Insolvency Reform

Malta implements and transposes Directive (EU) 2019/1023 of 20 June 2019

| 20 Jul 2023

Insolvency Reform Img

Following the introduction of Directive (EU) 2019/1023 on preventive restructuring frameworks, on the discharge of debt and disqualifications, in December of 2022 the Maltese Parliament enacted three Acts which will substantially revolutionize the current Maltese legislation regulating processes of insolvency in Malta. The main objective behind the legislative reform is to provide early-warning mechanisms and tools which businesses may resort to when experiencing financial distress. The amendments to the Commercial Code introduced changes in terminology and the 'Pre-Insolvency Act' to strengthen the existing legal framework on insolvency in Malta and discharge of debt. The Insolvency Practitioners' Act aims to strengthen the efficiency and of the existing legislative framework relating to insolvency in Malta through the regulation of activities of insolvency practitioners. 

Early Warning Mechanisms

The new legislation on Early Warning Tools and Crisis Prevention, aims to provide for preventative tools and more specifically crisis prevention mechanisms to pro-actively address potential situations of insolvency in Malta. This new legal framework will bestow upon officials of a company a greater duty to monitor any such alerts made, and the Malta Business Registry (“MBR”), as the competent authority overseeing the implementation of Early-Warning mechanisms, will be responsible to develop and maintain up-to-date information about the availability of early-warning mechanisms. These mechanisms include the introduction of a self-help portal, an online register of insolvency practitioners and dedicated advisory services for debtors. 

Preventative Restructuring Procedures

The reform of the Insolvency Framework through the Pre-Insolvency Act introduced preventive restructuring procedures to maximize value for stakeholders. These procedures provide temporary protection to the debtor until a concrete restructuring plan is agreed upon. An insolvency practitioner is appointed to guide the debtor and oversee the procedure while providing any necessary assistance. 

The Pre-Insolvency Act names three distinct types of Preventative Restructuring Procedures: the Standard Procedure, the Pre-Formulated Procedure, and the Pre-Approved Procedure. The Standard Procedure is used when a detailed restructuring plan is unavailable, and is triggered through the debtor or alerted by the creditor or employees' representative. It provides for a four-month timeframe, and a creditor ranking process followed by an evaluation of the businesses' assets. The restructuring plan is submitted for a creditors’ vote, and if approved by the creditors, the court must give its approval for the cram-down dissenting creditors. The Pre-Formulated Plan Procedure and the Pre-Approved Procedure are similar recovery plan procedures that are adopted when a recovery plan is in place or when the business has a more finalized business plan approved by the creditors. The difference in the three procedures lies in the duration of the recovery procedure. The act requires the plan to be presented for implementation at a meeting between the affected parties, called upon by the insolvency practitioner. 

Furthermore, the Insolvency Reform provides debtors with contractual protection in relation to contracts entered into with counterparties. Officials of the debtor, in consultation with an Insolvency Practitioner, will be able to evaluate the possibility of terminating or re-negotiating any contracts of which performance has not been concluded. Ultimately, if no mutual agreement is reached with a counterparty, the debtor shall be in a position to unilaterally terminate such contract subject to compensation for losses incurred. The previously established mechanisms failed to provide adequate protection for dissenting creditors, and therefore the updated insolvency framework aims to provide extensive safeguards for dissenting creditors from the very initial phases of the procedure. Additionally, any interim financing acquired during a Preventative Restructuring Procedure shall not be declared voidable or unenforceable, and the grantors of such financing shall not be liable for civil, administrative, or criminal liability in any subsequent insolvency proceedings. The Pre-Insolvency act sets forth the principle that all creditors shall be affected parties to a preventative restructuring plan. Creditor claims are organized into 5 classes: secured claims, unsecured claims, claims for the payment of wages, subordinate claims, and claims related to shares, equity or ownership rights. 

The Pre-Insolvency Act provides for cross-class cram-down, judicial approval and imposition of a restructuring plan over one or several dissenting creditors. The plan must be satisfactory of the foregoing conditions: 

  1. sufficiently in the best interest of creditors,
  2. no class of creditors shall receive an economic value exceeding the full amount of the claims, and
  3. any dissenting class of affected parties' claims must be handled at least as favorably as those of the majority.

Once the debtor is put under a standard preventative restructuring procedure by the Court, the enforcement of any financial claims made against the debtor shall be suspended for a period of four months, except where any claims of debt are brought forward by employees.

Protection of Interim Financing 

The Pre-Insolvency Act stipulates that in the event of any subsequent insolvency proceedings concerning the debtor, any temporary financing obtained by the debtor, forming part of a restructuring plan or otherwise, shall be given protection and be considered as an enforceable claim rather than declared as void, voidable or unenforceable. The financial assistance provided by grantors of such interim financing is protected from any legal disputes alleging that such aid is detrimental to the debtor's creditors, and any interim financing shall not serve as a basis for any claim or allegation of wrongful trading or fraudulent preference.

Discharge of Debts

The amendments to the Commercial Code introduce a new test to assist in procedures declaring bankruptcy, known as the 'Cash Flow Test'. This test is identical to the 'cash flow test' as established under English law, and can be used to declare bankruptcy if it is satisfied that an executive title has remained unsettled after a period of 24 weeks. This test would not apply to those insolvent debtors and bankrupts who have been declared fraudulent bankrupts. The new law establishes the rights and obligations of a Bankruptcy Trustee (“Trustee”), such as allowing a bankrupt trader to receive minimum wage, retain the use and possession of one's residential home and allow the use of certain property. The Trustee is also required to draw up an inventory of the bankruptcy estate, make a list of the bankrupt's creditors and conclude a debt register. The Bankruptcy Resolution Board (MBR) will then call a meeting where the bankrupt's attendance is mandatory. The Trustee will lead a meeting to discuss the terms of a debt agreement and an income payment agreement. If the bankrupt is a legal entity, all its debts will be automatically discharged and the bankrupt will be removed from any relevant register. However, the following forms of debts shall not be dischargeable: fines, civil debts, wages, fraudulent or wrongful trading, and maintenance obligations. Other types of debts may be considered by the court to be discharged depending on the circumstances of the case.

The Malta Insolvency Practitioners’ Act

The Malta Insolvency Practitioners Act introduces a new role in insolvency proceedings, this being the Insolvency Practitioner. The said Act establishes clear eligibility requirements for both natural persons as well as registered firms seeking to act as Insolvency Practitioners, which appointment requires the approval of the competent authority. The Act also introduces rigorous sanctions to ensure compliance with the guidelines set in place to uphold the necessary standard of diligence and responsibility, which sanctions may vary from a fine to imprisonment. An Insolvency Practitioner that breaches one's professional duties shall be subject to cancellation or revocation of the authorization granted by the competent authority.

How will the new laws help Maltese Companies?

This new Insolvency Reform aims to pro-actively provide struggling entrepreneurs with a lifeline, allowing them to control their own assets and the day-to-day operation of their businesses. Companies will have access to a time-limited "breathing space" from enforcement actions of no more than four months, renewable until a maximum duration of 12 months. This will facilitate negotiations and reduce the length of procedures, but also provide further legal certainty for creditors. 

Request More Information

Please send me legal and other updates

Key Contacts

Dr Priscilla Mifsud Parker

Senior Partner, Corporate, Tax & Immigration

+356 22056122

Dr Charlene Mifsud

Partner, Corporate & Commercial

+356 2205 6298

Related Industry Groups