Under Article 218 of the Companies Act, any creditor or creditors can, by means of an application, request the court for the winding up of a company. Such process takes place when the company is no longer able to pay its creditors and the directors are not in a position to make a declaration of solvency.
A recent Legal Notice (LN 373 of 2020) has effectively suspended this right given to creditors and debenture holders for a period of 40 days, following an order from the Minister for the Economy, Investment and Small Businesses to terminate such suspension. This also applies to any action or proceeding for the dissolution and winding up of a company in terms of Article 214 filed in the Registry of Courts and Local Tribunals on or after 16th March 2020 by any debenture holder or creditors. The Legal Notice shall not hinder or prejudice the power of the Court to order the filing or hearing of applications under Articles 214 and 218, if it is satisfied prima facie, that the application was filed prior to the 16th March 2020.
Article 316 of the Companies Act concerns an action brought against the directors of a company in dissolution or which is insolvent, if they knew or ought to have known, prior to the dissolution, that there was “reasonable prospect that the company would avoid being dissolved due to its insolvency”. This has also been suspended for a period of 40 days in terms of the LN. It has also been specified that the steps the director should have taken in order to minimise the potential loss to the company’s creditors during the suspension established by means of this regulation, shall exclude the filing of an application in court in terms of Article 218, which he is entitled to file ins his position as director of the company. This also includes if the director was incurring debts in good faith on behalf of the company during its ordinary course of business, unless it is shown that such actions or omissions were intended to prejudice the pari passu ranking of creditors in the company that existed prior to such act or omission.
The purpose behind this Legal Notice is understood to be that of protecting companies that have been heavily affected by the COVID-19 pandemic, by giving them some breathing space in being chased by creditors without being forced to wind up their business. This also follows the implementation of the Companies Act (Company Reconstructions Fund) Regulations which had the aim of creating the Company Recovery Fund to provide support for company recovery procedures that have been instituted in accordance with the Companies Act.
This article was written by Dr Cherise Abela Grech and Legal Trainee Mr Steve Vella.
Disclaimer: This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.