The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit Mc Keon, in the case ‘Fimbank plc vs Almeco Ltd’, on February 18, 2013, held, among other things, that there were grounds to order the dissolution of Almeco Ltd, owing to its inability to pay its debts, and the suspension of its business for an uninterrupted period of over 24 months, in accordance with article 214 (2)(a) and article 214 (5)(b) of the Companies Act.
The facts in this case were as follows:
Failure to pay a debt which is due and not disputed amounts to evidence of cashflow insolvency
On June 16, 2003, the First Hall of the Civil Court in the case ‘Fimbank plc vs Almeco Ltd’ declared Fimbank to be a creditor of Almeco Ltd for the amount of €844,899, £845,877 and $5,842, which decision was res judicata. This debt had not been paid and during the last years, several attempts had been made to request Almeco Ltd to pay the debt.
It was evident that Almeco Ltd was not in a position to pay its creditors. It also resulted that Almeco Ltd had ceased trading for over 12 months.
Faced with this situation, Fimbank plc filed legal proceedings asking the court to declare that Almeco Ltd was not in a position to pay its debts and that it had suspended its business for over 12 months. Consequently, the court should order its dissolution and liquidation in terms of article 214 (2) (a)(i) and (ii) of the Companies Act, which provide that:
“In addition to the modes of dissolution referred to in sub-article (1
“(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 24 months;
“(ii) if the company is unable to pay its debts.”
Fimbank plc also requested the court to appoint a liquidator.
A director of Almeco Ltd testified that it exported aluminium profiles, which it manufactured. Almeco used to operate from a factory at Ħal Far, which it rented from the Malta Development Corporation. It had had to cease operations after the Government took possession of the factory, owing to non-payment of rent. Almeco Ltd had eventually been evicted from the factory.
After the court decision of June 16, 2003, the company made a payment to Fimbank of €250,000. Almeco Ltd had no assets.
The court considered that a company could be dissolved if its business was suspended for an uninterrupted period of 24 months or if it was unable to pay its debts.
Article 214 (5) established when a company was to be deemed not to be in a position to pay its debts.
Maltese law was modelled on the UK Companies Act of 1985 and indicated precisely when a company was unable to pay its debts.
Article 214 (5) provided: “For the purposes of sub-article (2)(a)(ii), a company shall be deemed to be unable to pay its debts:
“(a) if a debt due by the company has remained unsatisfied in whole or in part after 24 weeks from the enforcement of an executive title against the company by any of the executive acts specified in article 273 of the Code of Organisation and Civil Procedure; or
“(b) if it is proved to the court’s satisfaction that the company is unable to pay its debts, account also being taken of contingent and prospective liabilities of the company.”
The court considered Boyle & Birds Company Law pg. 859 et seq: “There are two principal, although not exclusive or exhaustive, tests of insolvency: a company is insolvent if it is unable to pay its debts as they fall due (cash-flow insolvency); it is also insolvent if its liabilities exceed its assets (balance-sheet insolvency).”
Article 214 (5)(a) mentioned cash-flow insolvency, while balance-sheet insolvency was stated in article 214 (5)(b).
Boyle & Birds Company Law: “Failure to pay a debt which is due and not disputed amounts to evidence of cash-flow insolvency. Thus a company which has a policy of late payment of bills could find itself the subject of a petition for a winding-up order or administration order.
“Such a petition will not be struck out at an early stage as a form of improper pressure and an abuse of the process of the cour, because, as Staughton L.J. explained in Taylor’s Industrial Flooring (1900, BBC 44 at 51), creditors, not late payers, are more worthy of the protection of insolvency law.
“Many people today seem to think that they are lawfully entitled to delay paying their debts when they fall due or beyond the agreed period of credit, if there is one… This can cause great hardship to honest traders, particularly those engaged in small businesses recently started. Anything which the law can do to discourage such behaviour in my view should be done.
“The position is different if there is a bona fide dispute about a debt. A petition based on a disputed debt will usually be dismissed because the procedure is ill-equipped to resolve factual matters. However, it will not be dismissed where the petitioning creditor has a good, arguable case and the dismissal would deprive the petitioner of a remedy, injustice would otherwise result or there is some other sufficient reason for the petitioner to proceed.”
In Insolvency Law, Corporate and Personal, the following was stated as regards cash-flow insolv-ency in the context of the Insolv-ency Act 1986: “The court, in examining whether a company is suffering cash-flow insolvency, will consider whether the company is actually paying its debtors. Courts must take into account what current revenue the company has, as well as what the company can produce by realising assets within a relatively short time…
“A company can rely on money which might be obtained from the sale of assets or on money which might be obtained on the strength of its assets… It is possible that sometimes a debtor might be able to establish solvency by demonstrating that funds can be obtained through an unsecured loan. In considering whether a person or a company is insolvent the debtor’s whole financial position must be studied… and a temporary lack of liquidity does not necessarily mean that the company is insolvent…
“At one time courts were rather strict on what they required to be established before they were willing to deem a person or a company insolvent, but in more recent times they have become more liberal as far as creditors are concerned and have held that a debtor is insolvent if a creditor is able to prove that he or she has not paid an undisputed debt after a demand has been made… and this is the case even if there is other evidence which suggests that the value of the assets outweighs liabilities …
“Whether a company is cash-flow insolvent is principally a question of fact and one which may be established in any number of ways, such as the existence of a large number of outstanding debts and unsatisfied judgments … or there is lack of assets on which execution can be levied …
“It has been said that a debtor is not regarded as solvent just because if sufficient time were granted the debts could be paid off...”
As regards article 214 (5)(a) of the Companies Act, our courts have said that the fact alone that a creditor obtained a decision in its favour against its debtor did not satisfy the requirements of this provision. A court decision was an executive title. This provision specifically mentioned the enforcement of an executive title by one of the executive warrants.
In this case, it did not result that after Fimbank plc obtained a favourable judgment against Almeco Ltd, it filed an executive act and enforced it. In this respect, the term of 24 weeks did not commence in favour of the bank. The court said therefore that the bank’s claims could not be based on article 214 (5)(a) of the Companies Act.
In Axel John International AS vs Aluminium Extrusions Ltd the court held, as regards article 214 (5)(b “This condition could be verified by way of balance sheets after considering if the assets were less than the liabilities. But it was not sufficient for the company to be in a position to discharge its current obligations if its total liabilities could only be paid by the realis-ation of its assets over a long period of time. There was no good reason why its creditors had to wait until the company sold all its assets to receive payment.”
The court considered that Almeco Ltd had not filed accounts for the years 2004 to 2007. It had no assets, and significant debts. It had ceased trading and generating income from December 2007. In this regard the court was satisfied that Almeco Ltd was not in a financial position to pay its debts on the basis of article 214 (5)(b).
Under article 214 (2)(a)(i), one ground for dissolution was the unhindered suspension of business for over 24 months. In Palmer’s Company Law (25 Edition, Sweet & Maxwell) it is stated that: “The court’s jurisdiction is discretionary and the fact that the petitioner can establish this ground does not give him an automatic right to an order (re. Metropolitan Railway Warehousing Co. Ltd 1887.36 LJ Ch 827).
The court has refused to make an order where there are good reasons for the delay and where the great majority of members desire that the company shall continue. An order may, however, be made in the appropriate circumstances against the majority’s wishes.
Where the business has merely been suspended, the court must be satisfied of an abandonment or inability to carry on. In ascertaining such intention the court will have regard to the opinion and wishes of the majority of shareholders whose names appear on the register. Merely abandoning one of several objects is insufficient (re. Norwegian Titanic Iron Co. (1866) 35 Beav. 223).”
The court felt that Almeco’s financial problems had commenced before its eviction. It did not appear that Almeco was capable of repaying its debts in full with the bank. Nor did it result that it had made any attempt to continue its business elsewhere. Effectively it had abandoned its principal purpose and had not pursued its other objects. Its client base was lost.
In the court’s opinion, Almeco was in financial difficulties which had prevented it from carrying out its business before December 1, 2007. It had done nothing to recover its business, regardless of whether it had creditors which dealt with it in good faith and which were also due substantial sums of money. Almeco Ltd was solely responsible for its misfortunes. The court was satisfied that the requisites of article 214 (2)(a)(i), article 214 (2)(a)(ii) and article 214 (5)(b) of Chapter 386 had been satisfied.
For these reasons, on February 18, 2013, the Court of First Instance gave judgment by accepting Fimbank plc’s requests and ordering the dissolution of Almeco Ltd. It declared that the requirements of article 214 (2)(a)(i), article 214 (2)(a)(ii) and article 214 (5)(b) of the Companies Act had been established.
The court appointed the official receiver as liquidator with powers and duties in accordance with article 228 et seq of Chapter 386. It held that the liquidator had the following powers and duties:
(a) to obtain a declaration of the company’s position as required under article 226 of Chapter 386 and make a report to the court in accordance with article 227 of Chapter 386;
(b) to verify the assets and liabilities of Almeco Ltd and the ranking of its creditors;
(c) to take custody and control of the company’s assets in accord-ance with article 237 of Chapter 386;
(d) to take and defend any action in the interests of Almeco Ltd; and
(e) to state what measures were necessary to protect the assets of Almeco Ltd and to file a report not later than three months from the date of the court’s decision.
Dr Grech Orr is a partner at Ganado Advocates.