Covid-19: The Increasing Importance of the Company Recovery Procedure

The Covid-19 outbreak, and the resulting measures imposed by states to combat the outbreak, brought the global economy to a standstill. The pandemic and the preventive measures imposed by the Maltese government resulted in otherwise viable companies experiencing an exceptional and sudden loss in revenue and consequential liquidity problems. As Malta, like many other countries, attempts to get the wheels of its economy turning again through the implementation of a financial recovery package and the lifting of certain measures, many previously healthy companies nonetheless face an uphill struggle for survival. However, such companies may have the opportunity to find relief through the company recovery procedure (the “CRP”) as set out in the Companies Act [Chapter 386 of the Laws of Malta] (the “Act”).

The CRP is a procedure made available under article 329B of the Act which aims to enable companies experiencing financial difficulties to return to operating as a viable going concern whilst safeguarding the interests of all relevant stakeholders. Therefore, companies struggling financially which, prior to the Covid-19 outbreak, were financially viable and which may reasonably be expected to return to such position within a short period of time, may apply for relief through the CRP and consequently avoid the possibility of liquidation.

The shareholders, the directors or the creditors (which represent more than half in value of the company’s creditors) of a company may apply to the Civil Courts of Malta requesting that the company in question be placed under the CRP and that the courts appoint a special controller “to take over, manage and administer the business of the company” for a period of time. Such an application may only be filed where the company is unable to pay its debts or is imminently unlikely to pay its debts. The foregoing requisite must be proven by the applicant to the satisfaction of the courts. Furthermore, the application must also show how the financial economic situation of the company can be improved and how the company can return to operate as a viable going concern.

The court, in assessing the foregoing, shall take into account the interests of the company’s creditors, shareholders, employees and the company itself. If satisfied, the court shall place the company under the CRP by issuing a company recovery order which shall, inter alia, appoint an individual as a ‘special controller’ who shall carry out such functions and powers as decided by the court and shall be responsible for the administration and management of the property and business of the company throughout the term of the CRP. The special controller must be a professional with proven competence and experience in the management of business enterprises.

The CRP, as laid down in the Act, shall originally be in force for a period of four months, provided that, upon good cause being shown, such period may further be extended by the court up to a maximum of twelve months. During such time, the company placed under the CRP shall benefit from the following safeguards:
(i) any pending or new winding up application of the company shall be stayed and no resolution for the dissolution or winding up of the said company may be passed or given effect to;
(ii) the execution of any monetary claims against the company and any interest that may accrue thereon shall also be stayed;
(iii) Where the company leases property, no landlord may exercise any right of termination of the lease due to the company’s failure to comply with any term or condition thereof, except with the special leave of the court;
(iv) no steps may be taken to enforce any security over any property of the company, nor may any precautionary or executive act or warrant be made against the company without the special leave of the court; and
(v) no judicial or arbitration proceedings may be commenced or continued against the company or its property without the special leave of the court.

It is clear that the foregoing effects of the CRP could provide the necessary relief required by financially distressed companies nearing the risk of unnecessary liquidation to recover from the adverse effects of the pandemic and return to operating as a successful and viable going concern.

Whilst it is recognised that not all companies may benefit from the CRP, the increasing importance of the procedure in respect of struggling businesses in these trying times cannot be overstated. It is worth noting that in this respect, the Maltese legislator implemented the Companies Act (Company Reconstructions Fund) Regulations [S.L 386.21] (the “Regulations”) on the 12th May 2020. The scope of the Regulations is to create and regulate the administration of a fund intended to facilitate the CRP. The Regulations provide that a fund has been created, entitled the ‘Company Recovery Fund’ (the “Fund”), out of which payments shall be made to special controllers appointed in accordance with the provisions relating to the CRP under the Act. The Fund shall receive the amount of five hundred thousand euro (€500,000) annually from the Malta Business Registry. Subject to any recommendation made by the court stipulating otherwise, the maximum cumulative amount claimed from the fund in respect of each recovery procedure shall not exceed ten thousand euro (€10,000).

The creation of the Fund is intended to ease the related costs of the CRP which have proven to be the main deterrent to companies from applying for such remedy, and is a clear indication of the important role the CRP is expected to play in the near future.

For further information or assistance in this regard, please contact Dr. Ivan Vella on [email protected], Dr. Nicholas Bradshaw on [email protected]