Few entrepreneurs can ever forget the grave consequences of the insolvency of Priceclub in 2001. This was a major shopping complex operating in Malta enjoying an overwhelming share of the domestic market for foodstuff trade with a reported €35 million turnover.
Its financial tragedy was marred by stories in the media of an undercapitalised group of companies which albeit profitable, was grossly over-trading. No proper stock-taking functions were discovered to be in place after PWC was appointed by unpaid creditors to investigate the transactions and unravel any wrongful trading practice. The brief also included inspecting records to check on the reporting obligations of the group.
PWC found inter alia that poor inventory controls were rife, while millions were siphoned by directors to finance side property deals. The business disruption of such a major group left hundreds of unpaid creditors, many discharged workers and the initiation of court cases by suppliers that went penniless. Court cases took 20 years and cost a lot leaving dissatisfied suppliers chasing for redress against allegations of wrongful trading by the directors and the quality of reporting by the auditors.
The auditors, Deloitte, have since been ordered by the court to pay nearly €42,000 to former Priceclub suppliers Valle Del Miele (VDM) after losing an appeal it had filed against a judgment which had found it to have been negligent. Luckily, there has been thus far no-repeat incidences of the Priceclub collapse since 2001 but other insolvencies have occurred which did not make the headlines but with caused much damage to the economy.
This resilience is perhaps due to a diversification of the consumer market sector into well-organised shopping malls which compete for trade offering competitive prices and efficient service. Yet the Maltese economy does not appear to be immune to insolvencies, more so now that COVID-19 is causing vulnerabilities to come to light even though many governments have gone in debt to try and salvage certain sectors devastated by lockdowns. A quick return to normality was promised by many governments, which initially believed the pandemic would only last a few months. In reality, with the stronger second wave of the pandemic, commerce took a nose dive.
In Malta, statistics show how almost one half of the working population (barring state employees) are barely surviving on a tapered furlough scheme, now extended till March. The consequences of this financial and commercial tragedy will be felt this year as a number of businesses will start closing down. It is not unrealistic to expect an unprecedented wave of insolvencies and bankruptcies as creditors resolve to eat out of past reserves peters out. Though this may sound a diluvian prediction yet one needs to act in a pragmatic manner to avoid another Priceclub debacle.
Just tinkering with book losses and deferring debt write-offs will not lead to a sustainable recovery. Much delayed insolvency reforms led to conflict-of-laws issues, particularly regarding judicial recognition and enforcement in case of foreign insolvency in cross-border proceedings. Whilst other jurisdictions have updated their insolvency laws following the 2008 financial crisis, Malta has not followed suit.
A solution is now in hand as an EU business recovery directive must be transposed by July this year. This refers to the directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019. It concerns preventive restructuring frameworks, on the discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt.
An early warning system has to be put in place to alert debtors that insolvency may be creeping in. The law suggests that three important indicators such as:-
(a) alert mechanisms when the debtor has not made certain types of payments;
(b) advisory services provided by public or private organisations.
(c) incentives under national law for third parties with relevant information about the debtor, such as accountants, tax and social security authorities, to flag to the debtor a negative development.
Locally, the Official Receiver (within MBR) with help from Deloitte, is charged with the Maltese transposition of Directive (EU) 2019/1023. As stated earlier, once in place, the law focuses on preventive restructuring frameworks, on the discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt. When fully transposed this directive is expected to prevent non-detection of the build-up of non-performing loans. The availability of effective preventive restructuring frameworks prescribed by MBR would ensure that action is taken before enterprises default on their loans.
Restructuring should enable debtors in financial difficulties to continue the business, in whole or in part, by changing the composition, conditions or structure of their assets and their liabilities or any other part of their capital structure – including by sales of assets or parts of the business or, where so provided the business as a whole – as well as by carrying out operational changes.
Preventive restructuring frameworks should, above all, enable debtors to restructure effectively at an early stage and to avoid insolvency, thus limiting the unnecessary liquidation of viable enterprises. Such frameworks should help to prevent future job losses and the loss of know-how and skills, and maximise the total value to creditors – in comparison to what they would receive in the event of the liquidation of the enterprise’s assets or in the event of the next-best-alternative scenario in the absence of such a plan.
Locally, SME’s in particular do not have the resources needed to assess risks and install early preventive measures unless such systems are made available to them by MBR. Ideally, MBR with a new Blockchain monitoring system helps to remove any barriers to the effective preventive restructuring of viable debtors in financial difficulties.
Essentially, this contributes to minimising job losses. It can prevent losses of value for creditors in the supply chain, preserves know-how and skills and hence benefits the wider economy. Facilitating a discharge of debt for entrepreneurs would help to avoid the exclusion of workers from the labour market and enable them to restart entrepreneurial activities.
This is an essential tool which post-Covid helps attract foreign direct investors which are assured that their investment in Malta is protected from the ravages of aggressive creditors or other class actions.