Suspension of the rights to file winding up applications and of the provisions on wrongful trading under the Companies Act
News    ·   18-09-2020
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AUTHOR: Donald Vella; Kirsten Debono Huskinson; Gabriella Chircop

The Companies Act (Suspension of Filing for Dissolution and Winding Up) Regulations, 2020 (the “Regulations”) were published on the 15th of September 2020 with a view of regulating the suspension of rights relating to the filing of winding up applications as well as the suspension of the applicable provisions on wrongful trading arising under the Companies Act, as further explained below:

1.       Suspension of the right relating to the filing of winding up applications

By virtue of the Regulations, the rights of persons entitled under the provisions of the Companies Act to file winding up applications (debenture holders, creditor/s), are being suspended, with effect from the 16th March 2020. These rights will remain so suspended up until the lapse of 40 days from the date on which the Minister responsible makes an order to lift the said suspension.   

Likewise, any action or proceeding in court for the dissolution and winding up of a company filed by any debenture holder or creditor/s in the Registry of Courts and Local Tribunals on or after the 16th March 2020 shall be stayed for a period of 40 days following an order of the Minister to lift such suspension.

Therefore, for the time being, both the rights to file a winding up application as well as related court proceedings are suspended, and will only be reinstated/resume once 40 days have lapsed from the date of issuance of a lifting order by the Minister.

Nevertheless, despite the above-mentioned suspensions, the Court retains the discretion to order the filing or hearing of applications for winding up in terms of the Companies Act, where it is satisfied that the circumstances claimed in the application for winding up arose prior to the 16th March 2020.

Under normal circumstances, where the Court accedes to the winding up of a company, essentially by passing a winding up order, the date of dissolution of such company would be the date of filing of the winding up application.  Within the context of the Regulations, which currently suspend the right of persons to file applications in Court, where a winding up order is eventually made in relation to a company, then the deemed date of dissolution will not be the date of filing of the winding up application, but shall be that upon which a debenture holder, creditor/s files a judicial letter in court against the company informing it of the circumstances warranting its dissolution.

2.       Suspension of the provisions on Wrongful Trading

Provisions on “wrongful trading” were introduced in the Companies Act as a remedy to minimise abuse by a company’s officers, where a company is insolvent or approaching insolvency.

Under the provisions of the Companies Act, in ordinary circumstances, personal liability for wrongful trading may be imposed on directors and shadow directors when a company is being wound up and is insolvent, should it be found that such directors of the company continued to trade when they knew, or ought to have known, prior to the dissolution of the company, that there was no reasonable prospect for the company to avoid insolvency.  Should this be the case, the said directors may be ordered by the court to make a payment towards the assets of the company, as the court thinks fit.

To this end, liability will be triggered, largely, where it is evident that the directors failed to take every step which they ought to have taken in order to minimise and mitigate the potential loss to the company’s creditors.

Given the extraordinary circumstances we are currently facing owing to the COVID-19 pandemic, certain amendments to the Companies Act have entered into force which empower the Minister to make regulations to suspend, even retrospectively, the application of the provisions on wrongful trading, as described above.  In fact, these amendments have now been reflected in the enacted Regulations and were intended to provide the sought after peace of mind to directors who are now allowed to continue trading for as long as possible without the threat of eventual liability for wrongful trading.

In this respect, in terms of the Regulations, the provisions on wrongful trading are being suspended, with effect from the 16th March 2020, and shall remain so suspended for a period of 40 days following an order by the Minister responsible to lift the said suspension. 

The provisions on wrongful trading are being suspended to the extent specified below:

(i)                  if  the directors opt not to file an application in court for the dissolution and consequential winding up of the company, they will not be deemed to be in breach of the provisions of wrongful trading, unless it is shown that such omission was deliberately intended to prejudice the equal footing ranking of company creditors which existed prior to the said omission; and

(ii)                owing to the precarious financial state companies might find themselves in owing to COVID, as a result of which the directors may incur further debt, should such debt be incurred in good faith on behalf of the company during its ordinary course of business, the directors will not be deemed in breach of the provisions on wrongful trading, unless the additional indebtedness was deliberately intended to prejudice the equal footing ranking of company creditors which existed prior to this act.

 

 

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