A new set of reforms primarily aimed at transposing the European Union’s Directive (EU) 2019/1023 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), were recently tabled in the House of Parliament. The set of reforms tabled, included the introduction of a/n:
- Pre-Insolvency Act – which seeks to provide for a modern framework relating to early warning signs of insolvency, and restructuring procedures directed at avoiding insolvency; and
- Insolvency Practitioners Act – which seeks to provide for a modern framework to strengthen the efficiency and effectiveness of the existing legislative framework relating to insolvency through regulation of the activities of insolvency practitioners.
A breakdown of these Acts hereinafter follows.
The Pre-Insolvency Act
The Pre-Insolvency Act proposes the inclusion of a system that aims to identify businesses on the brink of insolvency and introduces effective and efficient restructuring mechanisms. The Act tasks the Insolvency and Receivership Service within the Malta Business Registry with providing public information about early warning tools which are intended to help companies/commercial partnerships/legal organisation (“debtors”) detect circumstances that could lead to their insolvency and should signal such debtors to act without delay. Where debtors deem there is this likelihood of insolvency, the Act obliges the officials of such debtors (i.e. those persons tasked with the direction of the debtor) to take appropriate countermeasures with a view to preventing insolvency and ensuring business viability. The Act prescribes that not later than thirty (30) days from becoming aware of this likelihood, officials of such debtors are to convene a meeting for the purpose of reviewing the debtor’s position and of determining what steps should be taken, having regard to the interests of the creditors, equity holders, employees, and other stakeholders of the debtor.
The Act allows debtors to submit a preventive restructuring application to court, requesting that it be placed under a preventive restructuring procedure, provided that the debtor has reasonable prospects of viability, has not become liable for the payment of a debt which has remained unsatisfied for twenty-four (24) weeks from the enforcement of an executive title, and has not previously been admitted to preventive restructuring procedures in the three (3) years preceding the date of the application. This application can be made by the debtor and endorsed by an insolvency practitioner, or made by an insolvency practitioner on behalf of the debtor. The insolvency practitioner is a person authorized as such by the Insolvency and Receivership Service within the Malta Business Registry and registered in the Register of Insolvency Practitioners maintained by the same Insolvency and Receivership Service. In relation to said application, the insolvency practitioner is responsible to assist the debtor in the preventative restructuring procedure.
The Act recognizes three types of preventative restructuring procedures which a debtor may apply for, namely:-
- the standard preventative restructuring procedure:- this procedure contemplates the formulation of a restructuring plan and the optional procurement of interim financing by the officials of the debtor in consultation with the insolvency practitioner. This formulated restructuring plan is submitted for adoption by the debtor’s creditors, equity holders and employees whose claims or interests are (or may be) directly affected by the plan (“affected parties”). The duration of this procedure is that of four (4) months which may be extended for a maximum of eight (8) additional months. During such period, the court shall (i) stay the execution of all monetary claims against the debtor (except for workers’ claims); (ii) prohibit the termination of any essential executory contract to which the debtor is party and prohibit the acceleration, modification, withholding or suspension of any obligations emanating therefrom in favour of the debtor solely on the basis that the debtor has not made payments as they fell due or on the basis that the debtor has entered into a preventive restructuring procedure; (iii) prohibit the execution of any precautionary or executive act or warrant on the debtor or its property; (iv) prohibit the institution or continuation of arbitration proceedings against the debtor or its property; and (v) prohibit the institution or continuation of any judicial proceeding against the debtor or its property. This restructuring procedure empowers the insolvency practitioner to rank all claims against the debtor, organize creditors into classes and select claims which shall be included within the scope of the restructuring plan. These rankings and classes are reviewed by the creditors who are entitled to object. The final restructuring plan prepared after all objections are considered by the insolvency practitioner, is submitted for adoption by the affected parties during a meeting convened for such purpose.
- the pre-formulated preventative restructuring procedure:- this procedure deals with the submission of a restructuring plan formulated prior to the submission of the court application for adoption by the affected parties. The duration of this procedure is that of four (4) months which cannot be extended. This procedure contemplates the consultation of the debtor’s creditors, and where a significant proportion of creditors are not in favour of the plan, such that the necessary amount of approvals are not obtainable for confirmation of the plan, a conversion of the pre-formulated preventive restructuring procedure into the standard preventive restructuring procedure is permitted.
- the pre-approved preventative restructuring procedure:- this procedure presupposes that a restructuring plan has already attained written approval of the affected parties and is merely submitted to Court for confirmation thereof.
The restructuring plan submitted for adoption by the affected parties under the standard preventive restructuring procedure and the pre-formulated preventive restructuring procedure is adopted by the affected parties if it is approved by not less than two-thirds (2/3) of the affected parties in each class, by reference to the value of the claims represented thereby. Where the restructuring plan is approved, the insolvency practitioner files an application to Court for the confirmation of the restructuring plan with the scope of rendering such plan effective and binding on all affected parties including dissenting parties. If the restructuring plan is not adopted by the affected parties, the insolvency practitioner may still request the Court to confirm the plan and render it effective and binding on all affected parties provided the following conditions are satisfied:-
- The restructuring plan satisfies the best-interest-of-creditors test;
- The restructuring plan will not result in any class of affected parties receiving economic value in excess of the full amount of its claims;
- The restructuring plan ensures that any dissenting class of affected parties is treated at least as favourably as any other class of affected parties whose claims would, if the normal ranking of liquidation priorities were to be applied, rank pari passu with the claims of the dissenting class, and more favourably than any other class of affected parties whose claims would, if the normal ranking of liquidation priorities were to be applied, rank below the claims of the dissenting class; and
- The restructuring plan has been approved for adoption by at least one (1) class of affected parties who would, if the normal ranking of liquidation priorities were to be applied, receive payment of their claims in whole or in part.
The Court’s decision to confirm or refuse the restructuring plan may be appealed by any interested party by means of an application submitted to the Court of Appeal within twenty (20) days of decision, which appeal will not have suspensive effects.
The Insolvency Practitioners Act
The Insolvency Practitioners Act regulates the profession of the insolvency practitioner. According to this Act, an individual may apply to the Insolvency and Receivership Service within the Malta Business Registry for authorization to act as an insolvency practitioner. An individual is eligible to qualify as an insolvency practitioner if:-
- he/she is authorized to exercise the profession of an advocate, accountant or auditor in Malta or another recognized jurisdiction;
- he/she has sufficient competence in the required fields of expertise pertinent to the performance of the functions of an insolvency practitioner;
- he/she is fit and proper to carry out the functions of an insolvency practitioner and has not had any previous authorization withdrawn due to misconduct; and
- has satisfied such other additional criteria/requirements as may from time to time be required under law.
Apart from individuals, where an entity proves that it satisfies all the aforementioned requirements, it may also be authorized to carry out the functions of an insolvency practitioner. In the case of an authorized entity, the responsibility for the performance of any act or function of an insolvency practitioner must be assumed by at least one (1) individual authorized to act as an insolvency practitioner (a ‘principal’) who shall become jointly and severally liable with the entity for any act or function carried out by the entity or its officers, principals, agents or employees.
The Act also identifies and regulates the functions of the Insolvency and Receivership Service within the Malta Business Registry (‘the competent authority’). The competent authority is vested with the responsibility and authority to regulate the activities of insolvency practitioners and establish and maintain a public register known as the ‘Register of Insolvency Practitioners’. The Act allows the competent authority to revoke, cancel, suspend or subject to other conditions or restrictions any authorization or registration issued under the Act.
The Act imposes a duty on all insolvency practitioners to provide the competent authority with such information as may be required, and requires insolvency practitioners to notify said authority where changes to such information are made. If during an ongoing investigation the insolvency practitioner alters, hides or fails to disclose information which is relevant to such investigation, the person responsible may be liable to a term of imprisonment not less than three (3) months and not more than two (2) years, and/or a fine(multa) not exceeding fifty thousand Euro (50,000EUR). An insolvency practitioner is also liable to a term of imprisonment for a period of not less than one (1) year and not exceeding five (5) years, and/or a fine(multa) not exceeding sixty thousand Euro (60,000EUR) if there is a breach of a professional duty when exercising his functions particularly if the act or omission amounts to gross negligence, bad faith or serious misconduct. Any agreement purporting to exempt an insolvency practitioner from liability in the execution of its functions shall be null and void. Administrative penalties can also be imposed if there is a breach of any other provision of the Act. All measures taken and administrative penalties imposed on insolvency practitioners shall be disclosed to the public which may take place through a website.
Any person aggrieved by the decision of the competent authority has a right of appeal to the Administrative Review Tribunal.
In conclusion, it is observed that the rationale behind the introduction of these pre-insolvency reforms boils down to the belief that early intervention in these cases, increases the chances of survival for the debtor, whilst creditors are able to maximize recovery of their debts in a timely manner. The second reading of the aforementioned proposed bills was carried out on the 26th of October 2022, and as such, these bills shall proceed to the final stage of promulgation in the near future.