The Maltese restructuring and insolvency market has recently witnessed some significant activity due to the investigation of a number of local banks by the regulator which has shed significant light on issues within the financial services sector, and has increased awareness amongst financial services players of a number of due diligence and AML issues.
The launch of a new legal framework for the regulation of virtual assets and cryptocurrencies did trigger a significant wave of tech start-ups and cryptocurrency platforms setting up operations in Malta. However, not all entrants into the market have succeeded in satisfying the licensing requirements stipulated by the legislation, which has resulted in a significant rate of aborted operations with several companies entering into liquidation.
Recent legislative amendments to the provisions on restructurings are yet to result in a wider use of company recovery proceedings and/or informal restructurings, however, we can expect a gradual shift in the local market from traditional court supervised procedures to more informal and flexible out-of-court workouts.
The principal legislation dealing with corporate insolvencies and liquidations is the Companies Act 1995 (the “CA 1995”). The sections of the CA 1995 dealing with corporate insolvency contain both procedural and substantive provisions related to liquidations including inter alia the requirements for the commencement of formal winding-up proceedings, the appointment of a liquidator, application of potential claw back provisions, pari passu distribution of company assets, etc.
The CA 1995 also, amongst other matters, deals with corporate restructurings or reorganisations, duties of company directors, the management of a company’s affairs and the circumstances under which a director may be subject to a disqualification order.
Underpinning the CA 1995 is the Civil Code (the “Code”), which establishes the general legal framework for the creation and granting of security over property (whether movable or immovable) and general rules on the ranking of creditors. The notion of “fiduciaries” (which applies to Maltese company law insofar as directors are also treated as fiduciaries) was introduced into Maltese law following amendments to the Code in 2004.
As a Member State of the European Union (the “EU”) the European Insolvency Recast Regulation (Regulation (EU) 2015/848 on Insolvency Proceedings (Recast)) is applicable to Malta with respect to cross-border insolvency issues falling within the scope of the said Regulation. Following approval at European level of the Preventative Restructuring Frameworks Directive (Directive (EU) 2019/1023), Malta will be required to transpose the directive into national law within two years from its publication date in the EU’s Official Journal.
Other pieces of legislation which contain important provisions within the context of a restructuring and/or liquidation are the Set Off and Netting on Insolvency Act and the Financial Collateral Arrangements Regulations.
With respect to voluntary liquidations, the shareholders may resolve by means of an extraordinary resolution to have the company dissolved and wound up either voluntarily or by means of a court winding-up procedure. Depending on whether the company’s directors are in a position to issue a declaration of solvency, a voluntary winding-up may either take the form of a members’ voluntary winding-up or that of a creditors’ voluntary winding-up.
Additionally, a company may be compulsorily dissolved and wound up by the court in a number of scenarios set out under the CA 1995 (as explained in more detail in 7 Statutory Insolvency and Liquidation Proceedings).
All dissolution and winding-up proceedings have, as their purpose and scope, the cessation of the company’s business, the realisation of company property and its application in satisfaction of the company’s liabilities, and the distribution of remaining assets (if any) among the shareholders according to their rights and interests in the company. The end result of the liquidation process is the striking off of the company’s name from the companies register at which point the separate legal personality of the company is extinguished.
With respect to restructurings, a company may attempt to reorganise its affairs consensually with its creditors, outside the supervision of the court, or alternatively reach a court sanctioned compromise or arrangement with its creditors. It may also apply to the court for a company recovery procedure.
There are no mandatory provisions under the CA 1995 compelling the shareholders to file for insolvency within any specific period. Directors are also not obliged to file any action to have the company liquidated. However, they are bound, where they have become aware that the company is unable to pay its debts (or is imminently likely to become unable to pay its debts), to convene a meeting of the shareholders not later than 30 days from when they become so aware. The meeting should be convened at a date not later than 40 days from the date of the notice and should call upon the shareholders to review the company’s position and to consider inter alia whether to liquidate the company or go for a company recovery procedure.
The CA 1995 also imposes a positive duty on directors of a public company in situations where there is a serious loss of capital. Where the net assets of a public company are half or less of its called up issued share capital, the directors are required to convene a meeting of the shareholder, once again, to consider what steps are to be taken including whether the company ought to be liquidated. If this meeting is not called, each of the directors of the company in default shall be liable to a penalty and, for every day during which the default continues, a further penalty.
The company, acting through its shareholders, may resolve to enter winding up proceedings. It may also apply for a company recovery procedure or seek to reach a compromise or arrangement with its creditors or shareholders.
Depending on which particular provision of the CA 1995 the action to liquidate is based on, involuntary proceedings may be instituted by any debenture holder, creditor or creditors, any contributory or contributories, by any director or by any shareholder of the company. The Registrar of Companies in Malta may also file a winding-up application if they deem it to be in the public interest. The Registrar may file an application either when the number of directors of a company has fallen below the statutory minimum or when there are grounds of sufficient gravity warranting liquidation.
The creditors of the company may also try to seek to put the company into a company recovery procedure.
Insolvency is one ground upon which a company may be dissolved and wound up, but it is not a blanket requirement for all types of proceedings and a company may be dissolved and wound up even when solvent.
At least for certain purposes, the CA 1995 considers a company to be insolvent when it is “unable to pay its debts”. This concept includes the two traditional insolvency tests – the “cash flow” test and the “balance sheet” test which are given statutory form under Article 214(5)(A) & (B) of the CA 1995, respectively.
Under the Maltese “cash flow” test, a company would be unable to pay its debts if a debt due by the company remains unsatisfied in whole or in part after 24 weeks from the enforcement of an executive title against the company. A company would be unable to pay its debts in terms of the balance sheet test where a Maltese court is satisfied that the company is unable to pay its debts, account being taken of the company’s contingent and prospective liabilities.
It is a requirement that, in order to obtain a company recovery order for the company in question, it must be either unable to pay its debts or to be “imminently likely to become unable to pay its debts”.
For the purpose of the availing of the provisions on schemes of compromises or arrangements, it is also a requirement that the company is unable to pay its debts (although this procedure may also be used where there are grounds of sufficient gravity that would otherwise warrant the company’s liquidation).
Even though banks and other credit institutions remain subject to the general insolvency principles under the CA 1995, bank insolvencies are also subject to a special regime encompassing a number of special laws which apply to varying degrees.
Insurance undertakings are also subject to special regulatory regimes with respect to reorganisations and/or winding-ups. Special rules also apply in the case of the reorganisation or winding-up of investment firms.
Traditionally, local parties tended to demonstrate a preference for statutory restructuring processes rather than out-of-court workouts. The number of out-of-court restructurings is, however, on the increase, mainly due to the growing realisation of the potential remedies for creditors who pursue this course of action, coupled with the fact that judicial proceedings can, in practice, prove to be costly and very time-consuming.
To the best of our knowledge, the “INSOL Principles” are not directly referenced. However, as a matter of practice, informal and consensual frameworks are structured and carried out in accordance with general principles of insolvency law.
Banks, credit funds and other lenders are generally supportive of debtors experiencing financial difficulties and are usually receptive to the idea of an out-of-court restructuring if it would mean improved prospects of repayment and by-passing lengthy and costly judicial proceedings.
Maltese law does not require mandatory consensual restructuring attempts as a prior requirement for the institution of a statutory formal procedure, however, as a matter of common practice, a debtor would attempt to stave off formal insolvency proceedings by seeking to negotiate an alternative solution with its principal creditors.
In trying to secure a feasible restructuring process which would be binding on all creditors, the preferred approach would be to try and reach a compromise or debt restructuring agreement under the CA 1995.
The process would involve a series of discussions between the debtor and (usually) the major creditors as to the terms and timing of the debt restructuring. It is common for the debtor company to engage a reputable law firm and a well-reputed accountancy or audit firm to drive forward the restructuring plans. Usually, no objections would be raised at this point, however, it is also not uncommon for the major creditors to insist that the debtor co-operates directly with their own professional advisors.
Maltese law does not expressly provide for the formation of creditor steering committees within the context of a consensual restructuring, although it is not uncommon for such creditor groups to be formed.
Typically, new money would be injected by an existing lender (or lenders) and would typically acquire senior priority status in terms of the relevant intercreditor arrangements. Similarly, where new money is to be injected by a third-party financier, the financier would look to obtain the consent of the existing lenders for the purpose of acquiring super-priority status.
Maltese corporate insolvency law does not impose any general duties on creditors in the context of informal workouts or restructurings, and the actions of the various creditors vis-à-vis each other during the restructuring are mainly based on principles of good faith.
See 3.1 Restructuring Market Participants.
Security over Real Estate
Where real estate is concerned, the common forms of security are hypothecs and privileges.
A hypothec is a right created over the property of a debtor or a third party, for the benefit of the creditor, as security for the fulfilment of an obligation. Hypothecs can be divided into three broad groups:
A general hypothec operates as a quasi-floating type security which does not attach to any specific asset of the security provider but instead extends over the general pool of assets encompassing all property present and future. One disadvantage of the general hypothec is that the assets involved may be transferred to third parties, whereby the hypothec would not extend over the transferred assets.
A special hypothec, on the other hand, has the major advantage that it attached to specific assets and continues to remain attached to those assets even in the event that an asset or property passes into the hands of a third party. As a result, this kind of hypothec (as opposed to the general hypothec) confers in favour of the creditor this special right, known in legal parlance as a droit de suite.
A hypothec (whether general or special) must be constituted by means of a public deed drawn before a notary and registered with the Maltese Public Registry. There is no time limit for registration, however, the hypothecary security will rank in accordance with its respective date of registration.
A privilege is a right of preference which the nature of a debt confers upon a creditor over the other creditors, including hypothecary creditors. A privilege may either be general (extends over all property in general) or special (affects certain particular movables or immovables).
Shares Issued by a Company
With respect to shares in a company, the most common form of security granted is by way of a pledge. A pledge of shares must be constituted by means of an agreement in writing entered into by and between the pledgor and the pledgee (it is common market practice for the company itself to also be party to the agreement). The pledge over the shares becomes operative vis-à-vis third parties only once notice of the share pledge is delivered for registration with the Malta Business Registry (previously the Malta Registry of Companies). Registration must take place within 14 days from the granting of the pledge and it is common practice for the parties thereto to commercially agree to a shorter time period. Special rules apply with respect to the pledging of shares which are listed on the Maltese Stock Exchange.
Depending on the type of tangible movable asset, security can be taken in a number of forms. Typically, movables such as machinery, plant and equipment, inventory stock and similar chargeable assets would be secured by the general hypothec explained above. It is, theoretically, possible to grant a pledge over these movables but difficult in practice, owing to the civil law rules on contracts of pledge requiring the delivery to the creditor of the thing pledged or of the document conferring the exclusive right to the disposal of the thing pledged.
Alternatively, the movables may be transferred by way of security by title transfer. Security by title transfer is a contract whereby the debtor, or a third party for the debtor, transfers or assigns movable things to secure a present or future obligation. Subject to the observance of such formalities, as may be required in case of particular types of movable property, ownership of the property is acquired by the creditor as soon as the transferor and the creditor enter into an agreement in writing. The creditor to whom the property has been transferred shall be considered to be the absolute owner of the property and this property shall not form part of the patrimony of the debtor.
Rights under contract (receivables)
The most common form of security over claims and receivables is a pledge. Where a thing pledged is a debt, the pledgee shall be responsible for the collection of the debt on its maturity and shall place the money or other things received either as agreed or, failing such agreement, as the court may determine. If the debt secured by the pledge is due, the pledgee may retain, from the moneys received, an amount sufficient to satisfy their rights and shall deliver the remainder to the pledgor.
Pledge of bank accounts
The principles dealing with the pledge of tangible things and the pledge of debts/receivables apply in the case of bank accounts.
Security may be constituted over any form of intellectual property including patents, trademarks, designs and copyrights. Security with respect to intellectual property rights, which are registrable under Maltese law (eg, trademarks), are most commonly granted. In our view, the most appropriate form of security with respect to trademarks, designs, patents or copyright would be the security by title transfer.
Subject to any act of subordination, postponement, waiver or modification of any existing or future right, a secured creditor can enforce their security in accordance with its terms. Terms would typically permit the enforcement of rights and remedies upon the occurrence of an event of default that is continuing, however, under certain security arrangements, the enforcement of rights and remedies would only be permissible once notice is served on the debtor.
As explained further below, the onset of certain insolvency and/or restructuring proceedings trigger off the operation of moratoria on actions against the company, which would include the enforcement of certain security interests against the company and/or its property.
Security constituting a financial collateral arrangement remains valid and enforceable in accordance with its terms, notwithstanding the commencement or continuation of any winding-up proceedings or reorganisation measures in respect of the debtor. Furthermore, entering into the financial collateral arrangement and the security granted thereunder shall not be declared invalid or void or be reversed on the sole basis that, at the time of the creation of the security, winding-up proceedings or reorganisation measures were instituted. Similarly, a transfer of assets as security by title transfer remains enforceable notwithstanding the insolvency of the debtor (or of any grantor) or the commencement or continuation of winding-up proceedings or reorganisation measures.
See 4.2 Rights and Remedies.
There are no procedures or other impediments that hinder or discriminate against foreign secured creditors, however, it should be noted that security interests, mortgages, encumbrances, liens or charges created under a law other than Maltese law are not directly enforceable over the movable or immovable property situated in Malta.
Other than the right to benefit from a superior legal ranking and the exercise of specific rights attached to their security interest, secured creditors are not entitled to any special procedural protections or rights under Maltese corporate insolvency law.
For the purpose of a liquidation, Maltese corporate insolvency law does not divide creditors into classes other than to recognise that secured creditors may enjoy a preferential ranking at law over secured creditors in the event of the company’s liquidation. As a general principle, the property of a company is to be, on its in winding-up, applied in satisfaction of its liabilities pari passu,however, subject to any law as to preferential debts or payments.
Unsecured trade creditors are treated together with the general body of unsecured creditors and their claims will rank pari passu in the manner explained under 5.1 Differing Rights and Priorities.
Unsecured creditors may file a winding-up application in court requesting the delivery of a winding-up order. Typically, this action would follow the enforcement of an executive title which a creditor may obtain as judicial confirmation of the claim due by the insolvent debtor, enforcement of which would not achieve the satisfaction (whether in whole or in part) of the debt due. It is possible to use this as evidence that the debtor is insolvent and unable to meet its liabilities, thereby warranting its dissolution. Indeed, one of the tests for demonstrating a company’s inability to pay its debts is where a debt remains outstanding (in whole or in part) after 24 weeks from the enforcement of an executive title (eg, a garnishee order) against the company.
It is possible, under Maltese rules of civil procedure, for any person to secure their rights by one or more of the precautionary acts contemplated under the Maltese Code of Organisation and Civil Procedure (“COCP”) without the necessity of any previous judgement or award in their favour.
The most common method of enforcing an unsecured claim is though the institution of summary judicial proceedings. Certain fast-tracked special procedures are possible in respect of certain unopposed claims. For instance, an action for the recovery of a debt not exceeding EUR25,000 and which is certain, liquidated and due, and not consisting in the performance of an act, may be instituted by means of a judicial letter containing an intimation on the debtor that failure to reply within 30 days from service would amount to an admission of the claim due and constitute an executive title capable of enforcement.
Actions for the recovery of a debt which is certain, liquidated and due, and not consisting in the performance of an act, in excess of EUR25,000 may still be expedited by means of a special summary procedure (informally known as the “guillotine route”) in the COCP which requires that the applicant, by means of a sworn application, declares that it their belief that there is no defence to answer the claim and that the court should decide the claim without proceeding to trial.
Landlords enjoy a privilege for the rent due over the movables used for the furnishing and stocking of the leased tenement. In the case of movables which have been removed from the tenement against a landlord’s consent, the privilege over such movables may be preserved provided that the landlord takes the necessary steps to seize or attach by garnishee order the said movables within 15 days from the date when they were removed.
See 4.4 Foreign Secured Creditors.
Costs and expenses incurred in the winding-up, including the remuneration of the liquidator, are payable in priority to all other claims and are paid out in the order of priority established under the CA 1995. Following costs and expenses are preferential debts, which operate as an exception to the general pari passu principle. Preferential debts may arise under specific Maltese legislation (eg, the Social Security Act) or under the Code. Unsecured creditors rank below.
The expenses of liquidation enjoy priority and are paid ahead of all other claims.
Employee wages and compensation for leave is a preferential debt which is to be paid in preference to all other claims, whether privileged or hypothecary. Certain claims due from the employer under social security legislation rank equally with employee wages. Other preferential debts enjoying a high ranking at law are due to the Income Tax authorities, which are to rank after employee wages and social security claims.
There are two forms of statutory restructuring or reorganisations under the CA 1995: schemes of compromise or arrangements and the Company Recovery Procedure.
Schemes of Arrangements
Schemes of compromise or arrangements are possible either between a company and its creditors or between the company and its shareholders.
Where a compromise or arrangement has been proposed, the scheme may either be carried forward under the supervision and direction of the court or it may be facilitated by a process of mediation.
The scheme is carried forward by the court when an application is filed either by the company, a creditor or a shareholder (as the case may be) or the liquidator (where the company is in the process of being wound up) requesting the convocation of a meeting of the creditors or shareholders (as the case may be) for the purpose of putting the proposition to a vote. During this meeting, if a majority representing two thirds in value of the creditors or shareholders agree to the compromise or arrangement proposed then, if sanctioned by the court, it would be binding on all creditors and/or shareholders of the company and on the company itself.
Alternatively, the scheme can be settled out of court through a process of mediation. For this to be possible, the company or any creditor, with the sanction of not less than two thirds of the creditors, may seek the appointment of a mediator for the purpose of organising a meeting to bring the company and the creditors to an agreement on a proposed compromise or arrangement. If all creditors execute a written agreement containing a compromise or arrangement, it shall be binding on all creditors and also on the company.
A scheme of arrangement may only be utilised by a company which is either unable to pay its debts or in cases where the court is of the opinion that grounds of sufficient gravity exist which warrant the dissolution and consequential winding up of the company.
The Company Recovery Procedure
This procedure is applicable where a company is unable to (or imminently likely to become unable to) pay its debts. In this scenario, a company recovery application may be filed in court to place the company under a company recovery order.
The rationale behind the company recovery procedure is to shield the company during this period and give it some “breathing space” to allow it to rehabilitate and return to financial profitability. Accordingly, a court will accede to such an application only if it is satisfied that the company is unable (or imminently likely to be unable) to pay its debts and that this recovery procedure would likely result in the company’s survival as a viable going concern or would sanction a compromise or arrangement, taking into consideration the best interests of the company’s creditors and employees.
An application for this procedure may be instituted:
The court is required to take its decision within no more than 40 working days from the filing date. If the application is granted, the court shall appoint a special controller who is required to take under their control all the property of the company and is thereafter responsible for its administration and management. At this point, any powers conferred on the company, its directors or its officers are suspended unless the consent of the special controller is obtained.
When an application is filed a number of important legal effects arise (which continue to operate during the company recovery period if the application is successful). Some of the notable effects consist of the following:
The term of appointment of the special controller is fixed in law to a period not exceeding four months, however, this may be extended by the court by additional period provided that any additional periods do not exceed a further eight months.
The company recovery may also be terminated at any stage of the proceedings where either the special controller reaches the conclusion that the company has no credible prospects of recovery or, alternatively, where they believe that the affairs of the company have improved to the extent that the company is capable of paying off its debts.
At the end of this term, the special controller is obliged to submit a written final report giving comprehensive reasons and opinions as to whether the company has any reasonable prospects of continuing as a viable going concern. If of the opinion that the company has such reasonable prospects, they are to attach to their report a detailed recovery plan with all the proposals. If the court accepts the recovery plan, it shall be effective and binding on all interested parties.
Where the court accepts the recovery plan, any dissenting creditors may apply to the court of appeal in those circumstances where they are of the opinion that their rights might be reduced to a level lower than what would have been granted had the company been dissolved and wound up. However, it is important to note that such application does not hinder the implementation of the recovery plan and the only remedy available to dissenting creditors is compensation for any loss suffered.
An application for company recovery is not possible if the company is being wound-up pursuant to a winding-up order. Also, no application may be submitted by the company after it has been dissolved voluntarily.
It is important to note that, during a company recovery, the business of the company is expected to continue in accordance with its normal activities under the management and direction of the special controller.
Creditors play a proactive role in a company recovery. Aside from being able to apply for the procedure (see 6.1 Statutory Process for a Financial Restructuring/Reorganisation), creditors are to be kept informed by the special controller, the latter being bound to convene a meeting of the creditors to inter aliaprovide the creditors with a detailed statement of the company’s affairs and appoint a joint creditor and shareholder committee to assist the special controller. The purpose of this committee is to advise and assist the special controller in the management of the company.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
A creditor is free to assign its claims to a third party, during such time as the company recovery procedure is on-going, provided that due notice of the assignment is provided to the special controller.
It is possible for a special controller to obtain a court order extending their appointment and functions to a company forming part of the same corporate group as the company undergoing company recovery.
To the best of our knowledge, this has never been used in practice and thus far there is some doubt in our view as to whether the effect of this kind of extension would be to also place the group company into company recovery mode. The wording of the law is not clear on this matter.
This depends on the powers and functions of the special controller, as may be determined by the court.
The special controller requires court authorisation to sell or otherwise dispose of company property to themselves or their spouse or relative, suggesting that the disposition of property in favour of unrelated third parties is possible.
In any case, a special controller is bound to consider any proposals previously submitted to the court by the applicant with respect to the amelioration of the company’s economic situation, which may include inter alia a pre-negotiated sale of assets.
Not unless the Secured Creditor consents to the release. Furthermore, security arrangements structured and governed in terms of the Financial Collateral Arrangements Regulations may be enforceable, notwithstanding the onset of a company recovery.
The court may authorise the grant of new financing to the debtor company for the purpose of implementing a recovery plan. In the event that the company recovery does not succeed, the new financing would constitute, for the purpose of priority, charges or expenses incurred in the winding-up and would rank in accordance with order of priority established under the CA 1995.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation
This point is not specifically addressed in the relevant provisions on reorganisations, however, in practice, it is unlikely that a court would release a surety or guarantor from their obligations towards the creditors as part of the reorganisation.
Under the Code, set-off takes place ipso jureif there are two mutual debts. The CA 1995 does provide rules on set-off in cases of corporate insolvency and consequently, the general rule in the Code should apply, ie, set-off should take place automatically in cases of corporate insolvency.
The position that set-off takes place ipso jure,even if an insolvency scenario based on the general rule under the Code, is not accepted as settled law by some lawyers in Malta who take the view that set-off and netting can only take place in an insolvency situation if the requirements of the Set-Off and Netting on Insolvency Act (“SONIA”), a law which was drawn up to “make provision for the enforceability of set-off and netting on insolvency”, are satisfied.
The rule under SONIA is that notwithstanding any other provisions of law, any contractual provision providing for or relating to the set off and netting of sums shall be enforceable in accordance with its terms whether before or after bankruptcy or insolvency.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
The voluntary modes of liquidation are the members’ voluntary winding up (“MVWU”) and the creditors’ voluntary winding up (“CVWU”).
A MVWU is only possible where the company is solvent and the directors are capable of issuing a declaration of solvency, declaring that the company will be able to pay its debts in full within 12 months commencing from the date of its dissolution. If a director were to make a declaration without having reasonable grounds to form the required opinion, they shall be guilty of an offence and susceptible to a fine and/or term of imprisonment. Indeed, the CA 1995 presumes that a director lacked reasonable grounds for his opinion where the company’s debts have not been settled within the period indicated in the declaration, but this presumption may be rebutted.
A MVWU is commenced with the passing of an extraordinary resolution by the shareholders. The date of the company’s dissolution shall be the date of the passing of this resolution (unless a later date is specified in the resolution). As from the date of dissolution, the company shall be required to cease carrying out its business except so far as may be necessary for the purpose of winding-up its affairs.
Typically, the shareholders appoint the liquidator in a MVWU. On the appointment of the liquidator, all the powers of the directors and the company secretary cease unless otherwise provided in law.
In the case of a CVWU, the directors are required to convene a meeting of the creditors which is to be held within 40 days from the date on which the company is put into liquidation.
The general rule for a CVWU is that the liquidator is appointed by the creditors. During the same meeting, the creditors may also opt to appoint a liquidation committee (to be composed of no more than five representatives).
A company may also be dissolved and wound up by the court involuntarily in any of the following scenarios:
Where a company is put into liquidation by the court, a number of important statutory effects kick in, particularly that no action or proceeding may be taken against the company (or its property) except by leave of the court. Furthermore, there are strict rules prohibiting the transfer of shares or alterations to the shareholder status.
All winding-up proceedings involve the appointment of a liquidator (albeit this may occur at different stages depending on the particular proceedings). Broadly speaking, a liquidator has the same set of powers and functions regardless of the type of liquidation.
Essentially, the role of the liquidator is to represent the company in all matters necessary for its winding up, take into their custody and control all of the company’s property and rights and pay off the company’s creditors in accordance with their ranking at law.
The liquidator is free to apply to court for any directions with respect to any matter arising in the course of the winding-up. Any person who feels aggrieved by any act or decision of the liquidator may seek to have the act or decision reversed or modified by the court.
The liquidator has the power to sell company assets and represent the company in all matters regarding the winding up. Additionally, it is the liquidator who primarily negotiates, executes and authorises the sale of company property.
The purchaser of assets sold by the liquidator would, assuming assets are not otherwise collateralised or encumbered, acquire good title, however, the purchaser is unlikely to receive the standard full spread of warranties and convents from the liquidator and a sale may be questioned or challenged by the right, under the CA 1995, of any aggrieved person to apply to court to reverse or modify any act or decision of a liquidator.
In practice, pre-negotiated sales do happen, provided the transaction is conducted as an arms’ length transaction and assets are sold for fair market value.
In the liquidation process, there is no rescue plan as such. Instead, the liquidator is tasked with paying off the company’s creditors from the assets of the company. Failure on the part of the company’s officers, eg, the directors, to assist and/or follow the directions of the liquidator may result in them being liable to incur serious penalties, both of a civil or criminal nature; for instance, where a company officer does not provide the liquidator with the company’s accounting records and/or makes a material omission in any statement relating to the affairs of the company.
New money may be secured on unencumbered assets of a company provided the acceptance of new money would not fall foul of any contractual restrictions (eg, negative pledges) and/or the rules on void or voidable transactions.
There are no procedures under Maltese law regulating the dissolution and winding-up of a corporate group on a collective basis. Each entity is liquidated on a case-by-case basis and there is no legal provision or mechanism allowing for a collective pool of assets.
The setting up of liquidation committees is possible under Maltese winding-up proceedings. Where a company is being wound up by the court, the creditors may decide whether to appoint a liquidation committee to act with the liquidator. Such a committee shall consist of not more than five members selected by the creditors and will fulfil, primarily, a supervisory role. The committee is intended to act as a check on the liquidator. It may issue directives to the liquidator regarding the administration of the company’s assets and the distribution thereof amongst its creditors, and some of the powers of the liquidator are only exercisable with the sanction either of the court or of the liquidation committee. Similarly, in a CVWU the creditors may appoint five representatives to compose a liquidation committee.
A liquidator’s power to sell company assets is subject to the control of the court and a creditor may apply to court in the event of the exercise (or proposed exercise) of such power by the liquidator.
Furthermore, a liquidator is prohibited from transferring company assets to certain persons, eg, to their spouse, their relatives or a company of which they is a director or shareholder.
The European Insolvency Recast Regulation is directly applicable to Malta. As such, with the exception of Denmark, any judgement opening insolvency proceedings in another EU Member States and capable of recognition under Regulation is recognised in Malta from the moment it becomes effective in the Member State in question.
In respect of third-party countries, the CA 1995 does not contain any provision addressing the recognition of a foreign insolvency judgement and Malta is not current a signatory to the UNCITRAL Model Law on Cross-Border Insolvency.
To the best of our knowledge, no formal protocols or co-ordination arrangements have been adopted by the Maltese Courts, however, in a case where co-ordination is required or desirable, a Maltese Court would be guided by the relevant provisions of the Recast Regulation addressing co-operation and communication between courts and between insolvency practitioners and courts.
The main rules addressing matters of jurisdiction in cross-border cases and the determination of the governing law are set out under the Recast Regulation, eg, the determination of a debtor’s centre of main interests.
Foreign creditors are not dealt with differently.
There are a number of statutory officers as part of the Maltese corporate insolvency legal framework which consist of the following:
The official receiver acts as the default, or “interim”, liquidator, until such time as a liquidator is appointed.
The provisional administrator is appointed by the court and their function is to look after the administration of the estate or business of the company until such time as the winding-up application is decided.
The liquidator is appointed either by the court or by the creditors or shareholders (depending on the mode of winding-up in question). Their main role is to liquidate the company and to the extent possible bring about a successful satisfaction of the company’s liabilities.
A special manager may be appointed by the liquidator or provisional administrator if a particular area of expertise is required, depending on the nature of the company’s business.
The special controller’s appointment and role is explained in 6 Statutory Restructurings, Rehabilitations and Reorganisations.
See 9.2 Statutory Roles, Rights and Responsibilities of Officers.
Prior to the institution of formal winding-up or restructuring proceedings, it is common for the company to engage the services of professional advisors such as company lawyers, tax advisors, management consultants, etc. When a company is being wound up, a liquidator may, in the course of their powers and functions, seek guidance and/or engage the services of any professional advisors, including a special manager, depending on the nature of the business of the company.
In the case of a company recovery, the special controller may, as part of their statutory powers, engage professional advisers for the rendering any service to the company as part of the company recovery.
Advisors are appointed by the liquidator and they are remunerated for their services out of the assets of the company as part of the costs, charges and expenses of the winding up procedure in such order of priority as established under the CA 1995.
Fees due to professional advisors engaged by a special controller are to be paid by the company.
The appointment of a special manager requires the approval of the court. However, the liquidator does not require court approval to engage other professional advisors.
The special manager appointed by the court is to restrict their activities to the functions and powers as the court entrusts to them in the act of appointment and any acts as may be necessary or consequential thereto. The special manager is required to provide an account of their management to the court.
Arbitration or mediation are not mandatory; however, a liquidator is able to refer any matter concerning any compromise or arrangement, or any claims which may be due in damages to arbitration. Even though mediation is not expressly stated as an option, a liquidator should be able to engage the company in mediation proceedings as well.
Recent amendments to the provisions to the Code of Organisation and Civil Procedure appear to require court input at the outset todetermine, on a prima faciebasis, whether the matter in dispute ought to be referred to mediation.
Pre-insolvency agreements may be enforceable, however, where the proceedings in question carry, as an effect, a moratorium on proceedings against the company (such as a winding up by the court or a company recovery procedure) enforcement would only be possible with the special leave of the court.
The Arbitration Act (Chapter 387 of the Laws of Malta) is the principal legislation governing arbitration proceedings in Malta. It codifies and reproduces the UNCITRAL Model law.
Mediation is regulated primarily in terms of the Mediation Act (Chapter 474 of the Laws of Malta).
A mediator is appointed by the parties from a list of acceptable mediators kept by the Mediation Centre. If the parties fail to agree, any one party may apply to the registrar for the appointment to be made and the registrar shall suggest to the board of the Mediation Centre the name of the mediator next on the list.
With respect to arbitration, if a sole arbitrator is to be appointed, any one of the parties may propose a prospective arbitrator. If within thirty days the parties have not reached an agreement, the arbitrator is appointed by the Chairman of the Malta Arbitration Centre. If three arbitrators are to be appointed, each party is to appoint one arbitrator and the two arbitrators chosen will select a third arbitrator who will preside over the proceedings.
Besides the specific duties mentioned in 2.3 Obligation to Commence Formal Insolvency Proceedings, directors are subject to broad and wide-ranging duties under the CA 1995, such as the duty to always act honestly and in the best interests of the company. When a company is insolvent (or threatened with insolvency) additional duties come into play. At this stage, directors become bound to have regard to the interests of the creditors.
Directors (including a shadow director) may found be liable for wrongful trading under the CA 1995. Liability for wrongful trading may be imposed when a company is being wound up, is insolvent and it appears that a person who was a director knew, or ought to have known, prior to the dissolution of the company that there was no reasonable prospect that insolvency could be avoided. The court will not find the director liable for wrongful trading if it is satisfied that the director took the necessary steps to minimise loss to the creditors.
A director may also be found liable for fraudulent trading where a director was knowingly party to any business of the company conducted with intention to defraud creditors.
Directors’ fiduciary duties are, primarily, to the company and, therefore, it would be for an insolvency office holder representing the company to pursue an action for breach of fiduciary duties against the company, not the creditors.
Chief Restructuring Officers are still relatively uncommon in Malta; however, it is common for companies experiencing financial distress to obtain external advice (either legal advice or the advice of a certified accountant or auditor) on the possibility of achieving a financial turnaround.
Maltese company law does recognise the concept of a shadow director. For specific duties see 2.3 Obligation to Commence Formal Insolvency Proceedings, and for liabilities see 12.1 Duties of Directors.
As a fundamental rule of Maltese company law, the liability of shareholders is limited to the amount, if any, unpaid on the shares respectively held by each shareholder.
This rule is only disapplied in the situations where the corporate veil is lifted.
Maltese law applies a number of claw-back provisions targeting certain transactions carried out shortly prior to a company’s dissolution and winding up where such transactions are deemed to amount to a fraudulent preference.
The claw back rule applies to every privilege, hypothec or other charge, or transfer or other disposal of property or rights, and any payment, execution or other act and any obligation incurred by the company within six months before the date of its dissolution.
An act or obligation would be deemed to amount to a fraudulent preference if it constitutes a “transaction at an undervalue” or if a “preference is given”.
A company is deemed to have entered into a “transaction at an undervalue” if the company makes a gift or otherwise enters into a transaction on terms that provide for the company to receive no considerations; or the company enters into a transaction for a consideration the value of which is significantly less than the value of the consideration provided by the company. By way of example, a company will be deemed to have entered into transactions at an undervalue when it leases out company property at a rent considerably lower than its rental value or allows an asset to be retained by the other party in satisfaction of a claim against the company which is significantly less than the value of the asset retained.
The company would be deemed to give a “preference” to a person if:
The test for the application of this rule would be the determination of whether an act or thing that has been done has disturbed the statutory order of priorities in an insolvent liquidation. The aim here is to avoid those transactions that would disturb the statutory order of distribution. Consequently, it is not a preference for the company to pay a secured creditor a sum not exceeding the value of their security, since this would constitute the extinguishment of the security interest and leaves the position of the other creditors unaffected.
The only exception to the fraudulent preference rule is where the other party proves that it did not know, and did not have reason to believe, that the company was likely to be dissolved by reason of insolvency.
See 13.1 Historical Transactions.
See 13. 1 Historical Transactions.
Under Maltese law, insolvency is equated to the inability to pay one’s debts, as per the test applied under the CA 1995. Consequently, a valuation exercise is not applied for the purposes of determining insolvency.
Valuations play an important role in company restructuring, particularly in the case of a company recovery where, as a part of the process, a detailed rescue strategy plan must be presented to the court as evidence of the company’s potential to recover.
There is no hard rule regarding who will initiate a valuation process in an insolvency proceeding. Where a valuation is beneficial it is, however, typically the debtor who initiates the process. Creditors would rarely initiate such a process directly, although a secured creditor with influence over the debtor may encourage the debtor to obtain valuations in some circumstances.
There are no specific court processes which determine who must undertake valuations and/or the relevant valuation methods which should be applied. However, particularly in the case of a company recovery procedure, where the court is expected to assess the viability of any rescue plan presented, various methods may be adopted.