Insights

In its judgment on the 23 January 2023, the First Hall Civil Court (Commercial Section) (hereinafter the “Court”) presided by Mr. Justice Ian Spiteri Bailey delved into the salient features of a request made to the court for the dissolution and winding up of a company by a creditor or creditors of such company by means of an application in terms of Article 218(1) of the Companies Act, Chapter 386 of the Laws of Malta (the “Act”).

In the case of Francesca Isolan and Itaca Consulting JDOO (the “Plaintiffs”) versus Aureus Ltd (the “Defendant”), the Plaintiffs filed an application requesting the Court to, inter alia:

1. declare that the Defendant is unable to pay its dues in accordance with article 214(5)(a) of the Act; and
2. order the dissolution and winding up of the Defendant pursuant to Article 214(2)(a)(ii) of the Act;

The Plaintiffs further noted that the application for the dissolution and winding up of the Defendant was being made in terms of Article 214(2)(b)(iii) and Article 214(5)(b) of the Act.

During the course of proceedings, the Court, upon application of Alberto and Alessia Camorani and Paulo and Silvana Sabato (the “Intervenors”), admitted these individuals to the proceedings in statu et terminis, as additional creditors of the Defendant.

Facts of the case

One of the Plaintiffs, Francesca Isolan, entered into an agreement with the Defendant dated 29 September 2018 (the “Contract”), by virtue of which, the Plaintiff agreed to make certain capital investments in the Defendant company. The Defendant agreed to return the capital invested together with interest accrued thereon upon expiration of the contract. The contract further stipulated that should the company suffer a loss such that not even the restitution of the capital is possible, the Defendant undertook to compensate the client by paying an amount corresponding to 50% of the initial invested capital. Subsequently, the Parties entered into a separate agreement, pursuant to which Francesca Isolan, assigned her rights under the Contract to Itaca Consulting JDOO.

The Plaintiffs provided a statement of their investments showing a total investment of €1,379,097 and additional interest of €397,000 which were not paid. The Plaintiffs argued that if 50% of the investment was reduced and taking into account the unpaid interest, the Defendant owed the Plaintiffs the amount of €1,086,548.50.

The Intervenors presented copies of agreements entered into by them, identical to the Contract, together with a statement of the investments made and a statement of the payments made by the Defendant to them.

Application of Law

The Court noted that this was a request made by a creditor for the dissolution and winding up of a company in terms of Article 218(1).

Primarily the Court had to determine whether the Plaintiffs and the Intervenors were indeed creditors of the Defendant since such an application was privy to those persons (whether natural or legal) who were creditors of the company in question. Article 218(1) does not require that the debt due to a creditor be declared by court judgment or by having an executive title.

On this matter, the Court referred to Boyle & Birds’ Company Law which provides that: “Unpaid creditors of a company may consider commencing winding-up proceedings against the company as an alternative to suing for payment. As a debt collection mechanism, winding up proceedings may be swifter and, for the individual creditor, less expensive than a claim that may come to trial…”

Reference was also made to Insolvency Law – Corporate and Personal (Andrew Keay and Peter Walton) which provides that “While a creditor is able to establish the fact that a company is unable to pay its debts … it does not mean that a winding-up order will be automatically made; the court has an unfettered discretion … The company might be able to establish that it is solvent thereby rebutting the presumption of insolvency relied on by the creditor. Nevertheless, a court may still make a winding up order if the company does not dispute the fact that it owes money to the creditor who has requested payment because non payment gives rise to a legitimate suspicion of inability to pay …”.

Based on the aforementioned doctrine, the Court held that the Plaintiffs and the Intervenors had the juridical interest to make this application and although their claim has not been determined by a court, sufficient proof was presented to the Court evidencing that the Plaintiffs and Intervenors were indeed creditors of the Defendant.

Based on the claims made in the application filed by the Plaintiffs, the Court observed that these were primarily based on Article 214(2)(a)(ii) and Article 214(5)(a) however reference was also made to Article 214(2)(b)(iii)  and Article  214(5)(b) of the Act. As a preliminary observation, the Court requested attention and precision in the manner in which such an application is drafted.

The Court noted that “kif inhu risaput, l-oggett tad-domanda f’kawza jippostula li l-kawza li fuqha dik id-domanda hi fondata ghandha tkun wahda sostantiva u mhux merament appartenenti jew formalistika”. In principle the request made by the Plaintiffs was for the dissolution and winding up of the Defendant. Even though the claims made by the Plaintiffs referred to specific articles of the Act, the substance of the claims can be reconciled with the other recitals which refer to other articles of the Act which articles can also lead to the dissolution and winding up of a company. Accordingly, the Court felt that this did not change the substance of the procedure instituted and therefore the Court held that it would not limit its assessment to the Articles referenced by the Plaintiffs in the heads of claims but also to the other articles referenced in the remaining recitals.

On this basis, the Court proceeded with determining the applicability of Articles 214(2)(a)(ii) and 214(5)(a) of the Act. Article 214(2) provides that a company may be dissolved and wound up by the Court (i) if the business of the company is suspended for an uninterrupted period of twenty-four months; or (ii) the company is unable to pay its debts. Referring to Article 214(5) of the Act, a company is deemed to be unable to pay its debts:

• 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 of the executive acts specified in article 273 of the Code of Organization and Civil Procedure; or
• if it is proved to the satisfaction of the court that the company is unable to pay its debts, account being taken also of contingent and prospective liabilities of the company.

The Court held that the Plaintiffs did not provide proof relating to the enforcement of an executive title by means of any executive warrant and accordingly, the requisite elements of the first limb of Article 214(5)(a) did not subsist.

The Court then went to consider the requisite elements of Article 214(5)(b). It referred to the judgment in the names of “Kenneth Xuereb vs Weber Constuction Limited” et decided by the Court as presided over by Justice Zammit McKeon on the 18 March 2021. In its judgment that court noted that:

“For the purposes of sub-article (2)(a)(ii), a company shall be deemed to be unable to pay its debts … if it is proved to the satisfaction of the court that the company is unable to pay its debts, account being taken also of contingent and prospective liabilities of the company.”

That court also referred to the UK Insolvency Act of 1986 which contains a similar, albeit not exact, provision to Article 214(5)(b). It provides that “A company is also 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.” That court noted that, although the divergences between the provision in the Act and that found in the UK Insolvency Act where of a substantive nature, it still had to find a synthesis between the two in order to obtain an understanding of what “contingent and prospective liabilities” are being referred to.

In order to do so, it referred to the so-called ‘balance sheet insolvency’ test recognised in the UK. In this regard Insolvency Law – Corporate and Personal (Andrew Keay and Peter Walton), provides that that a court “is able to take into account contingent and prospective liabilities, but not contingent and prospective assets. “Liabilities”, for the purposes of a company winding up, means a liability to pay money or money`s worth, including any liability under an enactment, any liability for breach of trust, any liability in contract, tort or bailment and any liability arising out of an obligation to make restitution. It is 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.

On the same lines, Roy Goode in Principles of Corporate Insolvency Law (2011) states that; “The idea underlying this test … is that 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 and these are insufficient for the purpose …”.

Based on the aforementioned principles derived from UK Law and doctrine, the Court formed the following views:

1. the Defendant failed to pay the sums due by it to the Plaintiffs and the Intervenors;
2. the Defendant has failed to make any filings with the Malta Business Registry since 2019
3. even though no particular proof was provided on the financial situation of the Defendant, it is clear that since the Defendant has failed to make any filings with the MBR since 2019 and also failed to communicate with the Plaintiffs and the Intervenors, as well as the fact that the alleged sums due are still outstanding, the requirements of Article 214(5)(b) subsist.

In tandem, the court examined Article 214(2)(b)(iii) of the Act which in principle provides that a company is to be dissolved if in the opinion of the court, grounds of sufficient gravity exists for its dissolution. In the context at hand, it is clear that the Defendant completely abandoned its obligations vis-à-vis the Plaintiffs and intervenors, it stopped all trading activities and communications and also remained contumacious in these proceedings. On that basis the Court was of the view that this fact is of a grievous nature and should lead to the winding up and dissolution of the Company.

Professor Andrew Muscat notes that “A company`s substratum is the purpose or group of purposes which it is formed to achieve – in other words, its main objects. If the company has abandoned all its main objects (and not merely some of them) or if in practice it cannot achieve any of them, then its substratum has disappeared …”

On the basis of the above considerations, the Court formed the view that the Defendant had essentially reached a point of no return and ordered its dissolution and winding up in accordance with Article 214(2)(b)(iii) and article 214(5)(b) of the Act.

The article was first published on The Malta Independent (22 February 2023).