The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit Mc Keon, on February 26, 2015, in the case ‘Jane Mizzi v JAJ Company Ltd’ held, among other things, that a shareholder was entitled to apply for the dissolution of a company if he could prove that the company was unable to pay its debts within the meaning of our article 214 (5) (a) and (b) of the Companies Act.
Jane Mizzi, as shareholder of JAJ Company Ltd, filed legal proceedings under article 214(2)(a)(ii) of the Companies Act requesting its dissolution on grounds of its insolvency.
The company had been managed by her husband, Alfred Mizzi who died tragically on May 26, 2011. After his death, she discovered that the company had substantial debts, in well excess of its assets. The company ceased operating and had no employees.
The company was unable to pay its debts under article 214(5)(a) and (b) of the Companies Act. For this reason, Jane Mizzi asked the court:
i. to declare that the company was not in a position to pay its debts from the beginning of 2011; and
ii. to order its dissolution in terms of Article 214(2)(a)(ii) Companies Act (its inability to pay its debts) , and to make provision for the appointment of a liquidator under the Companies Act.
It resulted that the company’s financial position was dire. It had been without any director for over three years, its last director having resigned on October 3, 2011. It had no company secretary and had debts of over €700,000.
Executive warrants had been served against the company by the tax authorities and by its former employee Nicholas Agius. The last annual accounts filed at the Registry of Companies were for the year ending December 31, 2007. Its accounts for 2008 had been prepared but had never been filed at the Registry of Companies. On the death of Alfred Mizzi, there was no hope that the company would be revived.
The court noted that the company had three shareholders: Alfred and Jane Mizzi and Jonathan Mizzi.
The court considered that Jane, as shareholder, was entitled to present this application, under article 218 of Chapter 386. The court had the discretion to order the dissolution of the company, if it was unable to pay its debts.
The court said that under our law the fact that a company was unable to pay its debts had a precise meaning. The position was wider under English law. The concept of insolvency under our law was more restrictive than under English law, though there were overlaps.
Boyle & Birds’ Company Law (8th edition) on page 859 states:
“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) established when according to law a company was to be deemed to be unable to pay its debts:
Whether a company is cash flow insolvent is principally a question of fact and one which may be established in any number of ways
• If a debt was unpaid after 24 weeks from the execution of an executive title against the company by one of the executive warrants mentioned in article 273 of Chapter 12; or
• If it was proven to the satisfaction of the court that a company could not pay its debts in view of its assets and liabilities.
Our law in a more restricted way resembled the English concept of cash flow insolvency. Under English law the concept was more generic, a company was insolvent if it was unable to pay its debts as they fell due.
Boyle & Birds’ Company Law states:
“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.”
In Insolvency Law – Corporate and Personal, Andrew Keay and Peter Walton say:
“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 outweigh 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, which 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.
In ‘Axel John International AB v Aluminium Extrusions Ltd’ dated May 28, 2003, it was held that this conclusion could be verified by way of balance sheets to determine whether its assets were less than its liabilities. It was not sufficient if a company could only pay its debts by the sale of its assets over a long period of time. There was no reason why creditors should wait until a company sold its assets in the hope of obtaining payment.
In Principles of Corporate Insolvency Law – Fourth Edition 2011, Roy Goode states:
“The excess of liabilities over assets is not in itself determinative. What has to be shown is that by reason of the deficiency of its assets the company has reached the point of no return.
“To give the phrase ‘contingent liability’ any meaning we must restrict it to a liability or other loss which arises out of an existing legal obligation or state of affairs but which is dependent on the happening of an event which may or may not occur. Many of the cases have stressed the need for the liability to arise out of an existing obligation.
“Prospective liability included also future debts.”
The court felt that it had been proven that the company was unable to pay its debts under article 214(5)(b) of Chapter 386.
Boyle & Birds’ Company Law – 8th Edition – 2011 states:
“Unpaid creditors of a company may consider commenting winding-up proceedings against the company as an alternative to suing for payment. As a debt collection mechanism, winding up proceedings may be swifter and for the individual creditor, less expensive than a claim that may come to trial for some time: on the other hand, winding up is a collective procedure for the benefit of creditors generally and it does not benefit specific creditors individually (F. Oditah, Winding Up Recalcitrant Debtors (1995)”.
The court had discretion to decide whether to give an order for the dissolution of a company (Palmer’s Company Law, Edition 25).
The court considered that the company had stopped operations more than three years ago, which was a long time in business. The company only accumulated debts, and its shareholders appeared to have given up on the company.
In this respect its dissolution and liquidation was inevitable, pointed out the court.
On February 26, 2015, the First Hall of the Civil Court gave judgment by declaring that article 214(2)(2)(a)(ii) and article 214(5)(a) and (b) Chapter 386 had been proven. It ordered the dissolution of the company with effect from December 7, 2012, according to article 223(1) of Chapter 386. Michelle Spiteri Bailey was appointed liquidator with all powers and duties under chapter 386.
The liquidator had to draw a report for the court in terms of article 227 of Chapter 386 by not later than May 19, 2015, to verify the ranking of creditors; to take control and custody if necessary of its assets per article 237 of Chapter 386; and to file and defend legal proceedings in the name of and in the interest of the company.
Dr Karl Grech Orr is apartner at Ganado Advocates.