Insolvency & Directors’ Duties

Responsibilities of Directors

Directors have certain fiduciary duties and responsibilities, including acting in good faith about the interests of the company and honestly about the conduct of the affairs of the company.

A director should also be aware that in circumstances where it is deemed that the company has traded in a reckless and fraudulent manner while insolvent, that the director can be made personally liable for the debts of the company.

In these challenging times, it is essential to ensure that all material business decisions are documented at board meetings to demonstrate good faith, reasonableness and sound judgment in continuing to trade the company.  

Key challenges which companies will face over the coming months include:

• Maintaining cashflows to pay staff and creditors as they fall due
• Ability to perform contractual obligations to customers, suppliers, financial institutions and the Revenue Commissioners, etc.
• Will debtors continue to pay on time or potentially not be recoverable?
• Will the business remain viable if there is reduced trade for a protracted period - at what point are you insolvent or ought to have been aware you were insolvent?
• Protecting staff, customers and the public from infection as well as other hazards 
• Loss of key personnel due to illness

Concerned About Your Company

There are many actions you can take if you are concerned your business will struggle to survive the current situation:

• Review your cost base to see if it can be adjusted to meet current activity levels
• Can you seek emergency funding if you believe the business is ultimately viable?
• Subject to proper procedure and consultation, reduce staff numbers or pay scales
• Engage with your creditors and seek to restructure repayments

Formal Restructuring Options

If you believe there is no prospect for your business being viable during the current crisis or even once we emerge from it, you may need to consider whether a formal insolvency procedure is appropriate.

There are, however, options if you believe that your business is viable in the medium-term. Still, the coming months may see it accumulating liabilities which will impact on its ability to continue once we emerge from the COVID-19 crisis. These options include:

Given the current economic climate, the Directors may opt to reconstruct any company duly registered and regulated in terms of the Companies Act, in Malta.  This would mean that:

1) The Company may enter into a compromise or arrangement which would be proposed between the company and its creditors, or any class of them, or between the company and its members, or any class of them.   

Such compromise or arrangement would encourage the company of the possibility of a repayment structure plan to ensure that the company remains in a position to pay its debts yet still able to operate until the company is able and fully operational.  This would strengthen the company’s ability to continue to trade and avoid an early liquidation process.   

The compromise or arrangement agreement would be legally binding on the parties.  It is to be noted that such compromise or agreement shall require a 2/3rd majority of all creditors or class of creditors and sanctioned either by the Court and/or through a mediation process. 

Or 

2) The Company may enter into a company recovery procedure, should it arise that the Company is unable to pay its debts or is imminently likely to become unable to pay its debts.  The company recovery application would need to be filed at Court to request said Court to place the company under a company recovery procedure and appoint a special controller to take over, manage, and administer the business of the company for a period as specified by the Court.   

This process provides the Company a safe haven as the Company has Court protection and creditors' actions are halted, for example, termination of leases would not be possible.  The Company placed under company recovery procedure shall continue to carry on its normal activities under the management of the special controller.   

Following the specified period of time for which a company recovery procedure has been imposed, and following receipt of the special controller’s report the Court may terminate the company recovery procedure and declare the company as recovered or commence the process to wind up the company.  

General Considerations

• Review critical contracts with suppliers, customers, employees, etc. to see if they contain force majeure clauses that may impact on your business strategy 

• Does your insurance cover include business interruption and if so, what are the specific terms and conditions surrounding the same? We recommend that you discuss this directly with your insurance broker

Publication date: 26/03/2020