COVID-19 has taken the world by surprise in all aspects of life. Just like scientific research is struggling to catch up with the spread of this virus, the business community is fighting to survive. All business plans which may have been in place until a few months ago are no longer applicable and businesses are now looking at contingency plans instead, struggling to cope with the new circumstances they are now facing.
Having substantial losses or major cash flow problems may not be something most businesses have faced during their lifetime. The consequences of one’s actions during this period may, however, have serious implications from a legal perspective in the event of a company being on the brink of insolvency, which may arise either due to cash flow problems or because of the losses incurred.
During this period, companies should tread carefully since in certain instances there might also be personal liability attached to certain actions which may be taken (with the legal terminology which is typically referred to being that of the ‘lifting of the corporate veil’).
The law may, however, provide some help to companies which would still be experiencing difficulties as the situation starts returning to normal. Once we start to see the light at the end of the tunnel, companies on the brink of insolvency but with effective recovery plans can use the law to their benefit in order to put their recovery plans into action effectively, while being safeguarded from their creditors’ claims.
The company recovery procedure is available to companies unable to pay their debts or imminently likely to become unable to pay their debts. This procedure is availed of by submitting an application to the court and requesting the court to “place the company under the company recovery procedure and to appoint a special controller to take over, manage and administer the business of the company”.
The aim of this procedure is, therefore, to give companies breathing space when they are most vulnerable.
Once a company recovery application is filed in court, the court is obliged to accept or dismiss this application within 40 working days from the filing of the said application.
A company recovery order has a four-month lifespan
Once a company recovery application is submitted to court, and unless this is dismissed: any winding up applications are stayed, and no resolutions for the dissolution of the company may be adopted or given effect to; the execution of claims of a monetary nature against the company are stayed; the company will be protected in that landlords will only be able to terminate any lease, as a result of the company’s default, with leave of the court; creditors will not be able to enforce security taken over the company’s assets and any precautionary or executive warrants against the company will also be stayed, unless the court’s consent is obtained; and arbitration proceedings made or continued against the company are to be stayed and no judicial proceedings can be commenced against the company unless with the court’s authorisation.
A company recovery order has a four-month lifespan, with the court being entitled to extend this period for further periods of four months each, provided this maximum period of a company recovery order does not exceed a total of 12 months. This means that if a company can convince the court it has an effective recovery plan, and if the court actually sees the recovery plan is coming to fruition, the company can benefit from a maximum of 12 months wherein priority is given to the recovery of the company, rather than to satisfying its creditors’ claims.
A court is obliged to accede to a company recovery application only if it is satisfied the company is, or is imminently likely to become, unable to pay its debts; and only if it considers the making of the order would be likely to achieve one of the following purposes: the survival of the company as a viable going concern in part or in whole or if the court considers that entering into a company recovery procedure will allow the company and its creditors to arrive to a compromise or arrangement.
In order for this procedure to apply, the company’s administration and management is to be entrusted into the hands of a special controller appointed by the court, who is to be a person who does not hold any conflict of interest. Though the powers of any directors or officers of the company are considered to be suspended throughout a company recovery order, the law also provides for situations where the special controller grants consent for such officers or directors to continue exercising certain functions determined by the said special controller.
A company recovery procedure can terminate before the period established by the court if the special controller considers there is no longer any hope of the company recovering (as a result of which the company will be wound up), or alternatively if either the special controller or the directors or the shareholders of a company consider that the affairs of the company would have improved to the extent that the company would be in a position to pay its debts.
If the period established by court for a company recovery procedure expires, the special controller will be obliged to prepare a report for the court’s consideration, through which the court can also approve a recovery plan which becomes binding on both the company as well as on its creditors.
Though it may be too early for companies to finalise their recovery plans given the current uncertainty, boards of directors should consider the benefits of this procedure as it may provide companies with an essential breathing space as part of their recovery processes.
George Bugeja, senior associate, Corporate Finance team at Ganado Advocates