Early in October, three new Bills were tabled to Parliament: a Bill to amend the Commercial Code provisions on Bankruptcy, a Pre-Insolvency Bill, and a Bill to regulate Insolvency Practitioners. These Bills intend to partially transpose the EU Directive 2019/1023 on preventive restructuring frameworks. The aim of the Directive is to encourage Member States to implement measures that enable the early detection of financial difficulties to avoid insolvency altogether, failing which, there could be a smoother transition into insolvent liquidation. These Bills seek to introduce innovative concepts into Maltese law and pave the way for further amendments to Malta's insolvency laws which are expected to be introduced in the coming months (and which we understand will be proposed both at a Maltese as well as at a European Union level).
Both the Directive and the Bills tabled to Parliament are motivated by the multiple interests at play when financial viability is at risk, including employee and community interests that support the view that rescue should be one of the goals of an insolvency framework for the benefit of both the debtor and his creditors.
Did Malta already have any formal measures aimed at corporate restructuring and rescue?
Yes – since 2003 the Companies Act has provided for both a Company Reconstruction procedure as well as a Company Recovery Procedure. The Company Reconstruction procedure enables already-insolvent companies to reach a compromise or arrangement with at least 2/3rds of its creditors or members which would receive court approval. This procedure has never been used. The Company Recovery Procedure enables insolvent companies, or companies imminently likely to become insolvent, to undergo a process where a special controller is appointed and attempts to implement a plan through which the company can recover both financially and economically. This procedure has seldom been used.
The Pre-Insolvency Bill introduces a new Preventive Restructuring Procedure for both legal and natural persons carrying out trade, business or profession who become ‘exposed to a likelihood of insolvency'. Detection will be possible through access to ‘early warning tools' which are not described in the Bill but will be prescribed by regulations in due course. There is notably significant overlap between the circumstances giving rise to an obligation to consider the Preventive Restructuring Procedure in the Bill, and those giving rise to an obligation to consider the Company Recovery Procedure in the Companies Act, which has been an option for companies ‘imminently likely to become insolvent' for several years.
The Pre-Insolvency Bill proposes to introduce a new duty on directors (or other officials) of a debtor to convene a meeting within thirty days from becoming aware that there might be a likelihood of insolvency, to review the debtors' position, and to consider the interests of the creditors, equity holders, employees and other stakeholders of the debtor. The director or officials will also need to consider whether a preventive restructuring application should be resorted to. It is interesting to note that creditors of a debtor may also trigger this procedure and require the officials of a debtor to consider the debtor's position.
A Preventive Restructuring Application will be made to the Commercial Section of the Civil Court, opting for either the standard procedure, pre-formulated procedure, or pre-approved procedure that would already have secured approval by affected parties. The application must be made or endorsed by an Insolvency Practitioner, a new role contemplated by the Insolvency Practitioners Bill. A single hearing must be held within 30 days of the filing of the application, and the Court must immediately decide whether or not to deliver a preventive restructuring order. There does not appear to be any opportunity for third parties such as creditors to object or be heard at this stage. The Bill specifically prohibits equity holders from obstructing any part of the procedure, although this may not have been necessary considering it is low-ranking shareholders who have the most to gain from their company avoiding insolvent liquidation.
The moment a Preventive Restructuring Application is filed, any winding-up proceedings already pending against the debtor are automatically stayed, and if an order is given, the Court may disallow those proceedings from continuing at all. There is a risk here of abusive resort to these proceedings by debtors faced with creditor action for a winding-up order, however the 30-day period within which the Court must decide the application should counter-balance that.
The procedure itself involves a broad automatic stay of all individual enforcement actions, intended to grant debtors breathing space to restructure their debt. This stay specifically extends to ipso facto termination clauses in essential executory contracts (such as for supplies or services) in terms of which unperformed or continuing obligations remain on the part of the debtor. The entry into the Preventive Restructuring Procedure cannot trigger the automatic termination of such contracts or allow creditors any right to accelerate obligations or repossess property, and the stay is only lifted 3 months after confirmation of the restructuring plan.
Throughout this process the debtor continues to be “in possession”, meaning that the officials of the debtor continue to be in control of the business. The debtor is free to seek secured interim financing during this period, subject to the approval of at least 50% of the affected parties in each class, without the risk of liability for “wrongful” or “fraudulent trading” for its officials. Cross-class cramdown is possible, with the restructuring plan requiring approval from no less than 2/3rds of the value of the affected parties in each class.
The entire protective period granted is not intended to last longer than 4 months, although extensions up to a period of 12 months are possible in order for the Commercial Section of the Civil Court to approve or reject a restructuring plan, though it is also possible for decisions to be appealed to the Court of Appeal. However, the resulting restructuring plan, once approved, may govern the debtor's relationship with its creditors indefinitely, and the relationship here will be entirely contractual in nature.
It is still possible for changes to be made to the Bill. At the time of writing, it is up for its second reading in Parliament.
Originally Published by The Sunday Times, 6 November 2022.
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