Insolvency 2024 Comparisons

The Companies Act (Chapter 386 of the Laws of Malta) is the main body of legislation regulating companies and the solvent and insolvent dissolution and liquidation of companies generally. The Companies Act must, however, be read in conjunction with:

• the Pre-Insolvency Act (Chapter 631 of the Laws of Malta);
• the Insolvency Practitioners Act (Chapter 632 of the Laws of Malta); and
• the Commercial Code (Chapter 13 of the Laws of Malta).

The Companies Act specifically regulates the liquidation and insolvency of limited liability companies, while the Commercial Code regulates “bankruptcy”, which applies to registered commercial partnerships other than limited liability companies (ie, partnerships en nom collectif and partnerships en commandite) and to the personal bankruptcy of “traders” (as defined in the Commercial Code).

The Pre-Insolvency Act and the Insolvency Practitioners Act regulate preventive restructuring procedures in a pre-insolvency context, as well as the office of the “insolvency practitioner”.

Maltese law refers to “dissolution”, which is the first step of the process, and consequent “liquidation” or “winding-up”, which are generally used interchangeably, and which may be:

• voluntary or by the court; and
• solvent or insolvent.

A voluntary liquidation can take the form of either:

• a members’ voluntary winding-up (solvent); or
• a creditors’ voluntary winding-up (insolvent).

Similarly, a winding-up by the court can also be either solvent or insolvent, though in practice court-controlled winding-up procedures are typically applied for in an insolvency scenario.

From a restructuring perspective, the Companies Act provides for a “company recovery procedure” as well as for “company reconstructions”.

With the implementation of the Pre-Insolvency Act, which partially transposes Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (amending Directive (EU) 2017/1132 on restructuring and insolvency), the “preventive restructuring procedures” were also recently introduced into Maltese law as another restructuring mechanism, to strengthen the legislative framework relating to insolvency and to provide for a pre-restructuring and restructuring framework.

The different statutory officers in this field include the following.

• “Liquidators”, who can be appointed by the shareholders, the creditors and/or the court for the company in liquidation.
• The “official receiver”, who is a public official and who may be appointed as liquidator of a company by the court, typically in court liquidations.
• “Special controllers”, who are appointed by or with the approval of the court when a company is undergoing a company recovery procedure.
• “Provisional administrators”, who can be appointed after the presentation of a court winding-up application but before the making of a winding-up order, to assume such powers, functions and responsibilities with regard to the company as the court may direct, until a decision as to whether the company should be put into liquidation is taken by the court.
• “Bankruptcy trustees”, who are appointed in the bankruptcy of partnerships en nom collectif and en commandite under the Commercial Code.
• “Insolvency practitioners”, who are specifically required to be appointed in the context of preventive restructuring procedures under the Pre-Insolvency Act. Currently, liquidators of insolvent companies also require an insolvency practitioner authorisation to so act, under the Insolvency Practitioners Act. 

Examples of common creditors of companies in an insolvency scenario include:

• employees;
• government departments;
• tax authorities;
• institutional lenders (such as banks);
• shareholders;
• lessors of property leased to the company; and
• general trade creditors.

The pari passu principle is an important facet of Maltese corporate insolvency law that asserts that all creditors shall rank equally. An exception to this rule exists when the company’s liabilities exceed its assets and the company is “unable to pay its debts” as defined in the Companies Act. In that case, a form of ranking or lawful cause of preference is required to be able to give priority to those creditors who have a secured debt or a preferential claim, as opposed to other unprivileged creditors who will be treated rateably in relation to the residual assets (if any) of the insolvent company that has been liquidated.

Under Maltese law, the priority and ranking of creditors in an insolvency scenario emanates from a number of different pieces of legislation. See 2.2 Priority Claims in Restructuring and Insolvency Proceedings.

Owing to the lack of one defined list of priority claims in Maltese law, the authors have focused on the typical creditors in insolvent liquidations, which in practice take the form of court liquidations. This list should therefore not be taken as exhaustive.

• 1) Costs, charges and expenses incurred in the winding-up – here the court will determine the order of priority as it thinks fit, but will have regard to a general order of priority specified in Article 258 of the Companies Act. Expenses properly chargeable or incurred by the official receiver or the liquidator in preserving, realising or collecting any of the assets of the company will rank first, and any new financing granted to the company for the purpose of a recovery procedure under Articles 329A and 329B will rank last, for example.
• 2) Moneys due to employees – this includes wages, compensation for leave that the employee is entitled to, and any compensation due to the employee in consideration of the termination of employment or of any notice period.
• 3) Claims by the director of social services for any amount due in terms of social security contributions.
• 4) Tax due under the Income Tax Management Act and the Value Added Tax Act.
• 5) Tax due in terms of the Duty on Documents and Transfers Act.
• 6) Privilege of the Commissioner of Inland Revenue.
• 7) Pledges – the pledgee will have a prior ranking right over the asset or assets subject to the pledge.
• 8) Security by title transfer – the person receiving an asset as security under title of security by title transfer will acquire ownership of the asset and will have a right to retain such asset on the insolvency of the debtor company.
• 9) General privileges and special privileges – a number of general and special privileges emanate from Maltese law, specifically the Civil Code (Chapter 16 of the Laws of Malta). These are preserved in virtue of a public deed registered at the public registry and, if so registered, grant a prior ranking right to the creditor over the assets (general or specific) of the debtor company.
• 10) General or special hypothecs – like privileges, these are preserved in virtue of a public deed registered at the public registry and, if so registered, grant a prior ranking right to the creditor over the assets (general or specific) of the debtor company. Hypothecs rank after privileges.

Under Maltese law, security can take the following forms.

• Special hypothecs over immovable property.
• General hypothecs over all the property of the debtor, both present and future.
• Pledges of movable assets, shares in companies and/or bank accounts.
• Security by title transfer for movable property (both tangible and intangible). Trade marks (for example) are subject to registration in Malta – following the enactment of the Trademarks Act 2019 (Chapter 597 of the Laws of Malta) and the Trademark Rules, it is now possible to take specific security and register rights in rem over trade marks.
• Mortgages over ships and aircraft.

Outside a restructuring or insolvency context, enforcement will differ depending on the type of security. Generally, creditors seeking to enforce their security against the debtor’s assets are required to submit an application in court to that effect, in order to obtain a court judgment and potentially force the sale of the assets through a judicial sale by auction mandated by the court. Exceptions apply in relation to aircraft, where rights to enforce security over aircraft assets can be exercised without leave of court.

However, in the case of security by title transfer, ownership is transferred to the creditor upon the security being created, with possession being retained by the borrower; therefore, without prejudice to the relevant agreement, there is no need to resort to court for enforcement in an event of default as the creditor may, upon giving notice in writing to the debtor, be entitled to realise the property by sale or by setting off or netting its value, if so agreed.

The enforcement of a pledge of shares is specifically regulated in the Companies Act; in an event of default, without prejudice to applying for a judicial sale by auction of the shares, the pledgee may, upon giving notice by judicial act to the pledgor and the company, dispose of the shares and acquire them themself, in settlement of the debt due to them or of a part thereof.

Unsecured creditors can apply to the court to issue a precautionary warrant against their debtors under Title VI of the Code of Organisation and Civil Procedure (Chapter 12 of the Laws of Malta).

These include:

• a warrant of description;
• a warrant of seizure;
• a warrant of seizure of commercial going-concern;
• a garnishee order;
• a warrant of impediment of departure;
• a warrant of arrest of sea vessels;
• a warrant of arrest of aircraft; and
• a warrant of prohibitory injunction.

A precautionary warrant would need to be followed up with the filing of court proceedings within 20 days.

While parties can agree to follow out-of-court bespoke restructuring processes, no formal requirements exist, and it is not mandatory to enter into consensual restructuring negotiations before proceeding with formal statutory restructuring proceedings.

However, if there is a likelihood of insolvency, or if the company is unable to pay its debts or is imminently likely to become unable to pay its debts, the directors and the shareholders may have the duty to at least consider proceeding with statutory restructuring procedures in terms of Maltese law, all of which include some sort of court involvement (though some more than others).

No information is available on this topic.

A number of different statutory restructuring procedures exist under Maltese law, though in practice these have rarely been resorted to, and, when they have, have rarely been successful; as such, the company typically ends up in insolvency proceedings anyway. That said, the following restructuring procedures exist, though they are not mandatory.

Company Reconstructions

These apply where a company (which is unable to pay its debts) enters into a binding compromise or arrangement with its creditors or any class of them, or with its members or any class of them, in one of two ways.

• The company, any creditor, member or liquidator may submit to the court an application to order a meeting of the creditors or members (as the case may be) to be called in such manner as the court directs. If two thirds of the value of creditors or members present and voting (as the case may be) agree to the compromise or arrangement, and if this is sanctioned by the court, it will become binding on all relevant persons.
• The company or any creditor with the sanction of not less than two thirds of the creditors or class of creditors may seek the appointment of a mediator, who must organise a meeting of the creditors or a class thereof for the creditors to reach a compromise or arrangement. If all the creditors agree to execute a written agreement containing a compromise or arrangement, such arrangement will be binding on all creditors as well as on the company or, in the case of a company in the course of being wound up, on the liquidator.

Company Recovery Procedure

A company that is unable to pay its debts, or that is imminently likely to become unable to pay its debts, can apply to the court for a company recovery order, in which case the court will appoint a special controller to take over and administer the business for a period as specified by the court. The court will accede to a company recovery application and give the order if it is satisfied that it is likely to achieve the survival of the company as a viable going-concern (in whole or in part) or the sanctioning of a compromise or arrangement between the company and any of its creditors or members. A company recovery application can also be filed by the directors of the company or by the 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.

Preventive Restructuring Procedure

The directors of the company can make a preventive restructuring application to the court (provided this is endorsed by an insolvency practitioner) to the extent that the company:

• is exposed to a likelihood of insolvency and has reasonable prospects of viability;
• has not become liable for the payment of a debt that has remained unsatisfied in whole or in part after 24 weeks from the enforcement of an executive title against the company, or has not been otherwise declared unable to pay its debts; and
• has not been admitted to preventive restructuring procedures in the last three years from the date of application.

While company reconstructions and the company recovery procedure apply to companies that are unable to pay their debts or that are imminently likely to become unable to pay their debts, the preventive restructuring procedure applies to “debtors”. This includes companies, partnerships en commandite and en nom collectif, associations and foundations, but excludes credit institutions and investment firms, as long as they satisfy the conditions mentioned above. The preventive restructuring procedure can take the form of:

• a standard preventive restructuring procedure;
• a pre-formulated preventive restructuring procedure; or
• a pre-approved preventive restructuring procedure.

Although the above-mentioned procedures are optional, directors and shareholders have the obligation to call certain meetings for the opportunity to discuss the necessity (or otherwise) of the company proceeding with such restructuring procedures.

A binding compromise or arrangement in a company reconstruction can be imposed on the creditors or a class of creditors, or on members or a class of members, as long as it is approved by persons present and voting as well as representing two thirds in value; and it must be sanctioned by the court. Every notice for a meeting of the creditors or members must have a statement explaining the effect of the compromise or arrangement, and in particular stating any material interests of the directors of the company – whether as directors, members or creditors of the company, or otherwise – and the effect on those interests of the compromise or arrangement, in so far as this differs from the effect on the similar interests of other persons.

The company recovery procedure and the preventive restructuring procedure delineate that creditors with different interests should be treated in separate classes. Both processes require due consideration to be had for the best interests of the creditors, the shareholders of the company, and the employees and other stakeholders. Stays on enforcement action exist in the context of both procedures, and are dealt with in 4.6 The Position of Shareholders and Creditors in Restructuring, Rehabilitation and Reorganisation.

In a company recovery procedure, the court will decide whether to accept or reject the proposed recovery plan, and may require amendments thereto. Dissenting creditors can appeal, as specified in 4.3 The End of the Restructuring, Rehabilitation and Reorganisation Procedure.

In a preventive restructuring procedure, the proposed restructuring plan will be adopted by the affected parties if approved by not less than two thirds of the affected parties in each class, with reference to the value of the claims represented. The insolvency practitioner will then file an application in court requesting confirmation of the plan to make it binding on all affected parties. If the restructuring plan is not so approved, cross-class cram-down is possible, whereby the restructuring plan is deemed to be adopted if, in the view of the insolvency practitioner, the restructuring plan satisfies at least the following conditions:

• the best-interest-of-creditors test;
• the plan will not result in any class of affected parties receiving economic value in excess of the full amount of its claims;
• any dissenting classes are treated at least as favourably as any other class of affected parties that would rank equally with them in a normal liquidation ranking, and more favourably than those parties with lower ranking claims in the context of a liquidation; and
• the plan is approved for adoption by at least one class of affected parties who would, if the normal liquidation ranking applied, receive payment of their claims in whole or in part.

Even in this case, the insolvency practitioner will then file an application to the court to confirm the restructuring plan, to make it binding on all affected parties. The court has 30 days from receipt to approve or reject the restructuring plan. This is subject to appeal.

A binding compromise or arrangement that has been reached will take effect once it is delivered to the Registrar of Companies for registration, and a copy thereof is annexed to every copy of the company’s memorandum issued thereafter.

In dismissing or acceding to a company recovery procedure application, the court will take into account the best interests of the creditors (with consideration being given to the different classes thereof), of the shareholders and of the company itself, as well as the possibility of safeguarding employment in so far as reasonably and financially possible. If acceded to, the directors, members at an extraordinary general meeting or the special controller (in consultation with the joint creditors’ and members’ committee) can, at any time, apply to the court to terminate the company recovery procedure if the affairs of the company have improved and the company is able to pay its debts. In this case, a recovery plan would need to be included, which must contain all relevant proposals to enable the company to continue as a viable going-concern. If, however, the special controller believes that the procedure would serve no further useful purpose, they can apply to the court for the termination; in this case, the court will order the company to be wound up.

Depending on the type of preventive restructuring procedure, termination may occur in a number of ways.

A standard preventive restructuring will automatically terminate upon the lapse of four months from the date of filing of the application, unless it is extended. Otherwise, if, at any time during which a standard preventive restructuring order is in force, it goes to the insolvency practitioner (after consulting with the officials of the debtor or creditors) to determine that:

• the affairs of the debtor have improved to the extent that the debtor is no longer exposed to a likelihood of insolvency;
• the affairs of the debtor have deteriorated to the extent that the debtor does not have reasonable prospects of economic viability; or
• a significant proportion of the debtor’s creditors do not support the continuation of negotiations and shall prevent the obtaining of necessary approvals for the restructuring plan.

The insolvency practitioner must request that the court terminate the preventive restructuring procedure, giving detailed and comprehensive reasons. The officials of the debtor or any creditor can also request termination on certain grounds. The court will not accede to or decline such applications without having first heard the insolvency practitioner, in so far as reasonably possible.

The insolvency practitioner may, at any time during which a pre-formulated preventive restructuring order is in force, file an application to the court to convert the procedure into standard preventive restructuring, if certain criteria established at law subsist; then, the above-mentioned procedure would apply for the preventive restructuring procedure to terminate.

A pre-approved preventive restructuring would likely not need to be terminated or converted, as the necessary approval for adoption would have already been obtained and would solely require the court’s stamp of approval.

Otherwise, the preventive restructuring procedure terminates once a restructuring plan is adopted, as specified further in 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure.

Whether or not the debtor can continue to operate its business in a restructuring procedure will depend on the chosen restructuring procedure.

In a company recovery procedure, the court may appoint a special controller to carry out such functions and powers as the court may entrust to them in the administration of the property and business of the company. New financing for the purposes of implementing a recovery plan can be obtained in the context of this procedure.

In a preventive restructuring procedure, the officials of the debtor must (in consultation with the insolvency practitioner) review any executory contracts the performances of which have not been concluded, and must re-evaluate the termination or potentially the renegotiation thereof, as long as this is conducive to the economic viability of the debtor. The renegotiation or termination of employment contracts will continue to be regulated by the relevant employment legislation.

In terms of interim financing, in a preventive restructuring procedure, the officials of the debtor company together with the insolvency practitioner must review whether the procurement of such interim financing is necessary to preserve the economic viability of the company until the confirmation of a restructuring plan; if it is deemed necessary, they can solicit proposals from third parties willing to provide the debtor company with such financing and take these to the insolvency practitioner for their approval.

In a company recovery procedure, a special controller is appointed to take over, manage and administer the business for a period as specified by the court.

Any preventive restructuring application must be made by or endorsed by an insolvency practitioner; as such, the insolvency practitioner plays an indispensable role in initiating the process. Throughout the process, the insolvency practitioner has a number of powers, including:

• the power to consult with interested parties (including creditors and the officials of the debtor with respect to any actions to be taken with the intention of negotiating a restructuring plan);
• dividing creditors into different classes; and
• seeking interim financing, if required.

When a company recovery order has been given by the court, many protections against enforcement action exist, including that:

• any pending or new winding-up application will be stayed;
• no resolution for dissolution can be passed by the company or given effect;
• the execution of claims of a monetary nature against the company will be stayed; and
• no steps to enforce security over property of the company may be taken.

Moreover, no judicial proceedings may be commenced with or continued against the company or its property except with leave of the court, as the court deems fit.

Under a preventive restructuring procedure, the debtor company is largely protected from creditor claims for a period of four months following the date of application. This is subject to the exception that the insolvency practitioner or the creditors may make an application for the court to remove such protections when that protection will cause substantial harm or financial distress to the creditor, for example. General exceptions to such protections also exist – for instance, in terms of actions in rem against ships and aircraft.

Notwithstanding anything in the constitutive instruments of the debtor or ancillary instruments thereto, in a preventive restructuring context equity holders of the debtor may not obstruct, in any way, the officials of the debtor from taking any lawful action in terms of the Pre-Insolvency Act.

Maltese corporate insolvency legislation outlines three main procedures that result in the liquidation and consequent striking-off of the name of a company from the register of companies. These procedures are the following:

• members’ voluntary winding-up;
• creditors’ voluntary winding-up; and
• winding up by the court.

Both a members’ voluntary winding-up and a creditors’ voluntary winding-up are triggered by shareholders passing an extraordinary resolution to dissolve and wind up the company voluntarily without court involvement.

When the directors of the company make a declaration of solvency, to the effect that the company will be able to pay its debts in full within such period not exceeding 12 months from the date of dissolution, the winding-up takes the form of a member’s voluntary winding-up. When no declaration of solvency is made, the winding up must take the form of a voluntary creditors’ winding up, as described below.

A creditors’ winding-up takes its name from the fact that the creditors are given more control over the winding-up of the company in light of the company’s state of insolvency. The date of dissolution will be deemed to be the date on which the extraordinary resolution of the shareholders is passed.

A winding-up of the company by the court may be instituted through an application filed in court, by any one of the following:

• the company itself following a decision by extraordinary resolution of the general meeting;
• the company’s board of directors;
• any debenture holder;
• any creditor;
• any contributory; or
• the Registrar of Companies.

The date of dissolution will typically be deemed to be the date on which the application for the winding-up of the company is filed in court; however, there are some exceptions depending on the grounds of dissolution and/or whether the dissolution of the company – albeit taking the form of a court winding-up – was instigated by an extraordinary resolution of the company.

These procedures apply to limited liability companies, while the bankruptcy provisions in the Commercial Code apply to individuals who are bankrupt.

In all cases, once the decision has been taken by the company itself or by the court to dissolve and consequently wind up the company, the company is said to be in a state of liquidation. Therefore, dissolution precedes the winding-up and subsequent striking-off of a company’s name from the register of companies.

Members’ Voluntary Winding-Up and Creditors’ Voluntary Winding-Up

In both cases, from the deemed date of dissolution, the company will cease to carry on its business except in so far as may be required for the beneficial winding-up thereof.

In a members’ voluntary winding-up, a liquidator is typically appointed to wind up the affairs of the company in the same resolution putting the company into dissolution. In a creditors’ voluntary winding-up, the directors must summon a meeting of the creditors, laying before such meeting a full statement of the position of the company’s affairs, together with a list of the creditors and an estimate of their claims. The board of directors must appoint a director to preside over the creditors’ meeting. A liquidator must be nominated in the creditors’ meeting and in the general meeting of the company.

If the nominated individuals are different, the nomination made by the creditors will take precedence and the appointment will be made accordingly. If no nomination is made by the creditors, the nominee of the general meeting of the company will be appointed. In a creditors’ voluntary winding-up, a liquidation committee may be formed by the creditors’ meeting with the intention of protecting the creditors’ interests.

In both cases, the liquidator will be obliged to summon any meetings of the shareholders or creditors of the company, as the case may be. On the appointment of a liquidator, all the powers of the directors and of the company secretary cease, except as specifically otherwise provided in the law.

In terms of a members’ voluntary winding-up, if, at any time after the declaration of solvency is made, the liquidator forms the opinion that the company will not be able to pay its debts within the 12 months as specified in the declaration of solvency, they must summon a meeting of the creditors, and must lay before the meeting a statement of the assets and liabilities of the company; they will also convert the members’ voluntary winding-up into a creditors’ voluntary winding-up.

In both a creditor’s and members’ voluntary winding-up, once the affairs of the company are fully wound up, the liquidator will prepare an audited account of the winding-up, detailing how the winding-up has been conducted and how the assets of the company have been disposed of in the course of the liquidation; they will then compile a scheme of distribution (if any) indicating the amount due in respect of each share from the residual assets of the company. The liquidator must then call a general meeting of the company and a meeting of the creditors (if required) for the purpose of laying the account and scheme of distribution (if any), together with the auditors’ report, before the meetings and provide any explanations thereof.

Court Winding-Up

Once a winding-up application is made to the court, the application is typically notified to the Registrar of Companies, which will then publish a notice on its online portal that the company is going to undergo a court winding-up, allowing any potential creditor to intervene in the proceedings to protect their interests. Once the application is received, the court sets the date for hearing, and subsequent sittings are held depending on whether sufficient evidence has been produced to enable the court to determine whether or not to put the company into liquidation. When a winding-up order is made, the court typically appoints the official receiver to act as liquidator of the company.

Where the court has made a winding-up order, a statement of affairs of the company – detailing its assets, debts and liabilities, creditors and the securities held by them, respectively, as well as any further information as may be required – must be submitted to the official receiver by the directors or any other founder, officer or employee of the company, as specified in the law and as may be requested by the official receiver. After the statement of affairs has been delivered to the official receiver, the official receiver must carry out an investigation into the company and submit a preliminary report to the court on the company’s affairs leading up to the dissolution. If they deem it fit, the official receiver may also make further reports on any other matter which, in their opinion, should be brought to the attention of the court.

Similar to the creditors’ voluntary winding-up, a liquidation committee may be appointed in order to assist the liquidator. In a court winding-up, the official receiver may summon separate meetings of the company’s creditors and contributories for the purpose of choosing a person to be liquidator of the company in their stead. It shall be the official receiver’s duty to summon a meeting to appoint a liquidation committee if one fourth of the value of the company’s creditors request it.

In a court winding-up, the court has power to:

• stay the winding-up proceedings;
• settle a list of contributories and to make calls on those contributories; and
• require any contributory, or any other person holding property to which the company is entitled, to deliver such property to the liquidator.

The court may also fix a time within which creditors are to prove their claims or are to be excluded from the benefit of any distribution made before those debts are proved. The court must adjust the rights of the contributories among themselves and distribute any surplus among the persons entitled thereto.

The affairs of a company are deemed to have been wound up when the liquidator:

• has realised all the property of the company as can, in their opinion, be realised without needlessly protracting the liquidation;
• has made an audited account of the winding-up, showing how the winding-up has been conducted and how the property of the company has been disposed of; and
• has drawn up a scheme of distribution indicating the contributory amount due from the assets of the company, if any.

In both the members’ and creditors’ winding-up, within seven days of the date of the final meetings, the liquidator must send to the Registrar of Companies a copy of the account and of the scheme of distribution (if any), together with the auditors’ report, and must include details of the holding of the meetings and of their dates.

The Registrar – on receiving the account, the scheme of distribution (if any), together with the auditor’s report and the details of the meetings – must register them forthwith; on the expiry of three months from the publication of the relevant notice, the Registrar will strike the company’s name off the Register, signifying the termination of the winding-up, and the company shall cease to exist.

In all winding-up procedures, subject to the provisions of any specific law relating to preferential debts or payments, upon its winding-up the property of a company will be applied in satisfaction of its liabilities pari passu, and, subject to such application, will (unless the articles provide otherwise) be distributed among the members according to their rights and interests in the company. In the winding-up of a company whose assets are insufficient to meet the liabilities, the rights of secured and unsecured creditors and the priority and ranking of their debts will be regulated by the law in force, for the time being.

In a court winding-up, there is an opportunity to request a “stay” of other judicial proceedings.

Moreover, any disposition of the property of the company – including any rights of action, transfer of shares, or alteration of the status of the company’s members – made after the date of its deemed date of dissolution, will be void, unless the court orders otherwise.

Similarly, any act or warrant (whether precautionary or executive), other than a warrant of prohibitory injunction, issued or carried into effect against the company after the date of its deemed dissolution, will be void.

The Companies Act does not provide that a voluntary winding-up will give rise to any stay on judicial or other proceedings. The liquidator may, however, apply to the court to determine any question arising in the course of the winding-up of a company, or to exercise all or any of the powers that the court might exercise if the company were being wound up by the court.

The major source of international insolvency law is Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the “European Insolvency (Recast) Regulation”), which is directly applicable in terms of Maltese law.

More recently, Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (amending Directive (EU) 2017/1132 on restructuring and insolvency) was transposed into Maltese law, with the introduction of the Pre-Insolvency Act, the Insolvency Practitioner’s Act and amendments to the Commercial Code.

In terms of the European Insolvency (Recast) Regulation, the criterion used to determine which country has jurisdiction to open insolvency proceedings (the “main insolvency proceedings”) is the centre of main interests (COMI). This shall be the place where the debtor conducts the administration of its interests on a regular basis, and which is ascertainable by third parties. In the case of a company, the COMI is presumed to be the place of registered office of that company, but this can be rebutted if there is proof to the contrary.

Where the COMI is situated within the territory of a member state, the courts of another member state shall have jurisdiction to open secondary insolvency proceedings against that debtor only if it possesses an establishment within the territory of that other member state. The effects of those proceedings shall be restricted to the assets of the debtor situated in the territory of the latter member state.

In terms of the European Insolvency (Recast) Regulation, save as otherwise provided in that Regulation, the law applicable to insolvency proceedings and their effects will be that of the member state within whose territory such proceedings are opened. That law will determine:

• the conditions for the opening of those proceedings, their conduct and their closure;
• in particular, the respective powers of the debtor and the insolvency practitioner;
• the assets that form part of the insolvency estate; and
• the treatment of assets acquired by or devolving to the debtor after the opening of the insolvency proceedings, for example.

Chapter II of the European Insolvency (Recast) Regulation specifies that any judgment opening insolvency proceedings, handed down by a court of a member state that has jurisdiction, must be recognised in Malta from the moment it becomes effective in the state of the opening of proceedings.

The judgment opening the insolvency proceedings will produce the same effects in Malta as under the law of the state of the opening of proceedings, with no further formalities required, unless the Regulation provides otherwise and as long as no secondary proceedings have been opened in Malta. Article 32 of the European Insolvency (Recast) Regulation then states that such judgments as are recognised in accordance with the recognition rules of the Regulation shall be enforced in accordance with Articles 39 to 44 and 47 to 57 of Regulation (EU) No 1215/2012 (the “Brussels Recast”).

Judgments from jurisdictions outside the EU can generally be enforced against a debtor in Malta pursuant to the provisions of Title V of the Code of Organisation and Civil Procedure (COCP), “Of the Enforcement of Judgments of Tribunals of Countries Outside Malta”.

For other judgments relating to claims by creditors (other than in insolvency proceedings), under the Brussels Recast, a judgment delivered by a court of an EU member state will be recognised and enforced in other EU member states (including Malta) without the need for any special procedure. A party seeking to enforce a judgment under this regulation must apply for a declaration of enforceability from the court of the member state of origin pursuant to Article 53, certifying the judgment’s enforceability. The certificate issued pursuant to Article 53, as well as a copy of the judgment (if not already served) must be served on the debtor in Malta. Once the debtor is notified in the manner stated above, the enforcing party must apply to the Maltese court for the enforcement of the judgment through of any of the executive acts available under Title VII or Part I of the COCP.

By derogation to the above, and depending on the state of the court of origin, specific legislation may regulate the recognition and enforcement procedure. Such legislation includes:

• the British Judgments (Reciprocal Enforcement) Act (Chapter 52 of the Laws of Malta), which applies to monetary claims only;
• the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the “Lugano Convention”); or
• the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters.

Like the Brussels Recast, these do not regulate insolvency decisions.

The European Insolvency (Recast) Regulation specifies that, in order to facilitate the co-ordination of main, territorial and secondary insolvency proceedings concerning the same debtor, a court before which a request to open insolvency proceedings is pending, or which has opened such proceedings, shall co-operate with any other court before which a request to open insolvency proceedings is pending, or which has opened such proceedings, to the extent that such co-operation is not incompatible with the rules applicable to each of the proceedings.

For that purpose, the court may, where appropriate, appoint an independent person or body acting on its instructions, provided this is not incompatible with the rules applicable to them. The courts or any person acting on their behalf may communicate directly with or request information from each other as long as procedural rights of parties to the proceedings and confidentiality of information is respected.

The same Regulation also regulates co-operation and communication between the insolvency practitioner in the main insolvency proceedings and the insolvency practitioner in secondary insolvency proceedings concerning the same debtor; these shall co-operate with each other to the extent that this is not incompatible with the rules applicable to each set of proceedings, and such co-operation may take the form of conclusion of agreements or protocols.

Foreign creditors are not dealt with differently – any foreign creditor may lodge their claims in insolvency proceedings in accordance with the standard procedure for filing such claims in Malta.

The duties of directors mainly emanate from the Companies Act. The general rule is that directors largely owe their duties to the company on whose board they sit as “mandataries”, “agents” and/or “fiduciaries” thereof and not (for avoidance of any doubt) for the company’s individual shareholders. 

In an insolvency context however, when a company is unable or is imminently likely to become unable to pay its debts, it is understood that the directors’ duties towards the company include a duty to not prejudice the interests of the creditors of the company. Although this is not an explicit and direct duty in the Companies Act, this duty is inferred from the general duty of directors “to act in the best interests of the company”. 

In fact, where the company is unsuccessful in avoiding an insolvent liquidation, the directors may assume responsibility and potential personal liability in favour of third parties, particularly the creditors of the company, and may be ordered to personally contribute to the company’s assets with no limitation and as the court thinks fit in terms of specific provisions in the Companies Act imposing such liability.

Notably, in a “pre-insolvency” context, the Pre-Insolvency Act does explicitly specify that the debtor company should have regard to the interests of its creditors, equity holders, employees and other stakeholders in a pre-insolvency context, which is pinned down to a moment in time where the company is exposed to a “likelihood of insolvency”.

As a general rule, the board owes its duties to the company collectively, and liability towards the company is joint and several under the Companies Act, though with some exceptions.

Personal liability can be incurred in an insolvency context however, where the law contemplates personal liability actions against those directors who have committed the wrongdoing. For example, in a wrongful trading context, any person who was a director (or a de facto or “shadow” director) of the company, and who knew or ought to have known that there was no reasonable prospect that the company would avoid insolvent dissolution and who continued to trade and incur debts, can face an action for personal liability. In the context of fraudulent trading, such action can be brought against “any person” who was knowingly a party to carrying on the business of a company with the intent to defraud creditors.

In both cases mentioned above, the action can only be brought after the company has been put into dissolution, and in each case liability is unlimited. With respect to wrongful trading, a director can be liable to make a payment towards the company’s assets as the court thinks fit, while with fraudulent trading, the court can declare any person who acted with fraudulent intent to be personally responsible without any limitation of liability for all or any of the debts or other liabilities of the company as the court may direct.

While a wrongful trading action can only be brought by the liquidator of a company against directors or shadow directors, the fraudulent trading action can be brought by a wide array of persons – including the liquidator, official receiver, and any creditor or contributory of the company – against “any person”.

In terms of the Pre-Insolvency Act, where the directors of a company become aware that the debtor has become exposed to a likelihood of insolvency, they must duly convene a meeting of the directors not later than 30 days from becoming aware thereof, for the purpose of reviewing the debtor’s position and of determining what steps should be taken to deal with the situation, having regard to the interests of the creditors, equity holders, employees and other stakeholders of the debtor company. This includes – but is not limited to – consideration of whether the debtor should consult with an insolvency practitioner and/or make a preventive restructuring application. The minutes of this meeting should include a detailed review of the financial matters and any determination made. Creditors or a representative of the company’s employees can request such company to have this meeting.

Furthermore, although there is no explicit duty on the directors of a company to file for insolvency if and when that arises, Article 329A of the Companies Act specifies that, where the directors of a company become aware that the company is unable to pay its debts or is imminently likely to become unable to pay its debts (and is therefore insolvent), they should – not later than 30 days from when the fact became known to them – duly convene a general meeting of the company by means of a notice to that effect for a date not later than 40 days from the date of the notice, for the purpose of reviewing the company’s position and of determining what steps should be taken to deal with the situation (including consideration of whether the company should be dissolved or, where applicable, whether the company should make a company recovery application under Article 329B).

Although this is expressed as a duty of the directors, the law does not specify any consequences for failure to do so. That said, it would be within the realm of the duties of the directors to duly apply the law; therefore, failure to comply will likely be detrimental to a director defending themself against an action for wrongful trading, for example.

In the performance of their duties, including the above-mentioned duties, the directors of a company that has become insolvent can be found liable for a number of different offences, including but not limited to:

• wrongful trading;
• fraudulent trading;
• fraudulent preference;
• fraud in anticipation of dissolution;
• fraud by officers of a company being wound up;
• delinquency (remedy against delinquent directors);
• wrongful payments out of capital; and
• failure to maintain proper accounting records.

In addition to the previously discussed, a disqualification order can also be requested to be given against a director of a company that has at any time become insolvent, if their conduct as a director of that company – either taken alone or taken together with their conduct as a director of any other company or companies – makes them unfit to be involved in the management of a company. This will prohibit such person from acting as (inter alia) a director, company secretary, liquidator, provisional administrator and special manager of a company without leave from the court.

Finally, the law in this area notably provides a catch-all provision that the foregoing offences are without prejudice to any other offences or remedies that may exist under any other law, which would include offences in the realm of criminal law. 

The directors of a Maltese company may also be personally responsible for the company’s obligations in terms of tax laws, such as:

• the Income Tax Act;
• the Income Tax Management Act;
• the Value Added Tax Act;
• the Social Security Act; and
• the Import Duties Act.

Further personal liability may arise from the company’s obligation to pay the wages of its employees.

Finally, general piercing-of-the-corporate-veil actions can be brought to impute personal liability to the officers or shareholders of a company in the context of fraud or other similar wrongdoing, where there is abuse of the separate legal personalities granted by law to limited liability companies or of the benefit of limited liability.

Transactions can be voided in Maltese law in the following instances:

• in the case of a fraudulent preference, where a company that is in insolvent liquidation is found to have given a preference to a creditor, surety or guarantor of any of the company’s debts or other liabilities, and where the company does anything or suffers anything to be done that has the effect of putting that person into a position which, once the company went into insolvent winding-up, is better than the position they would have been in had that act or omission not occurred;
• in the case of a transaction at an undervalue, where a company makes a gift or enters into a transaction for the company to receive no consideration, or for a consideration whose value in money/money’s worth is significantly less than the value in money/money’s worth of the consideration provided by the company; and
• by virtue of the general civil law remedy known as the actio pauliana, which is another tool available to a prejudiced creditor allowing them to impeach any fraudulent act by their debtor and to void transactions under Article 1144 of the Civil Code.

Under Article 303 of the Companies Act, the following shall be deemed to be a fraudulent preference against a company’s creditors, whether of a gratuitous or an onerous nature, if it constitutes a transaction at an undervalue or if the preference is given every privilege:

• hypothec or other charge;
• transfer or other disposal of property or rights;
• any payment, execution or other act relating to property or rights made or done by or against the company; and
• any obligation incurred by the company within six months before the dissolution of the company.

This is the case unless the person in whose favour it is made, done or incurred proves that they did not know and did not have reason to believe that the company was likely to be dissolved by reason of insolvency, and in the event of the company being so dissolved every such fraudulent preference shall be void.

However, the actio pauliana applies generally and is not subject to the dissolution and insolvency of the company; it is also not constrained by any such timeframes and has the effect of placing the creditor in the situation they were in before the fraudulent act was undertaken by their debtor. Maltese courts have held that the creditor bringing the action must prove that the act complained of caused prejudice to that particular creditor. In other words, the loss brought about by the act must have rendered the company insolvent or less solvent than it was before.

A transaction at an undervalue or a fraudulent preference in terms of Article 303 of the Companies Act can be attacked by the liquidator or any creditor of the company. A successful action in this case would result in the transaction being annulled and voided.

However, the actio pauliana, which exists outside an insolvency context, can be brought by any “creditor” in the wide sense of the term. Since the actio pauliana is not an insolvency/liquidation action, a successful application of the actio pauliana will not serve to restore the debtor company’s pool of assets from where the general body of creditors would be paid according to their ranking at law; rather, the action benefits only the creditor who seeks to impeach the fraud – ie, who files the actio pauliana and who will be put back into the position they were in prior to the fraud.