Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.

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 Companies Act (Cap 386 of the Laws of Malta), 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.

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 parent company, 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, only thorough due diligence may serve to potentially limit liability. If due diligence uncovers matters which may give rise to personal liability, it is unlikely that any person would be willing to take on a role within the company and potentially expose himself or herself to such liability. Generally, the standard of diligence required of a director is that of a bonus paterfamilias

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 (these arise by operation of the law), judicial (originated 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 (ie, 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. However, we are not aware that this has ever occurred in practice.

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 by auditors. 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 eligibility criteria will depend upon which restructuring procedure is pursued.

Companies in financial distress may choose between two formal procedures to restructure their business:

  • the company recovery procedure (CRP); or
  • the compromise or arrangement.

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 available restructuring procedures are the CRP and the compromise or arrangement.

CRP An application for the CRP may be made by:

  • the company following an extraordinary resolution;
  • the directors following a decision of the board; or
  • the company’s creditors representing more than one-half of the value.

Following the application, existing management will be displaced in favour of a court-appointed special controller for a 12-month period. 

The CRP application must, as far as possible, 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 the company itself.

The court must accept or dismiss the CRP application within 20 working days of its filing and will issue a company recovery order only where 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 approval 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, shareholders and the company itself and the possibility of safeguarding employment.

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 option.

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 and the liquidator (in the case of a company winding up) – order a meeting of the creditors or class of creditors, or members or class of members, as the case may be. If the compromise or arrangement is approved by the requisite majorities (one-half in number and three-quarters in value of creditors or shareholders or classes thereof), an application must be made to the court for its judicial approval.

The most distinctive feature of this restructuring procedure is that it allows a company to cram down a restructuring plan against the will of dissident minorities.  

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;
  • the retention of employees;
  • the future management of the company; and
  • the proposed manner of paying creditors their claims, whether wholly or in part.

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 If a compromise or arrangement is approved by the requisite majorities (one-half in number and three-quarters in value of creditors or shareholders or classes thereof), an application must be made to the court for its judicial approval. Owing to the dearth of local jurisprudence on this matter, it is uncertain whether this will simply involve a mere rubber-stamping exercise or a real exercise of discretion by the court on the substance and merits of the compromise or arrangement.

What effects do restructuring procedures have on existing contracts?

The filing of a CRP application triggers a moratorium in which a broad range of creditor actions will be stayed. The effects of the moratorium include the following:

  • The execution of monetary claims against the company will be stayed;
  • The right to terminate a contract of lease due to failure to comply with any condition of tenancy is prohibited; and
  • No measures may be adopted to enforce security against the company or to repossess goods acquired under a hire-purchase agreement.

Other than the foregoing, the entry into restructuring procedures will not result in the termination or alteration of terms of existing contracts. 

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. 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.

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 (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 wind up the company 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 the compromise or arrangement 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

A company recovery application may be filed by creditors of the company representing more than one-half in value. Creditors’ involvement is generally limited after admission to the CRP, as control of the company is vested in the special controller.

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 are as follows:

  • Any new or pending winding-up application against the company is stayed;
  • No resolution for dissolution and consequential winding up may be made against the company;
  • The execution of monetary claims against the company is stayed;
  • The right to terminate a contract of lease due to failure to comply with any condition of tenancy is prohibited;
  • No measures may be adopted to enforce security against the company or to repossess goods acquired under a hire-purchase agreement;
  • No precautionary or executive warrants may be enforced against the company; and
  • No proceedings may be instituted or continued against the company.

Compromise or arrangement The compromise or arrangement 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 compromise or arrangement procedure 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 valuation) the class of creditor concerned has an economic interest in the company. For instance, where senior debt is unimpaired, with value break occurring in the junior tranche, it is likely that any compromise or arrangement proposed by the company will be made to both senior and junior lenders (and therefore, in such instances, both senior and junior lenders would 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, for instance, and value break occurs in the senior tranche, 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.

A moratorium does not apply when a company is being restructured under the compromise or arrangement route.

Under what conditions may dissenting creditors be crammed down?

The courts may approve a compromise or arrangement where it is supported by a majority in number (representing three-quarters in value) of creditors, members or respective classes 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 merely hold a nuisance value in the company. However, the cram-down mechanism has the potential to bind only unsupportive minorities belonging to a class of creditor which has voted in favour of a plan (ie, it applies intra-class and cannot be used by one class of creditor to cram down another class into a restructuring plan). 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.

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 12 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 and the compromise or arrangement option. Shareholders’ involvement is generally limited after admission into the CRP, as control of the company is vested in the special controller.

Compromise or arrangement 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 compromise or arrangement 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.

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 myriad 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 volatility.

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/shareholder classes. This is evidently 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 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 of 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 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 relating to the conduct of such business. 

Financing

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

In this context, the rules against fraudulent preference would apply. 

Employees

Effect of insolvency on employees

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

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

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

In the event of insolvency, an employer would most likely face a situation in which employees are made redundant. There are a number of factors to consider in this situation.

Redundancy is regulated in different ways, depending on the number of employees being made redundant. In the event of insolvency, it is assumed that most, if not all, employees are terminated on this basis. The principle act regulating employment is the Employment and Industrial Relations Act (Cap 452), which regulates the grounds for termination on the basis of redundancy and should be the first port of call in such a case.

If all employees are made redundant, such an action may constitute a collective redundancy, in which case specific regulations apply. The general rule is that if 10% of the workforce is to be made redundant over a period of 30 days, this would qualify as a collective redundancy.

On the other hand, if not all employees are made redundant at the same time, the employer will need to examine the date of engagement of each employee in every class and terminate employment on a last-in-first-out basis.

The following employment provisions also apply:

  • Duty to notify employees – in terms of Article 36(3) of the act, the employer is required to notify employees in the event of termination due to redundancy. 
  • Duty to notify employees in the event of a collective redundancy – in the event of a collective redundancy, the employer has an additional obligation to notify, by means of a written statement, and subsequently consult with the recognised employees’ representative. 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.
  • Obligation to pay wages – while wages should always be paid as they fall due, Article 20 of the act provides that wages are privileged debts to be paid in preference to all other claims. 
  • Establishment of a guarantee fund – Article 21 of the act sets out the general obligation for employers to set up a guarantee fund with the purpose of guaranteeing payment of unpaid wages due to employees whose employment is terminated because of the employer’s proved insolvency. 

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 will adopt a cooperative attitude in this respect.