The test of insolvency under Maltese law

In a judgment delivered on the 28 June 2018 in the names Vella et vs Ciliberti et, the Commercial Court, presided over by Hon Justice Zammit McKeon analysed, by means of extensive reference to English jurisprudence, the test for determining the insolvency of a Company under Maltese law.

Action was instituted by Plaintiff Christopher Vella and Pentasia Co Limited seeking an order by the Court for the dissolution and winding up of Recruitair Limited, a Company constituted under the laws of Malta of which both Vella and Pentasia Co Limited were shareholders. Vella, who was also a Director of the Company, instituted proceedings in terms of Article 218 of the Companies Act (Chapter 386 of the Laws of Malta) against the other two directors sitting on the board of the company, Messrs Ciliberti and Tan. Plaintiffs argued that in accordance with Article 214(2)(a) and 214(2)(b)(iii), the court had the power to order the winding up and dissolution of the company both on account of the fact that its business had been suspended for an uninterrupted period of twenty-four months, and on account of the fact that there existed grounds of sufficient gravity to warrant the dissolution and consequent winding up of the Company.

The Court heard how although the company was initially financially self-sufficient (albeit not profitable), when following the acquisition of an overdraft facility, its financial position did not improve, it became clear that the business of the company was not doing as well as expected. The Directors had come to an agreement that the Company had to be placed in dissolution so as to avoid incurring any further losses. It was at this point that the company stopped trading altogether. Following preliminary discussions, it appeared that all of the company’s directors had been in favour of dissolution and the decision to proceed with the company’s voluntary liquidation had been agreed to, at least in principle, with the shareholders passing the necessary resolutions to approve the liquidation and winding-up of the Maltese Company. The shareholders had decided that all debts owed by the company be split equally among them. Despite this agreement, Plaintiffs argued that the liquidation proceedings had been stalled as a result of conflict that had arisen among the Board of Directors.

Having noted the Company’s accounts and its memorandum and articles of association, the Court moved to analyse the first ground of dissolution brought forward by the plaintiffs, i.e. dissolution on account of suspension of trading for more than twenty four months. Upon a factual assessment of the Company’s trading position, the Court was convinced that this ground for dissolution, which was drawn from Article 12(1)(d) of UK Insolvency Act of 1986 had been satisfied.

The Court moved on to determine whether the Company was solvent or otherwise, and to this effect made reference to Article 214(5) which sets out the test of solvency under Maltese law and reads:

• (5) For the purposes of sub-article (2)(a)(ii), a company shall be deemed to be unable to pay its debts:

• (a) if a debt due by the company has remained unsatisfied in whole or in part after twenty-four weeks from the enforcement of an executive title against the company by any of the executive acts specified in article 273 of the Code of Organization and Civil Procedure or;

• (b) if it is proved to the satisfaction of the court that the company is unable to pay its debts, account being taken also of contingent and prospective liabilities of the company.

There did not appear to be any judgments or other executive title in force against the Company, and the provisions of subparagraph (a) were therefore deemed not applicable. In delivering judgment, the Court noted that while there existed a number of differences in the Maltese and English law insolvency tests, the Maltese law provision drew extensively from its English law equivalent under the Insolvency Act of 1986 and that it would be thus imprudent of the Court not to refer to the English law doctrine and jurisprudence in the course of its decision. The insolvency test under English law essentially constitutes the so-called balance sheet insolvency test, and it is set out in Article 123(2) of the aforementioned UK Insolvency Act which stipulates that “a company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.”

The Court continued by quoting from Keay & Walton’s ‘Insolvency Law – Corporate and Personal’ who note that in determining whether the assets are outweighed by the liabilities, under English law, a court is not able to take into account contingent or prospective asses of the Company – reference can only be made to liabilities, which term is in turn defined to mean “a liability to pay money or money’s worth,” and shall include any liability under an enactment, any liability for breach of trust, any liability in contract and tort and any liability arising out of an obligation to make a restitution. The Court also quoted Sweet & Maxwell, who, in their writings on the ‘Principles of Company Law’, note that

“... it is immaterial whether the liability is present or future, whether it is certain or contingent, whether it the amount is fixed or liquidated or whether it is capable of being ascertained by fixed rules or as a matter of opinion... To give the phrase “contingent liability” any meaning we must restrict it to a liability or other loss which arises out of an existing legal obligation or state of affairs, but which is dependent on the happening of an event which may or may not occur.”

It was noted that although the term contingent liability was neither a specifically legal nor an accounting term, reference could also be made to Accounting Standard 12 which sets out a good working definition of the term.

The mere excess of liabilities of the Company over its assets is not in itself determinate of the Company’s insolvency – rather, what must be proven is that by reason of the deficiency of its own assets, the company has reached the point of no return. Turning to the merits in question, and after due consideration of the audited accounts of the Company, the Court noted that while the operating losses of the Company continued to increase over time, its assets decreased: the shareholder made no attempt to inject fresh capital in the Company and even went so far as to stop the overdraft facility that had been initially taken up to provide the Company with working capital. As such, the Court was satisfied that the plaintiffs had been correct in their assessment of the Company’s affairs and that it was, indeed, insolvent.

The Court proceeded by noting that although the Company had ceased to carry out business and was unable to repay its debts, dissolution was not automatic: with reference to Palmer’s Company Law, the Court noted that its jurisdiction is discretionary and the fact that the ground of dissolution set out in Article 214(2)(a)(ii) of the Companies Act has been proven, did not result in an automatic right to an order for dissolution by the Court. If there existed good reasons for delaying any such order or the great majority of members desired the company to continue in its business, the Court could, assuming that there existed appropriate circumstances for so doing, decide to refuse a request for winding up. Despite this discretion, it was clear to the Court that there had been no attempt by the Shareholders to continue the operations of the Company and it was thus satisfied that the Company was to be dissolved, noting, in its concluding remarks that a non-trading company is a soulless entity.