On 23 December 2022, the Pre-Insolvency Act (Chapter 631 of the Laws of Malta) (“Pre-Insolvency Act”), came into force, introducing new preventive restructuring procedures. The Pre-Insolvency Act marks a significant advancement in the Maltese restructuring framework, complementing the pre-existing debt restructuring mechanisms, which include:
- the company recovery procedure as established by Article 329B of the Companies Act (Chapter 386 of the laws of Malta);
- private workouts, a voluntary, out-of-court negotiation process between a debtor and its creditors aimed at reaching a settlement; and
- compromises or arrangements, a hybrid mechanism that blends elements of both in and out-of-court procedures.
Despite the availability of established restructuring options, their full potential has yet to be realised, partly due to the stigma surrounding debt restructuring. Directors often hesitate to utilise these legal remedies for fear of reputational harm and the resulting impact on market valuation.
To address the underutilisation of existing frameworks and in line with Article 4 of the Pre-Insolvency Act, the Insolvency and Receivership Service within the Malta Business Registry (“MBR”) took a decisive step on 15 November 2024, nearly two years after the enactment of the Pre-Insolvency Act, by refining a key aspect: the Early Warning Tools. Previously, Article 6 of the Pre-Insolvency Act recognised only basic indicators of financial distress, such as concerns raised by auditors and alerts from employees or creditors. These required directors to re-assess the company’s financial status and develop a strategic response within 30 days. However, the limited effectiveness of these initial tools highlighted the need for more advanced early warning systems. Robust early warning mechanisms are essential for directors to fulfil their duty to monitor and assess their company’s financial health – an obligation which was not fully addressed by the original tools.
In response, the newly introduced Self-Assessment Test —a simple online questionnaire—allows companies to proactively evaluate their financial condition and take necessary steps to avoid severe financial difficulties. Since the results remain confidential and accessible only to users, the tool’s usefulness is further enhanced, enabling businesses to independently assess indicators before they escalate into a crisis. This test evaluates key financial factors such as sales decline, payment practices, supplier relationships, cash flow, and compliance with financial obligations, over a 12- to 36-month period. By analysing both current challenges and potential risks, it provides a comprehensive view of a company’s financial health. Additionally, the Insolvency and Receivership Service within the MBR has introduced Alert Mechanism, triggered under specific conditions, such as when a company falls behind on tax or social security payments, fails to make timely fiscal filings, fails to submit annual returns and financial statements, or delays utility payments.
These tools shift the focus from the urgent threshold of being “imminently likely to become unable to pay its debts” as stipulated under the Companies Act, to a broader concept of “likelihood of insolvency”, which emphasises early risk identification rather than crisis response. Indeed, the term ‘pre-insolvency’ within the Pre-Insolvency Act does not signify imminent financial failure, but rather a foreseeable risk of financial difficulty, marking a critical period for pre-emptive measures.
However, the effectiveness of these tools depends entirely on the accuracy and honesty of the data provided by management. As such, the outcomes generated should be regarded as indicative, serving as a preliminary basis for further investigation rather than as conclusive judgments. These tests do not substitute for professional advice. In cases where the assessment signals potential financial distress, it is imperative for company directors to engage with accredited Insolvency Practitioners, lawyers and financial advisors who can provide strategic, tailored advice beyond what an online tool can offer.
As Malta continues to refine its approach to business solvency, the introduction of tools like the Self-Assessment Test and Alert Mechanisms represents a proactive step toward helping businesses identify financial risks before they escalate into crisis. These developments pave the way for further advancements. Over time, the incorporation of technologies such as artificial intelligence could enhance these capabilities, offering even more precise and predictive insights. AI-driven tools could provide real-time financial analysis, detecting early warning signs and forecasting future trends, enabling business to take preventive action even earlier.
