Evaluating the effectiveness of the wrongful trading suspension in Malta as a response to COVID-19 : a comparative approach

Abstract

Background: Ordinarily, directors may be held personally liable to contribute to a company’s assets if, at some point prior to its dissolution, they knew or ought to have known that there was no reasonable prospect that the company would avoid being dissolved due to insolvency, and they failed to take every step they ought to have taken to minimise the potential loss to the creditors. Enshrined in Article 316 of the Companies Act, the wrongful trading provision therefore aims to deter directors from prolonging trading when insolvency is inevitable and thus creates an incentive to file for the company’s dissolution and consequential winding up. Yet, during the pandemic, this is precisely what the government did not want directors to do. With many companies unable to meet their short-term obligations or to withstand prolonged periods of disruption, directors were faced with a difficult dilemma: either to continue trading and risk incurring personal liability under wrongful trading, or to prematurely dissolve their otherwise viable companies (i.e., those considered as a going concern under ordinary market conditions). Fearing an unexpected wave of economically damaging insolvencies, the Maltese legislator introduced the Companies Act (Suspension of Filing for Dissolution and Winding Up) Regulations, which inter alia suspended the applicability of Article 316 of the Companies Act. Directors who no longer had to fear incurring liability under wrongful trading, the suspension implied, would feel freer to keep their companies alive and ‘wait out’ the pandemic. However, wrongful trading is not the only possible source of liability for directors of companies that are tiptoeing the line of insolvency. Indeed, throughout the pandemic, directors were still liable for fraudulent trading under Article 315, the remedy against delinquent directors under Article 312, their duty to convene a general meeting under Article 329A, together with their fiduciary duty to act honestly and in good faith in the best interests of the company under Article 136A. Aim: This research evaluates the effectiveness of Malta’s wrongful trading suspension under Regulation 5 of the Companies Act (Suspension of Filing for Dissolution and Winding Up) Regulations and assesses whether the regulation provided directors with adequate protection to prevent premature insolvency filings during the COVID-19 pandemic. By comparing similar measures adopted in the United Kingdom and Australia, the study aims to identify strengths and shortcomings in Malta’s approach and offers key recommendations for legislative action, should the legislator consider re-invoking Regulation 5 in response to future economic crises. Method: A doctrinal analysis has been adopted throughout the research to examine primary legal sources, including statutes, regulations, case law, and parliamentary debates concerning the temporary suspension of the wrongful (or insolvent) trading provision in Malta, the United Kingdom, and Australia. Secondary sources, such as academic commentary, legal publications, and judicial interpretations, are also utilised to support the research’s analysis and its findings. Conclusion: This research has concluded that the temporary suspension of the wrongful trading provision under Legal Notice 373 of 2020 provided directors in Malta with minimal protection during COVID-19. It was limited in its reach, the test of causation was thin, and the suspension lacked juridical assistance. Comparatively, the UK and Australia had greater, more integrated, legislative responses that offered specific protections from both policy makers and courts of law. The Maltese suspension could not eliminate legal uncertainty or encourage the perseverance of business enterprises. New laws in the future should consider a proactive, more holistic approach that includes safe harbour considerations and interpretive guidance, to protect the directors in time of economic turmoil without abandoning creditor protections.