Navigating the Dissolution of Inactive Companies in Malta

25 April 2024

A recently issued judgment by the First Hall Civil Court in Malta has resonated through the legal landscape governing defunct companies. This landmark decision carries substantial implications for stakeholders seeking to recover assets from entities delisted from the Malta Business Registry.

This article delves into the transformative potential of this ruling, illuminating its impact on the legal framework surrounding inactive companies and the critical process of asset recovery.

Understanding Defunct Companies

The concept of “defunct companies” plays a crucial role in managing the fate of inactive entities within the Maltese legal framework. As outlined in Article 325(1) of the Companies Act, a defunct company signifies an entity that has ceased both business operations and functionality. Such situations frequently arise when directors resign, leaving the company in a state of abandonment and disrepair.

Recognising the growing prevalence of such scenarios, the early 2000s saw the introduction of the “defunct companies” concept. This empowered the Malta Business Registry (MBR) to remove these entities from the official Register of Companies through a defined process. This process begins with inquiries regarding the company’s operational status, followed by confirmations of dormancy and a mandatory three- month waiting period before final strike-off.

While strike-off signifies the formal decommissioning of the company, it is crucial to note that the liabilities of directors, officers, and members remain in effect. However, a critical aspect of this process arises upon strike-off: Article 325(2) dictates the automatic transfer of all company assets to the Government of Malta. This provision, as we will delve into further, has generated considerable controversy and legal challenges.

Current Legislative Measures

Article 325(2) of the Maltese Companies Act has ignited significant debate concerning the fate of assets belonging to companies delisted due to inactivity. This provision mandates the automatic transfer of such assets to the Government of Malta, raising concerns about transparency, fairness, and potential infringement of stakeholder rights.

Critics strongly object to the lack of transparency surrounding the strike-off process and asset transfer under Article 325(2). They argue that it operates in a shroud of secrecy, leaving stakeholders, particularly shareholders and creditors, unaware of potential losses until it’s too late. This lack of knowledge effectively strips them of their investments and extinguishes any possibility of recovering their rightful claims.

While sub-article 4 presumably offers a conciliatory solution by granting aggrieved parties the right to petition for company revival within five years of the strike-off notice, its effectiveness is hampered by two substantial limitations. The relatively short timeframe creates a significant hurdle, especially considering the potential lack of awareness about the strike-off itself. Stakeholders may simply be unaware of the action taken against the company, leaving them with insufficient time to exercise their rights. Secondly, critics argue that the current procedure creates an uneven playing field. Legitimate claims to company assets are essentially forfeited and transferred to the government, often leaving stakeholders with no recourse. This imbalance raises concerns about fairness and justice, particularly when considering the potentially substantial value of the assets involved.

Analysis of the Carmel Cortis et vs L-Onor Prim Ministru et Judgment

In Carmel Cortis et vs L-Onor Prim Ministru et, a pivotal legal challenge arose regarding Article 325(2). The Company claimed the provision violated their human rights to property and effective remedy. Strikingly, the court agreed, calling the article “draconian” due to its inherent imbalance: stakeholders potentially lose their assets, while the government inherits associated liabilities. This landmark decision deemed Article 325(2) a form of “de facto expropriation,” prompting the company’s reinstatement and setting a precedent for future challenges. Notably, the ruling potentially opens a pathway for recovering previously lost assets in similar cases.

The Evolving Legislative Landscape

The court’s verdict highlights the compelling need for legislative action to address systemic inadequacies within the current framework, where equitable protection for both companies and their stakeholders is lacking. Prompt legislative reforms are imperative to prevent future inequities and ensure fair outcomes for all parties involved.

The pending appeal creates an uncertain legal landscape for corporate governance and asset recovery. Stakeholders in these domains must remain vigilant and attuned to potential legislative adjustments arising from this precedent-setting decision.

How we can help

At AE Legal, our experienced team of lawyers are ready to ensure that your rights are protected. We recognise the potential difficulties arising from companies being compulsorily struck off the Register. If you are a member, creditor, or other party negatively impacted by such an action, do not hesitate to reach out to us at info@ae.com.mt.

Key Contacts

Kris Scicluna Director, AE Business Advisors

Kris Scicluna

kscicluna@ae.com.mt

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