The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit Mc Keon, on July 15, 2014, in the case ‘Medsea Shipping Agency Ltd v Mad Ltd, Jean Calì and Giovanni Calcaterra’, ordered the dissolution of the company Mad Ltd, as it was unable to pay its debts under article 214 (5) of the Companies Act and on grounds of sufficient gravity.
The facts in this case were as follows:
Medsea Shipping Agency Ltd filed legal proceedings against Mad Ltd (previously called Bluewave Line Ltd) as well as against Jean Calì and Giovanni Calcaterra, requesting the court to order its dissolution under articles 214(2)(a)(ii) and 214(5)(a) & (b) which state that “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 if it is proved to the satisfaction of the court that the company is unable to pay its debts, account being taken also of contingent and prospective liabilities of the company”, the company can be dissolved by court order.
Medsea Shipping had obtained in its favour two judgments (both res judicata), whereby Mad Ltd was declared to be indebted to Medsea for the amounts of €44,339 and €37,436. The 24-week time limit lapsed from the date of the execution of the executive warrant.
Mad Ltd still did not pay its debts.
Medsea said that Mad Ltd was not in a position to pay its debts. It had no funds and no immovable property. It maintained that there existed sufficient and grave reasons for the court to order its dissolution and liquidation in terms of article 214(2)(b)(ii) and 218(1)(c) of Chapter 386.
It was also stated that the directors mismanaged Mad Ltd. The company had long been in a state of insolvency. Its directors should have been aware of the company’s financial position and they should have applied to liquidate the company instead of continuing to trade to the prejudice of its creditors.
Faced with this situation, Medsea Shipping asked the court:
• To appoint a provisional administration to manage Mad Ltd;
• To declare that Mad Ltd was unable to pay its debts in terms of article 214(2)(a)(ii), 215(5)(a), 215(5)(b) and 218(1)(b) of Chapter 386;
• To declare that there were sufficient, grave reasons to justify the dissolution of Mad Ltd;
• To order the dissolution and liquidation of Mad Ltd in terms of article 223 of Chapter 386;
• To provide in terms of article 219 of Chapter 386 such orders and provisions which it felt were appropriate during the proceedings;
• To appoint a liquidator with powers under article 228 et seq chapter 386 and the power to investigate the negligent and abusive acts of Calì and Calcaterra, ex- directors of Mad Ltd;
• To declare and decide that Calì and Calcaterra managed Mad Ltd fraudulently;
• To declare that they or any of them were personally responsible without limitation for the debts of Mad Ltd and to condemn them accordingly.
Calì and Calcaterra contested being the legitimate defendants, as they had no power to represent Mad Ltd. Prior to these legal proceedings they had resigned as directors and transferred their shares to third parties. It was stated that the third parties had assumed responsibility for all debts of Mad Ltd. Calì and Calcaterra also disputed acting fraudulently.
The court considered that under article 214(2)(a), the law gave the courts discretion to dissolve and liquidate a company if a company was unable to pay its debts.
Sub-paragraph (1) of article 214(2)(a) had to be read together with article 214(5) which established when a company was to be deemed unable to pay its debts.
In Maltese law, the fact when a company could not pay its debts had a precise and specific meaning as stated in article 214(5). The concept of insolvency was more restrictive than under English law, although there were overlaps.
In Boyle & Birds’s Company Law (8th edition), it is stated on page 859 that “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’)”.
Maltese law includes both in article 214(5) of Chapter 386.
Cash flow insolvency: While under Chapter 386 it was stated precisely when a company was to be deemed unable to pay its debts, in English law the criteria was more generic. A company could be insolvent if it was unable to pay its debts, as they fell due.
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 court, because, as Staughton LJ explained in Taylor’s Industrial Flooring (1990. BBC 44 at 51) creditors, not late payers, are more worthy of insolvency law’s protection.”
Insolvency Law – Corporate and Personal: “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 procure by realising assets within a relatively short time… A company can rely upon money which might be obtained from the sale of assets or upon 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 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…
The court was of the opinion that the warrants issued and enforced against Bluewave Line Ltd were not affected when Bluewave changed its name to Mad Ltd. The company remained the same
“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.”
The court referred to the English concept of balance sheet insolvency. In Insolvency Law – Corporate and Personal, it is further stated that in determining whether the assets are outweighed by the liabilities, a court is able to take into account contingent and prospective liabilities, but not contingent and prospective assets. It has been said that ‘liabilities’ is a broader term compared with ‘debts’.
The court noted that on March 2, 2012, the shareholders of Bluewave transferred all their shares to third parties and on March 22, 2012, the company changed its name to Mad Ltd.
The court also noted that it was proven that Mad Ltd did not pay its debt to Medsea Shipping within 24 weeks. The court was of the opinion that the warrants issued and enforced against Bluewave Line Ltd were not affected when Bluewave changed its name to Mad Ltd. The company remained the same.
The financial position of the company was not sound. It was also in breach of its statutory requirements, as it had not filed its audited accounts at the Registry of Companies. There was no proof that the company had assets and by the sale of these assets, Medsea Shipping could be paid within a reasonable time, nor was there proof of its income. The court said that Mad Ltd was not in a position to pay its debts and it was justifiable and reasonable for this court to dissolve it.
As at the time of filing this lawsuit, Calì and Calcaterra had already resigned as directors and transferred their shares. The court accepted their pleas that they were not the legitimate defendants for Medsea Shipping’s first six claims and should not suffer the judicial costs in this regard.
For these reasons, on July 15, 2014, the First Hall of the Civil Court gave judgment as follows:
It declared that defendants Calì and Calcaterra were not the legitimate defendants in respect of Medsea Shipping’s first six claims and should not suffer the costs.
It declared that Mad Ltd was not in a position to pay its debts in terms of article 214(2)(a)(ii) and article 214(5) of Chapter 386, and ordered its dissolution with effect from November 20, 2012.
The court also appointed an official receiver as the liquidator of the company with all powers under law:
• To make a report to the court in terms of article 227 of Chapter 386; within three months;
• To make verification on the assets and debts of the company and the order of ranking;
• To take under its control all the assets of the company under article 237 chapter 386;
• To make and defend legal action in the name and interests of Mad Ltd;
• To report on the necessary measures to protect the assets of Mad Ltd.
• The court postponed sine die a decision on Medsea’s seventh claim; that was whether there was fraudulent trading on the part of the ex-directors of Mad Ltd. It said that this claim would be considered after Mad Ltd was liquidated in terms of Chapter 386.
Dr Karl Grech Orr who is a partner at Ganado Advocates.