An analysis of corporate failure and related weaknesses in the Maltese scenario

Abstract

Purpose: In light of various corporate failures which have taken place in Malta, the study aimed at gaining a better understanding of the main shortcomings found within the local scenario which might jeopardise the going concern prospects of Maltese companies. The dissertation also tested the reliability of the Altman Z-score as a failure prediction model and its usefulness to local professionals in assessing the future prospects of companies. Moreover, the study also analysed the robustness of selected provisions found in the Maltese Companies Act of 1995. Design: To tackle the objectives of the dissertation, a combination of both quantitative and qualitative research methods were used. Quantitative research consisted of the calculation of the Altman Z-score and selected traditional financial ratios based on the information extracted from the financial statements of the well-known local corporate failure of Price Club Operations, which case was used throughout the study as a real case scenario. Qualitative research consisted of documentary research of both existing literature on the subject matter and an in-depth analysis of the court proceedings of Price Club Operations. Information gathered from such research was used to formulate a set of open-ended questions asked during the interviews which were conducted with various local professionals, these mainly being lawyers, auditors, accountants, credit associations and creditors of Price Club Operations. Findings: Findings suggested that most weaknesses which contribute to corporate failure are all attributable to human action primarily as a result of bad and incompetent management. The study also underlined that local professionals have a lack of knowledge about failure prediction models and rely mostly on traditional financial ratios to assess the financial health of companies. Based on the data collected, interviewees highlighted that provisions dealing with the regulation of directors, the filing of financial statements at the Registrar of Companies and the minimum capital requirements are not adequate and need to be amended. Conclusions: The study calls for more education and awareness amongst local businessmen with respect to practices such as credit management, better use of financial statements, more importance being given to financial and succession planning and increased reliance on professional input. With regards to the robustness of selected legal provisions, if the aforementioned amendments take place, coupled with more efficient court proceedings this would help ensure that the benefits underlying such legal provisions would actually be yielded in practice. Value: Given that Malta is a small economy, whenever a corporate failure takes place; many parties are hit by the adverse repercussions brought about by such an event. Thus the conclusions and recommendations emanating from this study could help tackle the issues which are found present in the local scenario which if not addressed and managed, may result in further corporate failures taking place within the local scenario.