BusinessToday Previous Editions

8 OPINION 07.01.2021 FEW entrepreneurs can ever forget the grave consequenc- es of the insolvency of Price- club in 2001. is was a major shopping complex operating in Malta enjoying an overwhelm- ing share of domestic market for foodstuff trade with a re- ported €35 million turnover. Its financial tragedy was marred by stories in the media of an undercapitalised group of companies which albeit profita- ble, 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. e brief also included inspecting re- cords to check on the reporting obligations of the group. PWC found inter alia that poor inventory controls were rife, while millions were si- phoned by directors to finance side property deals. e busi- ness 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. e 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. is resilience is perhaps due to a diversification of the consumer market sector into well-organised shopping malls which compete for trade of- fering competitive prices and efficient service. Yet the Mal- tese 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 gov- ernments have gone in debt to try and salvage certain sectors devastated by lockdowns. A quick return to normality was promised by many govern- ments, 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 em- ployees) are barely surviving on a tapered furlough scheme, now extended till March. e 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 in- solvencies and bankruptcies as creditors resolve to eat out of past reserves peters out. ough this may sound a dilu- vian prediction yet one needs to act in a pragmatic manner to avoid another Priceclub de- bacle. Just tinkering with book loss- es and deferring debt write-offs will not lead to a sustainable recovery. Much delayed insol- vency reforms led to conflict- of-laws issues, particularly regarding judicial recognition and enforcement in case of for- eign insolvency in cross-bor- der proceedings. Whilst oth- er 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 di- rective must to be transposed by July this year. is refers to directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019. It concerns preventive restructuring frameworks, on discharge of debt and disqual- ifications, and on measures to increase the efficiency of pro- cedures concerning restruc- turing, insolvency and dis- charge of debt. An early warning system has to be put in place to alert debtors that insolvency may be creeping in. e law suggests that three important indicators such as:- (a) alert mechanisms when the debtor has not made cer- tain types of payments; (b) advisory services provid- ed by public or private organ- isations. (c) incentives under national law for third parties with rel- evant information about the debtor, such as accountants, tax and social security authori- ties, to flag to the debtor a neg- ative development. Locally, the Official Receiver (within MBR) with help from Deloitte, is charged with the Maltese transposition of Di- rective (EU) 2019/1023. As stated earlier, once in place, the law focuses on preventive restructuring frameworks, on discharge of debt and disqual- ifications, and on measures to increase the efficiency of pro- cedures concerning restructur- ing, insolvency and discharge of debt. When fully transposed this directive is expected to prevent non-detection of the build-up of non-performing loans. e availability of ef- fective preventive restructur- ing frameworks prescribed by MBR, would ensure that action is taken before enterprises de- fault on their loans. Restructuring should enable debtors in financial difficul- ties to continue 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 liq- uidation 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 compari- son to what they would receive in the event of the liquidation of the enterprise's assets or in the event of the next-best-al- ternative scenario in the ab- sence of such a plan. Locally, SME's in particu- lar do not have the resources needed to assess risks and in- stall early preventive measures unless such systems are made available to them by MBR. Ide- ally, MBR with a new Block- chain monitoring system, helps to remove any barriers to effec- tive preventive restructuring of viable debtors in financial dif- ficulties. 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 dis- charge of debt for entrepre- neurs would help to avoid their exclusion of workers from the labour market and enable them to restart entrepreneurial ac- tivities. is is an essential tool which post-Covid helps attract for- eign direct investors which are assured that their investment in Malta is protected from the ravages of aggressive creditors or other class actions. The reform of business recovery laws George Mangion George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF being instrumental in establishing many companies in Malta and ensured PKF become one of the foremost professional financial service providers on the Island

• Cover