US Chapter 11-type protection for Gozo company

Legal history was made on Friday when a company going through financial difficulties as a result of the prevailing market conditions in the poultry industry, has been given, for the first time, US Chapter 11-type protection from its creditors for a one-year period by the Gozo court, presided over by Magistrate Paul Coppini, so that it can reorganise its business practices and its financial situation.

This is possible in virtue of Section 329 (b) of the Companies Act, Cap. 386, which gives companies a temporary reprieve to put their financial house in order and in the process, enhance the value of the company to be in a better position to honour its obligations towards its creditors.

Otherwise, a company facing these financial difficulties would see its assets base progressively dismantled by the actions of individual creditors. The company's directors are also legally bound to put the company into insolvency proceedings if they are unable to honour its debts.

In virtue of Section 329 (b), a company can undergo restructuring under the control of a special comptroller appointed for the purpose and under the constant supervision of the court with a view to ensuring that the company remains a viable firm.

The rationale of Chapter 11-type proceedings is that the value of the whole is much superior to the value of the total value of the individual parts of the firm. Several US companies, including all major US airlines, have been or are under Chapter 11 protection so that a temporary reprieve from their creditors would help them get back on their feet.

This type of procedure should help to avoid a repetition of Price Club-type debacles where good management could have put the company back on its feet but as a result of insolvency proceedings, the creditors are still owed substantial sums of money.

Ray Bugeja, B.Sc. (Eng.), has been appointed special comptroller for one year, while Dr Joseph Ellis was counsel to the company and its directors.