Louis de Gabriele and Andrew Caruana Scicluna of Camilleri Preziosi assess the bankruptcy and insolvency regime in Malta
Section 1: processes and procedures
1.1 What reorganisation and bankruptcy processes are available for financially troubled debtors?
When faced with financial difficulties, debtors are faced with two broad options: insolvency/ bankruptcy; or a voluntary reorganisation. The options available to a financially distressed debtor will inevitably depend on whether the debtor is a company or an individual or partnership.
A company may be dissolved and consequently wound up voluntarily or by the court. A voluntary winding up may be a members' voluntary winding up or a creditors' voluntary winding up.
In a members' voluntary winding-up, which may only take place if the company is solvent, the emphasis is on simplicity and expediency. The directors of the company must make a declaration of solvency within one month preceding the date the extraordinary resolution for dissolution was passed by the company's shareholders. The liquidator appointed by the shareholders will be responsible for winding up the affairs of the company and distributing its assets.
A creditor's voluntary winding up is resorted to where the directors of the company are not in a position to draw up a declaration of solvency. In a creditor's voluntary winding up, both the creditors and the shareholders have a right to nominate a liquidator, but in the case of a difference, the creditors' nomination will prevail. The creditors of the company may also appoint up to five persons to form a liquidation committee.
The company's shareholders may also resolve to have the company dissolved and wound up by the court.
In terms of the Maltese Companies Act (CA), there are two broad options available to companies in order to restructure their businesses: the company recovery procedure (CRP) or the compromise or arrangement option.
An application for the CRP may be filed where a company is unable to pay its debts or imminently likely to become unable to pay its debts. Such application may be made by the company (following an extraordinary resolution), its directors or its creditors (representing more than one half in value). One of the core attractions of the CRP is the wide-ranging stay on creditor enforcement conferred by the court-imposed moratorium – this affords a company some leeway within which to restructure its liabilities as it prevents creditors racing to court to enforce their claims.
The compromise or arrangement option is a hybrid remedy that embodies a near verbatim replica of the UK scheme of arrangement, although in Malta it is only available to insolvent companies. Its most distinctive feature is that it allows the courts to sanction a compromise or arrangement, where it has been approved by a majority in number, representing three-quarters in value of creditors or members or separate classes thereof. This allows a company to cram down a restructuring plan against the will of dissenting minorities.
The bankruptcy of persons or commercial partnerships other than companies (traders) is regulated by the Commercial Code (CC). In terms of the CC, every Trader who suspends payment of their debts is deemed to be in a state of bankruptcy and can make a voluntary declaration of bankruptcy to the First Hall of the Civil Court. Bankruptcy proceedings may also be commenced by creditors. In terms of the CC, a curator will be appointed to take over the assets of the bankrupt and can also continue the business instead of the trader.
The CC contemplates the possibility of a composition or scheme of arrangement in the case of bankrupt traders, where they may propose the terms of a composition to their creditors. A majority in number representing three-fourths in value of the creditors is needed to approve such composition. The CC therefore allows recalcitrant minority hold-outs to be crammed down.
1.2 Is a stay on creditor enforcement action available?
Yes, a stay on creditor enforcement is available under the CRP.
The moratorium (article 329B(4) CA) enters into effect on the filing of a company recovery application. Unless the CRP application is dismissed by the court, the moratorium will apply during the period in which the company recovery procedure is in force and allows a broad range of creditor actions to remain held in abeyance. Its effects are the following: (i) any new or pending winding-up application against the company is stayed; (ii) no resolution for the dissolution and consequential winding-up may be made against the company; (iii) the execution of claims of a monetary nature against the company are stayed; (iv) the right to terminate a contract of lease due to failure to comply with any condition of tenancy is prohibited; (v) no measures may be adopted to enforce security against the company or to repossess goods acquired under a hire-purchase agreement; (vi) no precautionary or executive warrants may be enforced against the company; and (vii) no proceedings may be instituted or continued against the company.
Close-out netting provisions or any other contractual provision relating to the set-off or netting of sums in respect of mutual credits, mutual debts or other mutual dealings with the company survive insolvency, and upon entry into the CRP become enforceable against the special controller. Further, financial collateral arrangements remain enforceable notwithstanding the commencement of winding-up or reorganisation measures of the financial distressed company.
1.3 What are the key features of a reorganisation plan and how is it approved?
A CRP application may be made by the company (following an extraordinary resolution), its directors or its creditors (representing more than one half in value). It must give the full facts and circumstances which led to the company's inability or likely imminent inability to pay its debts, together with a statement by the applicants as to how the financial and economic situation of the company can be improved in the interests of its creditors, employees, and of the company itself. Where the application is made by the company it must contain a recent (not older than two months) statement of the company's assets and liabilities; and a list of the creditors, their addresses, the amounts due to them, and the security they hold over the company's assets. Where the application is made by the creditors, the CA prescribes that such application must be accompanied by appropriate supporting documentation and statements.
The court will make its decision whether to dismiss the application or make a company recovery order within 20 working days of the filing of the application. The court will only issue a company recovery order where it believes that the proposed plan of reorganisation will achieve either: 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 its creditors or members.
In making a company recovery order, the court will take into account: (i) the best interests of the creditors, shareholders and of the company itself, and the possibility of safeguarding employment as appears to be reasonably and financially possible in the circumstances; and (ii) the cost that would have to be incurred by adopting the company recovery procedure.
The compromise or arrangement
The contents of a plan of reorganisation proposed under the compromise or arrangement route are not prescribed by the CA. Nonetheless, the CA does regulate the process to procure the approval of a compromise or arrangement. Such process is as follows.
First, where a compromise or arrangement is proposed between a company and its creditors or members (or any class of them), the court may order a meeting of the creditors or class of creditors, or members or class of members, on the application of: (i) the company; (ii) a creditor; (iii) a member; and, (iv) the liquidator in the case of a company being wound up.
If the compromise or arrangement is approved by the requisite majorities (half in number and three-quarters in value of creditors or shareholders or class of them) an application must be made to the court for its judicial sanction.
1.4 Can a creditor or a class of creditor be crammed-down?
Article 327 of the CA provides that the courts may sanction a compromise or arrangement where it is supported by the above mentioned majorities (see question 1.3). However, the article 327 cram-down mechanism only has the potential of binding unsupportive minorities belonging to a class of creditors which has voted in favour of a plan (it applies intra-class and cannot be used by one class of creditors to cram-down another class of creditors into a restructuring plan).
The CC also envisages a cram-down mechanism in the case of bankrupt Traders. However, a composition under the CC merely requires the sanction of the majority in number and three-fourths in value of all creditors. The CC does not make reference to creditor classes within the ambit of schemes of arrangement – therefore, all creditor classes are subsumed into one. This makes it possible for a fragmented body of junior creditors to hold senior creditors to ransom where senior creditors are not able to meet the majority in number requirement.
1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
Maltese corporate recovery law does not have a mechanism similar to that of the US section 363 bankruptcy sale. Further, although credit bidding is possible within the ambit of local judicial sales by auction, the latter are not relevant within the context of Maltese corporate rescue law.
Nonetheless, within the local framework, pre-packaged asset sales (pre-packs) may be employed in order to achieve the swift sale of a distressed debtor's business. Pre-packs are not formally codified under Maltese law, and practice has thus far not necessitated their judicial recognition. However, the local legislative architecture may indeed be stretched to accommodate pre-packs; if pre-packs were to enter into vogue locally as a result of developments in the Maltese restructuring market, they could be sanctioned under the CRP or the compromise or arrangement restructuring route.
Since pre-packs thrive on speed of execution and minimal court involvement, the CRP would seem to be the more appropriate route for their execution. Where all required consents to the pre-pack are solicited before entry into the CRP, the issuance of the company recovery order (approving the pre-packaged sale) may take place shortly after, and, in any event, within a maximum of 20 days of the CRP application being filed.
There would be no plausible grounds for a putting a pre-packaged restructuring plan to creditor or member meetings and subsequently applying to the courts to sanction its outcome under the compromise or arrangement option, unless such option is necessary to overcome hold-out within an impaired debt tranche.
1.6 What are the duties of directors of a company in financial difficulty?
Company directors are subject to a plethora of obligations, emanating principally from the CA. These provisions are supplemented by the Civil Code dispositions governing fiduciary duties, and in the case of listed companies, the Listing Rules and the Code of Good Corporate Governance.
The general duty underpinning the conduct of directors in terms of article 136A of the CA is to act honestly and in good faith in the best interests of the company. Creditors are afforded protection under a host of other provisions of the CA, most notably those governing fraudulent and wrongful trading. Where a company is operating on the cusp of insolvency, the conduct of directors will be guided by fear of attracting liability under these two provisions.
A director may be held liable for wrongful trading where a company has been dissolved and it appears that a director knew, or ought to have known, prior to the dissolution, that there was no reasonable prospect of avoiding an insolvent liquidation. An action for fraudulent trading may be brought where it is proved that during the course of a winding up, the business of the company has been carried on with the intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose. Within the context of corporate restructuring, the risk of fraudulent trading comes to the fore where directors incur additional credit where there is no reasonable prospect of survival.
Further, directors must summon a general meeting when they become aware that a company is unable or imminently likely to become unable to pay its debts. At the meeting it may be determined that the company should be dissolved, or, that an application be filed for accession into the CRP. In the case of public companies, directors are also under a duty to summon a general meeting where the net assets of the company fall below half or less of its called-up issued share capital.
1.7 What priority claims are there and is protection available for post-petition credit?
The ranking of creditors' claims will depend on the nature of the debtor's outstanding liabilities and the security package in place and will be determined in accordance with general civil law principles.
The following are examples of claims which enjoy priority status: (i) costs incurred in the a winding up; (ii) wages of employees under the Employment and Industrial Relations Act (Chapter 452 of the Laws of Malta); (iii) claims by the director of social security under the Social Security Act (Chapter 318 of the Laws of Malta); (iv) claims made by the commissioner under the Income Tax Management Act (Chapter 372 of the Laws of Malta); (v) claims made by the commissioner under the VAT Act (Chapter 406 of the Laws of Malta); (vi) general privileges as the same are defined in the Civil Code (Chapter 16 of the Laws of Malta); (vii) special privileges, as the same are defined in the Civil Code (which include costs due to advocates and debts due to lessors for the rent of property); and (vii) secured creditors, to name a few.
There are no protections available for post-petition credit under Maltese Insolvency law.
1.8 Is there a different regime for banks and other financial institutions?
Where a bank encounters financial difficulties, in addition to the CA, the following apply: (i) the Banking Act (BA); (ii) the Credit Institutions (Reorganisation and Winding-up) Regulations; and (iii) the Controlled Companies (Procedure for Liquidation) Act.
The Malta Financial Services Authority (MFSA) is granted wide-ranging powers to intervene in the event that a bank encounters financial difficulties. Further, the introduction of the Bank Recovery and Resolution Directive will have a profound impact on the manner in which local, financially distressed banks are restructured.
For financial institutions, the Financial Institutions Act grants special powers to the MFSA in the event that the financial institution in question is likely to become unable to meet its obligations or has insufficient assets to cover its liabilities.
Section 2: international/cross border issues
2.1 Can bankruptcy or reorganisation proceedings be opened in respect of a foreign debtor?
In terms of Council Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation) which is directly applicable in Malta (and applies to all insolvency proceedings, whether the debtor is a natural person or a legal person, a trader or an individual), the Maltese courts may only open insolvency proceedings in respect of a debtor, if such debtor has its centre of main interests in Malta. In the case of companies or legal persons, this is presumed to be the place of the registered office.
Therefore, the process of: (i) a voluntary winding up (whether a members' or a creditors' winding up); (ii) a court winding up; and (iii) bankruptcy proceedings of a trader (each an insolvency procedure), may not be commenced in Malta in respect of foreign debtors which have their centre of main interests in another European jurisdiction. The re-domiciliation of a debtor into Malta immediately prior to entry into an Insolvency Procedure (in order to benefit from Malta's insolvency regime) is impermissible. This is made clear in the preamble to the Insolvency Regulation which states that forum shopping should be prohibited, since it distorts the proper functioning of the internal market.
However, it is possible for secondary proceedings to be opened in parallel with the primary insolvency proceedings. These may only be opened in Malta in respect of foreign debtor with assets in Malta.
The Insolvency Regulation does not apply to debtors located outside the EU, or to restructuring procedures.
2.2 Can recognition and assistance be given to foreign bankruptcy or reorganisation proceedings?
Under the Insolvency Regulation, any judgment opening insolvency proceedings handed down by a court of a member state, or judgments concerning the course and closure of insolvency proceedings, and compositions approved by that court, will be recognised in Malta (unless contrary to Maltese public policy).
With respect to a request for the recognition of non-EU insolvency, bankruptcy, or reorganisation proceedings, Maltese courts would also recognise a judgment unless any of the grounds of non-recognition enshrined in the Maltese Code of Organisation and Civil Procedure (COCP) subsist.
Assistance by means of letters of request as enshrined in the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters, to which Malta is a signatory, may be availed of to provide assistance in foreign bankruptcy and reorganisation proceedings.
Section 3: other material considerations
3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
Where the financially distressed company is in possession of a licence under the laws regulating banking, insurance, investment services and financial institutions, the MFSA will have an impact on the outcome of the reorganisation. Under the CA, where a company recovery application has been filed under section 329B of the CA, the court will not make a company recovery order without first having consulted the MFSA.
Employees also enjoy significant clout under the CRP. Indeed in terms of section 329B of the CA, in making a company recovery order: (i) the court must take into account the possibility of safeguarding employment; and (ii) once a company recovery order has been issued, the special controller may not dismiss employees of the company in question without first obtaining express authorisation from the court. In addition, it should be noted that in the event that the company in question is eventually wound down, employee wages constitute a privileged claim over the assets of the company and are paid in preference to all other claims whether privileged or hypothecary.
Maltese law does not expressly contemplate how pension liabilities are to be treated in the event that a company is restructured under the CRP or the compromise or arrangement route.
Section 4: current trends
4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction.
Owing to the resilience of the local economy, Malta has remained largely detached from the turmoil pervading the rest of the world. As a result, the CRP and the compromise or arrangement recovery route have lain largely dormant. Indeed, since the CRP's inception in 2003, only four company recovery applications have been made. Further, the compromise or arrangement restructuring tool has, to the knowledge of these authors, never been employed.
Further, although the insolvency and bankruptcy procedures are engaged routinely to wind down distressed companies and traders, no particular trends have emerged which are worthy of note.
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Louis de Gabriele
About the author
Louis de Gabriele heads the corporate and finance practice group at Camilleri Preziosi, which includes the corporate, banking, tax, investment services and insurance units of the firm. His areas of expertise are corporate finance, debt restructuring, investment funds and M&A, where he has been actively involved since the beginning of his career.
De Gabriele has led the Camilleri Preziosi team on a number of merger and acquisition transactions, both for local and international corporations, and capital markets assignments. He holds an LLD from the University of Malta and an LLM in corporate and commercial law from the University of London.
Andrew Caruana Scicluna
About the author
Andrew Caruana Scicluna's main areas of practice are asset management, investment funds and corporate reorganisation. He regularly advises on the incorporation and redomiciliation of UCITS funds and alternative investment funds in Malta and also advises a number of retail and non-retail funds, investment managers and administrators on their regulatory transactional affairs. He is experienced in corporate restructurings and company divisions.
Caruana Scicluna holds an LLD from the University of Malta and an LLM in banking and financial law from the London School of Economics.