Article 228 of the Companies Act (Chapter 386 of the Laws of Malta) lays down that a court may appoint a provisional administrator after the filing of a business's winding-up application and before a winding-up order.

The provisional administrator is tasked to carry out such functions  in relation to the administration of the estate or business of the company as the court may specify and is to hold office until the winding-up order is made or the winding-up application is dismissed.

The Commercial Court, presided by Mr Justice Ian Spiteri Bailey, in a decree on April 14, 2023 in the case between Liberty International Aktiengesellschaft vs. John’s Group Limited, delivered a decree refuting a request for the appointment of a provisional administrator.

The facts of the case were as follows: Liberty International Aktiengesellschaft requested the court to appoint a provisional administrator to take control of John's Group and all its assets, and to give the administrator the powers that the court deemed appropriate.

At the basis of its request was an executive title obtained against John’s Group to the tune of €100,000.

Liberty International Aktiengesellschaft argued that it had an interest in ensuring that the assets of John’s Group were conserved and that the appointment of a provisional administrator was therefore essential to identify, trace and take full control of John’s Group's assets; and ensure that there was no disposal of the company's property in violation of article 221 of Chapter 386 of the Laws of Malta.

That clause lays down that in a winding up by the court, any disposition of the property of a company, including any rights of action, and any transfer of shares, or alteration of the status of the members of the company, made after the date of its deemed dissolution, shall be void, unless the court otherwise orders.

John’s Group countered the request, arguing that Liberty International Aktiengesellschaft had failed to substantiate its claim of serious and real fear of the disposal of the company's property. Holding that clause 221 of Chapter 386 of the Laws of Malta was not applicable to the case at hand, it further argued that, in order to safeguard its position, the applicant company had at its disposal other judicial tools and that therefore there should be no divestment of the directors’ powers.

The court noted that the business of John's Group was in the transport sector. The company owns  John's Garage Limited and both companies are managed by the same directors and have the same shareholders.

The court further noted that John's Group owns a number of immovable properties and that it was burdened by debts of approximately €1,800,000. It was in the process of signing a contract with third parties in order to develop and transfer some sites that belong to the company with a portion of the proceeds to be dedicated to the settlement of debts.

Good company governance at the heart of an administrator's appointment

Citing local jurisprudence, the court observed that the decision it had been called upon to take was to be dictated by the facts and circumstances of the case. The court said it must always have the peace of mind that the administration and financial management of the affairs of the respondent company would be conducted well, in a transparent manner, and free from ambiguity so that the position of the company was never such to be prejudicial to the value of its assets and consequently to its creditors.

The main function of a provisional administrator, the court observed, was to preserve the assets against the risk of dissipation or reduction in value by the directors. The need for good, effective and transparent conduct by the directors becomes even more imperative when the company has only one asset.

It was clear in the mind of the court that these proceedings were instigated as a result of Liberty International Aktiengesellschaft’s preoccupation that John’s Group would dispose of its assets pending a potential winding-up order. The court however further observed that John’s Group was not contesting the sum due to Liberty International Aktiengesellschaft, and was doing its best to settle it.

Once the list of immovable property owned by John’s Group had, pending these proceedings, become known, and having established that the latter did indeed have a plan in place to pay all its creditors, the court felt it should not intervene and even disrupt the said plan, particularly when it appeared that the directors of the respondent company were acting in the best interests of all those concerned.

The court therefore turned down the request for the appointment of a provisional administrator. It however ordered John’s Group's directors to give periodic accounts under oath, substantiated by documentation where possible, regarding the developments in the process of settlement of its dues.

Dr Keith A. Borg, is a partner at Azzopardi, Borg & Associates Advocates.