The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, on March 27, 2012 in an application filed by Sakaras Holding Ltd, held, among other things, that for the court to order the “company recovery protection” under Article 329B of the Companies Act, it had to be satisfied that a company had a credible business plan to regain economic viability and that the requisites in Article 329B were met.

The facts in this case were as follows:

The plan seemed to be a desperate attempt by its directors to prevent a total collapse of the company, at the expense of its creditors... It was unlikely that the company would start to earn any profits within two years

Sakaras Holding Ltd applied for the benefit of company recovery protection in terms of article 329B of the Companies Act.

Article 329B (1) provides:

Where a company is unable to pay its debts or is imminently likely to become unable to pay its debts, a company recovery application may be made to the court, requesting the court to place the company under the company recovery procedure and to appoint a special controller to take over, manage and administer the business of the company for a period to be specified by the court subject to the limitation imposed by paragraph (c).

(b) A company recovery application, hereinafter in this article also referred to as the “application”, shall be made by means of an application which may be made:

(i) by the company following an extraordinary resolution;

(ii) by the directors following a decision of the board of directors; or

(iii) by creditors of the company representing more than half in value of the company’s creditors.

(c) The appointment of a special controller shall be made for a period not exceeding 12 months; provided that, at any time during which the company recovery procedure is in force, the court may, upon good cause being shown, extend the period by such additional period or periods which in aggregate do not exceed a further 12 months.

(d) The provisions of this article shall apply to:

(i) all companies other than companies which qualify as “small companies” in terms of Article 185; and

(ii) to “small companies” having more than €465,874.68 in value owed to creditors.

Sakaras Holding was a holding company in a group of companies known as Verysell Group. The business of the group was IT – both in hardware and software. It had debts of US$30 million with Brava Ltd and GMF Investments.

Its financial position deteriorated with the decline of its business. As Sakaras was unable to repay its debt, it accepted to sign a restructuring agreement, whereby it agreed to pay US$8 million immediately and US$3 million by August 31, 2011.

Sakaras also sold its distribution business for US$10 million, to raise funds to repay its debts but instead of repaying its creditors, it used the proceeds to pay off creditors of its subsidiaries.

On August 31, 2011, Sakaras went into default and its two creditors, Brava and GMF on December 23, 2011 applied for the court to order its dissolution.

They demanded Sakaras to be dissolved and wound up by the court.

Sakaras opposed the winding up application of its creditors and as a counter-reaction applied for company rescue protection under Article 329B of the Companies Act.

It said that liquidation would have a disastrous effect on Verysell Group.

Bailey, Groves & Smith in Corporate Insolvency (2nd edition) wrote:

‘’Inevitably the procedure obliges the court, lawyers and accountants to approach the problem raised with commercial awareness and sensibility. The court, in particular, is being asked on the hearing of the petition to make a commercial judgment which is often difficult to make even for a business person.

“The procedure is court-based and professional advisers must be involved from the earliest point possible; much of the success of the procedure will depend on the preliminary work leading up to presentation of the petition.’’

It was evident that Sakaras Holding was unable to pay its debts within the parametres of Article 214(5) Chapter 386. Effectively it was in a state of insolvency. Sakaras also qualified as a company to apply for company recovery protection under Article 329B.

Article 329B (2) provides:

The application shall, as far as possible, give the full facts, circumstances and reasons which led to the company’s inability or likely imminent inability to pay its debts, together with a statement by the applicants as to how the financial and economic situation of the company can be improved in the interests of its creditors, employees and of the company itself as a viable going concern.

(b) Where an application is made by the company, the following documents shall be annexed to it:

(i) A statement of the company’s assets and liabilities made up to a date not earlier than the date of the application by more than two months; and (ii) a list containing the names and addresses of the creditors together with an indication of the amount due to each such creditor and the security, if any, of the respective creditors.

(c) Where the application is made by the creditors, it shall be accompanied by appropriate supporting documentation and statements.

The court had to decide the application within 20 working days from when the application was filed.

The company was obliged to satisfy the court that it had good, financial prospects and that despite its current state of insolvency, it could be rescued financially.

Sakaras Holding presented the argument that its dissolution would cause serious prejudice to its subsidiaries, the loss of employment for over 200 people; in addition to preventing the creditors of the company from receiving any of the amounts due to them.

According to its plans, it anticipated that the company would be in a position to settle its debts by 2012, in view of the potentiality of growth in business; and provided there was an increase of capital by its members.

Dissolution, on the other hand, would result in a loss of investment in its subsidiaries, maintained the company.

On March 27, 2012, the First Hall of the Civil Court dismissed Sakaras’ application, finding no sufficient grounds to place Sakaras under company recovery. The Registry of Companies was to be notified of the court’s decision.

The following reasons were given for the court’s decision:

Business plan: The court did not consider the company recovery plan to be credible and realistic in the circumstances. It felt that it was based on misplaced assumptions and unsubstantiated by the performance of the company’s management. The court was not convinced that dividends will be paid to Sakaras.

It said that its subsidiaries were also in debt and the overall financial position of the group was unknown.

Prof. Muscat, in Principles of Maltese Company Law, writes:

“The primary aim of this far-reaching procedure is to allow, if practicable, companies in financial difficulty to recover rather than to put them into liquidation. The procedure is intended to be an alternative to the liquidation of a troubled business. It is not however intended to make effective insolvency or to merely postpone the inevitable crash.’’

State of insolvency: In this case, it was clear that the company was in a state of insolvency. It was also in default. The decision to utilise the proceeds to pay the creditors of its subsidiaries was incorrect. Sakaras should have first paid Brava and GMF, pointed the court.

Company recovery: The court noted that Sakaras decided to apply for company recovery under Article 329B of the Companies Act only after legal proceedings were taken by its creditor, requesting its dissolution. The court said that it was not the purpose of Article 329B to be used, to counter-act a creditor’s application for dissolution.

It did not result that “company plan” had not been verified nor approved by any commercial bank or any independent entity.

For it to be considered as a reliable business plan, the company should have obtained additional finance and not expect “charity” from its creditors.

The company assumed that there would be a growth of 18 per cent in IT and that business would increase. It expected a fresh injection of capital from its members; when none of its members, however, came forward with an additional injection equity.

The plan seemed to be a desperate attempt by its directors to prevent a total collapse of the company, at the expense of its creditors, noted the court.

It was unlikely that the company would start to earn any profits within two years.

The court remarked that no credible rescue plan would maintain in employment all 214 employees; especially when one factor which led the company to be unprofitable was that it had too many high-earning employees.

Dr Grech Orr is a partner at Ganado & Associates.

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