COVID-19 hastens the setting up of a new Company Recovery Fund

As the economic impact of the coronavirus (COVID-19) starts being felt, with companies experiencing financial difficulties, new regulations establishing a fund designated as, the Company Recovery Fund, have been published on the 12^th May 2020 by Legal Notice 192 of 2020.

 The Company Recovery Fund (Fund)

The Company Recovery Fund is a fund which is purposely set up to facilitate the initial payment of the remuneration of and the disbursements to be incurred by the special controller appointed by the court in a company recovery procedure.

By the Regulations, the Fund will receive a maximum amount of €500,000 per annum from the Malta Business Registry, which may only be utilised to make payments to the special controller to cover its remuneration and disbursements, throughout its appointment. In terms of the Companies Act, such payments are initial payments and are an expense attributable to and recoverable from the respective company. It is noteworthy, that such initial payment is not automatic,  but it is up to the court’s discretion to decide whether such payment is made, either directly by the company by depositing a sum of money in court or whether an initial payment may be made out of the Fund.

The Regulations provide for certain safeguards; such as the Official Receiver, as the administrator of the Fund, is required to certify claims for compensation by special controllers, as well as, the establishments of thresholds as maximum payments that may be made to special controllers. Indeed, a special controller may be remunerated up to a maximum of €2,500 for the original four-month period, €1,500 for the first extension and €1,000 for the second extension. A maximum of €5,000 is also set for the reimbursement of expenses that may be incurred by the special controller. An exception to these thresholds is also provided for in the Regulations which state that these limits may be increased by the Official Receiver, acting upon the recommendation of the Court, in complex cases or cases involving cross-border elements. In addition, the Companies Act also requires the court to ascertain that a special controller is only appointed if such person enjoys proven competence and experience in the management of business enterprises and has no conflict of appointment. The Court may appoint as special controller an individual from the list of special controllers held by the Official Receiver. The Regulations now also provide for certain disqualifications relating to the appointment of special controllers.

 The Company Recovery Procedure (CRP)

The CRP is not a novel procedure, though it is not very often resorted to by companies. It is a court procedure regulated by Article 329B of the Companies Act, that offers a valuable tool to companies that are passing through a period of financial distress, being unable to pay their debts or are imminently likely to become unable to pay their debts. This procedure affords these companies the opportunity to continue operating their business, albeit via the assistance of the special controller,  rather than going through the process of liquidation; if the court is satisfied the applicant company is likely to survive as a viable going concern,  or is likely to achieve an arrangement between the company and its creditors. The special controller is entrusted to take over, manage and administer the business of the company for a period not exceeding four months. This period may be extended by the court for a further two periods of four months each, upon good cause being shown, such as showing that the company has an effective recovery plan in place. Thus, allowing the company a maximum recovery period of twelve months.

Upon the successful submission of a CRP application, the company in question may benefit from various protections which aid it in its quest for recovery. These include:

1. staying of newly instituted or pending winding-up applications;
2. restriction from passing resolutions for the dissolution and consequential winding up of the company;

• staying of the execution of monetary claims against the company;

1. impossibility to enforce any security over company, except with the special leave of the court;
2. impossibility for landlords to exercise any right of termination of lease in relation to premises leased to the company in respect of a failure by the company to comply with any term or condition of its tenancy of such premises, except with the special leave of the court;
3. impossibility to make or continue any precautionary or executive acts or warrants against the company or any of its property, except with the special leave of the court, and

• restriction from making of continue arbitration proceedings against the company or any property of the company, except with the special leave of the court.

It is easily understood how these protections may play a pivotal role in the operations of companies facing financial distress pursuant to these temporary, though harsh and unprecedent times caused by the COVID-19 pandemic and its numerous negative financial impacts.

Authors: Celia Mifsud and Edward Meli 

Photo: DFA