Malta

A look at corporate, personal and, where relevant, partnership insolvency proceedings in Malta, with a brief description to explain key features, as part of our Dictionary of Insolvency Terms in EU Member States. In particular, we highlight who controls the procedure and whether it is likely to be accompanied by a moratorium to prevent enforcement.


Arrangament jew kompromess ma’ kredituri

Compromise or arrangement with creditors and members

  • Can be proposed between a company and its creditors (or any class of creditors) or between the company and its members (or any class of them), and the court may , following an application filed by the company, any creditor or member (as the case may be) or, if the company is undergoing winding up, by the liquidator, order that a meeting of the creditors or of the members (or any class of creditors or members), as the case may be, be called. Alternatively, the company or any creditor may, with the sanction of not less than two-thirds of the creditors or class of creditors, seek the appointment of a mediator and where appointed, shall organise a meeting of the creditors (or class of creditors) for the purpose of facilitating negotiations to reach a compromise or arrangement.
  • If a majority in number representing two-thirds value of the creditors or members (or any class thereof) as the case may be, present and voting (either in person or by proxy) at the meeting summoned by order of the court, agree to any compromise or arrangement, if sanctioned by the court, the compromise or arrangement shall be binding on all creditors or members and on the company.
  • Where the proposed arrangement or compromise has been referred to mediation, if all the creditors execute a written agreement containing a compromise or arrangement, such arrangement shall be binding on all creditors and also on the company.
  • There is no moratorium or stay at the initial approval stage.
  • Once approved by creditors and sanctioned by the court, the scheme is binding on all creditors.
  • The procedure is most commonly used when a company is in financial distress as a way of facilitating its financial recovery. However, a scheme of arrangement or compromise may also be proposed by a liquidator.
  • The scheme itself can propose a stay that will come into effect if the scheme is approved by the requisite majorities and sanctioned by the court.
  • This restructuring procedure does not apply to partnerships or individuals (solely to companies).

Procedura biex kumpannija tirkupra

Company recovery procedure

  • Where a company is unable to pay its debts or is imminently likely to become unable to pay its debts, a company recovery application may be made to the court requesting that the company be placed under the company recovery procedure and that a special controller is appointed to take over and administer the business of the company under conditions to be set by the court. The request may be made either by the company following an extraordinary resolution, by the directors (provided the Board has first convened a special general meeting of the shareholders pursuant to Article 329A of the Companies Act and the shareholders have not themselves passed a resolution for company recovery), or creditors representing more than half in value of the company’s creditors or by more than half in value of the creditors of a particular class.
  • The court may only accede to the application if: (i) it is satisfied that the company is, or is imminently likely to become, unable to pay its debts; and (ii) it considers that the making of the order would be likely to achieve either the survival of the company as a viable going concern (in whole or in part), or the sanctioning of a compromise or arrangement between the company and any of its creditors or members. Special additional considerations apply if the company in question is licensed or authorised under Maltese law to carry out regulated activities.
  • The court is required to decide on the request for a company recovery within not more than 40 working days from the filing of the application.
  • If the court issues a company recovery order, it will appoint a special controller for a period not exceeding 12 months (extendable by up to a further 12 months).
  • Following the application (unless dismissed by the court) and during the company recovery procedure a stay prevents action against the company or its assets including provision that no steps may be taken to enforce any security over property of the company or to repossess goods under any hire-purchase agreement except with the leave of the court.
  • While the order is in force, the directors’ powers are suspended and the special controller manages the company’s activities, business and property.
  • The special controller must submit reports to the court and may ask the court to terminate the procedure if they feel that it serves no purpose or if they feel that the company can settle its debts and continue as a viable going concern.
  • At the end of their appointment, the Special Controller must submit a final report to the court. If they think the company can continue as a viable going concern (in whole or in part), they must attach a detailed recovery plan that, if accepted by the court, binds all parties, including any dissenting creditors.
  • At the end of the procedure, the company is either wound up or continues in existence, as determined by the court.

Xoljiment u Stralċ Konsegwenzjali

Dissolution and Consequential Winding Up

  • Shareholders may resolve to dissolve and consequently wind up a company either by means of court proceedings or voluntarily by passing an extraordinary resolution. They are not required to disclose the reasons for their decision.
  • A resolution to dissolve the company may be passed at any time, regardless of the solvency of the company.
  • A company may also be dissolved and wound up by court order if the company’s business has been suspended for an uninterrupted period of 24 months, or if it is unable to pay its debts.
  • In addition to the above, a company may be dissolved and wound by the court in the following cases:
    • Where the number of shareholders is reduced to below 2 and remains so reduced for more than 6 months (this situation will obviously not apply in the case of a single-member company).
    • If the number of directors is reduced to below the statutory minimum and remains so reduced for more than 6 months.
    • If the court is of the opinion that there are grounds of sufficient gravity to warrant the company’s winding up; and
    • When the period, if any, fixed for the duration of the company in its memorandum and articles expires or an event occurs, upon which the memorandum and articles provide that the company is to be wound up, and the shareholders have not passed a resolution to have the company wound up voluntarily.

It should be noted that the law does provide some grace periods during which any of the above situations can be rectified in good time thereby avoiding a course of court winding up.

Hatra ta’ amministratur provvizorju

Appointment of a provisional liquidator

  • Not a standalone procedure: a court-appointed official may be appointed at any time following the filing of a winding-up application until such time as the court either makes a winding-up order or dismisses the winding-up application, with powers and functions relating to the administration of the estate or business of a company.

Stralċ volontarju mill-membri jew mill-kredituri

Members' or creditors' voluntary winding up

  • A members’ winding up is a solvent winding up procedure that requires the directors of the company to make a declaration to the effect that following an inquiry into the affairs of the company, the company will be able to pay its debts in full within a maximum of 12 months from the date of dissolution as specified in the resolution.
  • This declaration is known as a Declaration of Solvency and has no effect at law unless (i) it is made within the month immediately preceding the date of the passing of the resolution for the company’s dissolution and is delivered to the Malta Business Registry supported by a statement of the company’s assets and liabilities made up to a date not earlier than the date of the declaration by more than 3 months.
  • A director who makes a declaration of solvency without having reasonable grounds to conclude that the company would be capable of paying off its debts within the stipulated time-frame shall be guilty of an offence and liable on conviction to a substantial fine or term of imprisonment or both.
  • A winding up in respect of which a declaration of solvency has been registered under the requirements of the Companies Act is referred to as a “members’ voluntary winding up” whereas if no such declaration is produced, the winding up procedure would be referred to as a “creditors voluntary winding up”.
  • Where a members’ voluntary winding up is concerned, usually the liquidator is appointed by means of an extraordinary resolution by the shareholders (typically in the same instrument resolving to dissolve and liquidate the company). If for whatever reason a liquidator is not appointed by the shareholders, an application to court for the appointment of a liquidator would be necessary.
  • In the case of a creditors’ voluntary winding up, a meeting of the creditors of the company is summoned primarily for the purpose of appointing a liquidator, During such meeting, the creditors are expected to pass a resolution to nominate the liquidator.
  • In the case of a voluntary winding up, the company is required to cease, as from the date of dissolution (as stated in the resolution) carrying on its business except so far as may be required to successfully wind up the company’s affairs in an orderly manner.
  • Upon the appointment of a liquidator, all of the powers of the company directors and company secretary cease, except as otherwise provided in the law.
  • Title to the company’s assets remains vested in the company.
  • Subject to the provisions of the Act and any other law regulating matters of priority or ranking, the property of a company is, on its winding up, applied in satisfaction of its liabilities pari passu. A secured creditor has a right of preference over other creditors.
  • A voluntary winding-up order does not give rise to an automatic stay on proceedings; however, the liquidator may apply to the court for such a stay.

Stralċ mill-qorti

Winding up by the court

  • A terminal process, typically commenced by an unpaid creditor, although it may also be commenced by the company, a shareholder, director, debenture-holder or a contributory.
  • The presentation of a winding-up petition (the rikors għal stralċ) alone does not give rise to an automatic stay of proceedings. However, at any time after the filing of the winding-up petition, but before the making of a winding-up order (ordni għal stralċ), it is possible for the company, or any creditor or contributory to apply to the court to request a stay of judicial proceedings pending against the company.
  • When a winding up order is made or a provisional administrator appointed by the court, no action or proceedings against the company or its property may be commenced or instituted with special leave of the court.

Falliment f'każ ta' kummerċjant

Bankruptcy of a trader

  • For the purpose of the bankruptcy rules under the Commercial Code (Chapter 13 Laws of Malta) the term “Trader” is defined as “any person who, by profession, exercises acts of trade in his own name”.
  • Partnerships en nom collectif (a partnership formed by two or more partners, which has its obligations guaranteed by the unlimited and joint and several liability of its partners) and en commandite (a partnership where the obligations are guaranteed by the unlimited and joint and several liability of its general partners, and by the limited liability of its limited partners) may be rehabilitated in accordance with the provisions on bankruptcy of a trader under the commercial code.
  • As a general rule, where a trader suspends payment of their debts, they are held to be in a state of bankruptcy. The trader makes a declaration that must be filed at court together with their commercial books and documents. A creditor may also apply to court for a judgment confirming the debtor’s state of bankruptcy (stat ta’ falliment).
  • From the date of the trader’s declaration, or delivery of the court’s judgment, the bankrupt trader is dispossessed of the administration of their property. Debts that have not yet fallen due become demandable upon the making of the declaration of bankruptcy.
  • The court appoints curators to administer the bankrupt’s estate. Perishable goods must be sold by auction and non-perishable goods cannot be sold by the curators until a scheme of arrangement is agreed.
  • A meeting of creditors takes place in the presence of a judge on a day and time to be fixed by the court. Every creditor is required to present an application for admission of its debt and produce any documents in support of its claim. The court will deliver a decree stating which debts have been admitted. If the decree is not challenged within eight days following the publication of a notice in the government gazette, the decree is deemed to have been accepted.
  • Creditors whose claims have been admitted are summoned to a further meeting before the judge. The bankrupt trader proposes the terms of a composition and creditors are given at least eight days to consider the proposal. In order for the composition to be approved, a majority in number, and three-quarters in value of those creditors whose claims have been admitted must vote in favour of the proposal.

Xoljiment ta’ socjetajiet f’isem kollettiv u socjeta in akkomandita

Dissolution of partnerships en nom collectif and en commandite

  • Partnerships en nom collectif (a partnership formed by two or more partners, which has its obligations guaranteed by the unlimited and joint and several liability of its partners) and en commandite (a partnership where the obligations are guaranteed by the unlimited and joint and several liability of its general partners, and by the limited liability of its limited partners) may be dissolved voluntarily by common accord of the partners, or by court order if the partnership is adjudged to be bankrupt or if, in the court’s opinion, sufficient grounds exist to warrant its dissolution.

Ipoteki

Hypothecs

Talba ta’ bejgh ta’ immobli jew il-hwejjeg mobbli mghobbija b’ipoteka

Demand sale of immovable or movable charged with hypothec

  • Essentially, a hypothec is a right over property for the security of a debt.
  • Hypothecs can be sub-divided into three broad groups:
    • General hypothecs that affect all the property, movable and immovable, corporeal and incorporeal, present and future, of the debtor.
    • Special hypothecs that affect one or more particular immovables.
    • Special hypothecs over movables (movables capable of being subject to a special hypothec must be expressly created by the minister responsible for justice).
  • The ability to take enforcement action in respect of a debt requires the existence of an executive title, a list of which is set out in the code of organisation and civil procedure (chapter 12 of the laws of Malta).
  • Once an executive title has been obtained (and however so obtained), lenders can apply for the charged assets to be sold by judicial auction:
    • In the case of movables, there must be a warrant of seizure before their judicial sale by auction.
  • If there is a special hypothec over immovable property and that property has been transferred to a third party, the third party in possession of the property must either: (i) surrender the property charged with the hypothec, without any reservation; or (ii) undertake to pay all the hypothecdebts, as each of them falls due, regardless of their amount. If the third party possessor fails to surrender the immovable or to pay the debts as they fall due, the hypothec creditor can: (i) serve a protest on the debtor and third party possessor demanding payment of the debt, or surrender of the property; and (ii) demand a judicial sale of the property if the debt remains unpaid and the property has not been surrendered after 30 days from the date of the protest.

Rahan ta’ mobbli

Pledge of movables

Bejgh ta’ Rahan fl-irkant taht is-setgha tal-Qorti

Enforcement of pledge by judicial sale and appropriation

Enforcement of pledge by judicial sale and appropriation
  • A pledge is defined in the Maltese civil code as a “contract created as a security for an obligation”. A pledge may be given either by the debtor himself or by a third party for the debtor (eg a surety). Ownership of the asset is not transferred by the creation of the pledge and is retained by the pledgor. • The Maltese civil code draws a distinction between assets pledged which are: (i) movables (other than debts); and (ii) debts.
  • In the case of movables, the pledgee may only realise the pledged movable by means of a judicial sale by auction. Any covenant allowing appropriation, or disposal in any other manner, is null and void.
  • However, if the pledged property is a debt and the debt secured by the pledge is due, the creditor/pledgee is entitled to retain from any payments received in respect of the pledged debt an amount sufficient to satisfy its rights.
  • Under the general rules of the civil code, the only situation in which the law permits appropriation is where the asset pledged is a debt, as the debt is already quantified and liquidated, and there is no risk that abuse will occur. Any surplus should be paid to the pledgor. This method of enforcement is subject to the sanction of the court.
Enforcement of pledge over shares
  • In the case of a pledge of shares, if the debtor defaults, the pledgee is entitled to enforce the pledge by either:
    • Applying to the court for a judicial sale of the pledged shares.
    • Giving notice by judicial act to both the pledgor and the company that it wishes to dispose of the shares, or appropriate and acquire the shares for itself.

The pledgee can only sell or appropriate those shares needed to repay the debt. All other shares must be released to the pledgor.

  • Enforcement in relation to pledged shares may also be sought in accordance with the provisions of the Financial Collateral Arrangements Regulations (S.l. 459.01) (FC) that provide for a more creditorfriendly approach to enforcement. Under the FC, enforcement must accord with the terms of the pledge agreement and may be effected by way of sale or appropriation of the shares or receivables, offsetting their value against, or applying their value in discharge of, the secured obligations.
  • If the pledgor defaults on an agreement secured by a pledge of a bank account, then all rights over the account that are vested in the pledgor are terminated and vest in the pledgee, who can then exercise all rights and remedies previously possessed by the pledgor. This includes, without limitation, applying any balance held in the account on the date of enforcement against the secured obligations. Under the FC, on the occurrence of a specified event, the pledgee can realise pledged cash or the contents of a pledged bank account by offsetting it against, or applying it in discharge of, the secured obligations.

Garanzija

Suretyship

  • A form of guarantee given by a third party. A suretyship contracted for a principle obligation, in general terms, extends to all accessories of the debt.
  • In the case of a simple suretyship, the lender can only enforce its rights against the surety after attempting to enforce its rights against the principal debtor and finding that the estate of the principal debtor is insufficient to settle the debt. In the case of a joint and several suretyship (which is generally the default scenario in commercial transactions) the agreement usually entitles the lender to enforce its rights against the surety and the principal debtor at the same time, or to enforce against the surety without first enforcing its rights against the principal debtor.
  • A surety who has paid the debt is subrogated, by operation of law, to all the rights of the creditor against the principal debtor, and has a right of relief against the principal debtor (whether or not the suretyship was created with the consent or knowledge of the principal debtor).

Jedd biex izomm f’idejh il-hwejjeg

Right of retention

  • A lien is a right that entitles a party to retain assets in their possession pending payment of a debt owed. Liens occur more commonly in commercial transactions, typically when goods are being supplied, repaired or transported.
  • The civil code sets out various rights of retention. For example, in relation to the law of mandate, the mandatory is entitled to the right of retention against their mandator as long as they are not paid what is due to them under the mandate.

Trust tas-Sigurtà

Security Trust

  • Security may be created in favour of a security trustee for the benefit of creditors (whether present or future) by either constituting security in favour of the trustee in the manner provided for by law relating to the particular security, or, by settling property in favour of the trustee under written terms governing the security trust.
  • The security trustee shall have the power to file any legal proceedings necessary for the enforcement of the security but shall not be subject to any of the obligations of the creditors unless expressly agreed to in writing.

Fuq garanzija bi trasferiment ta’ titolu

Security by title transfer

  • Security by title transfer is a contract pursuant to which the debtor, or a third party for the debtor, transfers or assigns movable assets to a creditor to secure a present or future obligation.

Infurzar tad-drittijiet

Enforcement of rights

  • In the event of a default, the creditor is, upon giving notice in writing to the debtor (and the transferor of property by way of security, if different) entitled to realise the property transferred by sale, or by setting off or netting its value, and applying the same in discharge of the secured obligations. Set-off or netting is only permitted if it has been expressly agreed to in the agreement between the parties. Where a creditor exercises their rights as aforesaid, they must exercise such rights in a commercially reasonable manner, will be bound by fiduciary obligations in that regard and will be bound to account to the debtor as to the value used for such enforcement.

EU Directive Implementation

The EU Directive on Restructuring and Insolvency1 requires Member States to incorporate minimum common standards into their national restructuring and insolvency laws by 17 July 2021, with an option to extend that deadline by one year. The intention of the Directive is to reduce barriers to the free flow of capital stemming from differences in Member States’ restructuring and insolvency frameworks, and to enhance the rescue culture in the EU.

Notable features required to be included in Member States’ national laws include:

  • An effective preventive restructuring framework to enable debtors experiencing financial difficulties to restructure at an early stage, with a view to preventing insolvency and ensuring their viability.
  • A stay of up to four months extendable to up to 12 months to support negotiations of a restructuring proposal, which should prevent individual enforcement action and include rules preventing the withholding of performance, termination, acceleration or modification of essential contracts.
  • An ability to cram down dissenting classes of creditors.
  • Adequate protection for financing needed to allow the business to survive or to preserve the value of the business pending a restructuring, and for new financing necessary to implement a restructuring plan.
  • Provision for honest, insolvent entrepreneurs to have access to a procedure that can lead to a full discharge of their debts (subject to limited exceptions) within three years.

Implementation in Malta

The Directive has not yet been implemented in Malta and we expect that Malta will notify the Commission of the need to benefit from the one year extension of the implementation period under the Directive.

Implementation date

Date of implementation remains unclear.

Recognition of foreign insolvency processes

EU regulation on insolvency proceedings

The EU Regulation on Insolvency Proceedings2 applies to all EU Member States except Denmark and requires that certain collective insolvency proceedings, which are listed in Annex A to the Regulation, occurring in one EU Member State are automatically recognised in all other EU Member States and that each EU Member State automatically recognises the powers and authority of an insolvency practitioner appointed in another EU Member State.

Recognition of third country insolvency processes

Recognition of third country insolvency-related judgements or orders would be sought primarily under the rules contained in the Code of Organisation and Civil Procedure (the COCP) regulating the enforcement of foreign judgements. As a default rule, any judgement delivered by a competent court outside Malta and constituting a res judicata may be enforced by the competent court in Malta upon an application containing a demand that the enforcement of such judgement be ordered.

The foreign judgement seeking recognition must be final and definitive. Furthermore, it must not fall foul of any one of the procedural barriers to enforcement contemplated under the COCP. Recognition of a foreign res judicata judgements would be declined by a court in Malta where:

  • the judgement is one that may be set aside on any of the grounds contemplated for the institution of a new trial (eg where the judgement is based on evidence which subsequently turns out to be false etc.);
  • in the case of a judgement by default, if the parties were not contumacious according the foreign law in question; and
  • if the judgment contains any disposition contrary to public policy or to the internal public law of Malta.

Specifically, in the case of judgements delivered by a superior court in the United Kingdom, recognition and enforcement could also be possible under the British Judgements (Reciprocal Enforcement) Act provided that the UK judgement is one which satisfies the particular definition of “judgement” under the aforementioned Act. In this case, a “judgement” is defined as “any judgement or order given or made by a court in any civil or commercial proceedings, whether before or after the passing of this Act, whereby any sum of money is made payable.”

Malta is not amongst the handful of EU Member States who have adopted, as part of their domestic insolvency legislation, the UNCITRAL Model Law on Cross-Border Insolvency.

Prior to Brexit, the legal basis for the cross-border recognition of scheme of arrangements relied upon was the Brussels Recast Regulation. Since the Brussels Recast Regulation no longer applies to the UK, recognition of UK schemes of arrangement in Malta would need to satisfy the Maltese domestic rules on recognition previously explained.

Insolvency changes in response to COVID-19

As part of a package of COVID-19 related rescue measures, the Companies Act (Suspension of Filing for Dissolution and Winding Up) Regulations 2020 (the Regulations) was enacted. The main effects of these Regulations were: (i) to suspend the filing of winding up applications and (ii) to suspend the applicability of wrongful trading remedy (subject to certain safeguards provided for under the said Regulations).

The Regulations started to apply from 16 March, 2020. The suspensions established therein are to remain in place for a period of 40 days following a Ministerial Order lifting the suspensions. 

With thanks to Andrew Muscat and Simon Pullicino of Mamo TCV Advocates for writing this chapter of the dictionary.

Law stated as at 28 May, 2021


1Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 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, and amending Directive (EU) 2017/1132.
2Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast).