In an ideal world, a company which would have run its course is dissolved and wound up voluntarily by its members, thereby leaving no stone unturned with respect to any debts or obligations owed to other parties. Realistically, it is common for companies to grow stagnant and non-responsive, and such a reality is primarily prejudicial to, inter alia, the creditors of said companies who receive no response to any claims they might have against them. The Companies Act (Chapter 386 of the Laws of Malta) (the “Act”) caters for these scenarios by granting authority to the Civil Court (Commercial Section) (the “Court”) to intervene and order for the dissolution and winding up of these inactive companies on the grounds listed in Article 214(2) of the Act. Whilst there are various grounds listed within said sub-article, the scope of this work shall be limited to discussing the Court’s interpretation of Article 214(2)(b)(iii) of the Act vis-à-vis inactive Overseas Companies (“OCs”) in “Ir-Registratur tal-Kumpaniji vs. X” of 4th December 2023 (the “Case”).
Background
Article 214(2)(b)(iii) of the Act states that “a company shall be dissolved by the court … the court is of the opinion that there are grounds of sufficient gravity to warrant the dissolution and consequential winding up of the company”. This provision distinguishes itself from the other grounds listed in Article 214(2) of the Act because the Act does not define the term “grounds of sufficient gravity”. The absence of said definition grants the Court ample discretion to determine what could qualify as such, depending on the circumstances at hand.
Whilst court applications based on Article 214(2)(b)(iii) filed by creditors against inactive companies have become commonplace along the years, the innovative elements which emanate from the Case are twofold. Firstly, the plaintiff who filed the application requesting the Court’s intervention on the basis of, inter alia, Article 214(2)(b)(iii), was the Registrar of Companies (the “Registrar”), as it is authorized to do so under Article 218(4) of the Act. Secondly, the defendants in this Case were twelve separate OCs who, for differing reasons, the Registrar requested for their dissolution and winding up.
Within a Maltese context, an OC can be regarded as a branch or place of business established in Malta by a company which is incorporated outside of Malta. In this regard, it is important to note that OCs do not possess separate legal personality in Malta. In fact, their corporate governance is regulated by the law of its state of incorporation. Nevertheless, the OCs are still legally recognized under Maltese law, since Articles 385 to 389 of the Act imposes registration and filing requirements on OCs with the Registrar, and failure to adhere to said requirements would result in penalties to be incurred by the defaulting OCs. Furthermore, Article 399(1) of the Act extends the Court’s powers under Article 214 to be applicable within the context of OCs as well, as it states that, “the Court may wind up the affairs in Malta of an oversea company constituted or incorporated outside Malta in any of the cases mentioned in article 214 in which it may dissolve and wind up a company formed and registered in Malta”. It is on the basis of the above article that the Registrar tabled its application, which shall be further elaborated upon below, with particular focus on one of the OCs, to be referred to as “X”.
Facts of the Case
The Registrar tabled its application before the Court on 16th May 2023, requesting the Court to order for the dissolution and winding up of twelve OCs, and to have their names struck off the Register of Companies once the affairs of these OCs were completely wound up. Within said application, the Registrar laid out separate reasons for each of the OCs as to why the Court should order for their dissolution and winding up.
In this regard, the Registrar argued that X was not operative for a number of years and will never resume its operations because of the fact that the company for which it was established had been dissolved and wound up in its jurisdiction on 17th October 2018.
Considerations of the Court
In its analysis of Article 214(2)(b)(iii), the Court recognized two elements which preside within this provision. Firstly, the Court acknowledged how, with the words “…the court is of the opinion…”, the legislator intended to grant it full discretion to determine whether the circumstances tabled before it are “of sufficient gravity” so as to order for the dissolution and winding up of the company being considered. Secondly, the Court interprets the absence of a definition for what constitutes to “grounds of sufficient gravity” in the Act as its prerogative to consider what might amount to such on a case-by-case basis, without relying on precedent or past interpretations of the term.
The Court also quoted Professor Andrew Muscat who states that “A company's substratum is the purpose or group of purposes which it is formed to achieve - in other words, its main objects. If the company has abandoned all its main objects (and not merely some of them) or if in practice it cannot achieve any of them, then its substratum has disappeared...”. With reference to such, the Court argued that it would be justifiable for it to order for the dissolution and winding up of a company on the basis of Article 214(2)(b)(iii), if the primary purpose for which a company would have been incorporated, or its substratum, no longer subsists.
Considering the above, the Court noted that X’s primary purpose was to further the business of a company incorporated in another jurisdiction within Malta. In this regard, the Court argued that if the company which X was representing, and upon which X based its existence, was dissolved and wound up in 2018, then X’s substratum no longer exists.
In light of the above, the Court was of the view that the reason tabled by the Registrar with respect to X constitutes to a ground of sufficient gravity under Article 214(2)(b)(iii) and, therefore, issued the order for X to be dissolved and wound up. Consequently, the Court ordered for the Official Receiver to be appointed as the liquidator of X and to provide it a report of the winding up process once carried out.
Following such, the Court delivered another judgement on 5th June 2024 where, following receipt of the report prepared by the Official Receiver, it confirmed that X’s affairs were wound up by the Official Receiver in adherence to the relevant provisions of the Act. Consequently, the Court relieved the Official Receiver of its duties as liquidator and ordered for X to be struck of the Register of Companies.
Disclaimer: Ganado Advocates is responsible for contributing to this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report.
This article was first published in ‘The Malta Independent’ on 25/09/2024.