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Network News • 02-11-2022

Re-Introducing “Pre-Insolvency”

Author: Dr Robert Spiteri - Head of Legal PKF Malta
Published on The Malta Independent 2nd November 2022

Three bills have recently been presented at Parliament intended to modernise insolvency measures. These bills are being introduced as part of the implementation of Directive (EU) 2019/1023 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 (the "Directive").  

For the purposes of this article centre stage is being given to Bill number 12 of 2022 entitled the Pre-Insolvency Act (the "Bill") which has, as its scope, the provision of a "modern framework, relating to the early warning signs of insolvency, and restructuring procedures directed at avoiding insolvency". The Bill therefore aims to help prevent insolvency and is intended to help keep a business viable and running as a going concern. The Bill has a wide reach in that it covers all "debtors" as being any persons that carry out business, including companies, partnerships, and sole traders but excludes certain regulated business such as insurance undertakings, investment firms and public bodies. Whilst the first part of the Bill is novel, in that it will introduce a system of "early warning tools" intended to help identify the risk of insolvency, the second part deals with "preventive restructuring procedures" which echoes the existing provisions in the Maltese Companies Act, specifically the Company Recovery Procedure set out under Article 329B as triggered by article 329A.

The early warning tools that are set out in the first part of the Bill are described as measures that enable debtors to detect circumstances that could give rise to a likelihood of insolvency and to signal, to the debtor, the need to act. The provision of information on such mechanisms shall be the responsibility of a new authority dubbed the Insolvency and Receivership Service within the Malta Business Registry. What these tools will be and who will be providing them is not yet established however the Directive provides for the following options which our legislator may choose to introduce once the Bill has been passed:

(a)              alert mechanisms when the debtor has not made certain types of payments;

(b)              advisory services provided by public or private organisations; and

(c)              incentives under national law for third parties with relevant information about the debtor, such as accountants, tax and social security authorities, to flag to the debtor a negative development.

One notes that from a reading of the Bill and the Directive, the spirit of the law makes one understand that these tools should be designed in a manner that does not air a debtor's "dirty laundry" as this will surely not be a measure that will help prevent insolvency.

Another observation is that the introduction of these tools will create an obligation on directors of companies to make use of such early warning tools and monitor developments that may expose their company to a likelihood of insolvency; where this is so, directors should take measures to counter such insolvency and ensure business viability.  Whilst the director has always had a fiduciary obligation as a bonus pater familias towards the company, it is interesting to consider whether the sole inaction of not making use of such tools would put a director at the risk of being accused of wrongful trading should insolvency ensue.

The Bill continues by providing that once the directors are aware that there is a likelihood of insolvency, they shall forthwith convene a meeting for the purpose of reviewing the company's position and of determining what steps should be taken to deal with the situation, having regard to the interests of the creditors, equity holders, employees, and other stakeholder. During such meeting it will also be determined whether to make a "preventive restructuring application" as laid out in the Bill. The application to the courts for the provision of a preventive restructuring plan may be availed of by debtors but this is only optional. It is here where one will inevitably draw a comparison between this proposed mechanism and the existing Company Recovery Procedure set out under Article 329B of the Companies Act, at least with respect to companies and commercial partnerships.  Similar to the provisions in the Bill, article 329A of the Companies Act obliges directors who become aware that the company is unable to pay its debts or is imminently likely to become unable to pay its debts, to forthwith, set a meeting and determine the next steps and whether the company should make a company recovery application in terms of article 329B.  The primary aim of the procedure under Article 329B is to allow, if practicable, companies in financial difficulty to recover rather than to be put into liquidation.  The procedure under Article 329B has the same aim as the proposed preventive restructuring procedure under the Bill.  Both mechanisms require application to the court together with the submission of similar documentation and information as well as the appointment of a third party who would be appointed to manage such procedures. Whilst the existing provisions of Article 329B call for a "special controller" the Pre-Insolvency Act calls for the appointment of a novel profession, the "insolvency practitioner".  The profession of the insolvency practitioner will in fact be regulated by a specific act that will come about once Bill number 13 of 2022 entitled the "Insolvency Practitioners Act" is enacted in law.

The similarities between the two mechanisms continue in that what needs to be presented as part of the court application, the effects once triggered and the obligations of keeping involved parties such as creditors updated on proceedings are all quite comparable.

One notable difference between the appointment of the Insolvency Practitioner and the appointment of the Special Controller, is that whilst the Special Controller takes control over the company from the directors, the Insolvency Practitioner works with the directors.  Permission from the insolvency practitioner is however required before taking any major measures such as entering long term commitments, terminating employees or the selling of any assets.  Another notable difference is the ability of creditors to apply to the courts to trigger a Company Recovery Procedure under 329B wherein the Bill does not provide creditors with the option to apply for preventive restructuring.

Whilst it is true that the Bill and article 329B are different in that the Bill extends beyond companies, it is probably the case that the majority of applicants of the provisions of the Bill will indeed be companies.  With this in mind it will be interesting to observe how these two mechanisms will work side by side and whether directors will be scrutinised for opting for one instead of the other. 

Author: Dr Robert Spiteri - Head of Legal PKF Malta
Published on The Malta Independent 2nd November 2022
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