Financial implications of a corporate rescue regime

Abstract

Purpose : The purpose of this study is to review the main causes of financial distress and to analyse the Maltese corporate rescue culture. This study also seeks to critically assess the effectiveness of the corporate remedies currently available under Maltese law and to identify any other financial options or remedies which can help rescue distressed companies. Design: In pursuit of these objectives, semi-­structured interviews were carried out with independent lawyers and financial consultants, typically involved in advising financially distressed companies on the various options that they may opt for, regarding the financial implications of a corporate rescue. Findings: Malta is at the forefront in many commercial respects, however, evidence shows that corporate rescue is simply not one of them. Internally-­driven causes of financial distress were found to be the most predominant in Malta as the majority of Maltese managers and directors do not have the necessary experience and knowledge that is needed to run a business, possibly since a significant number of local businesses are family-­owned. When compared to Maltese formal restructuring methods, it was concluded that informal arrangements offer a more viable alternative, except in situations where there is fragmentation of credit, since negotiations are deemed to be too difficult to achieve. The findings show that many strongly believe that the system currently available in Malta is not adequate and the law lacks clarity as to the possibility of obtaining new financing during the course of a recovery procedure. It was highlighted that Pre-­Pack Administration could possibly be an option for distressed companies, as it addresses the issue of funding. This is due to the fact that the burden of financing the rescue would shift to the buyer after the sale of the company. Conclusion : Overall, it is clear that in Malta, there is still a big disconnect between what is theoretically available in terms of law and what can be achieved, which proves to be a big issue. In reality, there have not been too many corporate failures in Malta and it is often the case that family step in to provide the necessary support. However, Malta is becoming more popular as a business jurisdiction, and its financial markets are becoming increasingly sophisticated. Despite the recent amendments dictated by the need to implement certain developments at EU level, it is concluded that there is still much room for improvement. Through this study it is evident that a comprehensive review of the existing laws and experiences derived so far is necessary. Implications This study is the first to present Maltese insolvency practitioners’ opinion on the Maltese corporate rescue regime and should mark a significant step forward in the assessment of the current situation under Maltese Law, as well as current financial regulations. It will also offer an in-­depth insight for the financial services sector.