Navigating Dangerous Waters: Directors’ Duties in the Context of Highly Leveraged Companies

Apart from being responsible for the proper administration and management of the company, Directors of a Maltese company are, amongst other obligations, generally bound to act honestly and in good faith in the best interests of the Company; to promote its well-being and to exercise the degree of care, diligence and skill that may reasonably be expected of a person in such a position.

These duties, along with the duties of directors in the case of companies experiencing over-indebtedness and/or illiquidity are chiefly regulated by the Companies Act (the Act).

As soon as the directors of a company become aware that the Company is unable to pay its debts or is imminently likely to become unable to pay its debts, they must, according to the Act, convene a general meeting of the Company not later than thirty days from when the fact became known to them.

This general meeting is to be held for the purpose of reviewing the Company’s position and of determining what steps should be taken to deal with the situation, including consideration as to whether the Company should be dissolved or whether the company can once more become viable. It should be noted that the inability of a company to pay its debts is of its own a ground for the winding up and liquidation of a company.

The general duties of company directors become even more onerous when the company’s solvency is uncertain. Indeed, the Act also stipulates that where the director knew or should have known that the Company is unable to pay its debts or is imminently likely to become unable to pay its debts and did not take every step which a reasonably diligent person ought to have taken with a view to minimising the potential loss to the Company’s creditors, then such director can be held responsible for wrongful trading and ordered to make a payment towards the Company’s assets or to satisfy specific liabilities of the company.

Worse still, if it results that any business of the Company has been carried on with intent to defraud creditors of the Company or for any fraudulent purpose during such time as the company recovery procedure is in force, the Court may declare that any persons who were knowingly parties to such acts to be personally responsible, without any limitation of liability for all or any of the debts or other liabilities of the Company. Criminal proceedings for fraudulent trading can also ensue. Indeed, if any company officer is found guilty fraudulent trading, the court can impose a fine of not more than €232,937.34 and / or imprisonment for a term not exceeding 5 years.

Various other laws impose joint and several liability on company directors and officials and some even attract criminal liability, as is for example the case when the company fails to pay tax contributions.

It is therefore essential for the directors of a company faced with over indebtedness and/or illiquidity to make an informed decision regarding whether or not the Company can or should be saved.

This means that the company’s predicament and prospects must first be thoroughly assessed by professionals from the accounting and legal spheres since it is essential to first establish whether any restructuring can make the company viable once more. If the Company’s future viability is positively excluded, then the company should be wound up.

If the Company’s directors do reach the conclusion that the company can be restructured and become viable again, then the Act offers an opportunity for the Company to be made viable once more by restructuring the Company’ business or part of its business.

The Act provides for two distinct methods for recovering an ailing company in Malta, namely:

• 1.) The Voluntary Arrangement (VAP); and
• 2.) Company Recovery Procedure (CRP).

1. Voluntary Arrangement Procedure

VAP is more of an informal procedure which leaves much of the decision-making process in the hands of the Company’s directors and the Company’s creditors.

VAP is intended to provide a company which is unable or is imminently likely to become unable to pay its debts with a method of rescue achieved by a binding agreement with its creditors or with any class of them which will lead to the company becoming viable again.

This procedure is triggered either by the company itself or by any creditor making an application to court to kick-start this process or alternatively by the company itself or by any creditor with the sanction of not less than two-thirds of the creditors or class of creditors who seek the appointment of a mediator.

2. Company Recovery Procedure (CRP)

CRP is a more formal procedure than VAP. It also involves implementation of a more comprehensive restructuring process aimed at rendering the company viable once more and is carried out under the watchful eye of the court. Furthermore, since during CRP, the Company is administered by a Court-appointed Special Controller, the Company’s directors and officers minimise the risk of being held accountable for wrongful or fraudulent trading during an especially risky period when the restructuring is being implemented.

CRP is triggered by request to the court made by the Company or by its creditors. In certain situations, the Company’s directors can even file the request themselves.

CRP can be availed of by medium and large sized companies. It can also be availed of by smaller companies subject to their level of debt exceeding a certain threshold.

CRP is intended to be a speedy procedure – the Court is bound to take its decision whether to dismiss the application or to make a company recovery order within not more than 40 working days from the filing of the application. This is why it is imperative that the assistance of accounting and legal professionals should be sought from the outset.

CRP provides the added benefit that corporate restructuring can be achieved even where there is divergence of opinion between the company or its directors and the Company’s creditors.

If, at any time during CRP, it appears that the Company has become viable again then the Court will terminate the CRP. On the other hand, if it is established that the Company cannot recover then the Court will terminate CRP and order that the Company is to be wound up by the Court.

The above-mentioned obligations and potential liability of every Company director highlight the importance of Company directors treating every case of over-indebtedness and/or illiquidity with extreme care and caution and the importance of minimising the potential loss to the Company’s creditors. Indeed, it is with this in mind that an informed decision must be taken with the assistants of accountants and lawyers as to weather a company in financial difficulty can, or even should be saved.

If you require any assistance with corporate restructuring proceedings, or the duties of directors in the case of over-indebtedness and/or illiquidity, contact us at litigation@gvzh.mt .