Court upholds objection to company’s request for a provisional administrator

The First Hall of the Civil Courts on 18 March upheld Malta Financial Services Authority’s objection – together with a number of investors to All Invest Company Limited – for a court-appointed provisional administrator of the company.

In a decision given by the court in proceedings All Invest Company Limited –v– X, where in the MFSA and a number of investors intervened in these proceeds, the court was asked to examine whether it should appoint a provisional administrator for the company in terms of Article 214 of the Companies Act. The Company filed the request since it transpired that the investors would soon receive compensation from an Investor Compensation Scheme in the UK. If payment is effected, this would be a simple administrative matter which would not require any advice. 

The MFSA objected to this request on the grounds that it had instructed in terms of Article 15 of the Investments Services Act that the company was to delay “the winding up of the business until such time as the transfer of clients’ holdings is completed in an orderly manner”. The shareholder – and director of the company – Wallace Falzon was the only person licensed to give investment advice and knew the clients involved. If a provisional administrator were to be appointed, the investors of All Invest Company Limited would be prejudiced, because the administrator would have no knowledge of what advice was given and further advice is needed in regard to the compensation of the individual clients or investors. 

The investors agreed with the MFSA and want Falzon to continue to be responsible for the advice he had given.

The Court examined the legal position, which is derived from English law. Article 228 of the Companies Act states: 

(1) The court may by order appoint a provisional administrator at any time after the presentation of a winding up application and before the making of a winding up order, and either the official receiver or any other competent person may be so appointed.

(2) The provisional administrator shall carry out such functions and powers in relation to the administration of the estate or business of the company as the court may specify in the order appointing him.

(3) The provisional administrator holds office until such time as the winding up order is made or the winding up application is dismissed unless before such time he resigns.

Mr Justice Joseph Zammit McKeon compared this article to Article 135 of the UK Insolvency Act of 1985 and then quoted from Andrew Keay and Peter Walton’s book ‘Insolvency Law: Corporate and Personal’ which read:

“The power to appoint a provisional liquidator is a draconian power (Re Forrester & Lamego Ltd – 1997 – 2BCLC 155 at 158) as it involves a serious intrusion on the company; the management of the company is effectively under the control of the person appointed. Practically speaking, the appointment is likely to paralyse the company commercially (Re London, Hamburg & Continental Exchange Bank, Emmerson`s Case 1866 LR2 Eq 231). Therefore courts have said that if other measures would be adequate to preserve the status quo, they should be implemented instead (Constantinidis v JGL Trading ?Pty Ltd 1995 17 ACSR 625 at 635, 647) Courts.”

The Court held that the Courts have a discretion whether to appoint and provisional administrator or not, following liquidation proceedings of a company. If the court does not list the administrator’s duties, then the administrator is to take care of the day-to-day administration of the company. The provisional administrator does not take over the powers of the company directors, unless ordered by the courts.

In this particular case, the court had to determine whether there was a need for a provisional administrator. The Companies Act does not define the role of an administrator but leaves it up to the Court to choose one. At this stage the court is not to examine whether the company is insolvent and therefore merits to be liquidated, but a provisional administrator is appointed to protect the interests of the creditors. Mr Justice Zammit McKeon held that in his opinion, the appointment of a provisional administrator goes contrary to the intention of the law. Falzon is the only participant in the company and is the shareholder and director. If everything is above board then there is no need to appoint a provisional administrator as Mr Falzon can face the MFSA and the investors. It is the director’s responsibility to take into consideration the interest of the creditors when taking into consideration the interest of the company. Furthermore, there is no evidence that the company’s assets are in jeopardy and that this is not a case where there is dispute between the directors and the shareholders, since they are the same person. 

The Court then moved to uphold the objections lodged.

Malcolm Mifsud is a partner at Mifsud & Mifsud Advocates