Whilst the business of company service providers (CSPs), more often than not, includes the constitution and incorporation of companies, it is worth mentioning the process and stages involved in the winding-up of a company. This is also within the context of the juxtaposition of the terms ‘Dissolution’ and ‘Liquidation’ which are unfortunately often confused and commingled – but which relate to two entirely separate procedures.
Background
The Companies Act, 1995 deals with three different kinds of partnerships, these being the:
1) Partnership en nom collectif,
2) Partnership en commandite and
3) Limited Liability Company
Under the old Commercial Partnership Ordinance (CPO), the Dissolution and Liquidation of the three kinds of partnerships was regulated in a broadly identical manner. Following the enactment of the Companies Act 1995, a very broad distinction between the first two kinds and the third came into play. (For the purposes of this article, we shall be delving into the winding up of Limited Liability Companies (LLCs).
Types of Winding-Up.
It is first and foremost worth pinpointing that there are basically two different types of winding-ups, these being the (i) Court Winding-Up Process and (ii) Voluntary Winding-Up (which is further sub-categorised into either Members’ or Creditors’ winding-up).
Insofar as the Companies Act is concerned, reference should be made to Clause 214(1) which states that a company shall be dissolved and consequently wound up when (a) the company has by extraordinary resolution resolved that the company be dissolved and consequently wound up by the court and (b) the company has by extraordinary resolution resolved that the company be dissolved and consequently wound up voluntarily.
When the Court may dissolve and wound-up a Company.
In terms of Clause 214(2)(a), ‘a company may be dissolved and wound up by the court in the following cases:
(i) if the business of the company is suspended for an uninterrupted period of twenty – four (24) months;
The Companies Act does provide any guidance as to what the term ‘suspension’ implies – but any interested party may apply to the court to commence the liquidation process – and this is, therefore, the first cause for dissolution. (i.e. a suspension of business activities).
(ii) the company is unable to pay its debts;
In this instance, the Companies Act helps us by defining what constitutes ‘inability to pay its debts’. This primarily includes whenever the company has defaulted, the default has been recognised by a court judgment or the company has still not paid.
The court may generally order the issuance of an executive warrant of the company and if the company has not paid within 24 weeks after the executive warrant is issued – the company will be deemed ‘unable’ to pay its debts. In this connection, this is known as the ‘objective test’. However, there is also a subjective test, wherein it may be proven to the satisfaction of the court that the Company is unable to pay its debts by taking into account contingent and prospective liabilities.
When the Court shall dissolve and wound-up a Company.
Clause 214(2)(b) states that ‘a company shall be dissolved by the court in the following cases:
(i) The first instance is when the Company has less than two shareholders (members) and remains so reduced for more than six months.
Generally speaking, companies are composed of two shareholders, however, what would realistically happen if there was less than two members? First and foremost, an exception to this rule would actually be the ‘Private Exempt Status’ accordingly – wherein in that case, if the Company is composed of one shareholder and is in adherence with the provisions governing Private Exempt companies, Clause 214(2)(b)(i) would not apply.
However, if the company is classified as ‘non-exempt’ and for a period of more than six months is only composed of one member – a quick solution could be to allocate some shares to another member and rectify this accordingly as per statutory legislation.
For non-exempt companies, the minimum number of members is two, but if due to circumstances, this number is reduced to one and no second shareholder is appointed and the remaining shareholder carries on fulfilling the company’s activities, the law provides that this shareholder who proceeds with this ‘non-compliance’ shall incur liability jointly and severally with the Company itself. Therefore, in case of default, any remaining shareholder would become jointly and severally liable with the entity.
(ii) A company shall be dissolved when the number of Directors is reduced below the statutory limit (as prescribed by Article 137) as mandated in the Memorandum and Articles of Association.
This instance could occur when the sole director of a private company resigns. The recommendation, in this instance, would be to immediately re-appoint another Director and ensure the Company is in line with the Companies Act.
(iii) The Court believes there are grounds of gravity to include dissolution & consequential winding-up of the company:
‘Grounds of sufficient gravity’ are often decided by the court. The most popular one is deadlock whereby the company and its management is unable to function. This can also occur whenever there is genuine disagreement amongst the shareholders and if the company is unable to function or carry-on normal operations. The Courts have determined (through case-law) that deadlock is tantamount to a ground of sufficient gravity.
‘Offences’ can also be causes of sufficient gravity. A case may arise where a creditor might be submitting claims for fraud/mismanagement. This could happen, in particular, whenever a Creditor feels that, in view of the status of the company, he/she would not be able to collect receivables and henceforth applies to the court for a winding-up order under this cause of dissolution.
(iv) Another cause of dissolution refers to instances when the period, if any, fixed for the duration of the company by the memorandum or articles expires, or the event occurs, if any, on
the occurrence of which the memorandum or articles provide that the company is to be wound up, and the company in general meeting has not before such expiry or event passed a resolution to be wound up voluntarily.
Therefore, shareholders might want to consider changing the objects to cater for an Unlimited Duration/term.
The aforementioned cases are the main causes of Dissolution and where the Court may or shall dissolve the company. (It is important to remember that in the cases of dissolution falling within 214(2)(b), the court shall, at its discretion, determine whether the company shall be wound up by the court or voluntarily. The determining factor is often the ‘solvency’ of the company.
Procedures for Liquidation by the Court (Court Winding up).
For a Court to Wind-Up a company, it has to receive a formal request. This is normally done through a Sworn Application (‘Rikors’). This ‘Sworn Application’ may be submitted by:
- the Company itself
- the Shareholder
- a Debenture holder
- a Creditor or
- a Contributor
- also, the Registrar of MBR can also apply to request a winding-up order when it is deemed to be in the public interest to dissolve a company.
Protection of Property & Assets.
Throughout the course of analysing the Companies Act, one will also notice plenty of ‘protective’ provisions accordingly. These are primarily included to safeguard assets for the benefit of the creditors of the company and to mitigate against any fraud.
Therefore, insofar as ‘Property/Asset’ Transfer after a winding-up order is submitted, the moment the property is transferred, with the aim to prejudice/reduce the company’s ability to pay debts & liabilities, the winding-up order would be deemed to be null & void.
Within this context, it is important to note that during the winding-up by court, the Companies Act provides for only one type of warrant which can be issued, and this is the warrant of prohibitory injunction (mandat ta’ inibizzjoni). The court does not allow the issuance of a garnishee order (seizure) – so as to ensure that the winding-up order is not disturbed by any garnishee order that may be issued against the Company.
The ‘Date of Dissolution’
What is important to always remember is that the ‘Date of Dissolution’ does not mean the date of ‘striking-off’ of the Company. Rather, it is the commencement of the liquidation process.
The ‘striking-off’ literally represents the end of the company when this is struck off the Malta Business Registry. Within the context of a Winding-up application to the court to liquidate the company, the Date of Dissolution is the date when the order/request is made by the court.
The Shareholders may opt to wind up the company by the court in which case the Date of the Resolution is deemed to be the date of Dissolution.
Therefore, there are three important dates to consider:
- The date of Court Application requesting winding–up.
- The date itself of the Winding–Up order.
- The Date of Shareholders’ Resolution approving the winding-up by the court.
These three dates in different circumstances may be considered as the deemed date of the Company’s Dissolution. After the winding-up order, this is then communicated to the Registrar of Companies (MBR).
The Role of the ‘Official Receiver’.
Within the context of Winding-Ups, it is worth mentioning the role of the ‘Official Receiver’ accordingly. Appointed by the Minister, the functions of the Official Receiver are outlined in the Companies Act and are linked to the insolvency and the winding up of companies following a dissolution by the Court.
Whenever a company is dissolved by the Court, the directors and any other person who in the opinion of the Official Receiver withholds useful information in relation to the company, are required in terms of Clause 226 of the Companies Act, to draw up a ‘statement of affairs’ of the entity.
The information to be included in the statement is governed by the provisions of the Companies Act. The information requested ensures appropriate safeguards to the parties involved in winding up procedures. Most of the time company officials are cooperative however the Companies Act also provides for the imposition of a penalty, in case of non-compliance with the obligations, and to a further penalty for every day after the lapse of the twenty-one (21) days from the date of dissolution during which such default continues.
Following the receipt of such statement, the official receiver shall present a preliminary report to the court accordingly. The 21-day period during which the said statement should be submitted may be extended by the Official Receiver, if he deems it necessary as per the provision of Clause 226(3) of the Companies.
In a winding up by the court, both the Liquidator and Official Receiver are paid by the Assets of the Company.
The Role of the Liquidator in a ‘Court Winding-Up’ process.
Generally speaking, the powers of Liquidator are very wide. Upon Dissolution, the Management & Administration is shifted to the Liquidator and this is specifically prescribed for in the Companies Act. The Liquidator also has the power to call on the contributories to make contributions on the unpaid portion of their share capital – as so necessitated.
In a ‘Winding-Up’ by the Court, the role and function of the Liquidator is also critical. He/she normally
- Assumes custody or control of all the company’s property and all the rights to which he has reasonable cause to believe to be held by the company;
- Brings or defends any action or other legal proceeding in the name of or on behalf of the company;
- Carries on the business of the company as far as necessary for the beneficial winding up;
- Pays creditors according to their ranking at law;
- Makes any compromise or arrangement with creditors or persons claiming to be creditors;
- Makes calls on contributories or alleged contributories;
- Represents the company in all matters and to do all matters as necessary for the winding up of the company;
Additional powers (which are subject to the control/oversight of the Court) also include:
(1) Selling movable and immovable property
(2) Executing all deeds, receipts, and other documents
(3) Raising on the security of the Company’s assets any money requisite
(4) Appointing a mandatory to act for him in his capacity as liquidator
Upon the court being satisfied that Liquidator has satisfied all his/her obligations as mandated by law, the Court will release the Liquidator from his/her appointment, and this is sent to the MBR for notification and registration.
When the affairs of the Company have been completely wound–up, the court shall make an order that the name of the company be struck–off the register from the date of the order.
A copy of the order shall be forwarded (within 14 days) to the Registrar of Companies by the Registrar of Courts for filing and uploading.
Therefore, within the context of Court Winding-Ups, there are therefore three main players to consider: The Official Receiver, the Liquidator and the Court itself. It is also worth pointing out that the Court can appoint more than one (1) liquidator, but their functions must be clearly defined to ensure there is no overlapping or conflict insofar as Roles and Responsibilities are concerned.
Voluntary Winding-Ups.
Voluntary Liquidations are always initiated by the companies themselves –through a Resolution as governed Clause 265(1) of the Companies Act.
Members Voluntary Winding-Up.
A Members Winding up is the equivalent of a Solvent Dissolution. To commence the process of a Members’ Voluntary Winding Up, an Extraordinary Resolution of the Shareholders is taken and the commensurate Form B1 is prepared, filed and submitted to the Malta Business Registry. In this case, Date of Dissolution will be that as indicated on the form submitted to the MBR.
The Company shall cease to carry on the business except so far as shall be required for the beneficial winding up of the Company.
The Declaration of Solvency must be made within the month immediately preceding the date of dissolution and should be filed with MBR. This declaration should contain a statement of the company’s assets and liabilities (known as a ‘Statement of Affairs) and should not be dated earlier than 3 months from the date of the Form B2. The content should also not be earlier than 3 months from the B2.
(Moreover, Liquidation should be completed within 12 months and the Liquidator should ensure that there are sufficient Assets & Liabilities for distribution. (In the event that this is not possible, the Shareholders would normally proceed with a Resolution to wind–up the company through the Court and commence insolvency proceedings).
An Extension of the Liquidation Process of 12 months can happen, but the Liquidator has to provide a copy to the Malta Business Registry (MBR) – enshrined in the Form L4. (as per the procedures of Clause 273 and Clause 322 of the Companies Act). If the Liquidation process, which extends beyond the 12-month period is not notified to the MBR, there will be penalties incurred on the Liquidator.
Within this context, the nomination and appointment of a Liquidator is a shared power of the shareholders. The law does grant the facility to Directors to apply to the court in the context of a voluntary winding–up if the Shareholders disagree who should be nominated and appointed Liquidator. Similar to the function of a Director, a Liquidator can be appointed & also removed by the Shareholders.
As soon as affairs of the company are fully wound up, the Liquidation Accounts and Scheme of Distribution are prepared. (The Companies Act, also provides for a situation whereby this scheme of distribution can be rectified/amended if so necessitated.) This should be filed with the MBR within seven (7) days from shareholder approval, together with the auditors’ report and liquidator’s return.
The MBR will then register the documents and publish a notice for all third–parties and/or creditors. Upon the expiration of three (3) months from the publication of the notice, the company is stuck off and certificate of dissolution is issued by the Registrar.
Creditors’ Voluntary Winding Up.
Directors shall call a creditors’ meeting within fourteen days’ from the date of dissolution. The notice of meeting shall be sent to creditors at least seven days before the meeting This shall also be advertised at least once in one local newspaper. Within three months from the notice, if there is no application from an interested party, the company is struck–off.
The creditors’ meeting shall resolve on the appointment of a liquidator. Both the creditors and company are entitled to nominate a liquidator accordingly. If no liquidator is appointed, then the directors shall apply to the court for an appointment. The creditors shall also have the power to remove the liquidator.
Within the context of Clause 280(1), Companies Act, the creditors at the meeting to be held in pursuance of article 278 (Meeting of the Creditors), or at any subsequent meeting may, if they think fit, by resolution appoint not more than five representatives of the creditors to a ‘Liquidation Committee’, and if such committee is appointed, the contributories may by resolution appoint up to five persons to act as their representatives on the committee.
It is also important to remember that upon the appointment of Liquidator, the Directors/Secretaries’ powers cease immediately. Within this context, the Liquidator’s main role is to ensure there is settlement and payment via ranking – which refers to a situation where a creditor has a privileged hypothec/debt which is paid in advance of any other unprivileged debts. (Ranking is governed by Articles 301 and 302. This is particularly important to consider when there aren’t sufficient funds to pay all debts).
Insofar as Liquidators are concerned, only lawyers, accountants and auditors can act as Liquidators whilst Article 306(1) provides for a list of prohibited transactions by Liquidators.
Liability within the context of Dissolution and Winding-Up.
In the winding up of a company, every present and past shareholder shall be liable to contribute to the assets of the company to an amount sufficient for payment of its debts and liabilities and the costs, charges and expenses of the winding up and the adjustment of rights of the contributors among themselves, subject to the following qualifications as per Clause 216 of the Companies Act:
(a) No contributions shall be required in excess of any amount, if any, unpaid on the shares in respect of which he is liable as a present of past shareholder.
(This is in line with the principle of limited liability of shareholders). Therefore, the liability has to be in line with the normal line of shareholding under Maltese Company law. It is important to remember that the liability of past Shareholder/s is always limited to the unpaid portion of their paid capital. This is a very important qualification.
(b) Past Shareholders shall also not be liable in certain cases such as:
- If he has ceased to be a shareholder for at least a period of one year before the dissolution;
- In respect of a debt or liability contracted after he has ceased to be a member;
- Unless it appears to the court that the existing members are unable to satisfy the contributions required under the Companies Act.
Insofar as ceasing to be Shareholder is concerned, one needs to make reference to the effective date of transfer of shares (within the Share Purchase Agreement).
(c) Sums due to any shareholder by way of dividends, profits or otherwise shall not be deemed to be a debt of the company payable to that member in the case of competition between himself and any other creditor. Such a sum shall be taken into account for the purpose of the final adjustment of the rights between contributors themselves.
Directors’ Liability
In the context of Company law, a Director plays a very important role because Directors are responsible for management and administration of the company. Directors act in a ‘fiduciary capacity’ and should act with the duty and care and loyalty – as per the principles of Good Corporate Governance.
This is particularly important within the context of Fraudulent and Wrongful trading. The law provides that in the case of fraud (e.g. intention to defraud creditors), ‘the court on the application of the official receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in the manner aforesaid be personally responsible, without any limitation of liability for all or any of the debts or other liabilities of the company as the court may direct.’
Similarly, where a company has been dissolved and is insolvent and ‘and it appears that a person who was a director of the company, knew or ought to have known prior to the dissolution of the company that there was no reasonable prospect that the company would avoid being dissolved due to its insolvency. The court may on the application of the liquidator, may declare that the person who was director during the time referred above, liable to make payment towards the company’s assets as the court thinks fit.
Disqualification Orders.
Within this context, it is worth briefly mentioned the concept of ‘Disqualification Orders’ wherein, as per Clause 320 of the Companies Act
The court, upon the application of the Attorney General or the Registrar, may also make a disqualification order against any person if it is satisfied –
(a) that such person is or has been a director of a company which at any time has become
insolvent, whether while he was a director or subsequently; and
(b) that his conduct as a director of that company, either taken alone or taken together with his
conduct as a director of any other company or companies, makes him unfit to be involved in the management of a company.
Prior to 2020, Disqualification Orders were typically applied only in cases of serious criminal offences contemplated by the Companies Act. However, since 2020, the reasons that may lead to a disqualification order have also been broadened and these can now also be issued when there are serious breaches.
Conclusion
As can be appreciated, Dissolution and Winding-Up is complex, laborious, and can at times be tedious. What is important to remember is that the term Dissolution refers to the point in time at which the company is put into liquidation and the winding up process is commenced.
The broad objective of a Winding-Up is to achieve an orderly Liquidation of the company to bring in the assets of the company, to realise them, to satisfy creditors and if there are any assets left, to distribute them amongst shareholders and ultimately to strike off the company.
Disclaimer: The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet up with any of our representatives to seek further information, please contact us for an appointment.
