The Company Registry is going on the warpath against companies that do not file their annual reports and accounts – but don’t expect any banging on drums. That is simply not Joe Caruana’s style.
He has been Registrar of Companies since 2011, and has been slowly but steadily introducing a more proactive approach, realising the importance of of paying more attention to who companies appoint as directors – especially when these have a disreputable business record – and to timely filing to enable businesses to take informed credit management decisions.
Consider the latter: in 2014, 20,000 sets of accounts were filed with the ROC. But there are around 45,000 active companies. Even when you adjust that figure for shipping companies that do not need to file accounts, it still means that around 13,000 could be in default.
But that word – ‘around’ – is important. There have been over 69,000 companies registered since the ROC was set up in 1965, and while around 1,000 are dissolved every year through ‘natural causes’, there are almost certainly others which are no longer active but have not been dissolved.
Mr Caruana admits that there might be many reasons behind the delays, and he is anxious to clean up the records to get a clearer picture of the reality.
“Statistics is perhaps not our strongest point,” he said wryly. “I am trying to tackle this, a bit at a time. We look at companies which have not filed annual returns or accounts and paid the registration fee for one or two years in a row and start the ‘defunct’ process,” he said.
This legal process involves sending a letter to the company and veri-fying that it has been received. If there are no objections, three months from the date of publication of the notice they are struck off.
“So far, 3,600 companies were declared defunct since the Companies Act came into force in 1996. We started going through the files slowly but have recently been accelerating the process. We want to avoid the carelessness prevalent with regard to the filing of accounts,” he said.
Mr Caruana would certainly like to see the process made easier for companies which choose to dissolve, as it is currently unnecessarily costly to do so – rubbing salt into the wounds of any companies going into dissolution because they are not doing well.
We look at companies which have not filed annual returns or accounts and start the ‘defunct’ process
“As it stands, shareholders have to appoint a liquidator and an auditor. I would like to change this. If it is a private company, which is solvent at the time they wish to dissolve, with no creditors or no problems settling their debts, why not allow them to get by with just a liquidator? In the UK, all they have to do is present a declaration to the registrar and they do not even need a liquidator!” he argued. The data clean-up process is a distraction from the huge workload already carried by the ROC.
Its 31 staff had to deal with the registration of over 5,200 new companies in 2014, compared with just 2,400 in 2004. The numbers have been going up sharply since 2010 and, now that it seems fairly safe to assume that the trend will continue, he is planning to add five new staff by the end of the year.
New registrations are only one aspect of the work. Just as important is their maintenance as they send notifications – such as increases in capital, changes in directors, etc. – which need to be vetted and registered as promptly as possible, tens of thousands a year.
However, the late or non-filing of accounts is something that he would also like to tackle as a priority.
“The majority of companies do file their accounts – they are usually the ones that are doing well. The ones that don’t could be going through a difficult patch, or might disagree with their auditors, or perhaps the auditor himself falls behind and misses the deadline.
“To me, this issue goes beyond the filing of accounts: it is a concern that there are still people who do not actually believe in the need to have accounts or to audit them, especially sole traders who see it as a waste of time if there are no other shareholders. We try to be pragmatic, but the law is there and there is really no excuse.
“There are also some companies which simply do not want other people to know how they are doing, whether they are doing well or doing badly,” he said with a hint of frustration creeping in.
The fines actually charged to defaulters are only a fraction of what is permissible by law. Does this send out the right zero tolerance message?
“We charge just a little over 1 per cent of the maximum allowed: €25 and then another 50c per day. Even then, people complain that the fines are too high as they accumulate so fast, especially if more than one year’s accounts are overdue. I can assure you that even at the levels that we charge the fines, they are already a deterrent.
“But if we were to apply the maxi-mum, not a single company would ever be registered! In the future we might consider changing the fines to an increasing scale depending on how long the company fails to submit its documentation.”
In an ideal world, the fact that a company does not file its accounts would be enough of a red flag for its clients to walk away – but unfortunately, there are enough cases in court to show that many businesses get bitten.
Mr Caruana knows that this is something that needs to be tightened up. Last year, the ROC issued 500 warning letters about unfiled documents and unpaid fines, and while most companies regularise their positions when they receive notification, those which ignore them get a judicial letter and are eventually taken to court.
“There are many people who drag their feet and try to avoid paying the fines for as long as they can. The problem is that enforcement drains our resources and creates even more work for us,” he said, stressing that he is more interested in improving compliance than in issuing fines to defaulters.
One way to do this is to make the system more proactive. Recent investment in IT means that the ROC will soon be able to send a reminder to companies when their returns and accounts are due. The system, currently in testing phase, will then notify them again once the deadline passes and fines start to accumulate. And after a specified time, the fine itself will be issued automatically.
“At the moment this has to be done manually,” he said. “We have no alert system, so a desk officer might not notice that a company is in default for a year or two, by which time the fine will have accumulated. If we had a way of warning them that they are in default, the company could take action sooner.
“We are now asking companies to send one or more e-mail addresses to which notifications can be sent. This information should be sent to systemsupport@rocmalta.com.mt.”
It is a concern that there are still people who do not acually believe in the need to have accounts or to audit them
Mr Caruana is adamant that the ROC is not there to punish firms. For example, there are sometimes minor – and obviously genuine – errors in documents submitted, such as typing errors, incorrect ID cards and balance sheets that do not match up. In such cases, the ROC logs them as having been received, stopping the ‘clock’ that would otherwise lead to fines for delays. However, he hopes that the advent of company service providers will improve the situation – especially for new companies.
“Now we have added an element of due diligence as the company service providers are registered with the MFSA to provide this service, including assisting in the setting up of a company, drawing up their memorandum and articles of association, providing a registered office on their behalf and often even acting as directors. They are also obliged to do due diligence on their clients, although admittedly this is mostly aimed at the prevention of money-laundering,” he said.
“I hope company service providers will go beyond setting up a company and will guide their clients with regard to their oblig-ations. Directors have huge responsibilities under the Companies Act, with regard to the health and safety of employees, payment of VAT and income tax and so on.
“We have actually drawn up a sheet which we send to all new companies which briefly outlines these issues. But I agree that some people take the decision to become a director too lightly.”
Of course, some of the companies which do not file accounts – as well as some which do – have something to hide, but Mr Caruana was clear about the duties of the ROC.
“The registrar’s obligation is to ensure that the accounts are correct and are published. It is never foolproof. If someone wants to commit fraud, they will almost always find a way. But that is for the police and the courts to handle. This was never the registrar’s role. The registration of a company is everyone’s right – although it is not there to be abused.”
The ROC has some powers which it does not – at least yet – wield as effectively as it could: disqualifying directors. It is terrifyingly easy for someone who has acted dishonestly or in bad faith to set up another company and become a director again.
The Attorney General and the ROC have the power under Article 320 of the Companies Act to ask the court to disqualify someone from being a director – for a particular length of time.
“As far as I know, no-one has ever been disqualified in Malta,” he shrugged. “The problem is that, as with any other court case, you have to have proof. And it is a very costly procedure, not one this office would undertake lightly unless there were a very good chance we would win.
“We want to make sure that companies do not get bitten by people with a history of acting in bad faith. We must find a way to do this.”
The court can disqualify a director who meets two criteria: if the person was a director of a company which became insolvent; and it is clear that his conduct makes him unfit to be involved in the management of a company.
“If we know of cases, we might consider doing something about them. I would like us to be pro-active,” he insisted.
“I did come across someone who was being appointed as a director who I knew had been convicted – and we stopped the process. We also check the lists of people who are interdicted and in such cases, we instruct the company on how to proceed. This would apply to people convicted of fraud, theft, crimes affecting public trust or receiving stolen goods. But if they appeal, then you have to wait until that process has been exhausted,” he said, adding that very few people who were convicted would actually attempt to become directors again.
Once again, Mr Caruana’s sense of fair play was evident: “I feel that the clauses are rather harsh as there is no time limit associated with this. For example, if you had someone found guilty of stealing a car stereo when he was a teen, it means he will never be able to become a director, no matter how much he reforms. Perhaps here it should depend on the gravity of the crime, as it is in the UK.”
The IT project will help to tighten up the system. For example, it could cross-check the proposed director with his other involvements, and if he is also a director of other companies which are behind with the filing of their accounts, the ROC will suspend the registration of the new company until the position has been regularised.
“You have to prioritise. The workload is considerable with some 30 new company registrations a day. But the most important thing is that the word will spread and companies will realise that we mean business.”