The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon on March 17, 2016, in the case ‘Panta Contracting Ltd v DA Holdings Ltd and others’, held, among other things, that an unpaid creditor had the option of applying for the dissolution and winding up of its debtor under the Companies Act.

The company Panta Contracting Ltd filed an application before the First Hall of the Civil Court in terms of article 214 chapter 386 of the Laws of Malta, requesting the dissolution of DA Holdings Ltd.

It claimed that it was owed €1,501,113, which was left unpaid for over one year as DA Holdings Ltd was unable to pay this amount which was due in consideration for electrical and mechanical works in respect of the company’s Daniels Shopping Complex in Ħamrun. After June 22, 2012, it said that it received no further payments.

Panta Contracting Ltd maintained that DA Holdings was in a state of insolvency and that its directors were aware or should have known of its poor financial condition.

Panta Contracting Ltd said it could not accept further delays in payment. It alleged that the directors of DA Holdings Ltd had a personal interest to keep the company in existence in order to be paid their salaries.

Faced with this situation, Panta Contracting Ltd filed legal proceedings requesting the court:

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

• To declare that DA Holdings Ltd could not pay its debts in terms of article 214(2)(a)(ii) and article 214(5);

• To order the dissolution and winding up of DA Holdings and to appoint a liquidator in terms of the Companies Act.

The company, in reply, contested the amount claimed by Panta Contracting Ltd, and said that the amount was not certain, liquid and due. It claimed that this case was frivolous and vexatious, as Panta Contracting Ltd did not enjoy an executive title nor was it insolvent.

It said that the value of its assets exceeded its liabilities, which could be settled by the sale of some of its apartments.

Nor was there any need for a provisional administrator once it was being managed by its directors in the best interests of the company and its creditors. Allegedly it had to delay payments, as its bank was involved in a takeover.

DA Holdings Ltd added that Panta Contracting Ltd filed this case in order to apply pressure to obtain payment before other creditors, even before other secured creditors.

The court considered that DA Holdings had several creditors. Panta Contracting Ltd was owed €1,500,113. Mediterranean Corporate Bank, €11,084,522 and interests from October 31, 2015, Xuereb Installations €77,751, with interests; Herba Ltd, €1,451,649; architect Edwin Mintoff €233,478 and €100,000 for plaster.

The court noted that Panta Contracting Ltd had locus standi as a creditor to file this case. Under article 214(2)(a)(ii), the law gave the court discretion to dissolve the company if it was not in a position to pay its debts. This provision had to be read in conjunction with article 214(5) of the Companies Act which provides:

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 settle its debts, account being taken also of contingent and prospective liabilities of the company.

Malta’s concept of insolvency is more restricted than under English law although there were overlaps, re: Boyle & Birds’ Company Law (published by Jordans) pg859 where it was stated:

“There are two principles, 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 company could not generate enough revenue to pay its creditors

The court noted the difference with English law.

According to the legal referee, the company was solvent in the light of its balance sheet; but the only way creditors could be paid was for its property to be sold or for fresh capital to be injected or for it to be liquidated.

The company was in financial difficulties and its revenue was only sufficient to meet its recurrent expenses of water, electricity and insurance. On this point the court said that there was no doubt that the company was unable to pay its debts.

In addition, as a result of its non-payment, certain debts, such as bank loans, matured (in total €14,112,384).

In 2012, the assets of the company were revalued by €20,754,704. However, the auditors were unable to complete the accounts of the company for subsequent years as there was uncertainty on the value of its property.

As the company could not pay its debts other than by selling its property, it was clearly not in a position to pay its debts in terms of article 214(2)(ii) and (5)(b) of chapter 386, pointed out the court.

It was not acceptable for creditors to be placed in a situation where they had to wait for the company to be liquidated, or for its assets to be sold.

Reference was made to the court decision dated May 28, 2003; re: ‘Axel John International AB v Aluminium Extrusions Ltd’.

It was also proven that DA Holdings Ltd had defaulted on repayment of its bank loans. Besides, if the company sold its assets, there was no longer any purpose for its existence. It was evident, pointed out the court, that the company ceased paying its principal creditors in connection with the construction of the project.

The company did not manage to grow its business and increase its revenue, and in this respect the court felt that the requisites of article 214(5)(b) and article 214(2)(a)(ii) of chapter 386 were satisfied.

Reference was made to Boyle & Birds’ Company Law:

“Unpaid creditors of a company may consider commencing 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 tha a claim that may not 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 (Fidelis Oditah Winding Up Recalcitrant Debtors 1995 LMCLQ 107).

“Since winding up is a collective procedure for the benefit of creditors generally, one situation where the court may exercise its discretion against winding up is where other creditors in the same class oppose the making of the order.

“In this regard the court will usually have regard to the majority of the creditors and will refuse the petition if it is opposed by the majority.”

The court said that the company arrived at a point of no return. The company could not generate enough revenue to pay its creditors, and even by the sale of its assets, it was not certain that there would be sufficient proceeds to pay all creditors. Its dissolution was therefore inevitable.

For these reasons, on March 17, 2016, the First Hall of the Civil Court gave judgment. It declared that the company DA Holdings Ltd was unable to pay its debts in terms of article 214(5)(b) of chapter 386. It ordered its dissolution with effect from June 5, 2014 (article 223(1)).

It appointed a liquidator with powers under the Companies Act:

• To verify the assets and debts of the company, as well as the ranking of creditors.

• To take custody of all its assets.

• To sue or defend any legal action in the name of the company.

• To file a report by June 16, 2016, and state what necessary measures should be taken to protect the assets of the company.

All expenses were to be borne by DA Holdings Ltd.

Dr Karl Grech Orr is a partner at Ganado Adovates.