The Maltese economy has proved to be somewhat resilient in the wake of global crises thus far. Having withstood one of the worst financial crises in 2008, Maltese entrepreneurs and investors in the Maltese economy were led to believe that Isaac Newton's third law of motion, which states that "what goes up, must come down", does not apply to the Maltese economy. Yet the Maltese economy does not appear to be immune to COVID-19, as the global pandemic is now causing its vulnerabilities to come to light.
In order to safeguard the economy the Maltese Government acted in a protectionist manner whilst seeking to give it the necessary stimulus to mitigate the negative impacts of COVID-19; however, the unavoidable reality is that a number of businesses have been struggling and will continue to do so in the near future, most probably leading to an unprecedented wave of insolvencies and bankruptcies in Malta. Though a number of entities may have been postponing hard decisions over the past few weeks and months, a time will come when decision-makers will have to take a view as to whether there is a reasonable prospect for their businesses to pay their debts as they fall due, and possibly even face the consequences of failing to act in a timely manner. As the water starts to settle, matters may even get worse before they get better – entities which may have been responsible enough to save for a rainy day, will have to come to terms with writing off bad debts and acknowledge that amounts due to them may not be recoverable.
How quickly the Maltese economy recovers from COVID-19 is therefore not only dependent on improvements in the international markets, but also on how well our insolvency laws are geared to deal with insolvencies generally. Unfortunately, the situation here is definitely not promising. According to the World Bank's "Doing Business 2020", Malta ranks last in Europe on the ease of resolving insolvency and ranks in the 121st place worldwide. According to this report, the recovery rate expected for insolvencies in Malta is of 39.2 cents on the dollar, which is in stark contrast to the best performing countries in Europe (such as Netherlands, where the expected recovery rate is of 90.1 cents on the dollar). Thus creditors of an entity being subject to insolvency proceedings in Malta need to navigate through the lowest ranking insolvency laws in Europe in order to seek to recoup an average of 39.2% of debts owed to them, with this therefore possibly giving rise to financial problems to the creditors themselves too! This has a public and social impact as well, as creditors can also include employees in respect of unpaid wages, taxes, and can possibly even include other claims (such as environmental damage claims). Having a recovery rate of only 39.2% means that anyone who is a party to insolvency proceedings in Malta ends up losing.
Whilst other jurisdictions have updated their insolvency laws following the 2008 financial crisis, Malta has not followed suit. Contagion is therefore a very real risk which we may need to deal with unless Malta's insolvency laws and laws on security interests are updated urgently. Secured creditors need to have certainty that they can enforce their security seamlessly. Creditors need certainty over the outcomes of insolvency proceedings without any unexpected surprises. Debtors (and their decision-makers) need to be certain of their position and responsibilities and the consequences of failing to take decisions, whilst understanding that taking timely decisions (whether of filing for insolvency, or alternatively of trying to reach an amicable solution with their creditors) will benefit them too.
Updating Malta's insolvency laws could also be an opportunity for Malta to market itself as a desirable jurisdiction from which to operate. A number of international entities are effectively managed and controlled in or from Malta. This could also play a part in determining a company's "centre of main interests", when assessing which jurisdiction main insolvency proceedings are to take place in pursuant to Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings. A modernised insolvency legal framework that gives certainty to all parties involved will therefore encourage companies to relocate to Malta to ensure that they can benefit from Malta's insolvency laws should there be the need, whilst also encouraging creditors (and financing parties) to continue to trade with them and extend finance. This system has already worked particularly well in the shipping and aviation industries in Malta (which benefit from sector-specific security interests, and are subject to specialised enforcement mechanisms on insolvency), and should therefore also work in a similar way if applied to other industries of a general nature.
Group insolvencies involving entities situated in a multitude of jurisdictions give rise to a number of issues in their own right. While a single group member might be located in Malta, the insolvency rules of other countries that are applicable to other group members cannot always be easily coordinated. Various conflict-of-laws issues are bound to arise, particularly regarding judicial recognition and enforcement of foreign insolvency proceedings, the recognition of the claims of foreign creditors and the differences in the applicable laws in the disposal of assets. The aforementioned EU regulation has gone a long way towards addressing some of the issues arising in cross-border insolvencies, however Malta has to date failed to implement the UNCITRAL Model Law on Cross-Border Insolvency, which merely provides a legislative guide for States to modify their laws to ensure consistency of insolvency laws and practices between different countries. As a result, in situations where Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings does not apply, such as in the case of US Chapter 11 proceedings, Maltese Courts are left with no legal regime or legislative guidance as to the effect on local entities, creditors and assets.
Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 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, and amending Directive (EU) 2014/1132 also needs to be implemented into Maltese law by not later than July 2021. Though the Official Receiver has clearly been doing his best to ensure that this Directive is properly adopted into Maltese law, it is also essential to consider the wider insolvency framework within which this Directive will find itself, and the implications of not updating our general insolvency laws (and laws on security interests) in a substantive manner. Other proposals are also being considered at a European Union level (including those for a Directive on accelerated extrajudicial collateral enforcement mechanism, and also for a Directive on credit servicers and credit purchasers), and any reform of Malta's insolvency laws should therefore also consider these proposals as part of a holistic reform (whether these are adopted by the European Union in the near future or otherwise).
Delaying a reform in this area of law will only mean that Malta will continue to suffer the negative economic consequences of COVID-19 much more than other jurisdictions. Furthermore, having our insolvency laws classified as the last in Europe by the World Bank is definitely not something to be proud of.
This article was first published in the Times of Malta, 29 September 2020.
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