On the 23^rd of December 2022 Malta introduced Chapter 631 of the Laws of Malta entitled the Pre-Insolvency Act (the “Act”). The purpose of the Act is, amongst others, to introduce within Maltese legislation effective preventive restructuring frameworks which enable corporate structures and/or individuals engaged in trade who are facing financial difficulties to continue operating. By implementing structures to facilitate viable debtors in financial difficulties, the Act may contribute to minimise job losses and losses of value for creditors in the supply chain. The Act itself partially transposes Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019. The purpose of this news item is to explore certain features of the Act and to shed a light on the interplay between the Act and the registration of a mortgage over a Maltese flagged vessel.

Applicability

At the outset it is pertinent to establish the applicability of the Act. The Act clearly defines that it shall only be applicable to debtors who are natural person carrying out a trade, business, craft or profession in or from within Malta, or any legal organisation established in Malta as it expressly excludes, amongst others, credit institutions and natural persons in respect of debts not incurred in the carrying out of a trade, business, craft or profession.

Tools and Frameworks Established by the Act

Naturally, if a debtor can detect its financial difficulties early, it may take appropriate action to avoid an impending insolvency or, in instances where the business is no longer viable. Appropriate action may also be taken for a more orderly and efficient liquidation process.

Taking this premise into account, the Act legislates for “early warning tools” together with up-to-date publicly accessible information about the availability of early warning tools. “Early warning tools” are intended to enable debtors to detect circumstances that could give rise to a likelihood of insolvency and to signal, to the debtor, the need to act without delay. At the time of writing, the regulations pursuant to the Act establishing these early warning tools have not been enacted and therefore further details with respect to the nature of the tools cannot be commented upon at this juncture.

In terms of the Act, a debtor is expected to continuously monitor developments which could lead to a likelihood of insolvency and in instances where such developments are identified, the debtor should take appropriate countermeasures with a view to preventing insolvency and ensuring business viability. As part of the monitoring process, debtors are to make reference to early warning tools (once established) and any other information reasonably available to them.

In tandem to establishing early warning tools, the Act makes a restructuring framework available to debtors. Access to restructuring procedures is however somewhat limited, this is in order to ensure the restructuring framework is not misused. In order to be eligible for restructuring procedures, the debtor must have, upon reasonable consideration, determined that the debtor is exposed to a likelihood of insolvency, having regard to its business circumstances and its actual, contingent, and prospective assets and liabilities, and that:

• the debtor has reasonable prospects of viability, i.e. the debtor’s economic viability is likely to be preserved or restored as a result of being placed under a preventive restructuring procedure;
• the debtor has not become liable for the payment of a debt that has remained unsatisfied, in whole or in part, after twenty-four (24) weeks from the enforcement of an executive title against the debtor or has been otherwise declared by a court to be unable to pay its debts; and
• the debtor has not previously been admitted to preventive restructuring procedures in the three (3) years preceding the date of the application.

In the event that the debtor qualifies in terms of the above criteria, it will be eligible to make a preventive restructuring application before the Civil Court (Commercial Section) requesting it to place the debtor under a preventive restructuring procedure.

Effect of the Preventive Restructuring Order

The preventive restructuring procedure has a number of significant implications to the debtor including that the debtor may not during the course of the preventive restructuring procedure (without approval of the insolvency practitioner) terminate the employment of any employees of the debtor on the basis of redundancy and/or enter into any long-term commitment (longer than six (6) months). Some of the essential features of the procedure is that for a period of four (4) months following the date of the application:

(i)   the execution of claims of a monetary nature against the debtor (with the exclusion only of workers’ claims, and any interest that may otherwise accrue thereon) shall be stayed;

(ii)  in respect of essential executory contracts entered into prior to the order to place the debtor under preventive restructuring procedure, no party may exercise, to the detriment of the debtor, any right of termination, or any right to accelerate, modify, withhold or suspend the performance of its obligations in favour of the debtor, or any right to repossess any property leased, sold or granted to the debtor, solely by virtue of the fact that they were not paid by the debtor, or by virtue of the debtor’s entry into preventive restructuring procedure;

(iii) no precautionary or executive act or warrant shall be made or continued against the debtor or any property of the debtor;

(iv) no arbitration proceeding shall be made or continued against the debtor or any property of the debtor; and

(v) no judicial proceedings shall be commenced or continued against the debtor or its property, and any relevant court shall refuse any new judicial action against the debtor or shall ex officio order that ongoing judicial proceedings against the debtor are stayed.

Implications of Preventive Restructuring Order with Respect to Vessels

Notwithstanding the rights offered to the debtor in terms of the Act, the legislator has ensured that actions against vessels and the rights of a mortgagee with respect to a mortgage registered over a Malta flagged vessel are not prejudiced by the Act. The Act specifies that the rights offered to the debtor (including the staying of claims) shall not apply insofar as these may be inconsistent with, or insofar as these may be construed as limiting or restricting, inter alia:

1. any action in rem against a ship or sea vessel; and/or
2. any proceedings that may be instituted by the holder of a registered mortgage or a privileged creditor over a ship or sea vessel, or any other actions or proceedings to which a ship or sea vessel may be subject in terms of the Merchant Shipping Act.

By limiting the effects of the preventive procedure in relation to actions against vessels and proceedings by a mortgagee, the Act has ensured that a mortgage and the rights it offers to mortgagees are not limited. This is an important consideration in light of Malta’s reputation as a creditor friendly jurisdiction and ensures that the mortgage retains its strong position.

Conclusion

The Act is a piece of legislation which strengths Malta’s corporate regime. Whilst the Act offers several avenues for debtors, the law and the legislator has ensured that mortgagees and mortgages do not suffer any detriment by the legislation.

How can we help?

Should you require any further information or assistance on the matter, please do not hesitate to reach out to us personally on matthew.cassar@fenechlaw.com.

©Fenech & Fenech Advocates 2023

Disclaimer │ The information provided in this article does not, and is not intended to, constitute legal advice. All information, content, and materials available are for general informational purposes only.  This article may not constitute the most up-to-date legal or other information and you are advised to seek updated advice.