The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, in the case ‘In the acts of the application of More Supermarkets (Ħamrun) Limited’ held, among other things, that the purpose of the recovery procedure under article 329B of the Companies Act was to save the company which could be rescued with careful planning and to restore it into a viable enterprise. As it was proven to the satisfaction of the court that the company had no plan of recovery in order to be turned into a profitable business, its financial problems were irreversible and it was unable to pay its debts. The court, therefore, gave no order under article 329B.

More Supermarkets (Ħamrun) Ltd, filed an application requesting the court to place it under the recovery proceedings under article 329B of Chapter 386 and to appoint a special controller to take control, manage and administer for a period to be specified by the court in terms of article 329B.

Article 329B provides the procedure for the courts to place a company under the company recovery procedure. This recovery procedure (known as the company rescue) was introduced in the Company Law by article 329B (Act IV of 2003).

The procedure was based on the system of administration applied in the UK. In Bailey, Groves & Smith in Corporate Insolvency, Second Edition 2001 page 120, it is stated:

“Inevitably the procedure obliges the court, lawyers and accountants to approach the problem raised with commercial awareness and sensibility. The court, in particular, is being asked on the hearing of the petition to make a commercial judgment which is often difficult to make even for a business person. The procedure is court based and professional advisers must be involved from the earliest point possible; much of the success of the procedure will depend on the preliminary work leading up to the presentation of the petition.”

The court read article 329B into six parts.

1. In sub-clauses (1), (2) and (3) the law laid down the conditions for the court to decide whether to accept this request or make the order for the company to be placed in recovery proceedings.

2. In sub-clause 4, the law dealt with the effects of this procedure, which applied from the date of filing this application. The effects ceased from the date when the request was not accepted, or continued in the period wherein the company rescue procedure was authorised by the court.

3. Sub-clauses 5, 6, 7, 10 and11 dealt with the appointment, removal or vacancy of the special controller as well as his powers and duties.

4. Sub-clauses 8 an 9 applied in case it resulted that there was fraudulent or improper dealings.

5. Sub-clauses 12 and 13 provided for the termination of the order and the filing of documents with the Registry of Companies.

6. Sub-clauses 14 dealt with the liquidation of the company by the court.

In this case, the court was limiting its consideration to whether it should make the order under article 329B. If it was not in the opinion that it should give the order, it need not pass on to consider the issues under article 329B.

According to article 329B (1), when a company was not in a position to pay its debts, it could request the court to place the company under recovery procedure and to appoint a special controller to manage the company for a period to be specified by the court.

The court noted that the company More Supermarkets (Ħamrun) was not in a position to pay its debts and it was likely that it would be unable to pay them.

Under article 329B, this application could be presented:

• by the company pursuant to an extraordinary resolution; or

• by the directors following a resolution of the board of directors; or

• by the creditors of the company who represent more than half the debts of the company.

The company recovery procedure applied to all companies which did not qualify as small companies under article 185 and to small companies which owed in excess of €465,874.

The court considered 329B (2) and (3).

These proceedings were initiated by More (Ħamrun) itself, and not by its directors or its creditors. One important document was not presented to the court with the application – an extraordinary resolution of the shareholders was lacking, pointed out the court.

In this respect, the court had no option but to refuse the company’s application as it did not comply with article 329B (1) (b) (i) of Chapter 386.

The court made other considerations:

• One director of the company declared that the company was unable to pay its debts; and that the company’s liabilities exceeded its assets.

• It was up to the company to satisfy the court that its future financial prospects were positive, despite its present inability to pay its debts.

The company alleged that a restructure plan was envisaged, but there was nothing in writing. Reference was made to Professor Andrew Muscat page 45 in Principles of Maltese Company Law:

“The primary aim of this far-reaching procedure is to allow, if practicable, companies in financial difficulty to recover rather than to put them into liquidation. The procedure is intended to be an alternative to the liquidation of a troubled business. It is not, however, intended to make effective insolvency or to merely postpone the inevitable crash.’’

For a company to be placed on the road of recovery, when it was already not in a position to pay its debts, it required a fresh capital injection in addition to a restructure plan. As the sole shareholder of the company did not contribute more funds, no creditor would accept and no new investor would invest if he was not convinced that there was a serious business plan.

In this case, it resulted that there was nothing in writing of any restructure plan. The court had serious doubts on the existence of the recovery plan within the scope of article 329B (2) (a) Chapter 386. Neither from the application, nor from the documents presented, did it result that there was a declaration as required by law as to how the financial position of the company could improve in the interest of creditors and its employees and of the company itself as a viable concern.

Neither from the application, nor from the documents presented, did it result that there was a declaration as required by law as to how the financial position of the company could improve in the interest of creditors and its employees and of the company itself as a viable concern

More (Ħamrun) presented the following documents:

• Company details of D. More Holdings Ltd;

• Company details of More Supermarkets;

• List of creditors, suppliers;

• List of other debts;

• Nominal activity;

• Accounts up to June 30, 2014;

• E-mail dated October 15, 2014;

• Memorandum & Articles of More (Ħamrun).

The court said that on the day of the filing legal proceedings, More (Ħamrun) did not comply with article 329B (2) (b) (ii) of Chapter 386.

This meant that the court was not aware of the financial position of the company on the date of the presentation of the court application.

More Supermarkets (Ħamrun) was obliged that, on the date on which it instituted legal proceedings, it would inform the courts of its financial position as required under article 329B (2) (b) (i) of Chapter 386.

It was evident that the financial position was already negative up to June 30, 2014, and worsened in the next two months.

The court observed that, in the sitting dated October 23, 2014, the sole director of D. More Holdings – sole shareholder of More Supermarkets (Ħamrun) – contrary to what was alleged by the directors of the company, denied that there was a rescue plan.

It was stated that the company could not be rescued, as it was heavily burdened by debt. This was ample proof of a conflict between the sole shareholder and the directors of the company.

The court doubted whether the purpose of the necessary procedure would be achieved in this case. The court was of the opinion that the alleged plan of re-structure was a desperate attempt of the directors of the company to prevent as much as possible the total and inevitable collapse of the company, which was certainly not in the interest of its employees and at the expense of its creditors.

The goal of the recovery procedure was to save the company, which could be rescued with careful planning, and to restore it into a viable enterprise.

As it was proven to the satisfaction of the court that the company had no plan of recovery in order to be turned into a profitable business, its financial problems were irreversible and it was unable to pay its debts. The court did not feel that it was necessary to consider other issues under article 329B.

For these reasons, on October 27, 2014, the First Hall of the Civil Court gave judgment by declaring that the elements of article 329B of Chapter 386 were not established. It decided, therefore, not to give the order to place the company under the company recovery procedure.

The company’s application was, therefore, dismissed.

Dr Karl Grech Orr is apartner at Ganado Advocates.

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