In the case Kenneth Xuereb v. Weber Construction Limited decided on the 18 of March, 2021, the Civil Court (Commercial Section) (the "Court") presided over by Hon. Joseph Judge Zammit McKeon, considered at length the two tests of insolvency arising in terms of the Maltese Companies Act with particular reference to its English law equivalents.
In 2018, plaintiff Xuereb, a shareholder and director of the defendant company, instituted action in terms of Article 218(1) of the Companies Act (Chapter 386 of the laws of Malta) (the "Companies Act") requesting the Court to place the said company in liquidation on account of the fact that the said company was unable to pay its debts. Xuereb contented that at the date of the filing, the company had no assets in its patrimony and was indebted to third parties, however despite being called on by the plaintiff to do so, the majority shareholder of the company failed to place the company in liquidation.
The Court noted at the outset that a request for winding up on account of insolvency made in terms of Article 214 of the Companies Act must be read in conjunction with Article 214(5) which in turn sets out two specific tests to be used in determining whether a company is insolvent in terms of Maltese company law. Specifically, there are two principal though non-exhaustive tests to determine whether a company shall be deemed to be unable to pay its debts, namely:
- If a debt due by the company has remained unsatisfied, in whole or in part after twenty-four weeks from the enforcement of an executive title against the company by any executive act issued against the said company (the so-called 'cashflow insolvency' test); or
- If it is proved to the satisfaction of the court that company is unable to pay its debts, account being taken also of contingent and prospective liabilities of the company (the so-called 'balance sheet insolvency' test).
English company law is an important source of Maltese company law and the court acknowledged that the Maltese Companies Act drew heavily from the 1985 UK Companies Act. It was therefore relevant for the Court to compare the two legislative bodies in order to better understand the concept of corporate insolvency under Maltese law, which, although similar to its counterpart, is certainly narrower in scope than the that set out under English law.
The Court turned its attention to the first limb of Article 214(5), commonly referred to as "cashflow insolvency". The Court defined this concept by quoting heavily from a number of English jurists, who in turn noted that under English law, the mere failure to pay a debt which is due but is not disputed, can also amount to evidence of cash flow insolvency. The Court explained that under English law, a company which has a policy of late payment of bills could find itself the subject of a petition for a winding-up order, which petition would not be struck out as constituting improper pressure or an abuse of the process of the court. Therefore in examining whether a company is suffering cash flow insolvency, an English Court will consider whether a company is actually paying its debtors and must take into account the current revenue of the company, as well as any revenue which the company may be able to procure by realising its assets within a relatively short time.
This test should be contrasted with the test for cashflow insolvency under Maltese law which is objective in nature and by its nature refers to disputed debts: it is only upon the lapse of twenty four weeks from the enforcement of an executive title against a company that that company can be considered to be cashflow insolvent in terms of the Maltese Companies Act.
Article 214(5)(b) of the Companies Act sets out the second test for insolvency, known in practice as "balance sheet insolvency". Once again, the Court refers extensively to the English equivalent, noting that although similar to the Maltese test set out in point (b) above, this was not identical. Under the UK Insolvency Act, a company shall be deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company`s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. The difference between the two standards of insolvency is therefore that while under Maltese law, a company shall be deemed to be insolvent if it is unable to pay its debts account being taken also of contingent and prospective liabilities of the company, under English law, one must establish that the value of the company's assets is less than the amount of its liabilities by taking into account its contingent and prospective liabilities. Although seemingly subtle, Hon. Judge Zammit McKeon notes that the difference between the Maltese and English standards was one of substance and could not be set aside as a mere difference in drafting. Having said that, in order to be able to determine with precision what amounts to insolvency under Maltese law, the Court should nonetheless consider the works of English authors in order to determine the true meaning of the term "contingent and prospective liabilities", which terms emerge from the realm of accounting.
In determining what constitutes a 'contingent and prospective liability', the Court notes that under English law, the determination as to whether the assets of a company are outweighed by its liabilities, a court should take into account a Company's liability to pay money or money's worth, including any liability for breach of trust, breach in contract, tort and any other liability arising under any enactment. It is therefore immaterial whether the liability is present or future, whether it is certain or contingent, or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion. The term "prospective liability" shall include any debt which will certainly become due in the future either on some date which has already been determined or some date determinable by reference to future events.
Finally, while a court should have regard to a company's prospective liabilities, it should not take into account the said company's contingent and prospective assets. The Court quotes extensively from Roy Goode's 'Principles of Corporate Insolvency Law', which reads: "it is not sufficient for the company to be able to meet its current obligations if its total liabilities can ultimately be met only by the realisation of its assets. What has to be shown is that by reason of the deficiency of its assets the company has reached the point of no return." These principles had been referred to in cases such as Axel John International AB vs Aluminium Extrusions Limited whereby the First Court of the Civil Hall noted that there was no reason for the creditors of a Maltese company to have to wait for the said company to sell all of its assets in order to get paid and that therefore, the creditors were right to state that the company was unable to pay its debts.
Having regard to the facts of the case and to the doctrine and jurisprudence referred to in the course of its decision, the Court decreed that it had enough proof to declare that the defendant company was unable to pay its debts in terms of Article 214(5)(b) of the Companies Act and ordered that the said company be placed into liquidation.
First published in The Malta Independent.
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