The Suspension of Company Directors’ Liability – What’s the Story?
5 min read
Authors: Gianluca Falzon & Nico Fauser
On 15th September 2020, the Companies Act (Suspension of Filing for Dissolution and Winding Up) Regulations (the ‘Regulations’) were introduced as part of several other measures intended to protect local businesses from the adverse economic impact brought about by the COVID-19 pandemic. They became applicable retrospectively as from 16th March 2020.
Impact on creditors and shareholders
The Regulations effectively sought to limit the effect of two articles of the Companies Act (the ‘Act’), namely Article 218, dealing with dissolution and winding up of limited liability companies, and Article 316 of the Act, dealing with wrongful trading.
Article 218 of the Act grants stakeholders the power to request the dissolution of a company by filing an application in court. However, in an effort to grant relief to companies facing financial hardship resulting from the COVID pandemic, Regulation 3 effectively restricts this right by effectively suspending the filing of any new applications, except in circumstances where the court is satisfied, prima facie, that the causes of the insolvency are demonstrated to have arisen prior to the 16th March 2020 and not as a result of the pandemic. Furthermore, the Regulation provides that any proceedings pending before the courts seeking the dissolution of a company should be stayed, subject to the same exception.
Impact on directors
Article 316 of the Act, on the other hand, sets out the Maltese law rules regulating wrongful trading. The Regulation provides relief to directors who knew, or ought to have known that there was no reasonable prospect that the company would avoid being dissolved due to its insolvency. Before the introduction of the Regulation, a director could be held liable to contribute towards the company’s assets if such “wrongful trading” was successfully proven. Now, pursuant to the provisions of the Regulation, the liquidator of the company is restricted in his right to file an application against the directors of the company based on wrongful trading. Furthermore, a director is excluded from liability arising from the incurring of debts in good faith for as long as the Regulations apply. These rules, however, cannot be invoked in circumstances where it can be shown that any action or omission was deliberately intended to prejudice the pari passu ranking of creditors of the company.
Period of suspension
As things currently stand, these articles of the Companies Act remain suspended and shall continue to be so suspended until “…forty (40) days following an order of the Minister to lift such suspension.”
As we approach the lapse of a full calendar year from the day that the first cases of COVID-19 in Malta were detected, it is pertinent to question whether the Regulations should remain in force. On the one hand, it can be argued that a number of industries and companies are still facing financial hardship as a result of the on-going pandemic, and that directors should not be held financially responsible for the worsening of a company’s financial position as a result of the pandemic. On the other hand, it may also be argued that any further delay in establishing a cut-off date of the suspension period may trigger an indefinite inertia or complacency on the part of company directors since they are protected by the provisions of the Regulation.
For the purposes of this analysis, it is valuable to consider the stance taken in other jurisdictions. In the UK, for instance, wrongful trading provisions were similarly suspended as a result of the pandemic, allowing directors to continue to trade through their companies without any concern of prosecution. The suspension period in the UK originally spanned from 1st March 2020 until 30th September 2020, with such suspension period having been further extended from 26th November 2020 until 30th April 2021. UK directors may however be held liable for any worsening of financial condition which may have occurred between the end of the first suspension on 30th September and the 26th of November 2020 when the suspension was reintroduced. In Ireland, the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading) Regulations stated that the “relevant period” during which the suspension of wrongful trading is applicable shall be between 14th December 2020 and 30th April 2021.
What is clear is that whilst in the UK and Ireland there has been a clear indication in the corresponding statutory instruments that the suspension is temporary and a lapsing date was specifically provided for, the approach adopted in Malta has been significantly more open-ended by comparison, with no end date having been designated for the applicability of the provisions of the Regulations. Admittedly, the UK government saw the need to extend the applicability of their suspension from September 2020 to April 2021 and it may even be possible that additional extensions are granted depending on how long the pandemic will be protracted.
In our view, the Maltese legislator should take a pro-active stance in this regard, indicating a specific target date for the suspension of wrongful trading rules to be lifted, enabling directors of companies potentially facing insolvency to take an honest and timely view as to whether their company can become economically viable in the short to medium term, and not find a false sense of security in the protection afforded by the Regulations. What is clear is that the Companies Act provisions intended to protect the interests of stakeholders should not be suspended indefinitely to the detriment of such stakeholders, and more effective communication should be undertaken by the authorities to identify and implement a structured process for the phasing out of these special rules, whilst being sensitive to the realities being faced by the local business community as a result of the pandemic.