There is no doubt that many legitimate and viable businesses have been and continue to be impacted financially by the COVID-19 pandemic. Companies operating in the business of travel and entertainment have probably taken the most direct hit but many other businesses, including those in the supply chain to these sectors, are similarly affected.

Otherwise successful businesses are unexpectedly facing a severe reduction in revenue which, if prolonged, may impact their ability to pay their debts as they fall due. This, in turn, exposes these businesses to the rights granted to creditors (among others) by insolvency law to demand the liquidation of a company where it is unable to pay its debts.

Back in March, the Conference of European Restructuring and Insolvency Law (CERIL) published an executive statement encouraging countries across Europe to adapt their insolvency legislation to provide some relief to commercial enterprise in the “current extraordinary economic situation” the world has found itself in as a result of COVID-19.

The local response to that recommendation is Legal Notice 373 of 2020 entitled ‘The Companies Act (Suspension of Filing for Dissolution and Winding Up) Regulations’ published on September 15, 2020. These regulations seek to grant temporary relief from the risk of creditor-activated insolvency proceedings and from the risks associated with operating in times of financial distress. In brief, the main thrust of the regulations is to do three things. First, they temporarily suspend the right of creditors to file proceedings for the liquidation of a company. Second, they stay winding up proceedings initiated by creditors after March 16, and currently pending in court. Third, they temporarily and retroactively suspended the much-dreaded wrongful trading provisions in the companies act with effect from March 16.

Wrongful trading provisions are of grave concern to directors of companies

The wrongful trading provisions are of grave concern to directors of companies in financial distress because they may have the effect of imputing personal liability on directors in the event of the eventual insolvent liquidation of the company.

Without the suspension introduced by virtue of the regulations, directors of companies in distress as a result of the COVID-19 pandemic would likely be unwilling to continue to operate and would certainly be uncomfortable with pursuing the activity of the company during this period of hardship.

Because the purpose of the regulations is to provide relief to companies suffering the effects of the COVID-19 pandemic, anti-abuse safeguards are included in the regulations. Thus, the court will have the power to accept an application by creditors for the liquidation of a company when it is prima facie satisfied that the circumstances upon which the application is based pre-dated March 16 and were, therefore, not a direct effect of the pandemic.

Furthermore, the suspension of the wrongful trading provision does not give directors the freedom to act as if the company is not in financial distress. The effect of the suspension is to grant directors the opportunity to avoid the necessity of ceasing operations and to avoid the necessity of taking steps to recommend or apply for the insolvent liquidation of the company. It also allows them to continue to operate in spite of the financial distress of the company without the risk of personal liability provided that they continue to trade and to incur debts in good faith and in the ordinary course of business of the company. 

The regulations strive to strike an appropriate balance between adapting insolvency legislation to assist otherwise viable companies during the pandemic and the rights of creditors who have a right to ensure that their interests are protected.

Each of the suspensive measures referred to in this article will continue to subsist until 40 days after publication of an order to lift these suspensions.

Nicolai Falzon is a partner and Maria DeBono is an associate at Fenech & Fenech Advocates.

For more information, send an e-mail to nicolai.vellafalzon@fenlex.com and maria.debono@fenlex.com.