An overview of the Corporate Restructuring Process in Malta

Article 136A of the Companies Act requires directors to promote the company's well-being and ensure its effective governance, administration, and management.

Amongst the most important duties of a director contained in the Companies Act (Chapter 386 of the laws of Malta – the “Act”) is the duty under Article 136A to promote the well-being of the company and to be responsible for its good governance, proper administration and management. As part of this duty, a director must ensure that a company’s liabilities do not exceed its assets, which nonetheless may not always be possible in circumstances where business conditions are not favorable.

The Importance of Corporate Restructuring: Turning Around for Profit and Job Preservation

Directors of a company facing financial distress should not immediately seek the dissolution and subsequent winding up of the business - if the company is viable and can be turned around to make a profit, then the directors should attempt a restructuring process. A successful corporate restructuring process would not only save the business itself, but it would also save jobs which undoubtedly would be more beneficial to the economy than if the company were to be liquidated. A restructuring process would also offer the company the opportunity to be more efficient and to improve its performance. 

Exploring Company Recovery Procedures: Averting Insolvency Early
The Act provides for a number of company recovery procedures which may be used to avert insolvency, and which are useful tools especially when used at the early signs of distress. The first of these is the compromise or arrangement between a company and its creditors in terms of Article 327(1)(a), which empowers the court to order a meeting between the debtor company and its creditor/s in order to negotiate the terms of a settlement. The involvement of the court in this scenario would be very minimal since compromise negotiations take place out of court, and if the creditors and debtor company approve the compromise, then this would become binding at law. Court involvement may however become necessary with any dissenting creditor/s, as in such a case the court may be required to sanction the compromise. In addition to the foregoing, Article 327(1)(b) of the Act provides that a compromise or arrangement may also be reached through the involvement of a mediator chosen by the parties themselves. This is an out of court procedure which requires the unanimous agreement between the debtor company and its creditor/s.

The Comprehensive Company Recovery Procedure (CRP) and the Role of the Special Controller

Finally, the Company Recovery Procedure (the “CRP”) is the last formal type of restructuring procedure provided under Article 329B of the Act. This procedure is the most comprehensive tool that gives companies in financial difficulty an opportunity to recover and rehabilitate their business while also providing them with some breathing space by staying any legal actions against them. While this procedure is meant to be an alternative to the dissolution and consequent winding up of a company facing financial difficulties, it is not intended to conceal a company’s insolvency or simply postpone its unavoidable collapse.

In line with the above, an essential duty which stems from Article 329A of the Act is that once a director of a company becomes aware that the company is unable or imminently unlikely to pay its debts, then such director shall immediately call for an extraordinary meeting of the company in order to determine whether it should be dissolved or whether a Company Recovery Procedure in terms of Article 329B of the Act should be initiated and filed in court. The notice to the shareholders of the company should be sent within thirty (30) days from when the insolvency or likelihood of insolvency becomes known to the director, and the meeting should then be held not later than forty (40) days from the date of such notice.

If the meeting decides that an application in terms of Article 329B of the Act should be made to the Civil Court (Commercial Section), the insolvency tests that are to be carried out are the same as those carried out in a compulsory winding up procedure, being the Liquidity Test and the Balance Sheet Test. However, with the Company Recovery Procedure the court would also need to investigate the likeliness of the company becoming insolvent. If the application is acceded to, a Special Controller is appointed by the court who will take over, manage, and administer the company's activities for an initial period of no longer than four (4) months (though this might be extended again by further periods of four (4) months each time, provided good cause be shown).

The Special Controller is chosen from a list of individuals eligible to occupy such office which is now being administered and held by the Official Receiver, a public official forming part of the Malta Business Registry. The Special Controller must also verify whether there is a reasonable chance of the company recovering from its situation and becoming a viable going concern once more. If the Special Controller believes that there is the possibility for the company to recover from its situation, a restructuring plan which requires the approval of the court would need to be drawn up together with a plan on how to turn around the business of the company and avoid its insolvency.

Adapting to Challenging Times: Legal Notices Impacting Insolvency Legislation

Due to the challenges brought about by the Covid-19 pandemic, Legal Notice 192 of 2020 entitled ‘the Companies Act (Company Reconstructions Fund) Regulations’ (hereinafter the “Regulations”) was published on the 12th of May 2020 with the aim of creating and regulating the administration of a fund intended to facilitate company recovery procedures. In terms of the Regulations, the Special Controller is to be paid from the so-called Company Recovery Fund (hereinafter the “CRF’) which is financed by the Malta Business Registry in the amount of five hundred thousand Euro (€500,000) annually to cover the expenses related to its purpose under the Regulations. The Special Controller cannot make claims from such fund of more than ten thousand Euro (€10,000) per recovery procedure. This limit may be increased by the Official Receiver acting upon a recommendation of the court, in complex cases, or in cases involving cross-border elements.

Another legal notice which was spurred by the Covid-19 pandemic was Legal Notice 373 of 2020 entitled ‘The Companies Act (Suspension of Filing for Dissolution and Winding Up)’ published on the 15th of September 2020. The main objective of this Legal Notice was to suspend creditors’ rights to request for the dissolution of a company on the grounds of insolvency, and suspending the wrongful trading action against directors in terms of Article 316 of the Act. This Legal Notice was published as a response to the concerns of the Conference of European Restructuring and Insolvency Law (CERIL), which published an Executive Statement in March 2020 highlighting the importance of countries across Europe adapting their insolvency legislation in light of the Covid-19 pandemic and the extraordinary economic situation that the world found itself in. Nevertheless, in May 2022 the First Hall of the Civil Court (Commercial Section) made a recommendation to the Minister of Health and the Minister of Commerce to examine whether this Legal Notice is still required, since by that time the Covid-19 measures had been eased and many restrictions were removed.

Concluding remarks

The hardship brought about by the Covid-19 pandemic, together with the uncertainty facing businesses globally as a result of inflation and high interest rates brought about by the war in Ukraine, has shown that the necessity for a robust insolvency and company recovery regime, as well as an updated view on company officer obligations, have never been more relevant. Directors should therefore not hesitate in using the above-mentioned restructuring procedures firstly in order to avoid the insolvency and consequent winding up of the companies that they manage, and secondly in order to make the same companies stronger and more resilient to such market shocks.


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