Introduction
Despite the provision of authorised state aid, subsidised banking funding and interim supportive measures from other establishments, the past decade has seen numerous enterprises encounter financial difficulties due to both the financial crisis and the unprecedentedconditions induced by the COVID-19 pandemic. Businesses lacking resilient financial frameworks have faced the prospect of liquidation.
The Company Recovery Procedure (hereinafter referred to as ‘CRP’) is a legal process designed to address financial challenges in businesses. It falls under the insolvency framework and offers distressed companies a respite by preventing creditors from taking actions that could lead to their downfall.
Liquidation and insolvency may not always be the most beneficial courses of action for creditors. The CRP is governed by Article 329B of the Companies Act, Chapter 386 of the laws of Malta. This comprehensive provision was introduced through Act XIII of 2003, enabling companies facing immediate financial strain or potential future liquidity challenges to submit an application to the Maltese Courts to appoint a Special Controller.
As highlighted by Professor Andrew Muscat in his work “Principles of Maltese Company Law”, it is important to note that while Article 329B of the Companies Act presents an alternative to liquidation through the CRP, its primary objective is to ultimately reinstate the company as a self-sustaining and viable entity. Should it become apparent that the company is incapable of settling its debts and achieving viability, whether through the application or upon the conclusion of the proceedings, the Court will take the necessary steps to initiate the winding-up process for the company.
Which Companies Qualify for the CRP and What Does This Procedure Involve?
In accordance with Article 329A of the Companies Act, directors must convene a general meeting if they become aware that the company is unable to meet its debts. This notice should be issued within 30 days of this awareness.
Eligibility for the CRP extends to companies unable to meet their debts. Companies in this position can apply to the court to be placed under the CRP. This application can be initiated by the company itself, its directors or creditors. When submitting a company recovery application to the court, the applicant is required to present a comprehensive overview of the factors contributing to the company’simpending debt crisis, as well as a study outlining potential improvements that could restore the company’s viability. The Court will assess the viability of the CRP application for the company’s survival and take into account any agreements between the company and its creditors. If deemed viable, the Court will issue a Company Recovery Order within 20 days.
This can be achieved by:
Creating a Convincing Plan: The plan needs to be well-defined, practical and substantial enough to persuade the Court that the company can stay operational if the proposed procedure is implemented.
Considering Creditor Perspective: The Court also takes into account the opinions of the company’s creditors regarding the viability of the plan. In the case of Sakaras Holding Limited, the applicant presented evidence indicating that the company was unable to settle its debts. After reviewing the recovery plan, the Court remained unconvinced about the company’s ability to transform into a sustainable holding company in the future. The lack of credibility shown by the creditors was another factor that led to the decision to reject the application.
Ensuring Long-Term Profitability: The plan must convince the Court that the company is on track to achieve profitability in the long run. The Sakaras Holding Limited case demonstrated that the Court identified a plan primarily aimed at postponing liquidation rather than revitalising the company’s financial health. The Court labelled the plan as being a reactive rather than a proactive strategy required to make a real difference.
Effects of CRP
During the CRP period, directors’ powers are temporarily suspended and a Special Controller assumes these responsibilities. This grants the company breathing space, as pending applications and monetary claims are put on hold. Precautionary or executive actions or warrants are also prohibited against the company. While the cost of the CRP is the temporary removal of directors, the company gains a period of stability. Additionally, if the procedure does not lead to a successful recovery, the Court will order the company’sdissolution and winding-up.
Upon termination of the CRP, the Special Controller consults with members and creditors to determine the procedure’s effectiveness. If it is deemed ineffective, the Special Controller must apply to the Court for a winding-up order. Conversely, if the company’s position improves and it can meet its debts, the Special Controller applies to the Court to terminate the CRP, allowing the company to resume normal operations.
The Company Recovery Procedure offers a viable alternative for businesses facing financial distress, aiming to restore them to financial health and avoid liquidation. At VB Advocates, we provide expert guidance and advice to companies and their directors to ensure continuous compliance with their obligations and to assist in navigating the complexities of the CRP. Contact our team to discuss how we can assist your company in achieving financial stability and growth.