On the 27th October, 2014 the First Hall Civil Court rejected an application filed by a financially distressed company seeking a court-orchestrated company recovery. The company recovery application (the "CRP application") was presented by the applicant More Supermarkets (Hamrun) Limited ("More"), an operating company forming part of the wider "MORE Supermarkets" Group.
In Malta, the notion of a financially-battered company being granted sufficient "breathing space," allowing for its economic resuscitation under the watchful gaze of the court is still in its infancy, both in terms of cultural acceptance as well as practical application. To date, it has only been resorted to in a handful of cases and has only garnered modest success.
In the More case, the CRP application appeared to be doomed to fail from the start. The Company had failed to submit in the court proceedings, the extraordinary resolution adopted by the Company resolving to apply for a company recovery. The failure to exhibit this resolution was not well received by the Court which opined that insofar as such a resolution would undeniably constitute the "best evidence possible" to indicate that the Company had decided to pursue this course, the failure to tender such evidence was of sufficient gravity as to persuade the Court that a dismissal of the CRP application was appropriate.
The Court did not end its determination here however. Procedural considerations aside, the substantive thrust of a company recovery procedure lies in the applicant's ability to convince the Court that its business remains commercially viable and that a strategy or plan has already been identified which, if implemented with court approval, would result in the amelioration of the company's financial situation. Furthermore, the applicant must demonstrate that the mode of recovery proposed is in the best interests of the Company's creditors, employees and of the company itself.
Admittedly, the law does not appear to require nor specify any particular mode as to the type of business plan which an applicant seeking a company recovery must produce. Article 329B of the Maltese Companies Act, 1995 merely speaks of a "statement" showing how the "financial and economic situation of the company may be improved." In practice, a presiding judge will not entertain a request under Article 329B lightly but rather will rightly demand that a detailed, concrete and time-effective business recovery plan is presented for scrutiny. The plan presented cannot be one riddled with hypotheticals, plagued by uncertainties or at the mercy of several contingencies. The plan must be financially sound and capable of attaining concrete results within a reasonable span of time.
In the More case, the CRP application was not accompanied by any such "statement" but rather reference was made by More's directors to a restructuring plan that was allegedly being drawn up the sole shareholder of More. In a dramatic twist of events, the sole shareholder, present in court, openly contradicted the version offered by More's directors and disputed any claims as to the company's financial viability. In the shareholder's view, the applicant company was beyond economic viability and any eleventh-hour intervention would simply be futile.
Courtroom drama aside, the Court expressly declared that the evident conflict between the views of the directors and the sole shareholder eliminated any prospects, regardless how miniscule such prospects may be, that the CPR proceedings would yield the type of results envisaged under Article 329B.
The court's ruling, whilst retaining the high threshold required in previous CRP rulings, serves as a stark reminder that a CRP is not to be resorted to as a drastic attempt to delay the company's inevitable demise and that the court shall not outstretch its sympathetic arm to yank the company away from the brink of financial oblivion unless it is absolutely convinced that the business remains commercially viable, and that the company would, under well-controlled circumstances, be able to satisfy its creditors' claims.
The Judge's sceptical response to the CRP application should not be seen as suggesting, in any way, reluctance on the part of the Maltese courts, to embrace a so-called "rescue culture." In the More case, procedural shortcomings meant that the application never stood any chance of acceptance. The Judge's emphasis on detail and substance should not, in our view, be regarded as hostility towards the notion of "company recovery" but rather a hope that Maltese rules on company recovery will be applied with the level of awareness, care and sophistication which such special proceedings rightly warrant.
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