The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, on April 18, 2011, in the case “Mark Nurton and Paul Nurton vs PMN International Ltd”, held, among other things, that a company was deemed to be insolvent when it ceased to pay its debts. It was not necessary to show that it did not have funds or assets to pay its debts.

The facts in this case were as follows.

Mark Nurton and Paul Nurton, the majority shareholders holding a total percentage of 99.415 per cent of the issued share capital in the company PMN International Ltd, filed an application before the First Hall of the Civil Court requesting its dissolution in terms of article 214 2 (II) (A) and article 214 (2) (III) (B) of Chapter 386 of the Laws of Malta.

It was stated that the company was incorporated on July 14, 2006. Its objectives included “to carry on all or any of the business of suppliers, marketers, importers, exporters, merchants, dealers in foods and frozen foods, prepared, cooked, concentrated and other foodstuffs, products and comestibles of every description and food specialities”.

Its directors were both Mark and Paul Nurton. The company commenced business operations in 2006, manufacturing and selling pasta products through Pavi Supermarkets and Smart Supermarkets. Despite an investment of approximately €400,000, the company did not make a profit and by 2008 it was running at a loss. It had a long list of creditors, including suppliers and also had outstanding credit facilities with Banif Bank.

Finally by March 2009, it shut down operations. In their application, Messrs Nurton claimed that there existed good reasons for the company’s dissolution. Article 214 (2) (II) (A) of the Companies Act provides a company may be dissolved and wound up by the court if “the company is unable to pay its debts”.

The Nurtons asked the court:

1. To order the dissolution and winding up of the company in terms of article 214 (2) (II) (A) and according to article 214 (2) (III)(B) of Chapter 356;

2. To appoint a liquidator and to give such orders and directions under article 219, as it felt appropriate.

The court considered the only audited accounts of the company for the period July 14, 2006 to December 31, 2007.

It resulted that for the first 17 months of the company’s operations, the company was trading at a loss.

The auditors entered an annotation that the continuation of the company depended on whether its shareholders were to provide further finance, and inject additional capital.

The auditors stated that “these financial statements have been prepared on the going concern basis. The validity of this assumption depends on the continued support of the company’s shareholders. The company’s shareholders have confirmed that they will provide sufficient funds in order that the company meets its liabilities as and when they fall due”.

In the period covered by the audit, the company suffered a loss of Lm3,923.

It was clear that the company would not be in a position to meet its commitments unless its shareholders were prepared to contribute more funds.

The First Hall of the Civil Court noted that under article 214 (2) (B), it had to dissolve the company.

If it results that the company was unable to pay its debts, the court, however, could exercise its discretion to dissolve the company in terms of article 214 (2) (A) (II).

Article 214 (5) (B) stipulates that “if it is proved to the satisfaction of the court that the company is unable to pay its debts, account being taken also of contingent and prospective liabilities of the company...”

In the case “Axel John International AB vs Aluminium Extrusions Ltd”, dated May 28, 2003, the court held that “this condition could be established by the presentation of the company’s balance sheets. A company was not solvent, if it could meet its current obligations, by selling its assets over a period of time. There was no reason why creditors should wait until the company sold its assets in order to receive payment”.

The court considered that the company was not operating at a profit and could not make ends meet. Its shareholders injected as much funds as possible, until they felt they had to draw the line. In 2008, the company took a loan from Banif Bank to pay its creditors. However, the banking facility was not sufficient to vitalise the company. There were no management accounts for the period covering January 1, 2008 to March 31, 2011, maintained the court.

The court said that the financial accounts had to be prepared, filed regularly and in time, in order to enable its creditors to consider its financial condition.

The court had no doubt that the company was insolvent, and that it did not have enough assets to pay its debts.

At the time of these proceedings it had ceased trading for over two years.

There was no possibility for any turnaround; for the company to re-establish its goodwill, and to re-acquire its clientele and business partners.

A Company was insolvent when it ceased to pay its debts. It was not a requirement to prove that it did not have funds or assets to pay its debts.

In the circumstances, the court was satisfied that the company was insolvent, and that it should be dissolved according to article 214 (2) (a) (III) and article 214 (5) (B). In this way, no one creditor would be permitted to take advantage, and the liquidation of the company would be carried out under the scrutiny of the courts.

For these reasons on April 18, 2011, the court gave judgment by accepting Mark and Paul Nurton’s application.

1. It declared that the company PMN International Ltd could not pay its debts for purposes of article 214 (2) (a) (ii) and article 214 (5) (B) of Chapter 386.

2. It ordered the dissolution of the company with effect from the date of this decision, in terms of the proviso to article 223 (i) Chapter 386.

3. The court appointed the official receiver as liquidator with powers under Article 228 et seq of Chapter 386.

The liquidator was authorised without prejudice to the generality of the powers conferred in articles 228 et seq, to do as follows:

• After obtaining a declaration on the financial conditions of the company in terms of article 226, to draw a report to the court in accordance with article 227, Chapter 386.

• To make an assessment on the assets and liabilities of the company, as well as, list the debts of the company in their order of ranking.

• To take under his custody and control all the assets of the company in terms of article 237, Chapter 386.

• To file and defend legal proceedings in the name and interest of the company.

• To report on the necessary measures to be taken for the protection of assets of the company.

• To present his report to court within three months from the date of this decision.

Dr Grech Orr is a partner at Ganado & Associates.