Insights

Having substantial losses or major cash flow problems may not be something which most businesses have faced during their lifetime. The consequences of one’s actions during this period may however have very serious implications from a legal perspective in the event of a company being on the brink of insolvency, which may arise either due to cash-flow problems or because of the losses which would have been incurred. During this period companies should thread carefully since in certain instances there might also be personal liability attached to certain actions which may be taken (with the legal terminology which is typically referred to being that of the “lifting of the corporate veil”).

The law may however provide some help to companies which would still be experiencing difficulties as the COVID-19 situation starts returning to normal. Once we start to see the light at the end of the tunnel, companies which are on the brink of insolvency but with effective recovery plans can use the law to their benefit in order to put their recovery plans into action effectively, whilst being safeguarded from their creditors’ claims.

The company recovery procedure is therefore available to companies which are unable to pay their debts or are imminently likely to become unable to pay their debts. This procedure is availed of by submitting an application to the Court and requesting the Court to “place the company under the company recovery procedure and to appoint a special controller to take over, manage and administer the business of the company”. The aim of this procedure is therefore that of giving companies breathing space when they are most vulnerable.

Once a company recovery application is filed in Court, the Court is obliged to accept or dismiss this application within forty working days from the filing of the said application. Once a company recovery application is submitted to Court, and unless this is dismissed:

• any winding up applications are stayed, and no resolutions for the dissolution of the company may be adopted or given effect to;
• the execution of claims of a monetary nature against the company are stayed;
• the company will be protected in that landlords will only be able to terminate any lease, as a result of the company’s default, with leave of the Court;
• creditors will not be able to enforce security taken over the company’s assets, and any precautionary or executive warrants against the company will also be stayed, unless the Court’s consent is obtained; and
• arbitration proceedings made or continued against the company are to be stayed, and no judicial proceedings can be commenced against the company unless with the Court’s authorisation.

A company recovery order has a four-month lifespan, with the Court being entitled to extend this period for further periods of four months each, provided that this maximum period of a company recovery order does not exceed a total of twelve months. This means that if a company can convince the Court that it has an effective recovery plan, and if the Court actually sees that the recovery plan is coming to fruition, the company will be able to benefit from a maximum of twelve months wherein the priority is given to the recovery of the company, rather than to satisfy the claims of its creditors.

A Court is obliged to accede to a company recovery application only if it is satisfied that the company is, or is imminently likely to become, unable to pay its debts; and only if it considers that the making of the order would be likely to achieve one of the following purposes:

• the survival of the company as a viable going concern in part or in whole; or
• if the Court considers that entering into a company recovery procedure will allow the company and its creditors to arrive to a compromise or arrangement.

In order for this procedure to apply, the administration and management of the company is to be entrusted into the hands of a special controller, who will be appointed by the Court, and who is to be a person who does not hold any conflict of interest. Though the powers of any directors or officers of the company are considered to be suspended throughout a company recovery order, the law also provides for situations where the special controller grants his consent for such officers or directors to continue exercising certain functions which may be determined by the said special controller.

A company recovery procedure can terminate before the period established by Court if the special controller considers that there is no longer any hope of the company recovering (as a result of which the company will be wound up), or alternatively if either the special controller or the directors or the shareholders of a company consider that the affairs of the company would have improved to the extent that the company would be in a position to pay its debts. If the period established by Court for a company recovery procedure expires, the special controller will be obliged to prepare a report for the Court’s consideration, through which the Court can also approve a recovery plan which becomes binding on both the company as well as on its creditors.

Though it may be too early for companies to finalise their recovery plans given the uncertainty as to when things will get back to “normal”, boards of directors should consider the benefits of this procedure as it may provide companies with an essential breathing space as part of their recovery processes.

This article was first published on The Times of Malta on 7th April 2020.