not terminate the employment of company employees, and he shall not sell or dispose of property of the company to himself, his spouse or relatives, unless there is express authorisation of the Court. With authorisation of the Court, and upon good cause being shown, the special controller may also extend his appointment and functions to any company being a group company in relation to the company previously put under the company recovery procedure. The concepts of fraudulent trading and wrongful trading under Maltese law continue to apply once a company is under a company recovery procedure, and in any case, any director may be found guilty of such offence during such time as the company recovery procedure is in force. The special controller is given instructions and orders by the Court as it deems fit, and he may be removed or changed upon application of any member or creditor or of its own motion if the case necessitates.

At the end of the period of appointment (whether the original or extended), the special controller is obliged to submit to the Court a comprehensive report containing his proposals regarding the prospects for the recovery of the company as a viable going concern in whole or in part.  The Court, within a period not exceeding twenty working days from the termination of the period of appointment of the special controller, and any extension thereof, shall declare the termination of the company recovery procedure, and that the company has recovered, or that it shall be dissolved and wound up, irrespective of whether it has received the appropriate reports from the special controller in this regard. Furthermore, upon request for the termination of the company recovery order, which may in any case take place at any time as the special controller deems fit and by way of an application in that regard submitted by the special controller, the procedure shall be terminated and the company may either proceed to be wound up by the Court, if there is no prospect of viability for the company, or continue to operate if it is deemed that the affairs of the company have improved to the extent that it is in a position to pay its debts.  In this event, the procedure shall be terminated in accordance with any conditions and provisions that the Court may deem necessary in that particular case.

As already mentioned, in any event, at the end of the period of his appointment, the special controller is obliged to submit a comprehensive report as to whether or not the company has a reasonable prospect of continuing as a viable going concern in whole or in part and will be able to pay its debts regularly in the future. In the case that the special controller is of the opinion that the company has such a reasonable prospect, his report shall also contain a precise recovery plan for the company. The Court may either reject or approve such plan, also making amendments if deemed necessary and such plan shall be effective and binding on all interested parties for all purposes of law. Such recovery plan may also include the seeking of new financing. As already explained, if the Court deems that the company has no reasonable prospect of continuing as a viable going concern and will not be in a position to pay its debts regularly in the future, it shall order that the company is wound up by the Court.  Therefore, it is clear that once the company recovery procedure is kick-started, the stakeholders of the company in question are certain that, one way or the other, the company's situation shall not continue to remain in a perennial state of uncertainty and stagnation.

The company recovery procedure is a fairly new addition to Maltese law.  It is not regularly applied for by companies, however, it may be a valid lifeline for a company which is close to, or is, insolvent and has prospects of saving itself with the correct and cautious administration, and supervision from the Court.  However, such prospects must be clearly shown by the applicant upon application and the procedure is not one which is automatically provided for.  This difficulty may be one of the reasons as to why few cases regarding such procedure are available, and it is possible that in order to provide for further accessibility to such a lifeline it could be amended in ways that allow independent and expert administration and management of a company to be provided even when the proposals for improvement are not fully detailed and outlined by the applicant, especially since part of the special controller's duties is that of analysing the financial position and prospects of the company in question and providing a binding recovery plan if possible.  Nevertheless, this would need to be balanced against the risk of having companies access this procedure in order to avoid liquidation without valid purpose.

*Part of this article has already been published in Marine Money Magazine, October/ November 2017 Legal edition.