Ryan Dalli The Liquidator: A straightforward job, or a gateway to personal liability?
Dr Ryan Dalli is a Master of Advocacy graduate practicing in the Corporate sectors and mainly specialises in mergers and acquisitions, commercial transactions, and corporate insolvency. He is also currently reading for an LL.M. in European Business Law at the University of Malta.
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1. Introduction
T
he current economic climate – a time where numerous business ventures are being forged, and most take the form of a company, a partnership or a similar commercial entity vested with legal personality, and possibly even vested with limited liability. However, due to shifting market interests as well as numerous ideas never getting off the ground and forever remaining mere concepts, the need to eventually ‘clean up’ and liquidate these entities is becoming ever more apparent. This, therefore, necessitates the inclusion of a person who shall deal with this matter in the fairest and most efficient way possible, and this is where the role of a liquidator comes into the fray. While much concern has been given to the duties and personal liability of the partners and the officers (most noticeably the board of directors) of an entity, little thought is ever given to a liquidator. This paper will identify the significant obligations and duties of a liquidator within the sphere of Maltese Law, as well as evaluate the premise of personal liability of a liquidator should he not fully adhere to said duties and obligations. Before delving into the matter any further, it is important to note that this paper will not focus on the different modes of winding up, although a simple explanation will be given below, but rather have a focus on the role of a liquidator, particularly on the implications that such role presents to the appointed individual. In addition, this paper will have a particular focus on the provisions as contained within the Companies Act 19951 (the ‘Act’) and limiting the scope to a liquidator’s role within the dissolution and winding up of a company. Also, a small comparative analysis with English Law will be made due to the obvious similarities between the provisions contained therein and those contained within Maltese Law. One might also take into consideration the fact that since the Act came into force, the role of a liquidator has not only been expounded upon by virtue of the amendments implemented to the Act, but also by certain European Union legislation, significantly the Regulation on Insolvency Proceedings (Recast)2 (the ‘Regulation’). The provisions of the Regulation will not be the subject of this paper, yet these will be taken into consideration. 1 2
Companies Act, Chapter 386 of the Laws of Malta. Regulation (EU) 2015/848 on insolvency proceedings (recast).
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2. Dissolution and Liquidation Before delving into the matter further, it is important to note that the process of dissolution is distinct, although related, to the winding up procedure. Essentially, the dissolution precedes the winding up, and is very much characterized by the decision to terminate the company. This may be done either on the grounds which are listed in the law or within the statute of the company itself. On the other hand, winding up (which is the actual process of the liquidation) correlates to the completion of the affairs of the company and signifies the payment of debts and liabilities of the company, including any other distribution to the shareholders themselves (if any excess capital exists). During the process of winding up, the company still retains a separate legal personality, which subsists until its name is struck off the Register of Companies3. Furthermore, it should be noted that the Act caters for situations where the name of a company may be restored to the Register, thus reopening the winding up,4 and, to a certain extent, signifies a temporary resurrection of the company, albeit quite an exceptional procedure.5 The Act stipulates that a company may be dissolved and consequently wound up either voluntarily or by virtue of a court-regulated procedure. It may be of benefit to note that there are several instances when the court may proceed to terminate the company,6 but the company may only be wound up voluntarily by virtue of an extraordinary resolution.7 The various options will be expounded upon below.
2.1 Court Dissolution and Subsequent Winding Up The court may dissolve and subsequently wind up a company where an extraordinary resolution has been passed to do so, or if the business of the company is suspended for an uninterrupted period of twenty-four (24) months, or the company is unable to pay its debts, or the number of members or directors of the company has been reduced to below the 3 Companies Act, Chapter 386 of the Laws of Malta, Article 4(4). 4 ibid Article 300B. 5 581/2013 Vella Falzon Nicolai Av Dr. Noe vs The Registrar of Companies et, First Hall (Civil Court) 14 November 2013. 6 7
Chapter 386 of the Laws of Malta, Article 218. ibid Article 214.
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minimum as prescribed by the Act for a period exceeding six months, or where the court is of the opinion that there are grounds for sufficient gravity to warrant the procedure in question. The court may also proceed to dissolve and subsequently wind up the company upon the occurrence of an event as prescribed in the company’s statute. By virtue of Act I of 2018, the Code of Organisation and Civil Procedure8 and the relevant Subsidiary Legislation contained thereunder, were amended so as to confer that jurisdiction of matters related to the Act to the Civil Court (Commercial Section),9 which includes any procedure appertaining to the dissolution and winding up.10 Winding up by the court necessitates, as is usual with most court procedures, that it is initiated by virtue of an application. Such application may be filed by the company itself following a decision in the general meeting, by the board of directors, any debenture holder, any creditor, a contributory,11 the Registrar of Companies or the Official Receiver.12 Following said application, the court may decide to dismiss the matter or alternatively proceed to issue a winding up order and include any provisional order it may deem fit.13 Until such decision is taken as to whether to issue the winding up order, the court may appoint a so-called Provisional Administrator to administer the affairs of the company as the court itself may specify. Upon the issuance of a winding up order by the court, a liquidator must be appointed by the court to wind up the affairs of the company. The liquidator may be nominated by the contributories or the creditors of the company. Nominations are typically made at meetings of the contributories or creditors and the court will give preference to the nomination made by the creditors, depending on whether the company is in a solvent or insolvent state at the time.14 After making a winding up order, the liquidator will proceed with the process of winding up, including collecting any necessary amounts as might be applicable in terms of the contributories, namely the unpaid share 8 Chapter 12 of the Laws of Malta. 9 S.L. 12.19, Civil Court (Establishment of Sections) Order 2003, L.N. 396/2003, regulation 5A. 10 Companies Act , Chapter 386 of the Laws of Malta, Article 218. 11 Defined within Articles 215-217 of the Act; loosely may be defined as any person liable to contribute to the assets of a company in the event of dissolution, more specifically the possible past and present members of the companies. 12 Companies Act, Chapter 386 of the Laws of Malta, Article 218. The Official Receiver is a court appointed official for the purposes of the Act and his powers are encapsulated within art 225-226. 13 ibid Article 219. 14 ibid Article 230.
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capital,15 and fixing and ordering any proof of debts which might be owed to creditors,16 and this until the affairs of the company have been completely wound up.17 During the course of a court winding up, the aforementioned Official Receiver may opt to appoint a committee consisting of not more than five creditors of the company to assist the liquidator in his function (the ‘Liquidation Committee’).
2.2 Voluntary Dissolution and Subsequent Winding Up As explained above, the dissolution and the consequent winding up may also be done voluntarily. This would mean that this procedure is initiated by the members of the company via an extraordinary resolution. Once this is taken, the members of a company may still resolve to have the winding up done by virtue of the abovementioned court procedure, yet as will be explained below, this is not a requisite. Upon taking such extraordinary resolution, the company (more specifically its officers) shall deliver notice thereof to the Registrar of Companies within fourteen (14) days18 and as from that date, it shall cease to conduct business except in so far as may be necessary.19 From this point onward, filing (or omitting to file) a singular document, termed the Declaration of Solvency, would determine whether the mode of winding up will be a members’ voluntary winding up or a creditors’ voluntary winding up. As the name implies, this is a document filed to the Registrar of Companies, by the board of directors, declaring that such board believes that the company will be able to pay off its debts in full within a period not exceeding twelve months.20
15 16 17 18 19 20
ibid Article 251. ibid Article 255. ibid Article 264. ibid Article 265. ibid Article 267. ibid Article 268.
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2.2.1 Members’ Voluntary Winding Up & Creditors’ Winding Up Upon the filing of the Declaration of Solvency, the mode of winding up shall be that of members’ voluntary winding up. If the aforementioned Declaration of Solvency is not filed within the stipulated time frame as mandated by the Act, the mode of winding would be that of a creditors’ voluntary winding up. It is to be said, that although a company may be in a solvent state, any omission to file the Declaration of Solvency would still render the mode of winding up to be a creditors’ voluntary winding up. The main difference between the two modes of winding up would essentially come down to who takes the decisions during the winding up process, specifically whether it would be the members taking the decisions or creditors deciding upon any matters which are envisaged in the Act. However, it would seem that the most important decision which both groups need to take is the appointment (and possible removal) of a liquidator, since at the end of the day the majority of decisions are taken by the liquidator himself. Maltese courts have emphasised that during a voluntary winding up, caution, attention and vigilance are particularly important from the perspective of a liquidator,21 which is quite understandable due to the lack of court supervision. Furthermore, one should note that Maltese law on liquidation heavily borrows influence from English Law, specifically the English Insolvency Act of 1986. So much so, that under English law, similarly to Maltese law, the modes of winding up are either by court, 22 or by virtue of a voluntary winding up procedure,23 which similarly deposes the possibility of both a members’ voluntary winding up,24 as well as a creditors’ winding up.25 Again, in terms of the two different modes of voluntary winding up, the resolutive condition would again be whether the directors of the company opt to file a Declaration of Solvency.26
21 973/2012 Mizzi Associated Enterprises (C 1372) vs Kenneth Dimech proprio et nomine, First Hall (Civil Court) 31 October 2016. 22 Insolvency Act 1986, Chapter VI (UK). 23 ibid Chapter II. 24 ibid Chapter III. 25 ibid Chapter IV. 26 ibid Article 90.
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3. A Brief Overview of the Role of the Liquidator Many are of the opinion that a liquidator is merely entrusted with the distribution of the assets of the company being wound up. This is not really the case as his role is much more diverse than one would be led to believe. That being said, his main function is to ‘get in, realise and distribute a company’s assets for the benefit of its unsecured creditors’.27 Maltese Courts have precisely outlined that a liquidator is to take custody of the company’s patrimony, investigate all the claims advanced against the company by its creditors, decide any questions which arise, make a plan of how to distribute the assets of the company, and finally, distribute said assets once the plan has been approved.28 Under Maltese Law, a liquidator is required to hold the profession of an advocate, a certified public accountant, a certified public accountant and auditor or must otherwise be registered with the Registrar of Companies as a fit and proper person to exercise the function of a liquidator. In addition, the Act holds that the abovementioned persons may still be prohibited from holding the office of a liquidator if, within the four (4) years preceding the date of dissolution, they have held any office in connection with the company or they had any other connection with the company.29 Interestingly, the article concerning said restriction also includes ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act,’ which seems to be somewhere along the lines of the definition given to shadow directors by Maltese commentators.30 The Act also imposes other conflict-based restrictions on a liquidator, such as the prohibition precluding a liquidator from making any disposition of the assets of the company in favour of certain persons such as his spouse, partners, a commercial partnership in which he is involved in or a company within which he is appointed as a director. Upon the appointment of a liquidator, the powers of the company’s officers effectively cease.31 This is due to the fact that, upon said appointment, 27 Simon Passfield, Appointment of Liquidator, (2016). 28 989/2008 Mallia Jesmond vs Il-Palma Agricultural Supplies Co. Limited (C10770), First Hall (Civil Court) 7 July 2015. 29 Companies Act , Chapter 386 of the Laws of Malta, Article 305. 30 Prof. Andrew Muscat, Principles of Maltese Company Law (2nd Edition, Malta University Press 2019) p.504. 31 Companies Act , Chapter 386 of the Laws of Malta, Article 295.
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a liquidator is essentially vested with the entirety of the administration of the company, so much so that Maltese commentators on the issue have basically outlined that the only power which is essentially left to the company officers correlates to the proof of notice of any meeting pursuant to Article 297 of the Act.32
4. The Duties and Powers of the Liquidator Once a person assumes the role of a liquidator, he also begins to bear a number of very important duties, irrespective of the mode of winding up. It is to be said that, similar to a director of a company, it is commonly accepted that, ‘upon appointment a liquidator becomes an agent of the company; fiduciary duties obviously flow from this’.33 Thus, a liquidator is very much entrusted with fiduciary duties as contemplated under the Civil Code34. The appointment of a liquidator will only be effective upon the delivery of a notice of appointment to the Registrar of Companies.35 The liquidator is entrusted to take control of any property (including any rights) to which he is of the belief that the company being wound up is entitled to.36 The Act includes a list of powers which are granted to the liquidator during a court winding up; these powers essentially give the liquidator full control over the affairs of the company, including the taking of judicial decisions on behalf of the company (as well as the judicial representation required thereto), carrying on the business affairs of the company, effecting any payment to be made to the creditors in accordance with their ranking,37 as well as doing all such things as may be necessary for the winding up. Hence, these may be considered as very extensive powers.38 32 Prof. Andrew Muscat, Principles of Maltese Company Law (2nd Edition Ma;ta University Press 2019) p.681. 33 Top Brands Ltd & Ors v Sharma & Ors [2014] EWHC 2753 (Ch). 34 Civil Code, Chapter 16 of the Laws of Malta. 35 Companies Act, Chapter 386 of the Laws of Malta, Article 235. 36 ibid Article 238. 37 Fascinating is that the court is deemed to be a creditor in a court dissolution which normally has first ranking as a creditor as can be seen in the 6/1995/3 Konkors ta’ Kredituri ta’ Da Vinci Ltd. Vs X, First Hall (Civil Court) 13 November 2000. 38 Companies Act , Chapter 386 of the Laws of Malta, Article 238.
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Said powers are however subject to scrutiny by the court and the Liquidation Committee (if one has been appointed). These powers shall be subject to the control of the court, and any contributory or creditor may apply to court in respect of their exercise. Perhaps linked to the above, it would also seem that in a court winding up, great emphasis is given to both creditors and contributories involved to give direction to the liquidator, through various meetings appertaining to the same. The liquidator is granted the ability to refer certain matters to the court so that he may rely on the court’s direction on the issue (and in turn limiting his liability). Such guidance might be of great importance, as any person who feels aggrieved by an action taken by the liquidator may also apply to the court for its reversal, modification or confirmation.39 Two of the more obvious duties of the liquidator in a court winding up is to keep proper records in terms of the meetings conducted as well as to keep the proper accounts of the company being wound up40. It would seem that an optional power is also given to the liquidator in the possible instance where a report which is to be drawn up by the Official Receiver denotes any sort of fraud committed by the company,41 as the liquidator may take part in the examination either personally or be represented by an advocate.42 The Act also envisages the possibility of granting the liquidator certain powers which are traditionally conferred upon the court such as those appertaining to conducting meetings, drawing up of lists of contributories, making payments and deliveries, as well as fixing the time by which debts and claims may be proved.43 That being said, the Act does stipulate that the same powers are subject to the control of the court. The Act mandates that rectification of the register of members requires special leave of court and any calls to be made require either special leave of court or the sanction of the Liquidation Committee. Taking the above into consideration, in a nutshell the role of a liquidator under Maltese law is very much similar to the same role under English Law, whereby in terms of a court winding up, the liquidator has the function, ‘to 39 ibid Article 239. 40 ibid Article 240 & Article 242. 41 The Official Receiver is a government appointed official who is considered as the default liquidator until the role is fulfilled. One of his duties is to draw up a report in respect of Article 227 of the Act to which he may make a further report if he considers that any fraud is committed. 42 Companies Act , Chapter 386 of the Laws of Malta, Article 260. 43 ibid Article 263.
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secure that the assets of the company are got in, realised and distributed to the company’s creditors and, if there is a surplus, to the persons entitled to it.’44 With respect to voluntary winding up, it would seem that the liquidator is much less restricted in terms of his duties and powers. This may be seen within the context of the respective provision 288, which provides in many instances that the powers allocated to the court in that specific mode of winding up, are to be exercised by the liquidator. However, these powers are still subject to some discretion as some may require the sanction of an extraordinary resolution, either made by the company or by the creditors, and these include the payment to creditors in terms of their ranking and the power to make compromises or arrangements with any creditors. In a voluntary winding up, a liquidator is entrusted to deliver to the Registrar of Companies a notice of such appointment.45 Noteworthy, Maltese courts have stipulated that in a voluntary winding up, a liquidator is not merely entrusted with the submission of the necessary documentation to the Registrar of Companies, but must ensure the necessary diligence in the process, so much so that one of his main priorities should be transparency and making sure that the entirety of the process is conducted in accordance with the law.46 In a voluntary winding up, a liquidator is tasked with paying the company’s debts and adjusting the rights of the contributories.47 In a members’ voluntary winding up procedure, a liquidator, should he be of the opinion that the company will be unable to pay its debts, is entrusted with the duty to summon a meeting of the creditors where he shall lay before them a statement of the assets and liabilities of the company and effectively convert the voluntary winding up to a creditors’ winding up.48 Where a voluntary winding up continues for a term longer than twelve (12) months, the liquidator must summon a general meeting and another general meeting for each subsequent twelve (12) months, within three (3) months of the expiration of said twelve (12) month term, in order to present an account of his affairs including any receipts and proof of expenditure. Such meeting may also be requested by the members of the company holding ten percent (10%) of the 44 Insolvency Act 1986, s 143 (UK). 45 Companies Act , Chapter 386 of the Laws of Malta, Article 290. 46 1050/2016 Hal Mann Construction Limited (C 9762) vs The Registrar of Companies et, First Hall (Civil Court) 30 March 2017. 47 Companies Act , Chapter 386 of the Laws of Malta, Article 165. 48 ibid Article 272 & Article 276.
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voting rights,49 (which might seem similar to the procedure under Article 129 of the Act, where shareholders wish to call a general meeting). Upon fully winding up the affairs of the Company, a liquidator is entrusted to make an account of the winding up, explain how the winding up took place and how the distributions of the property of the company are to be made and, importantly, draw up a scheme of distribution attesting to the amount due in respect of each share from the remaining assets of the company and, where applicable, cause the accounts of the company to be audited. The scheme of distribution must be presented in a final general meeting, and within seven (7) days of said meeting, the liquidator must transmit the documents to the Registrar of Companies.50 The name of the company will be struck off the Register by the Registrar of Companies within three (3) months of receipt of the documents, unless within these three (3) months, a creditor or any person having an interest applies to court via an application in order to defer the date of striking off.51 A creditors’ voluntary winding up is somewhat similar to a members’ voluntary winding up in terms of the duties and obligations of a liquidator. As stated prior, one of the salient differences is that a liquidator is to be appointed by the creditors of the company during a meeting which is convened by the board of directors of the company.52 Furthermore, a Liquidation Committee may be appointed53 so as to assist the liquidator with the process. Similarly, the liquidator is entrusted to hold meetings after twelve (12) month periods within three (3) months expiration of the twelve (12) month periods, in a similar manner as stated above, yet these meetings are to be held between creditors,54 rather than members. Additionally, another very similar provision, the liquidator may be requested to hold a meeting by creditors representing at least ten percent (10%) of the value of creditors in the company, or alternatively by members holding ten percent (10%) of the voting rights within the company.55 The final general meeting, along with the submissions to the Registrar of Companies, are to be made in the same manner as a members’ voluntary winding up; however, a liquidator is also obliged to hold an additional meeting between the creditors of the company 49 ibid Article 273. 50 ibid Article 274. 51 ibid Article 275 – this ability is also granted to any other person who appears to the court to have an interest in the matter. 52 ibid Article 279. 53 ibid Article 280. 54 ibid Article 283. 55 ibid.
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wherein he shall also lay a copy of the same documents which are to be presented in the final general meeting.56 The provisions regarding the delay in the striking off are also replicated within a creditors’ voluntary winding up.
5. Liability of the Liquidator – Analysis of the Act As one will note in terms of the Act, most of the provisions referring to liability on the part of the liquidator are largely linked to penalties for breach of his duties, and the same are issued by the Registrar of Companies. The penalties are contained within the Eleventh Schedule of the Act and the amounts vary depending on the omission on the part of the liquidator. They might be considered somewhat hefty when a comparison is made to those having to do with the ongoing maintenance of the company, such as submitting an Annual Return or failure to submit the Beneficial Ownership Form as contained within SL 386.1957, yet this is understandable due to the possible repercussions. However, one may evaluate the same in a different light, and considering the current landscape of the corporate world, specifically investments in the millions being made in start-ups, it might even be considered as minimal in comparison. Said penalties range between four hundred sixty-five Euro, eighty-seven cents (€465.87) and two thousand, three hundred twenty-nine Euro, thirty-seven cents (€2,329.37) and some of these come with the possibility of a further daily penalty for every day the default on the part of a liquidator continues. These penalties correlate to the above-mentioned duties and seem to be strictly attached to voluntary winding up procedures. This might seem reasonable, due to the fact that, as one would imagine, in a court winding up a liquidator would be subject to court discretion and court supervision. As noted above, a liquidator is to summon a creditors’ meeting if he is of the opinion that the assets of the company are insufficient to cover its debts, and failure to do so would render the liquidator liable to a penalty.58 Another penalty will be incurred, during a members’ voluntary winding up as well as a creditors’ voluntary winding up, upon the omission of holding the requisite meeting should the winding up continue for more than twelve (12) months 56 ibid Article 285. 57 S.L. 386.19, Companies Act (Register of Beneficial Owners) Regulations 2018, L.N. 374/2017. 58 Companies Act, Chapter 386 of the Laws of Malta, Article 272.
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and any subsequent further twelve (12) month period.59 Failure to provide the Registrar of Companies with the mandated documents and forms at the end of a voluntary winding up would also render a liquidator liable to a penalty.60 Another penalty is also incurred upon failure to call the final meetings in the modes of voluntary winding up. Since it is up to a liquidator to notify the Registrar of his appointment, a penalty would also be incurred for any failure to do so.61 Additional penalties shall also be borne by a liquidator should he fail to adhere to the periodic reporting obligations,62 as well as any failure to keep the proper books for the period specified in the Act after the liquidation of the company, specifically for a period of ten (10) years.63 However, a liquidator is also faced with more serious exposure to personal liability in terms of the Act, besides the aforementioned penalties. The Act creates certain offences and contemplates personal liability of a liquidator in circumstances in which officers of a company would also be exposed to such liability. One of the most significant provisions contained within the Act which imposes liability on a liquidator is Article 312. This Article states that where in the course of winding up, regardless of the mode chosen, it appears that a person who has acted as an officer of the company, or liquidator of the company in question, or has been concerned with the company (which includes any person who has participated in the promotion, management or formation of the company), is found to have misapplied or retained or became accountable for any money or property of said company or is found to be guilty of any improper performance or any breach of duty in relation to the company, the court may, by virtue of an application filed by the Official Receiver, the liquidator, a creditor or a contributory, examine the conduct of said person. Upon examination, the court may compel the person liable to either repay, restore or account for the money or property or any part of it (including any interest rate which is established by the court) or alternatively to contribute a sum to be allocated to the company’s assets by way of compensation for the improper performance or breach of duty. Noteworthy, is that the court deciding upon the matter is granted a certain degree of discretion in applying the provisions of this Article.64 59 60 61 62 63 64 2018.
ibid Article 273 & Article 283. ibid Article 274 & Article 284. ibid. ibid Article 322. ibid Article 324. 268/2016 Catherine Grech Mallia vs Paolo Buffa et, First Hall (Civil Court) 30 January
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It would also seem, as will be explained further below, that certain cases have contemplated the possibility of fraudulent trading under Article 315 of the Act on the part of a liquidator. This type of action is considered as quite precarious in nature due to the fact that it contemplates unlimited and direct liability with respect to any person involved in the business of the company, arguably the shareholders and the representatives of the company.65 In addition, the second sub-article of Article 315 imposes criminal liability on such persons.66 Article 315 of the Act is discussed further below. Another provision worth mentioning is that relating to ‘Disqualification Orders’. The Act explains that a Disqualification Order is an order whereby a person, without special leave of court, shall not be able to act, among other capacities, as a liquidator.67 Pursuant to Article 320, upon the application of the Attorney General or the Registrar of Companies, the Disqualification Order may be issued against a person if found guilty of an offence under the Act, other than an offence which is punishable by a fine, or any person who has infringed any requirement under the Act whereby the consequence of such infringement would be that said person would become liable to contribute assets of the company or where he becomes personally liable to the debts of the company. One would notice that one of the grounds upon which a disqualification order may be issued is the failure to comply with Article 312. Contravening a Disqualification Order would amount to the possibility of incurring a fine of up to forty-six thousand and five hundred and eighty-seven euro and forty-seven cents (€46,587.47) or imprisonment for a term of up to three (3) years,68 thus it would seem that this would amount to a criminal sanction. In addition to the abovementioned provisions, there have been other instances where claims were brought forward against a liquidator under other provisions of the Act such as those under Article 308, which relates to fraud by officers of the company with respect to the property of the company.69 English judgements70 on the issue seem to consider a liquidator 65 9/2009 G. Molton Company Limited vs Dr. Borg Raymond et, Court of Magistrates (Civil) 21 March 2011. 66 501/15 Dr. Kenneth Grima nomine vs Dr. Renald Micallef propio et nomine, First Hall (Civil Court) 31 May 2018. 67 Companies Act , Chapter 386 of the Laws of Malta, Article 320 (4). 68 ibid Article 320 (6) 69 501/2015 Dr. Kenneth Grima Nomine vs Dr. Renald Micallef proprio et nomine, First Hall (Civil Court) 31 May 2018. 70 Powertrain Ltd [2015] EWHC B26 (Ch) (02 November 2015).
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as actually being an officer of the company, thus possibly being liable to other provisions as contained within Chapter V of Sub-title III of Title II of Part V of the Act. Interestingly as well, the articles found within the English Insolvency Act 1986 relating to ‘Malpractice before and during a Liquidation’,71 are similar to the articles found within the Act regulating ‘Offences antecedent to dissolution or in course of winding up’.72 That being said, there are some differences on the matters which should be pointed out. The comparative analysis with English law will be discussed further below.
6. Liability of the Liquidator – Judgements, Commentaries and Comparative Analysis Maltese judgements have explored the theme of personal liability of the liquidator in quite some detail and have been able to provide comprehensive explanations of the relevant provisions. The importance of the judgements which evaluated such actions cannot be undermined. It would also seem that Maltese courts tend to refer to British jurisprudence, as well as British commentators on the issue, due to the fact that as mentioned prior, the relevant provisions of the Act were somewhat modelled on the provisions contained within the English Insolvency Act of 1986. The Maltese judiciary does emphasise the fact that a liquidator, even in a members’ voluntary winding up, is bound by the legal obligation to do all acts which are necessary so as to properly wind up the business of the company and to conduct the relevant distribution73. Special consideration is to be made in terms of determining the assets of the company in an autonomous and objective manner, as any omission thereof would lead to negative consequences, especially on third parties.74 One might first analyse certain actions which may be brought against 71 Insolvency Act 1986, Chapter X. 72 Companies Act , Chapter 386 of the Laws of Malta, Chapter V, Sub-title III, Title II, Part V. 73 780/2014 Ax Holdings (C3595) et vs the Registrar of Companies, First Hall (Civil Court) 24 March 2015. 74 1050/16 Hal Mann Construction Limited (C 9762) vs The Registrar of Companies et, First Hall (Civil Court) 30 March 2017.
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a liquidator in terms of fraudulent trading provisions. Certain judgements, especially the recent judgement of Samchrome FZE vs Danko Koncar et,75 have attempted to answer the question of whether it would be possible to institute such type of action against a liquidator. In order to resolve this question, the honourable court in the aforementioned judgement referred to a Maltese commentator on the issue,76 whereby said commentator denoted that this action may be claimed against, ‘any other person, as long as they are knowingly parties to the fraud’,77 and further commented that it would seem that this action may be claimed against any person who perpetually participates in fraudulent trading, including a liquidator. Upon further examination of Maltese judgements on said article, it would seem that this action is mainly applied against the directors and more limitedly against the shareholders; however, pursuant to a comparative analysis, this is not its sole scope. With respect to this, Maltese courts note that this action under Article 315 of the Act is modelled upon Article 213 of the English Insolvency Act 1986, although it has been noted that while there is a striking resemblance, the action as stipulated under English law may only be filed by the appointed liquidator.78 That being said and with reference to the above, it would seem that English courts believe that such an article is deemed to be so far-reaching, that it even has an application of an extra-territorial nature,79 thus supporting the stance taken by Maltese courts that the terms ‘any person’ may apply to anyone who was responsible for the fraudulent conduct envisaged. With respect to wrongful trading provisions,80 Maltese courts are of the opinion that it is the board of directors which might be found liable by virtue of said provisions,81 and rightly so as this relates to the continuance of trade when one is aware of the insolvent state of the company; in fact, the court pointed out that such action may only be filed by the appointed liquidator. Perhaps more interesting is the examination of Article 312 of the Act. The 75 842/2014 Samchrome FZE vs Danko Koncar et, First Hall (Civil Court) 31 May 2018. 76 Specifically Prof. Andrew Muscat, Principles of Maltese Company Law (2nd edn, Malta University Press 2019) p. 360. 77 842/2014 Samchrome FZE vs Danko Koncar et, First Hall (Civil Court) 31 May 2018. 78 ibid. 79 Re Paramount Airways Ltd [1993] Ch 223 (also known as Powdrill v Hambros Bank (Jersey) Ltd) – the term ‘extra-territorial’ presents its natural meaning and may thus be applied to any person wherever resident. 80 Companies Act, Chapter 386 of the Laws of Malta, Article 316. 81 842/2014 Samchrome FZE vs Danko Koncar et, First Hall (Civil Court) 31 May 2018 .
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Courts pointed out that this article is modelled on Article 212 the English Insolvency Act 1986,82 hence making an examination of the English provision very much useful so as to aid in the interpretation of its Maltese counterpart. Under English law, the claim is referred to as a ‘misfeasance claim’, which therefore confers a wrongful exercise of a lawful obligation and a breach of duty. English courts have described such an action as ‘a summary remedy against liquidators and other.’83 Furthermore, in terms of their commentary on the action, they have acknowledged that ‘s.212 refers expressly to breach of fiduciary duties in the context of wrongdoing by a liquidator. Being procedural in nature, s.212 does not create new or additional obligations or duties, rather it provides the route of recourse for breach of established obligations and duties identified therein.84’ Interestingly enough, upon further analysis of the English provision, it would seem that it is commonly perceived that a liquidator owes a duty to the creditors as a whole and not to mere individual creditors. Thus, although an individual creditor may pursue such recourse, the action must be instituted in the names of creditors as a whole rather than in an individual capacity.85 It would also seem that it is necessary that under English Law, before a claim of this nature is brought against a liquidator, he must necessarily be removed from office.86 The English courts also emphasise that if any compensation is ordered, said compensation must exhibit a connection between the sum ordered and the actual loss incurred;87 thus, there seems to be some sort of limit in terms of liability incurred under Section 212 of the English Insolvency Act 1986. That being said, should a liquidator be found liable under the said English provision, there is a strong element of court discretion which is involved in determining the amount to be compensated.88 Upon examination in terms of Maltese law, the emphasis of Article 312 seems to be on the delinquent conduct performed. In fact, an important remark which has been made is that for a person to be able to avail himself of such an action under Maltese law, the illegal behaviour of the accused must be serious.89 Maltese Courts also expect the liquidator to be proactive 82 83 84 85 86 87 88 89
ibid. Core VCT Plc (In Liquidation), Re, Chancery Division [2019] EWHC 540 (Ch), 15 Mar 2019. Top Brands Ltd & Ors v Sharma & Ors [2014] EWHC 2753 (Ch). (Oldham and others v Kyrris and another [2003] EWCA Civ 1506. ‘Misfeasance claims in corporate insolvency: overview’ [Thomson Reuters] [2019]. Joint Liquidators of CS Properties (Sales) Ltd [2018] CSOH 24. Stone and Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2009] UKHL 39. 842/2014 Samchrome FZE vs Danko Koncar et, First Hall (Civil Court) 31 May 2018.
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and take the necessary initiative during the winding up process. Specifically, they tend to criticise any passive position which is taken by a liquidator, and comment that he must strictly take decisive and concrete decisions in the winding up process.90 That being said, the conduct of a liquidator must be taken into consideration on a case by case basis, due to the fact that taking on a passive role and awaiting for certain things to unfold would not necessarily render the liquidator liable under Article 312 as can be seen in the Liquidation proceedings of Il-Palma Agricultural Supplies Co Ltd (C-1077)91 where the court even went as far to say that if a liquidator is liable to certain penalties under the Act (which in this case was the failure to hold the necessary meetings as well as the omission to submit the necessary documentation to the Registrar of Companies), the court should still not find the said liquidator liable under Article 312. Thus, it would seem that Maltese Courts would expect quite a serious act or omission in order to find a liquidator liable under the aforementioned provision. It would seem important to take into consideration that the action provided under Article 312 may only be instituted by the Official Receiver, a liquidator, a creditor or by a contributory.92 An important inference to be made is that according to the Maltese Courts, upon strict analysis of the wording of the provisions in question, it would seem that such article is written in the past tense,93 and on this basis, Maltese Courts have concluded that this action may only be claimed against a person who had occupied the role of the liquidator, and not the person who currently occupies the said role.94 The application of the English counterpart of this provision seems to correlate in this circumstance. Hence, it would seem that this limitation might create some issues, due to the fact that certain judgements note that Article 312 is an action by which a liquidator might be sanctioned,95 in which case the prior removal of the liquidator, possibly under the provisions of Article 289 of the Act which require a valid reason to be shown, is required.96 The removal of the defaulting liquidator and his replacement by a new liquidator must 90 989/2008 Mallia Jesmond vs Il-Palma Agricultural Supplies Co. Limited (C10770), First Hall (Civil Court) 7 July 2015. 91 ibid. 92 842/2014 Samchrome FZE vs Danko Koncar et, First Hall (Civil Court) 31 May 2018. 93 973/12 Mizzi Associated Enterprises (C1372) vs Dimech Kenneth proprio et nomine, First Hall (Civil Court) 31 October 2016. 94 842/2014 Samchrome FZE vs Danko Koncar et, First Hall (Civil Court) 31 May 2018.. 95 780/2014 Ax Holdings (C3595) et vs the Registrar of Companies, First Hall (Civil Court) 24 March 2015. 96 501/15 Dr. Kenneth Grima Nomine vs Dr. Renald Micallef proprio et nomine, First Hall (Civil Court) 31 May 2018.
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necessarily take place because it is unlikely that the defaulting liquidator would agree to this himself. Over the years, Maltese courts have also referred to certain precautions which a liquidator should take so as to warrant against any liability. For example, as part of the process, courts emphasise that the liquidator is to determine the consistency of all the assets of the company, where special attention must be given to any immovable assets,97 wherein even certain judgements mandate the necessity of Public Registry searches so as to properly determine if there are any guarantees involved. English courts have also commented that a liquidator must ensure that any contract which is entered into during winding up clearly denotes that he is acting as an agent of the company and not in his own personal capacity98 (similarly to the Maltese approach in terms of mandate and fiduciary obligations).
7. Conclusion It would seem that a liquidator is entrusted with a number of varying duties as well as various possibilities for contingent liability. It is also to be mentioned, that although not expressly mentioned above, there is even the possibility of liability in terms of the aforementioned fiduciary duties, which would not necessarily constitute an action under the Act, but it may constitute a claim for damages under the Civil Code. One may also envisage the possibility of the liquidator being found liable for misappropriation99 under the Criminal Code (Chapter 9 of the Laws of Malta). One might also mention the fact that the Regulation provides for certain duties which are to be observed by a liquidator, such as the duty to cooperate with courts100; thus, there might even exist a situation where a liquidator might be subject to liability on an international aspect. Hence, the importance of being diligent and analysing the situation prior 97 780/2014 Ax Holdings (C3595) et vs the Registrar of Companies, First Hall (Civil Court) 24 March 2015. 98 Stead Hazel & Co v Cooper [1933] 1 KB 840. 99 Criminal Code, Chapter 9 of the Laws of Malta, Article 293. 100 Regulation (EU) 2015/848 on insolvency proceedings (recast), Article 43.
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to being appointed as liquidator is imperative for said liquidator to avoid any liability. In this respect, it is considered good practice to request such information as audited accounts of prior years, management accounts and a trial balance in order to have a full and fair view of the company itself. Also, liquidators nowadays have even implemented the practice of being provided with indemnity for anything which does not result from their own incompetence or wrongdoing. Thus, it would seem that although it is not common in Malta for a liquidator to be held liable in terms of the Act, it is very much possible. From an examination of the above, one might note that a misconduct could have dire consequences in terms of personal liability. The importance given to the role of a liquidator under the Act cannot be stressed enough, and it is obvious that it is a misconception that such role is merely an obligation put on the company in order to complete the winding up process. Any individual who wishes to take on such role should also bear in mind that a specific action, namely that contemplated in Article 312 of the Act provides an opportunity for the liquidator’s abilities to be scrutinised, and if such abilities are not up to the standard required by law, personal liability may ensue.
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