New insolvency and bankruptcy procedures

The House of Representatives yesterday started to debate the Set-off and Netting on Insolvency Bill.

Finance Minister John Dalli said this bill introduced into law new concepts in the business sector and amended the Companies Act.

This bill followed other recent amendments to financial legislation. Through this bill Malta was aligning itself with legislation abroad regarding the regulation of the business sector, ensuring there was a level playing field for all and also offering greater protection for consumers.

The only way how business could flourish was by improving credibility in the country. That could only happen when the country confirmed to and observed the standards and regulations practiced in other serious countries.

Any country which wanted to promote international business had to show it was credible and that operators within it did not come here solely to escape law enforcement elsewhere.

Mr Dalli said the problems this bill sought to tackle were not unique to Malta. Indeed, recent events in the US had revealed loopholes in the way the accounts of major companies there were reported, causing an ocean of problems to creditors and shareholders.

This bill, in amending the Companies Act, better defined the duties of directors and also introduced new recovery provisions for companies which ran into problems. Amendments to the Insider Dealing Act included new market abuse offences.

One of the new elements in the bill was set-off and netting in case of insolvency. When a company was insolvent, its debtors and creditors were to be considered as debtors and creditors according to the net amounts involved.

The practice of netting was mandatory in many countries. Its introduction here followed extensive consultations. It had been decided that this concept should apply "across the board" in Malta.

It reduced the exposure of creditors and risks for business, thus benefiting the economy.

Mr Dalli said some of the most important elements of this bill amended the Companies Act following the experience of the six years since its enactment.

The bill also included amendments to better define the various forms of public and non public share offerings and the information to be given to the public about the issuing companies.

The bill went into some detail on the duties of directors, their expected standard of performance, their obligation to work in good faith in the best interests of their companies, and their duty to supervise what went on in their companies.

Another important element in this bill was the Company Recovery Procedure which would apply to large companies which had credit exposure of over Lm200,000.

The procedure introduced a breathing space to allow companies in difficulties to recover rather than be liquidated. In such cases, a court appointed Special Controller who would take over the management of the company in difficulties. His responsibility was not that of a liquidator, but rather, to better manage, and thus rescue the company. During this period, of one year, all actions by creditors would be frozen and no legal proceedings may be taken against the company.

Yet another new element changed what was known as "partnership en commandite" to "limited partnership (LP)." Limited partnership companies would be restricted to the financial services sector for collective investment schemes. In such partnerships, one of the partners could have unlimited liability while the others would have limited liability.

Other provisions included the procedure for the strike off of companies, the division of companies, and the submission of the annual returns of companies on the basis of the anniversary of their registration. Small private companies would be exempt from the need for audit, in line with what was promised in the budget.

Mr Leo Brincat, opposition spokesman on finance, said this was technically a good bill and the opposition substantially agreed with it, but it would be forced to vote against because the minister had inserted amendments to the Business Promotion Act and the Freeport Act, which had nothing to do with the Companies Act.

Unfortunately the bill did not do enough to protect the interests of shareholders. It did not define the responsibilities of some posts within companies like the Chief Executive Officer or the Chief Operating Officer, and it did not promote the concept of corporate governance.

In view of the Priceclub case, there were not enough safeguards for creditors. Neither did the bill include measures to boost the equities market.

A Labour government, Mr Brincat said, remained committed to calling an inquiry in the Daewoo case. As for the Priceclub case, what remedial action was taken appeared to have been too little too late.

In the Priceclub case, could the authorities have acted earlier, given the rumours that had been circulating well before the collapse? There was suspicion that there may have been people with an interest for action not to be taken.

The liquidator was now accusing the directors of fraudulent trading and claims that they had continued to trade even when the company was insolvent.

The impotence of the then MFSC in this case could not be justified, Mr Brincat said.

What had happened underlined the need for the regulatory searchlight to be continuously trained on the operation of certain companies, particularly those which issued bonds so that action could be taken at the proper time and not when it was too late.

Turning to the proposed Company Recovery Procedure, Mr Brincat said he agreed with questions made by the Malta Association of Credit Management. What would happen if the company in difficulty was not in a position to deposit the required sum of money to cover the costs of the Special Controller or if all its assets were used as collaterals?

What guarantees would there be that the Special Controller would have no conflict of interest?

Once the Company Recovery Procedure was terminated and the Controller submitted his proposed recovery plan, who would ensure that that plan was observed and that the recommendations made by the controller were implemented?

Turning to other aspects of the bill, Mr Brincat asked if the provisions on shareholders included only ordinary shareholders or also preference shareholders?

Did the provisions which broadened definitions include also semi-commercial organisations which could even include the Curia, since it involved itself in commercial actions sometimes?

The articles of association, he observed, could be changed by partners whenever they wanted. But the Registrar was not being kept responsible to ensure that this was according to the provisions of the law. Surely the law should be safeguarded by the registrar himself?

The bill stated that amounts obtained by creditors could be used to distribute to shareholders. Would this apply even if a company had liquidation problems?

What would happen if shareholders moved out of a meeting before a vote was taken or if they chose not to vote? Could guarantees be presented by third parties? Could these be conditioned?

Mr Brincat said he agreed with the provisions of the bill against directors making secret or personal profits from their position without the consent of the company. It was also important not to have connections with other companies in the same genre.

In terms of the bill, a winding up application had to be filed in court even when a company was wound up voluntarily, and the winding up of a company only took effect from the date of presentation of an application. What was the advantage of this, expecially since applications could take a long time?

Mr Brincat said that apart from increasing the finance minister's powers, the bill was enabling the minister to draw up regulations. The minister's powers, he said, should be as limited as possible as these could lead to an abuse of power.

Mr Brincat said it was important to also consider the situation of parastatal companies as they would also be affected by this bill. In the case of the shipyard, for example, what would be the position of the CEO and the auditor when they felt that the company could not pay its debts? If a special controller was appointed by a court, would a court permit be required for the special controller to consult with the directors? And as the controllers could appoint managers, could they also transfer them and change their position?

The bill, he said, needed to include adequate safeguards in the case of foreign companies so that Maltese creditors would not end up chasing their money overseas.

One also needed to consider the introduction of the partial liability concept. For while unsecured creditors were now completely exposed, secured creditors had the guarantees of directors. In a partial liability, shareholders were also partially liable to a company's debts.

When he spoke on corporate governance, Mr Brincat said it was not clear if the role of board members and managment supervision should be divided. This was an issue which was currently being debated both in the US and Europe.

What was important was not company structures but that a corporate governance structure was adopted in a way to ensure that the interests of both shareholders and stakeholders were served.

EU legislation was still silent on the subject of corporate governance and the Maltese government should take the lead in this.

Mr Brincat said the Opposition was against the amendments to the Business Promotion Act and the Freeport Act included in this bill. The amendments of the former would revoke incentives given to companies in terms of the Industrial Development Act and the Income Tax Act as from year of assessement 2004.

Mr Brincat pointed out that an assessement year did not necessarily start on January 1, it could start on any day during the year.

The proposed amendments could revoke the eligibility of certain companies for income tax, export and investment incentives with retrospective effect. This was wrong as tax was a cost for companies. Goalposts were being moved backwards and this created uncertainty.

Mr Brincat said he had information that the Business Promotion Act was being amended to be more in conformity with the EU.

Where the rumours that it was the government's intention to issue legal notices for incentives to remain applicable to SMEs true? He hoped this was the case. Mr Brincat said he had also heard that the government intended to introduce a mechanism to establish if companies could qualify as SMEs and thus benefit from incentives.

The amendments to the Freeport Act would also affect incentives on profits, dividends, tax exemptions, benefits for non-residents, exchange control and provisions for expatriate employees of companies falling under the freeport.

He said that irrespective of what had been agreed in 2001, provisions of tax free profits and dividends would not apply for the freeport as from 2004 while the benefits for non-residents would stop applying in January 2003.

Mr Noel Farrugia (MLP) warned that EU membership would mean that prices on certain food imports would rise, undermining the competitiveness of catering establishments. When subsidies were given by the Maltese government, companies which received such subsidies would face huge problems to export their products.

The debate continues today.