Any lending of funds needs to be adequately secured. This is a practice which every lender knows and should observe in order to adequately protect his credit. However, the meaning of “adequate security” is not straight forward and lenders must be careful when selecting their preferred security .
This issue came to the fore in Malta in the judicial sale by auction initiated in year 2018 in the names Neofarma Pharmaceuticals Ltd. Vs Cauchi Gera et (Court Ref. No. 9/2018), by which The creditor company demanded the sale of a pharmacy licence. This meant that the immovable property where the pharmacy is located had to be separated from the respective licence and the two transferred separately. Third-party creditors whose credit was secured by the pharmacy feared that this separation would result in a diminution of the value of their respective security and hence prejudice their interests. Consequently, they objected to the judicial sale on these grounds and argued that the pharmacy is a going concern and that the judicial sale ought to be that of a going concern, since this is permitted under Maltese Law.
Notwithstanding this, the First Hall of the Civil Court presided by Mr. Justice Mark Chetcuti rejected the objection and ruled that any creditor has the right to transfer any asset belonging to his debtor, even though such asset is closely connected to another, such as in the case in question.
As a result of this interpretation, the immovable property can only be transferred by means of a second judicial sale by auction, hence adding to the expenses incurred. Furthermore, one needs to determine how the value of the pharmacy licence is to be set and also who the potential bidder can be. Although the Court has not addressed these matters, it seems that the licence value can be calculated according to economic formulas based on the location of the pharmacy and on its projected earnings , whereas the potential bidder can be any person as long as the licence is eventually registered in the name of an individual.
Beyond these issues and regardless of the eventual respective answers, once such issues are addressed , the conclusion drawn from the above-mentioned case is clear. It is not always safe for lenders to simply secure their credit by means of a going concern. Therefore, since going concerns can be separated as to the business licence on the one hand and the immovable property of the business on the other, lenders should consider making separate evaluations of the two assets in order to obtain a full picture of the value. Eventually, a going concern should only be accepted as sufficient security if the sum of the separate evaluations is sufficient to protect the credit.
This document does not purport to give legal, financial or tax advice. Should you require further information or legal assistance, please do not hesitate to contact Dr.Kevin Cutajar.