The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, on April 28, 2016, in the case Ballut Blocks Services Limited v FGS Construction Limited, held among other things that, according to article 214(2)(b)(iii) of the Companies Act, the court had to dissolve a company if, in its opinion, there existed grave reasons to justify its dissolution and liquidation. While the court was given wide discretion to determine whether there existed serious and grave reasons, if there were such justification, it was obliged to order the dissolution and liquidation of a company.

FGS Construction Limited owed Ballut Blocks Services Limited €107,173.03 together with legal interests. Ballut Blocks said that FGS Construction was unable to pay its debts and that it was insolvent in terms of article 214(2)(a)(ii) and article 214(5)(a) Companies Act.

Faced with this situation, Ballut Blocks proceeded to file legal proceedings requesting the court:

• To dissolve FGS Construction Ltd on the basis of serious and grave reasons;

• To declare that it was unable to pay its debts;

• To appoint a provisional administrator to administer the affairs of the company;

• To order its dissolution and liquidation in terms of article 214(2)(a)(ii) or under article 214(2)(b)(iii) of chapter 386; and to give such orders to appoint a liquidator and that dissolution of FGS Construction be effected in accordance with the Companies Act.

Ballut Blocks proved its claim and showed that FGS Construction had a long list of unpaid creditors, having significant debts.

Article 214(2)(a)(ii) and article 214(5) of the Companies Act provide that, for the purposes of subarticle (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 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.”

Under article 214(2)(a)(ii), Maltese law gives the courts wide discretion to dissolve a company, if a company is unable, to pay its debts.

Maltese law states precisely when a company was deemed to be unable to pay its debts (article 214(5)).

English law was wider. The concept of insolvency under Maltese law was more restricted than under English law, though there were overlaps.

According to the book Boyle & Birds’ Company Law, “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)...

“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...

Maltese law did not define ‘sufficient grave reasons’. So the court had to consider not only the events that took place until the presentation of the lawsuit but also anything that occurred even after, until it gave its decision

“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 judgment... 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...”

According to article 214(2)(b)(iii) of the Companies Act, the court had to dissolve a company if, in its opinion, there existed grave reasons to justify its dissolution and liquidation. While the court was given wide discretion to determine whether there existed serious and grave reasons, if there was such justification, it was obliged to order the dissolution and liquidation of a company.

Maltese law did not define ‘sufficient grave reasons’. So the court had to consider not only the events that took place until the presentation of the lawsuit, but also anything that occurred even after – until the time it gave its decision.

It said that English law and case law was a good reference guide to determine what was just and equitable for the purposes of winding up, which could assist the court to decide whether there was a ‘grave and serious reason’.

There was no doubt, pointed out the court, that the defendant company was not in a position to pay its debts. It was not acceptable for it to continue to accumulate more debt, which it could not pay. The court had no proof of its assets and whether these assets could be sold to settle its debts within a reasonable short time.

The court had no proof of the defendant company’s income or whether it had not paid its creditors owing to temporary lack of liquidity.

It resulted that FGS Construction had failed to pay its debts; that it was not in a position to pay its debts and that it was justified and reasonable for this court to dissolve the company. There were serious reasons in the circumstances to dissolve the company and that the grounds mentioned in Article 2142)(b)(iii) were amply proven, maintained the court.

For these reasons, on April 28, 2016, the First Hall of the Civil Court ordered the dissolute of FGS Construction Ltd. In terms of article 214(2)(a)(ii), and article 214(2)(b)(iii) of the Companies Act, on grounds that there existed grave reasons to justify its dissolution.

It appointed the official receiver as the liquidator having all powers and rights under chapter 386. The liquidator was tasked:

• To report on the assets and debts of the company including a ranking of creditors’ list;

• To take under his control and custody all the assets of the defendant company;

• To defend and or sue on behalf of the defendant company;

• To recommend any necessary measures to safeguard the remaining assets of the defendant company; and

• To present his report by not later than July 29, 2016.

Dr Grech Orr is a partnerat Ganado Advocates.