The inability to pay debts test before the Maltese Courts

In its recent decision Xuereb v Weber Construction Limited Et (decided 18 March 2021) the Civil Court (Commercial Section) weighed in once more on the appropriate tests to be applied when assessing a company’s inability to pay its debts under Maltese corporate insolvency law. One of Weber Construction Limited’s (“Weber”) shareholders filed an application in court requesting the company’s dissolution and consequential winding up on the grounds inter alia that it was unable to continue to pay its debts.

Article 214(2)(a)(ii) of the Companies Act, 1995 (the “Act”) grants the court discretion to order the dissolution and winding up of a company where the company is “unable to pay its debts”. For the purpose of this provision, a company is deemed to be unable to pay its debts if (i) a debt due by the company has remained unsatisfied (in whole or in part) after 24 weeks from the enforcement of an executive act specified under Article 273 of the Code of Organisation and Civil Procedure; or (ii) it is proved to the court’s satisfaction that the company is unable to pay its debts, account being taken also of the company’s contingent and prospective liabilities.

It is only once one of the above tests is proved to the court’s satisfaction that a Maltese court may consider exercising its discretion whether to order a company’s dissolution and consequential winding up. Therefore, a clear understanding and correct application of the various insolvency tests contemplated under the Act is central to the court’s application of its discretion in this regard.

In approaching this issue, Maltese courts do, as a matter of settled practice, refer to the corresponding provisions of the UK Insolvency Act, 1986, on account of the conceptual similarity between the two legal systems where matters of corporate insolvency are concerned.Indeed, the court in Xuereb v Weber did concede that although the Maltese concept of insolvency adopted a more restrictive application than the test applied under English law, there were “overlaps” between the two tests.

Under English law, there are 2 principal tests of insolvency – the “cash flow” test (where a company is deemed to be insolvent on account of its inability to pay its debts as they fall due) and the “balance sheet” test (where a company is deemed to be insolvent in the event that its liabilities exceed its assets).

Retaining this distinction is also possible under Maltese insolvency law however, any reference to a Maltese version of the cash flow test or balance sheet test only works to the extent that the application of specific statutory requirements under the Act are akin to a “cash flow” and/or “balance sheet”-type insolvency scenario.

Our courts (including in Xuereb v Weber) have been prepared to regard the Article 214(5)(a) of the Act (requiring for a debt to remain unsatisfied, whether in whole or in part, following 24 weeks from the enforcement of an executive act) as resembling the cash-flow test under English law, affirming nonetheless that the English law requirement that a company be “unable to pay its debts as they fall due” is a far wider test than the requirements under the Maltese statutory provision.

Similarly, Article 214(5)(b) which speaks of a company’s inability to pay its debts, account being taken also of the company’s contingent and prospective liabilities, can be treated, strictly for comparative purposes, as the Maltese law conceptual counterpart to the English law “balance-sheet” insolvency test. Here again, the Maltese courts have repeatedly pointed out a significant difference between the two tests, notwithstanding the accepted conceptual similarity. Section 123(2) of the Insolvency Act 1986 prescribes similar yet not identical wording to Article 214(5)(b) of the Act and states that: “A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.”

Under the Maltese “version” of the balance-sheet test, a court’s determination would be limited to assessing a company’s ability (or lack thereof) to service its debts, account being taken also of its contingent and prospective liabilities. On the other hand, a court in England carrying out a similar determination would inquire about the value of the company’s assets compared to the amount of its liabilities (account taken also of contingent and prospective liabilities).

Statutory divergences notwithstanding, a Maltese court will invariably draw upon the body of case-law developed by the English courts in determining a potential exercise of the balance-sheet test to reach a conclusion of inability of pay debts under the Act. In Xuereb v Weber, the court looked to English jurisprudence on the treatment of “contingent and prospective liabilities” for the purpose of determining potential balance-sheet insolvency. In so doing, a Maltese court will embrace and make part of its own determination those important principles developed before the English courts on this subject, for instance, that a court is able to take into account contingent and prospective liabilities, but not contingent and prospective assets [Byblos Bank SAL v Al-Khudhairy (1986) 2 BCC99 549 (CA)].

Based on the evidence submitted, and following an analysis of the applicable jurisprudence, the court in Xuereb v Weber did express its satisfaction that the company was shown to be in a position where it was not able to pay its debts, account having been taken of its contingent and prospective liabilities.

Having ascertained a case of “balance-sheet” insolvency, the court ordered that Weber was to be dissolved, and appointed the Official Receiver as liquidator to the company to commence the winding up process.