Company Recovery Procedure

In Malta, whenever a company finds itself in financial difficulties or distress, it is paramount, in order to safeguard the interests of its plateau of stakeholders, that it does not become insolvent. The Maltese Companies Act (‘the Act’) caters for a situation that provides a last line of defence in the form of the Company Recovery Procedure (‘the CRP)’. This procedure is outlined in Article 329B of the Act.

The CRP entails that, in instances where a company is not able to pay its debts or faces the risk of becoming unable to do so, the Civil Court (Commercial Section), (‘the Court’), upon an application being instituted, may opt to place the company under said procedure. Here, the company would be entrusted in the hands of a special controller for four to twelve months.

The Act provides that the following may file an application before the Civil Court in order for the company to avail itself of the CRP:

  1. The shareholders by means of an extraordinary resolution passed during a general meeting;
  2. The directors via a Board of Directors decision in cases where a general meeting of the shareholders could not be convened, a quorum could not be met or a tie vote is unresolved;
  3. The company’s creditors, where they constitute more than 50% of the company’s debts or more than 50% of its debts in a particular class.

The application to place the company under the CRP must encapsulate all the facts in order for the court to be able to understand the company’s affairs and how it ended up in such a position that renders it unable, or likely to become unable, to pay off its debts. A statement would need to follow in order for the Court to better understand how the CRP would ameliorate the company’s finances.

Moreover, where the Company itself is the one filing the application, it would need to provide documentation showing its assets and liabilities. Such documentation would need to be drawn up within a timeframe of two months before the application and should be accompanied by a list containing the names and addresses of the company’s creditors and the amounts due to each creditors together with any securities such creditors may have.

Upon the court deciding that placing the company under the CRP could aid the company in surviving and/or in an agreement being reached between the company and its creditors, a company recovery order (‘the Order’) is issued by said Court. The decision for such order to be issued ought to be taken within twenty days from the date of filing of the application.

Once this order is issued, the company would start benefitting from the following:

  1. The staying of any pending or ongoing winding up procedures;
  2. Protection from dissolution of the company;
  3. The staying of claims against the company;
  4. Protection from judicial proceedings being instituted against the company or its property without prior authorisation being obtained from the Court;
  5. Protection from executive acts or warrants can be issued against the company except with the authorisation of the Court;
  6. Protection from proceedings being instituted to enforce securities over the property of the company without the authorisation of the Court;
  7. The landlord of premises rented by the company cannot terminate the lease without first obtaining authorisation from the court, even if the firm has failed to comply with the lease agreement.

Upon the court issuing the Company Recovery Order, a special controller is then appointed who would be entrusted with controlling the entirety of the assets of the company, together with its property and the day-to-day running of its affairs. While in control, the special controller shall assess the company’s affairs and report his findings to the court within a timeframe of at least two months from the date of his taking up the role.

The controller is also vested with the power to convene shareholders’ meetings, engage persons to carry out professional and administrative services, remove directors and appoint managers as he deems fit after informing the Court. Moreover, the controller is also entitled to request that the Court condemn any of the company’s officers for wrongful or fraudulent trading if proof to that effect emerges.

The controller is not entitled, however, to have the company enter into commitments lasting longer than six months or to terminate the employment of any of the company’s employees without first obtaining authorisation from the Court.

Once his term would have expired, the controller draws up a final report wherein he expresses whether he thinks that the company may reasonably continue operating as a going concern. If he concludes in the affirmative, the report is accompanied by a recovery plan. Where this plan is approved by the Court, it shall become binding on all stakeholders.

Where, at any point during the Recovery Procedure, the controller opines that the company is able to pay off its debts, he would need to file a Court application so as to terminate the CRP.  The company’s directors or shareholders may also file such an application. However, for it to succeed, the Court would need to first listen to the opinion of the special controller before proceeding.

Moreover, should the Court find that it is not viable for the company to continue on as a viable going concern, it shall terminate the CRP and decide that the company is to be dissolved and wound up.

Therefore, the CRP introduced by virtue of Article 329B under the Act acts as a safety valve for companies which may still be viable to effectively escape insolvency when facing financial hardships, even if this viability would need to be adequately demonstrated to the Court.

For information or assistance, please contact us at info@gtg.com.mt

Author: Karl Cauchi

 

Disclaimer This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.
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