Just before going into summer recess Maltese Parliament held the first reading of three Acts which, once adopted, are bound to start changing the Maltese insolvency law landscape. These Acts will be amending the Commercial Code and will be introducing a new Insolvency Practitioners Act and a Pre-Restructuring Act.
The texts of these proposed laws are yet to be made public, however one can surmise that the main aim of these new laws will be that of implementing Directive (EU) 2019/1023 of the European Parliament and of the Council on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (the “EU Restructuring Directive”). The Malta Business Registry has also stated that other aims of the proposed reform include that of considering reports by the World Bank Consultancy Service on the Maltese insolvency framework and the World Bank Doing Business Reports; and adopting principles established by the International Association of Insolvency Regulators. Sources which have been considered in drafting the proposed new laws include the UNCITRAL Model Laws on Insolvency, as well as the insolvency laws of other jurisdictions including the United Kingdom, Ireland, Italy, Belgium and the Netherlands. All of these jurisdictions have different philosophical approaches to the treatment of insolvency law, and it will be interesting to see which features make their way into the Maltese legal system.
One of the main objectives of the new laws will be that of having an early warning system implemented whereby businesses which are on the brink of insolvency could be identified and be subject to effective and efficient restructuring mechanisms. Article 3 of the EU Restructuring Directive requires Member States to have systems in place to ensure that “debtors have access to one or more clear and transparent early warning tools which can detect circumstances that could give rise to a likelihood of insolvency and can signal to them the need to act without delay”.
The early warning tools which are being considered include alert mechanisms which debtors or employee representatives may raise, requesting the debtor to consider its financial standing; as well as automatic IT-based systems which trigger an alert when certain payments are not made on time (such as when defaults occur on the payment of taxes, loans, utility bills, and others). Furthermore, third parties with information on a debtor (such as accountants, employees and creditors) may also be required, or given incentives, to flag negative developments. To this end, the creation of a new competent authority to coordinate the process and provide businesses with necessary guidance at this early stage is being considered.
Businesses which enter a pre-insolvency restructuring phase should be able to benefit from the implementation of restructuring plans which would need to be approved by a judicial or administrative authority (which would presumably be identified by the new laws). Debtors should be able to remain in control of their assets (through the adoption of “debtor-in-possession” concepts into Maltese law), with the ultimate aim of increasing the pool of assets available for the benefit of the debtor and its creditors generally. This should mean reduced costs for struggling companies since there will be no need for an external special controller or provisional administrator who will need to be reimbursed for their costs. Throughout the pre-insolvency restructuring process, debtors may also be able to benefit from a stay of individual enforcement actions (for a maximum period of 12 months).
The above will be coupled by the introduction of a new specialised role for insolvency practitioners, thereby moving away from the current reliance on certified public accountants and advocates. The aim would here be to have specialised insolvency practitioners who are focused and well trained to carry out this role, and may even be governed by a dedicated code of conduct.
Given that the texts of the proposed new laws have not been published, one cannot comment on the specific details of the new laws which Parliament should be discussing in the coming months. Company recovery and arrangement mechanisms already contained in our Companies Act have had very little uptake or success throughout their lifetime, therefore care should be taken to ensure that new restructuring processes do not suffer from the same inefficiencies. A culture change would also be necessary within the legal and business communities as the proposed laws are bound to introduce a new approach as to how distressed businesses are dealt with.
Moreover, extra caution should be given by legislators to existing provisions in Maltese law which already regulate companies operating in the shipping and aviation industries – current laws already create special insolvency frameworks for these companies (also as a result of international conventions which Malta has signed up to, such as the Cape Town Convention) which have helped these industries grow exponentially over the past years, and care should therefore be given to ensure that Malta’s attractiveness in these industries (particularly to international financiers and lessors) is not dampened by the introduction of the new insolvency laws.