The new insolvency reforms proposed by Economy Minister Silvio Schembri aim at transposing EU laws into Malta’s legislative framework by adopting a 2019 EU directive on facilitating the insolvency process in all member states.
Schembri described the aim of the new act as encouraging the entrepreneurial spirit by “instilling a mindset that everyone deserves a second chance”. Creditors, he added, would be able to maximise recovery of their debts in a timely manner.
The new laws are a welcome development, as Malta’s old insolvency and bankruptcy processes are considered by some legal experts as notoriously laborious and lengthy.
When, in 2019, the European Parliament adopted the new directive, it reinforced the concept of ‘preventive restructuring’ aiming to ‘increase the efficiency of restructuring’. Malta, like Italy and some other EU countries, has often been advised by the IMF and rating agencies that it needs to update its insolvency processes.
The directive should end the slow reform progress in member states, like Malta. It is inspired by chapter 11 of the US Bankruptcy Code which was approved by congress in 1978.
European legal experts agree that the new directive can achieve several valuable objectives. It supports fast recovery from economic recessions when some companies face insolvency. It also limits creditor losses in insolvent companies, which is critical to developing and increasing creditor recovery. All this supports banks’ and other credit market operators’ health in dealing effectively with doubtful debts.
The rapid rate of technology-driven disruption in the modern economy means that more firms become insolvent. This directive should help prevent EU member states from struggling with large numbers of insolvent questionable firms that are no longer economically viable.
Implementing uniform and consistent rules across Europe should increase predictability and fairness for firms that operate across borders. Formal in-court procedures would reduce the need for out-of-court bargaining that, at times, unfairly favours some claimants with clout, like big banks.
Still, some European legal experts, like Bo Becker, professor of finance in the Department of Finance, Stockholm School of Economics, argue that the new legislation is incomplete. For instance, the directive uses the term ‘pre-insolvency’. Pre-insolvency means solvent. If a firm is solvent, why restructure? Solvent firms in need of restructuring do not need a court and attempts at abuse are likely.
Another arguably legal flaw highlighted by some experts is that the new system does not fully respect priority among creditors. If, under the new rules, there is little point to secured debt or senior debt in general, the implications could be disruptive for credit markets and firms’ ability to fund themselves.
While this directive is a step in the right direction, it needs further improvements to promote a genuinely effective insolvency regime. The restructuring procedure would have to be incorporated into bankruptcy law, for which insolvency is the trigger. Courts should be directed into restructuring or liquidation based on value maximisation for all stakeholders.
Further reforms on the bankruptcy and insolvency regime should ensure that the system respects private contracts and support is given to healthy credit markets. The system should respect ranking priority. Put simply: no losses on any creditors unless equity is wiped out.
Our courts are already struggling to cope with day-to-day litigation. To manage the new complex processes envisaged in this directive, a specialised bankruptcy court may be needed not to add more pressure on existing courts.
When further reforms are made to the new directive, the EU should achieve the corporate revitalisation, deep credit markets and support for employment and productivity growth that it so badly needs.
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