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Legal framework

Legislation

What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The primary legislation governing insolvency and restructuring is the Companies Act (Cap 386 of the Laws of Malta). 

Regulatory climate

On an international spectrum, is your jurisdiction more creditor or debtor friendly?

On balance, in an insolvency scenario, the debtor’s interests would be considered paramount.

Sector-specific regimes

Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?

The following apply:

  • with respect to insurers – the Insurance Business (Reorganisation and Winding Up of Insurance Undertakings) Regulations (LN 208/2004, as amended);
  • with respect to credit institutions – the Credit Institutions (Reorganisation and Winding Up) Regulations (LN228/2004, as amended),  the Banking Act (Cap 370 of the Laws of Malta) and the Controlled Companies (Procedures for Liquidation) Act (Cap 383 of the Laws of Malta); and
  • with respect to investment firms – the Investment Services Act (Cap 370 of the Laws of Malta) and the Investment Firms (Reorganisation and Winding Up) Regulations (LN300/2015, as amended).

Reform

Are any reforms to the legal framework envisaged?

No reforms are envisaged at present.

Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

In cases of fraudulent trading, the Companies Act grants the court the power to impose liability on the wrongdoer with no limitation for all or any of the debts or other liabilities of the company, as the court may direct. Fraudulent trading arises if, in the course of winding up a company, it appears that the business of the company has been carried out with the intention to defraud creditors of the company or creditors of any other person, or for any other fraudulent purpose. In such cases, the court may declare that any persons who were knowingly parties to the carrying on of the business in such manner be personally responsible, with no limitation of liability for all or any of the debts or other liabilities of the company, as the court may direct. The relevant provisions may be invoked against any person, including directors, shareholders or any other persons knowingly involved in the fraud.

In cases of wrongful trading, directors (including shadow directors) of a company which goes into insolvent liquidation may be ordered to make a payment towards the company’s assets, as the court sees fit. The provisions on wrongful trading apply where “a director of the company knew, or ought to have known prior to the dissolution of the company that there was no reasonable prospect that the company would avoid being dissolved due to its insolvency”.

Certain laws, such as the Income Tax Management Act, also impose personal liability on directors for certain debts which would in the normal course be due and payable by the company.

With respect to the group structures, the general principle which flows from the notion of separate juridical personality is that the holding company is not liable for the acts of its subsidiaries. However, there may be instances in which a holding company will incur liability on the basis of general principles of law and independently of the fact that a holding-subsidiary relationship exists. These include situations of:

  • agency;
  • liability in tort; and
  • the grant of a guarantee by a holding company in favour of the creditors of the subsidiary.

Defences

What defences are available to a liable director or parent company?

This will largely depend on the factual matrix of the case. In cases of wrongful trading, the action will not succeed if the court is satisfied that the director knew that there was no reasonable prospect that the company would avoid being dissolved due to its insolvency and accordingly took every step that he or she should have taken with a view to minimising the potential loss to the company’s creditors.

Due diligence

What due diligence should be conducted to limit liability?

Where a director has not been present or active in the company since its registration, thorough legal, financial and regulatory due diligence should be conducted with a view to exposing potential causes for liability.

Position of creditors

Forms of security

What are the main forms of security over moveable and immoveable property and how are they given legal effect?

The general principle under Maltese law is that any party that has bound itself is obliged to fulfil its obligations with all of its property present and future. Accordingly, the property of the debtor constitutes the common guarantee of all of its creditors, all of whom have equal rights against such property, unless there exist between them lawful causes of preference.

Hypothecs and privileges are the two forms of security interest that can be created over immovable property.

Hypothecs can be legal (arising by operation of the law), judicial (originating from a judgment) or conventional (established by contract). Hypothecs can take one of two forms: general or special. A general hypothec affects all of a debtor’s property (present and future) and includes both movable and immovable property owned by the debtor; while a special hypothec extends over only specific immovables of the debtor.

A privilege is another right of preference and ranks above a hypothec, even if the privilege is registered at a later date. The rationale for this is that privileges can be created only in the context of situations which the law considers to merit such preferred treatment. A privilege, which may exist over movables and immovables, exists only in the cases contemplated by law and accordingly cannot be created by the will of the contracting parties.

Generally, hypothecs and privileges must be registered in order to have effect. While privileges rank according to the nature of the debt that they secure, hypothecs rank according to the date on which they are registered.

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

The specific nature of various lawful causes of preference (eg, general privileges, special privileges over movables, special privileges over immovables and hypothecs) makes it impossible to rank the causes of preference in one list. This is compounded by the fact that the lawful causes of preference affect movables and immovables within the debtor company’s patrimony, thus not allowing for one sequential list.

Can this ranking be amended in any way?

Creditors’ claims will rank according to law. However, an arrangement entered into between a company in the course of being wound up and its creditors will, subject to appeal, be binding on the company if approved by an extraordinary resolution and on the creditors if acceded to by two-thirds in value.

Foreign creditors

What is the status of foreign creditors in filing claims?

Foreign creditors enjoy the same status as local creditors in the filing of their claims, provided that a foreign creditor is duly represented in any insolvency proceedings before the courts of Malta.

Unsecured creditors

Are any special remedies available to unsecured creditors?

With the exception of the remedies granted under law, no special remedies are available to such creditors.

Debt recovery

By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?

In the context of an insolvent winding up, creditors are generally prohibited from instituting or continuing proceedings against the company. The Companies Act provides that at any time after the filing of a winding-up application, and before a winding-up order has been made, the company or any creditor or contributory may apply to the court for a stay of judicial proceedings pending against the company, and the court may stay those proceedings. Further, when a company is being wound up by the court, any precautionary or executive warrant (other than a warrant of prohibitory injunction) issued against the company after the date of its deemed dissolution will be void. This is intended to ensure the pari passu treatment of creditors, pursuant to which all creditors rank equally unless there is a lawful cause of preference. Accordingly, once insolvency proceedings have commenced, creditors must recover their dues through such proceedings.

In this context, the effects that winding up may have on antecedent transactions are pertinent. Any privilege, hypothec or other charge and any payment, execution or other act relating to property or rights made or done by or against a company, as well as any obligation incurred by the company within the six months preceding the company’s dissolution, will be deemed to be a fraudulent preference against its creditors (whether it is of a gratuitous nature or an onerous nature) if it constitutes a transaction at an undervalue or if a preference is given (the latter being defined in the Companies Act), unless the person in whose favour it is made, done or incurred, proves that he or she did not know and did not have reason to believe that the company was likely to be dissolved by reason of insolvency. In the event of the company being so dissolved, all fraudulent preferences will be void.

Is trade credit insurance commonly purchased in your jurisdiction?

It is common in certain industry sectors, such as the import and distribution sector.

Liquidation procedures

Eligibility

What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

A company will be dissolved and consequently wound up if it has resolved by extraordinary resolution to be dissolved and consequently wound up by the court or voluntarily.

A company may be dissolved and wound up by the court if:

  • the business of the company is suspended for an uninterrupted period of 24 months; and
  • the company is unable to pay its debts.

A company will be dissolved by the court if:

  • the number of members of the company is reduced to below two and remains so reduced for more than six months (not applicable to single-member companies);
  • the number of directors falls below the minimum prescribed by law and remains so for more than six months;
  • the court is of the opinion that there are grounds of sufficient gravity to warrant the dissolution and winding up of the company; or
  • the period fixed for the duration of the company by its memorandum or articles (if any) expires or an event occurs which the memorandum or articles provide will trigger the company’s winding up (if any) and the company’s general meeting has not accordingly passed a resolution to be wound up voluntarily before such expiry or event.

Requests to the court must be made by means of an application, which may be submitted by the company following a decision of the general meeting, its board of directors or any debenture holder, creditor or contributory (the latter only if certain requirements subsist). In a number of cases, the application may also be made by any shareholder or director of the company. The directors, the company secretary and all contributories and creditors of the company are entitled to make submissions on the hearing of a winding-up application.

The registrar of companies may file a winding-up application where he or she finds that it is expedient to do so and in the public interest.

Further, an application for a winding up by the court may be filed notwithstanding that a company is being wound up voluntarily.

Procedures

What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

Pursuant to the Companies Act, a winding up may take place in one of three ways:

  • winding up by the court;
  • a members’ voluntary winding up (this would not apply in an insolvency scenario) – in such a winding up, the company must pass a resolution for dissolution and consequential voluntary winding up and the company directors may make a declaration that the company will be able to pay its debts in full within 12 months of the date of dissolution. If the directors do not make such a declaration, the winding up will be treated as a creditors’ voluntary winding up; or
  • a creditors’ voluntary winding up, which will apply in the abovementioned scenario.

How are liquidation procedures formally approved?

In the context of a court winding up, the court will, on the liquidator’s application, order a report to be prepared on the liquidator’s accounts (at the company’s expense) once the liquidator has:

  • realised all of the company’s property (or as much as can be realised without needlessly protracting the liquidation);
  • distributed a final payment to the creditors (if any);
  • adjusted the rights of the contributories; and
  • made a final return to the contributories (if any).

Once satisfied that the liquidator has complied with the requirements of the Companies Act and other applicable requirements, the court will release the liquidator from his or her appointment. Once the affairs of the company have been completely wound up, the court will order the company’s name to be struck off the register from the date of the order.

In a creditors’ voluntary winding up, as soon as the affairs of the company are fully wound up, the liquidator must make an account of the winding up showing how it has been conducted and how the property of the company has been disposed of. The liquidator must also draw up a scheme of distribution indicating the amount due in respect of each share from the assets of the company, where applicable. The account must be audited. Subsequently, the liquidator must call a general meeting of the company and of the creditors for the purpose of laying before them the account and scheme of distribution (if any), together with the auditors’ report, and must explain these documents. The liquidator must then send these documents to the registrar of companies, who must then publish a notice and, three months after publication of the notice (unless an objection is raised by a creditor or other interested person), strike the company’s name off the register. 

What effects do liquidation procedures have on existing contracts?

Existing contracts cannot be enforced during liquidation procedures for an insolvent company.

What is the typical timeframe for completion of liquidation procedures?

A voluntary winding up typically takes between 12 and 16 months from the date of the decision to wind up the company. This will vary depending on the nature and complexity of the case at hand. A court winding up may take considerably longer – possibly up to three years, depending on the complexity of the proceedings.

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

The liquidator is appointed by the general meeting or the creditors in the context of a voluntary winding up, or by the court in a winding up by the court.

In a winding up by the court, the liquidator has a number of powers set out in the Companies Act (Cap 386 of the Laws of Malta), which include:

  • bringing or defending any action or other legal proceeding on behalf of the company;
  • carrying on the business of the company as necessary for its beneficial winding up; and
  • paying creditors according to their ranking under the law.

The liquidator in a winding up by the court may also exercise the following powers (among others), subject to the control of the court:

  • sell the company’s movable and immovable property; and
  • undertake all acts and execute all deeds and other documents on behalf of the company.

The primary function of the liquidator, however he or she is appointed, is to realise the assets of the insolvent company and pay creditors according to their ranking under the law.

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

In a court winding up, the court will monitor and oversee most aspects of the winding up and appoint regular hearings in order to be updated by the liquidator with respect to the process. 

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

In a court winding up, creditors can make submissions to the court on the hearing of a winding-up application. In a creditors’ voluntary winding up, following the resolution for winding up, the directors must call a meeting of the creditors and submit to them a full statement detailing the position of the company’s affairs, together with a list of the company’s creditors and the estimated amount of their claims. The creditors may also nominate the liquidator. If the creditors and the company nominate different persons, the person nominated by the creditors will be liquidator. The creditors may also form a liquidation committee.

If the winding up continues for more than 12 months, the liquidator must summon a general meeting of the company and a meeting of the creditors at the end of the first 12-month period and each succeeding 12-month period, during which he or she must submit an account of his or her acts and dealings and the conduct of the winding up during the preceding 12 months, including a summary of receipts and expenditure.

In the context of an insolvent winding up, creditors are generally prohibited from instituting or continuing proceedings against the company.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

In any winding up, on the appointment of a liquidator, all powers of the directors and the company secretary cease, except as provided in the Companies Act.

Shareholders have little involvement in an insolvent winding up, beyond participation in the meetings called by the liquidator.

Restructuring procedures

Eligibility

What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?

The CRP is available only to companies that are unable to pay their debts or imminently likely to become unable to pay their debts. The compromise or arrangement option is available only where the company is unable to pay its debts or where the courts consider there to be grounds of sufficient gravity to warrant the dissolution and consequent winding up of the company.

Provided that the foregoing criteria are met, there are no explicit restrictions which would prohibit such procedures from being initiated.

Procedures

What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?

The formal restructuring procedures available are the company recovery procedure (CRP) and the compromise or arrangement restructuring option.

CRP CRP application An application for the CRP may be made by:

  • the company following an extraordinary resolution;
  • the directors:
    • following a decision of the board;
    • following a notice to convene a general meeting under Article 329A of the Companies Act (where the directors become aware that the company is, or is imminently likely to become, unable to pay its debts);
    • where the general meeting does not convene or a quorum is not present at the meeting; or
    • where a resolution with regard to the filing of a recovery application is not passed due to an unresolved tie following a vote;
  • the company’s creditors representing more than one-half of the value of the amounts owing by the company; or
  • the creditors forming part of a class of creditors, provided that they represent more than half of the company’s creditors in that class.

Contents of CRP application The CRP application must, as far as possible, give the full facts, circumstances and reasons 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 the company itself.

Assessment of CRP application by court and effects of issuance of company recovery order The court must accept or dismiss the CRP application within 40 working days of its filing and will issue a company recovery order only where it is satisfied that the company is, or is imminently likely to become, unable to pay its debts and it believes that that such an order would be likely to achieve one of the following purposes:

  • 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 any of its creditors or members.

In making the company recovery order, the courts must consider:

  • the best interests of the creditors (having regard to the different classes thereof), the company’s shareholders and the company itself, and the possibility of safeguarding employment; and
  • the costs that would be incurred by adopting the company recovery order.

In issuing a company recovery order, the court will appoint an individual to act as special controller who will displace the directors and officers of the company for a period not exceeding four months (extendable for further periods of four months upon evidence of good cause).

One of the core attractions underpinning the CRP is the wide-ranging stay on creditor action conferred by the court-imposed moratorium.

Compromise or arrangement Financially distressed companies may also restructure their debt through the compromise or arrangement procedure. Two options are available for the approval of a compromise or arrangement.

Voluntary compromise Where a compromise or arrangement is proposed between a company and its creditors (or any class thereof) or between the company and its members (or any class thereof), the court may – on the application of the company, a creditor, a member or the liquidator (in the case of a company winding up) – order a meeting of the creditors or the members or class of members, as the case may be. If a majority in number representing two-thirds in value of the creditors (or class thereof) or members (or class thereof), as the case may be, present and voting either in person or by proxy at the meeting agree to any compromise or arrangement, the compromise or arrangement – if sanctioned by the court – will be binding on:

  • all creditors (or the class thereof) or members (or class thereof), as the case may be; and
  • the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company.

Mediation Where a compromise or arrangement is proposed between a company and its creditors (or a class thereof) or between the company and its members (or a class thereof),  the company or any creditor – with the approval of no less than two-thirds of the creditors or class thereof – may seek to appoint a mediator under Article 20 of the Mediation Act (Cap 474 of the laws of Malta). Such mediation will involve a meeting of the creditors (or class thereof), as the case may be, in order to reach a compromise or arrangement. If all creditors, as a result of the mediation process, execute a written agreement containing a compromise or arrangement, such arrangement will be binding on all creditors and the company or, in the case of a company in the course of being wound up, the liquidator.

How are restructuring plans formally approved?

CRP Following admission into the CRP, if the special controller forms the opinion that the company has a reasonable prospect of continuing as a viable going concern, he or she must prepare a restructuring plan which contains all proposals necessary to enable the company to continue as a viable going concern, including in relation to:

  • financial resources (including new financing);
  • the retention of employees;
  • the future management of the company;
  • the proposed manner of paying creditors their claims, whether wholly or in part; and
  • whether it is proposed that the court sanction a compromise which has not been approved by all the creditors.

The court may either reject the recovery plan or approve it in whole or in part and may require amendments thereto. Where the court approves the recovery plan submitted by the special controller (with or without amendments), the recovery plan will be effective and binding on all interested parties for all purposes of law.

Compromise or arrangement See above.

What effects do restructuring procedures have on existing contracts?

The filing of a CRP application triggers a moratorium, pursuant to which a broad range of creditor actions are stayed. The effects of the moratorium include the following:

  • The execution of monetary claims against the company and any interest that may otherwise accrue thereon will be stayed (the stay on creditor action does not apply with respect to any new financing given to the company for the purposes of implementing a restructuring plan);
  • During the tenure of any lease, no landlord or other person to whom rent is payable may exercise the right to terminate lease in relation to any premises leased to the company in respect of the company’s failure to comply with any term or condition of its tenancy, except with leave of the court and subject to such terms as the court may deem fit to impose; and
  • No other steps may be taken to enforce security over the property of the company or to repossess goods in the possession of the company under a hire-purchase agreement, except with leave of the court and subject to such terms as the court may deem fit to impose.

What is the typical timeframe for completion of restructuring procedures?

Timeframes will vary on a case-by-case basis, depending on (among other things):

  • the restructuring procedure pursued;
  • the number of claimant constituencies having an interest in the restructuring plan;
  • the viability of the restructuring plan proposed; and
  • whether any litigation arises as a result of disagreement between competing creditor or shareholder constituencies.

Court involvement

What is the extent of the court’s involvement in restructuring procedures?

CRP In the case of the CRP, the court will first decide whether to dismiss or approve the CRP application. If the court issues a company recovery order, it will appoint an individual to act as special controller and fix such reasonable remuneration as the court considers appropriate. Thereafter, the special controller may not without the express consent of the court:

  • engage the company in any commitment of more than six months; or
  • terminate the employment of company employees; or
  • sell or otherwise dispose of the company’s property to him or herself, or his or her spouse or relatives.

Further, the special controller will be required to inform the court before removing any director or appointing any individual to serve as a manager. The court may, upon the request of the special controller and good cause being shown, extend his or her appointment and relative functions and powers to any company that is a group company in relation to the company placed under the CRP.

In addition, the court may (of its own motion or on the application of any member or creditor) review, confirm, modify or reverse any act or decision of the special controller and give him or her such directions or orders as it deems fit. It may also remove a special controller from office and appoint a replacement.

The court must also approve any restructuring plan formulated by the special controller and must make an order for the company to be wound up by the court where, following admission to the CRP, recovery does not appear achievable.

Compromise or arrangement The court’s involvement in a compromise or arrangement predominantly extends to deciding whether to approve a voluntary compromise after it has been approved by the requisite majorities of creditors or shareholders.

Creditor involvement

What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?

 

CRP Creditor involvement A company recovery application may be filed by:

  • creditors of the company representing more than one-half in value; or
  • creditors forming part of a class of creditors, provided that they represent more than one-half in value of the company’s creditors in that class.

Thereafter, in the event that the court issues a company recovery order, the special controller must appoint a joint creditors and members committee (comprising no more than three creditors and three members) to render such advice and assistance as the special controller may require in the management of the affairs, business and property of the company.

Finally, where the court accepts a recovery plan proposed by the special controller (with or without amendments), the dissenting creditors may apply to the Court of Appeal (Inferior Jurisdiction) if they consider that their rights are likely to be reduced to a level which is lower than that which they would have been granted had the company been dissolved and wound up at the time of the recovery. In the interest of creditors supporting the plan, such an appeal will not automatically suspend the implementation of the recovery plan and procedures, and remedies will be limited to compensation for the loss suffered by the applicant as a result of the recovery procedure.

Actions which creditors are prohibited from taking With respect to actions which creditors are prohibited from taking, a moratorium will apply during the period in which the company recovery procedure is in force. Its effects (in addition to those above) are as follows:

  • Any new or pending winding-up application against the company is stayed;
  • No resolution for the dissolution and consequential winding up of the company may be passed or given effect to;
  • The execution of monetary claims against the company and any interest that may otherwise accrue thereon will be stayed;
  • No running lease may be terminated by the landlord, expect with leave from the court;
  • No precautionary or executive acts or warrants may be made or continued against the company or any property of the company, and no steps may be taken to enforce security over the property of the company or to repossess goods in the possession of the company under a hire-purchase agreement, except with leave from the court and subject to such terms as the court may deem fit to impose;
  • No arbitration proceedings may be made or continued against the company or any property of the company; and
  • No judicial proceedings may be commenced or continued against the company or its property.

Compromise or arrangement Creditor involvement in a voluntary compromise The voluntary compromise restructuring procedure may also be initiated by creditors. On the application of any creditor, the court may order a meeting to consider a compromise or arrangement between the company and its creditors.

The extent to which different classes of creditor will be involved in a voluntary compromise is likely to depend on the exact isolation point of ‘value break’ within a company’s capital structure and whether (on the basis of the company’s value) the class of creditor concerned has an economic interest in the company. For instance, where senior debt is unimpaired, with value break occurring in a junior tranche of debt, it is likely that any compromise or arrangement proposed by the company will be made to both the senior and junior lenders (and therefore, in such instances, both senior and junior lenders are likely to play an active role in the restructuring, as they would have to approve any compromise or arrangement proposed to them). However, where a company is financed by both senior and junior debt, and value break occurs in the senior tranche of debt, it is likely that the compromise or arrangement will be proposed only to the senior lenders since – due to the subordinated status of the junior lenders and the insufficiency of assets to cover the senior tranche of debt in full – the junior lenders may be adjudged by the company to have no economic interest in the company.

Creditor involvement in a mediated compromise Creditors are heavily involved in a mediated compromise because:

  • the appointment of a mediator requires the approval of no less than two-thirds of the creditors or class thereof; and
  • for a mediated compromise to enter into effect, all creditors must execute a written agreement.

A moratorium does not apply when a company is being restructured under the compromise or arrangement route (irrespective of whether it is a voluntary or mediated compromise).

Under what conditions may dissenting creditors be crammed down?

Voluntary compromise The courts may approve a compromise or arrangement where it is supported by a majority in number representing two-thirds in value of the creditors (or class thereof) or members (or class thereof), as the case may be. This allows a company to pursue a restructuring plan against the will of dissenting hold-out creditors, which may – for instance – merely hold a nuisance value in the company. The CRP does not contemplate a cram-down mechanism within its ambit; however, it is possible to conclude a compromise or arrangement with the CRP – this will allow a financially distressed company to benefit from the moratorium (which is a key feature of the CRP) while concomitantly using a compromise or arrangement to cram down dissident, minority hold-out creditors.

Mediated compromise All creditors must execute a written agreement in order for a mediated compromise to enter into effect. For this reason, it is not possible to cram down dissenting creditors under the mediated compromise route.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in restructuring procedures?

Directors’ involvement In the case of the CRP, once the court issues a company recovery order, directors will be displaced by a court-appointed special controller for a span of four months. Under the compromise or arrangement route, the existing board of directors remains in place and will therefore be able to direct the company through the restructuring.

Shareholders’ involvement CRP Shareholders may initiate restructuring procedures under the CRP. Shareholders’ involvement is generally limited after admission into the CRP, as control of the company is vested in the special controller.

Voluntary compromise Where the quantum of debt exceeds the value of the financially distressed company and there are insufficient assets to cover the company’s debt in full (which is often the case in a restructuring scenario), shareholders are likely to be excluded from any voluntary compromise proposed, as they will be considered to be ‘out of the money’. In such instances, shareholders’ role at the restructuring table may be negligible, as they may be adjudged by the company in question to have no economic interest in the company.

Mediated compromise A mediated compromise is a creditor-centric restructuring tool and shareholder involvement is negligible. If, as a result of the mediation process, a written agreement containing a compromise or arrangement is signed by all creditors, the agreement will be binding on the company, irrespective of whether the shareholders agree with the compromise.

Informal work-outs

Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?

Yes.

Local restructuring practice is honeycombed with private work-out solutions, the scope and magnitude of which will hinge on multiple factors – in particular, the company’s financing structure and the degree of the company’s financial difficulties. Debt-to-equity swaps, bond exchange offers and the restructuring of syndicated loans are among a number of tools which may be used by local companies undergoing periods of financial distress.

The advantages underpinning informal work-outs are enhanced flexibility, lower costs, retention of management and the avoidance of negative stigma associated with court procedures. Nonetheless, private work-outs are not devoid of insufficiencies, as they necessitate a high degree of coordination between competing creditor and shareholder classes. This may be difficult to achieve where a company’s debt has been fragmented across a broad spectrum of lenders and truncated into various layers with differing seniority – in such instances, formal court reorganisation proceedings may need to be pursued, not least to enable distressed debtors to benefit from the court-imposed moratorium and, if necessary, cram down dissenting creditors.

Transaction avoidance

Setting aside transactions

What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?

A transaction entered into by a company may be set aside and will be considered void where it constitutes a fraudulent preference. Pursuant to the rules against fraudulent preference, any privilege, hypothec or other charge and any payment, execution or other act relating to property or rights made or done by or against a company, as well as any obligation incurred by the company within the six months preceding the company’s dissolution, will be deemed to be a fraudulent preference against its creditors (whether it is of a gratuitous nature or an onerous nature) if it constitutes a transaction at an undervalue or if a preference is given (the latter being defined in the Companies Act), unless the person in whose favour it is made, done or incurred, proves that he or she did not know and did not have reason to believe that the company was likely to be dissolved by reason of insolvency. In the event of the company being so dissolved, all fraudulent preferences will be void.

A transaction can also be challenged on the grounds of Article 303 of the Companies Act by the creditors of the company concerned.

Operating during insolvency

Criteria

Under what circumstances can a company continue to conduct business during an insolvency procedure?

In case of a voluntary winding up, the company must cease to carry on its business except as far as may be required for its beneficial winding up. In a court winding up, the liquidator also has the power to carry on the business of the company as far as maybe necessary for its beneficial winding up.

Stakeholder and court involvement

To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?

Stakeholders are updated on the progress of business conducted in the course of an insolvency process. During the course of a winding up by the court, stakeholders may attend court hearings, during which the liquidator will update the court on the status of the winding up. Further, the directors, secretary and creditors of the company will be entitled to make submissions to the court.

In the case of a members’ or creditors’ voluntary winding up, if the winding up continues for more than 12 months, the liquidator must summon a general meeting of the company at the end of the first 12-month period from the commencement of the winding up and every 12 months thereafter, and lay before the meeting an account of his or her acts and the conduct of the winding up, including a summary of receipts and expenditure.

Financing

Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?

The granting of a fraudulent preference within the six months preceding the company’s dissolution to the prejudice of the company’s creditors is prohibited. This also applies from the date of dissolution going forward.

Employees

Effect of insolvency on employees

How does a company’s insolvency affect employees and the company’s legal obligations to employees?

 

Insolvency may affect a company’s obligation to pay its employees. Employers must establish a guarantee fund with the aim of guaranteeing payment of unpaid wages owed to employees whose employment is terminated due to the employer’s proved insolvency.

The Guarantee Fund Regulations (Subsidiary Legislation 452.84) stipulate two instances in which an employer is deemed to be in a state of insolvency, namely:

  • where a request has been made for the commencement of proceedings for bankruptcy of the employer under the Commercial Code (Chapter 13) and the court establishes that the employer’s undertaking or business is closed down on the basis that the liabilities exceed the assets; or
  • where the court appoints a provisional liquidator or administrator, or a liquidator after a winding-up order is issued under the Companies Act (Chapter 386).

In addition to the company’s obligation to pay employees, insolvency would most likely result in a situation where employees are made redundant. Therefore, a number of other factors relating to redundancy should be considered.

Redundancy is regulated in different ways, depending on the number of employees being made redundant. Redundancy as a result of insolvency means that most employees, if not all, would be terminated on this basis. The principal act regulating termination of employment (including redundancy) is the Employment and Industrial Relations Act (Chapter 452). Secondary to this are the Collective Redundancies (Protection of Employment) Regulations (Subsidiary Legislation 452.80).

A collective redundancy occurs when, over a period of 30 days:

  • 10 or more employees are made redundant where the company employs between 20 and 99 employees; or
  • more than 10% of employees are made redundant where the company employs more than 100 employees. 

In terms of the applicable redundancy rules, termination of employment is effected on a last-in-first-out basis which is based on the date of engagement of each employee in every class. This generally applies where the redundancies are tapered in cases of insolvency.

Where the thresholds to trigger the collective redundancy procedures do not apply, the employer must notify the employee that the employment is being terminated on the basis of redundancy. In addition to the obligation to pay the employee wages up to the date of such notification, the employer must adhere to the notice periods established by law unless the parties have agreed to longer notice periods in the employment contract.

Notice periods generally depend on the length of service of the employee and, upon receiving notice, the employee can either remain in employment or leave and receive a payment equivalent to half the amount that he or she would have received during such notice period. If the employer asks the employee to leave after giving notice, then the employee is entitled to receive a payment equal to the full amount that he or she would have received during such notice period. Aside from payment due under the notice period, no other payments are due to the employee when terminated for redundancy and the company has no further obligations.

However, if the thresholds established in terms of the collective redundancy are satisfied, then the employer has an additional obligation to notify both the employees and the authorities by means of a written statement, and subsequently enter into consultations with the recognised employees’ representative. A minimum notice period of 30 days is also applicable. This may be extended by the authorities by up to 30 days in certain circumstances.

Consultations should commence within seven working days of the notification date with the intention of avoiding or reducing the number of redundancies or mitigating the circumstances. In the event of insolvency, there is very little scope for reducing the number of redundancies, but mitigating circumstances can include the manner in which employees’ wages will be paid.

Wages are privileged debts to be paid in preference to all other claims albeit up to a limited amount.

Cross-border insolvency

Recognition of foreign proceedings

Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?

In terms of EU Regulation 1346/2000 on insolvency proceedings – which has direct effect in Malta and applies to proceedings where the centre of the debtor's main interests is located in the European Union – any judgment opening insolvency proceedings handed down by a court in an EU member state which has jurisdiction pursuant to Article 3 of the regulation will be recognised in all the other member states from the time that it becomes effective in the state of the opening of proceedings.

Otherwise, any judgment given in the context of foreign insolvency proceedings must be recognised and enforced in Malta in accordance with national law.

Winding up foreign companies

What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?

Pursuant to EU Regulation 1346/2000, if the centre of the debtor's main interests (which is presumed to be the place of the company’s registered office, in the absence of proof to the contrary) is situated in Malta, the Maltese courts will have jurisdiction to open insolvency proceedings. Where the centre of a debtor's main interests is situated in the territory of an EU member state, the courts of another member state will have jurisdiction to open insolvency proceedings against the debtor only if the debtor possesses an establishment within the territory of the other member state; the effects of such proceedings will be restricted to the assets of the debtor situated in the territory of the latter member state.

Outside the context of the abovementioned regulation, and with the exception of any special laws dealing with insurance undertakings, credit institutions or investment undertakings (among other things), Maltese courts do not typically have jurisdiction to order the winding up of a company registered outside Malta.

Centre of main interests

How is the centre of main interests determined in your jurisdiction?

In terms of EU Regulation 1346/2000, the centre of the debtor's main interests is presumed to be the place of the company’s registered office, in the absence of proof to the contrary.

Cross-border cooperation

What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?

The Maltese courts typically display a cooperative attitude in this respect.