24th March, 2020

Update by Nicolai Vella Falzon, Partner and Ryan Dalli

The Covid-19 crisis is likely to cause local and foreign businesses to have to endure material financial turmoil due to reduced revenues resulting from the preventative measures imposed to control the pandemic. The wave of financial uncertainty is already palpable and otherwise viable and successful business are already concerned about their survival.

While some measures are being taken by Government to assist businesses during these dire times, these may prove to be insufficient (at least for some) and their ability to survive may require additional relief.  A form of relief that may prove useful in these circumstances already exists under the Companies Act (the “Act”), namely the Company Recovery Procedure (the “CRP”). The CRP could provide an interesting opportunity for relief to companies which were financially viable before the COVID-19 crisis and which have the potential to return to financial viability within a relatively short time once the crisis is over. The CRP may provide an opportunity to avoid unnecessary liquidation where financial distress was triggered not so much because of an unsuccessful business model but because of cash-flow shortages resulting from the lockdown measures.

The CRP is a court regulated procedure with the purpose of helping companies to recover from financial difficulties of a temporary nature. It is intended to safeguard the interests of the company, its employees, its shareholders and, of course, its creditors.

An application for a CRP may be filed in the registry of the Commercial Section of the Civil Court by the shareholders, the directors or the creditors of a company. The application must detail the reasons justifying the request for the CRP and must provide sufficient evidence to the court that the company is “unable to pay its debts” (as this term is defined in the Act) or is likely to become “unable to pay its debts” imminently.  It must also confirm that the company is able to return to a viable and profitable operation within a prescribed time and how it proposes to do so.

Experience shows that the Courts have applied a very restrictive approach to the CRP and the vast majority of applications filed to date have in fact been rejected due to a failure to prove to the satisfaction of the Court that the company had a reasonable prospect of returning to viability within the prescribed time or that the projected plans were in the best interests of its creditors.  This approach is justifiable because the effects of the CRP have very direct consequences for a company’s creditors.  That said, the COVID-19 crisis presents a unique opportunity for the application of this procedure in the sense that the financial distress suffered by otherwise successful companies is obviously and evidently a result of the measures taken to fight the pandemic and there ought to be no reason to believe that they cannot return to viability once the crisis is over.

Where the Court accepts an application to put a company into recovery, it will appoint a so-called Special Controller who will take charge of the management and control of the company. The Controller will be a professional with expertise in the management of businesses generally. The Controller acts upon the authority of the Court and is subject to its scrutiny.

During the recovery period, the company benefits from important protections.  In particular, the CRP prevents the institution of winding up procedures against the Company, thereby allowing the Company to continue its operations freely (subject always to the control of the Controller) in spite of its financial difficulties.  Furthermore, during the CRP, the execution of any monetary claims against the Company are stayed and, importantly, any interest due on loans or other commitments of the company ceases to accrue. Therefore, during the term of the CRP, the company’s exposure to further debts and claims is reduced and creditors are precluded from pursuing any action against the Company. In fact, during the term of the CRP, special leave of court will be required for any action or enforcement of any security against the company or for the issue of any acts or warrants against the company or for the commencement or continuation of any judicial proceedings, including arbitration proceedings.  Additionally, if the company occupies leasehold property, the landlord is precluded from terminating the lease due to a failure by the Company to comply with any term of the lease, without special leave of court.

The law sets out the term within which a company can benefit from the recovery procedure  which is of a minimum duration of four (4) months and a maximum of twelve (12) months, subject to the discretion of the court and its assessment of the state of affairs and progress being made by the Company.

It is anticipated that recourse to the CRP should acquire momentum during or after the COVID-19 crisis because the CRP provides an opportunity to otherwise viable and profitable businesses to avoid insolvency in these incredibly difficult times.  Of course, the availability of the procedure is premised on a situation of insolvency or quasi-insolvency and this must be shown to the satisfaction of the court.  Nevertheless, the use of the procedure may prove crucial to local businesses which are struggling or will struggle to weather the storm.

How can we help:

Our expert team of professionals would be able to determine the adequacy of the CRP, provide any considerations to be made in terms of such procedure, as well provide general guidance on the procedure itself.

Should you require any further information or assistance on the matter, please do not hesitate to reach out to us personally on nicolai.vellafalzon@fenlex.com  and ryan.dalli@fenlex.com.

©Fenech & Fenech Advocates 2020

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