25 September 2020

The Suspension Of Filing For Dissolution And Winding Up Regulations

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On 15 September 2020, the Minister for the Economy, Investment and Small Businesses issued the Companies Act (Suspension of Filing for Dissolution and Winding Up) Regulations, 2020 (the "Regulations").
Malta Corporate/Commercial Law
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On 15 September 2020, the Minister for the Economy, Investment and Small Businesses issued the Companies Act (Suspension of Filing for Dissolution and Winding Up) Regulations, 2020 (the "Regulations"). These Regulations have been anticipated ever since the publication of Bill 128 of 2020 and introduce a number of changes to Malta's insolvency laws in light of the COVID-19 pandemic. These changes are summarized and commented upon below.

Suspension of Rights to File for Dissolution

First and foremost, the Regulations suspend the rights of creditors and debenture-holders under Article 218 of the Companies Act (the "Act") to file for the dissolution of their debtor-companies on the grounds established in Article 214 of the Act, which suspension shall last until 40 days following any order by the Minister to lift the suspension established by these Regulations. However, where the court is satisfied on a prima facie basis that the alleged ground for dissolution arose prior to 16 March 2020, then the court can allow the filing of the winding-up application.

The Regulations do not affect other rights established by Article 218 of the Act, including the power for a winding-up application to be made by the company itself following a decision of the general meeting, or its board of directors, or any contributory, as well as by the Registrar of Companies. These rights have not been suspended, so it will still be open for such parties to file an application on the basis of Article 214 of the Act.

Right to Anchor the Date of Deemed Dissolution During the Suspension

In an attempt to counterbalance the suspension of the rights referred to above, the Regulations introduce a new date of "deemed dissolution" for creditors or debenture-holders which are prohibited from filing a winding-up application against their debtor company.

Thus, during the suspension, creditors or debenture-holders may still file a judicial letter in court against their debtor company informing it of the grounds for dissolution, typically an inability to pay debts i.e. insolvency. In the event that, following the lifting of the suspension, they succeed in obtaining a winding-up order against that company, then the company will be deemed to have been dissolved as at the date of the first judicial letter filed by the creditor/s or debenture-holder/s.

This can result in a number of repercussions. The date of deemed dissolution is in most cases the date of the filing of a winding-up application, and limitedly, where the ground relied upon is the existence of grounds of sufficient gravity, it will be the date of the winding-up order. This date is relevant particularly in relation to prospective requests by interested parties for the court to annul certain company transactions carried out within the 6 months preceding the date of deemed dissolution, including in the case of alleged fraudulent preferences, and transactions allegedly carried out at an undervalue. Thus, creditors will have an interest in filing judicial letters seeking to establish an earlier date of "deemed dissolution".

This change thus paves the way for the abusive use of judicial letters threatening a winding-up application throughout the suspension, with the obvious result that the fear of a winding-up order will constrain the activities of those companies, and any potential for turnaround will be stifled. Appropriate amendments to Article 303 of the Act on fraudulent preferences and transactions at an undervalue are lacking.

Stay of Pending Winding-Up Proceedings

The Regulations impose a stay of any pending dissolution proceedings that were instituted by an application filed in court on or after 16 March 2020 by a creditor or debenture holder on the grounds established in Article 214 of the Act, which suspension shall last until 40 days following any order by the Minister to lift it. However, where in those proceedings the court is satisfied on a prima facie basis that the causes underlying the request for dissolution arose prior to 16 March 2020, then the court has discretion to allow the hearing of the application.

The strict adherence to the date of 16 March 2020 fails to take into account whether the causes for the application for dissolution relate in any way to the COVID-19 pandemic, or otherwise. If this was the legislator's intention, then the choice of this date fails to consider that Maltese companies might have had business interests in other countries or continents where the effects of the COVID-19 pandemic were felt even earlier. Moreover, the increased reliance on the court to conduct prima facie assessments of winding-up applications brings with it concern of court delays and the absence of any indication of the type of evidence that should be brought. Further guidance is required in this regard.

Suspension of the Wrongful Trading Rule

The right of a liquidator of a dissolved company to bring an action against one of the company's directors for wrongful trading has also been suspended with retroactive effect, as from 16 March 2020 (until 40 days following the lifting of this suspension), albeit with a number of curious qualifications.

As the wrongful trading rule laid out in Article 316 previously held, where a director knew, or ought to have known, that there was no reasonable prospect that the company would avoid being dissolved due to its insolvency, he may be ordered to make a payment to the company's assets. However, the law provided directors in this instance with a defence; where they could show that they took every step they ought to have taken with a view to minimizing potential losses to creditors.

The Regulations now establish that directors will not be expected to have taken certain steps to minimize potential losses to creditors during the suspension of Article 316. Specifically, they will not be expected to:

  • file an application to dissolve the company of which they are a director; or
  • incur debts in good faith on behalf of the company.

The moment in time at which this regulation is intended to reprimand director behaviour is not clearly established. The Regulations suspend the right of a liquidator, after the dissolution of the company, to bring a wrongful trading action vis-à-vis a director's behaviour in the vicinity of insolvency, and nevertheless, prior to the dissolution of the company. Upon dissolution, the directors will no longer be responsible for the management of the company. Accordingly, it is uncertain what steps taken during this suspended period could be used by a director as a defence to allegations concerning his or her prior behaviour, particularly if he is no longer responsible for the management of the company due to its dissolution.

In any case, while Article 316 never specified the types of actions that would qualify as steps taken to minimize potential losses to creditors, the specific exclusions are confusing. The Regulations appear to imply that a director will not be able to defend himself against an allegation of wrongful trading if he shows that he continued to incur debts in good faith on behalf of the company during the period of suspension, or filed for the company's dissolution. The effect of this is that directors should cease trading entirely during this period of suspension, the only result of which will be the obvious worsening of the company's financial position. Effectively debtor companies are being expressly prohibited from seeking new finance in order to remedy their situation. Possibly the only solution a debtor company may have in such circumstance is to seek to avail itself of company recovery proceedings. If the Regulations rather intended to imply that the specified behaviour would not expose a director to liability for wrongful trading, then an appropriate amendment to clarify this is warranted.

The Regulation goes further and specifies that where, however, a director's acts or omissions during the suspension of Article 316 were deliberately intended to prejudice the pari passu ranking of the company's creditors, then this will not be excluded from the steps he ought to have taken to minimise the potential loss to creditors. Presumably, the legislator intended to imply that such behaviour of a director during the suspension of Article 316 would not escape wrongful trading liability, rather than the defence to such an allegation. In any event, this qualification was entirely unnecessary, as such behaviour would be caught by the fraudulent trading rule in Article 315 of the Act, which has not been suspended.

The Regulation likewise makes no changes to:

  1. the remedy against delinquent directors in Article 312 of the Act. An action can thus be brought against a director for a breach of duty that has allegedly taken place at any point in the company's lifetime, and which covers any improper performance or breach of duty;
  2. the duty of directors in Article 329A of the Act to summon a general meeting of the company within 30 days of knowing the company is unable, or imminently likely to become unable, to pay its debts, in order to review the company's position; and
  3. the fiduciary duties owed by directors generally.

In light of these Regulations, companies and their directors would be well-advised to seek appropriate advice as to their position and potential exposure to liability. Creditors' rights are also going to be severely affected and creditors will also need to consider what options at law they are going to have and what implications their actions may have against defaulting debtors.

This article was first published in the Times of Malta, 23 September 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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