Company Law

Insolvency Law in Malta

The relevant provisions relating to the local law of insolvency are found mainly in the Companies Act and the Commercial Code. Moreover as from 1st June 2003, the Set-off and Netting on Insolvency Act regulates the set-off and netting on bankruptcy and insolvency.

The Maltese Insolvency law regime distinguishes between bankruptcies of a person or a commercial partnership other than a company which are regulated under the Commercial Code and bankruptcy of a company which is regulated by the Companies Act.

Insolvency Proceedings

Insolvency proceedings may be started when the company is unable to pay its debts. Court must examine carefully if the financial situation of the company justifies its winding up or if there exists a possibility that the company can still operate and consequently pay its debts. The Companies Act provides that in proving to the court that the company is unable to pay its debts account must be taken of any contingent and prospective liabilities of the company. This may be verified by means of balance sheets and it must be verified that assets of the company concerned are less than its liabilities.

The Companies Act provides for 3 modes of insolvency proceedings:

– When the company by extraordinary resolution resolves to go through a dissolution and voluntary winding up: This procedure requires that the company enters into an arrangement or a compromise with its creditors or members which requires the majority of votes in an extraordinary resolution convened within a month from the discovery of the financial difficulties by the Directors for this purpose and the sanctioning by Court. The date of dissolution of the company is deemed to be the date of the resolution except if a later date is specified in the resolution. The Directors may also apply to Court for a Company recovery procedure whereby a special controller is appointed to take over, manage and administer the business of the company.

The Maltese Insolvency Regime further classifies between a members voluntary winding up whereby the directors issue a solvency declaration showing that the company will be able to pay its debts within a stated time, and a creditors voluntary winding up in cases where the Directors fail to issue such a declaration

– When the company by extraordinary resolution resolves to go through a dissolution and winding up by the court: In various instances, by way of protection, companies opt for a dissolution and winding up by Court for the reason that although all provisions are applicable, however all actions against the company or its property require leave of the court after the winding up order is issued.

– The court may on application, issue a winding up order if it finds that the company is unable to pay its debts : A request to Court for the winding up of the company may be made by the following: the company, the board of directors, debenture holders, creditors, contributories, shareholders, directors or the official receiver. In these cases the company is deemed to have been dissolved at the time of the filing of the winding up application.

A company shall be dissolved by Court if it is unable to pay its debts, however they may be other reasons for a Court winding up including when the business of the company is suspended for a given time period and when there are grounds of sufficient gravity to warrant the dissolution of the Company in the opinion of Court.

Consequences of Insolvency

By virtue of insolvency proceedings, a company is deemed to be dissolved. Any transfer of property or shares, and the issue of any warrants, except warrants of prohibitory injunction after this date would be void. The law goes further than this by providing that any transfer of any property or assets and any charge against the company done within six months prior to dissolution shall be void. On appointment of the liquidator, the powers of the officers of the company cease and pass on to the liquidator.

In both the members and the creditors voluntary winding up, if the scheme of distribution is approved in the final meeting, the name of the company is struck off the Register of Companies. This also occurs in a Court winding up where the Court orders the name to be struck off after having examined the report of the Official Receiver or of the Liquidator as to the payment of creditors.

The law seeks to protect creditors of the company throughout the proceedings of insolvency, in fact at the opening of proceedings creditors may ensure that their claims are protected by means of the precautionary warrants. In further stages of the proceedings, creditors who feel aggrieved by any form of arrangement that the company enters into can contest it in court.

The ranking of claims is according to the Civil Law rules as provided by the Civil Code. Any hypothecs or privileges registered during the insolvency of the trader or company are without effect.

Criminal proceedings may be taken against any officer of the company who in the twelve months prior to the deemed date of dissolution, had concealed assets or documents or disposed of assets or otherwise acted in a fraudulent manner. In civil proceedings these officers may be found responsible to pay back to the company any monies due to the company or even damages. The law also provides for proceedings in case of wrongful trading by directors and fraudulent trading by any officer of the company.

Participants in Proceedings

Liquidator: The liquidator plays a central role in insolvency proceedings, he is responsible for the management of the company and its assets during the period of winding up, and he has its legal and judicial representation. In a Court winding up, the Court may appoint a liquidator or a provisional administrator having duties as the above; however any actions against the company required leave of Court.

Official Receiver: The Official Receiver acts in default of the liquidator in both a voluntary winding up and a winding by Court. He may act in capacity of the liquidator and he may receive statement of affairs of the company being wound.

Final Provisions

Any interested person may file an application in court within five years from the date when the company is struck off the register, asking that the name of the company be restored on the Register of Companies and that the winding up process is reopened. The Court has to be satisfied that this is the only available remedy in order to grant the request. Also, any interested person may file an application in court after the striking off of the company name, asking that there will be a rectification of the scheme of distribution so that it will include an asset of the company which has been left out of the scheme. Any creditor who has not been paid may by an application filed in court within five years from the striking off of the company name, demanding to be paid.

Bankruptcy Proceedings

The Commercial Code provides that a person is declared bankrupt when he suspends payments of his debt. A voluntary declaration of bankruptcy may be made to the Civil Court, First Hall by the trader and his lawful representative alternatively bankruptcy proceedings may also be initiated by the creditors. The fact that a person fails to pay substantial debts is enough proof of suspension of payments of his debts and thus should be considered to be in a state of bankruptcy.

The law strives to protect the interests of creditors in bankruptcy proceedings by granting the Registrar of Courts the power to call on the creditors and state why their debtor should not be declared to be in a state of bankruptcy, and in order that curators may be appointed.

Consequences of Bankruptcy

As from the date of the filing of the traders voluntary declaration in Court, or the date of the judgment of bankruptcy, the trader is dispossessed of the administration of all his property. Anything which devolves on the trader subsequent to bankruptcy will fall under dispossession except for charges on the property and allowance for maintenance. Furthermore, any debts not yet due become exigible upon declaration of bankruptcy. At this stage, a curator is appointed who takes over the assets of the trader and sells any perishable assets.

These consequences of bankruptcy arise from the law in order to protect the interests of the shareholders. The person cannot be absolved from the consequences of bankruptcy proceedings by choosing to pay some of his creditors.

Participants in Proceedings

A curator is appointed who takes over the assets of the trader and sells any perishable assets. The curators duty is primarily to preserve the debtors rights, register any unregistered hypothecs and sue on behalf of the bankrupt in order to collect any sums due to him. With the authorization of Court, he can also continue the business instead of the trader.

Set-off and Netting

By virtue of Act IV of 2003, the set-off and netting on bankruptcy or insolvency was regulated. The Set-off and Netting on Insolvency Act provides that any provisions for the set-off and netting due from each party to the other in respect of mutual credits, mutual debts or other mutual dealings shall be enforceable in accordance with its terms, whether before or after bankruptcy or insolvency, in respect of mutual debts, mutual credits or mutual dealings which have arisen or occurred before the bankruptcy or insolvency of one of the parties. This provision will not be applicable in case of fraud or in case where the insolvent party is a trader or a commercial partnership not being a company and the other party knew or ought to have known of the application for winding up and dissolution of the company due to insolvency.
Any authority or mandate in a contract to implement any close-out netting provision shall not be revoked by the declaration of bankruptcy or the insolvency of any other party to the contract.