Alternative procedures for companies in financial distress

Abstract

Companies may face financial difficulties at some point, which may even lead to termination of business. This may be warranted in certain cases, as it leads to a reallocation of resources towards more productive use. However, it may be possible for companies to tackle their problems and recover from financial distress, safeguarding output capacity and jobs. Suitable legislation can assist such companies, which, although experiencing financial distress, have the necessary drive and reasonable prospects to attempt a recovery. Recent amendments to the Companies Act 1995 are to be seen in this perspective. However, the fact that no recourse to amended legislation has been made to date, suggests there may be need for further improvements so as to contain the risk of early liquidation due to co-ordination problems among creditors. The objective of the thesis is to evaluate current insolvency legislation in Malta, in order to identify possible deficiencies and make proposals for reform. The thesis describes the factors, which may exert pressure on companies' profitability and cash flow. The various stakeholders' interests and possible courses of action available in these circumstances are then discussed. The thesis also considers the desirable features in the area of insolvency legislation and puts proposals for legal reform, including the introduction of a definition of financial distress and amendments to encourage early recovery attempts. The aim is to provide a more predictable legal framework that clarifies the rights, duties and options of all stakeholders. The proposals attempt to strike the right balance between the protection of stakeholders on the one hand and offering companies sufficient leeway to resolve temporary financial problems on the other. Carefully planned reforms, which can be pushed forward by constituted bodies, implemented during normal times, rather than during crises, may provide lasting benefits, less destabilising effects, and ensure that all stakeholders' interests are properly evaluated and that the burden of adjustment does not fall onto a single category.