Priceclub directors responsible for debts - court

Three company directors were yesterday declared to be personally and unlimitedly responsible for the debts incurred by Priceclub Operators Ltd (PCO).

Mr Justice Tonio Mallia, sitting in the First Hall of the Civil Court, concluded that Victor Zammit, Christopher Gauci and Wallace Fino had committed fraudulent and wrongful trading in connection with PCO and the company's creditors.

The application for a declaration of fraudulent and wrongful trading was filed by lawyer Andrew Borg Cardona as liquidator of PCO.

The court explained that fraudulent trading existed when the directors of a company intended to defraud its creditors.

There was wrongful trading when the directors continued to trade when they knew, or ought to have known, that there was no reasonable prospect of the company's meeting its obligations prior to an insolvency.

Fraudulent trading also existed in cases where the directors had no good reason to think funds would become available to pay the company's creditors when the debts became due or shortly thereafter.

This principle was applicable to this case for it resulted that the three directors had asked for more credit from the company's suppliers when they knew there was no possibility of repayment being made within the stipulated period.

The only defence against a charge of fraudulent trading was that the directors had taken every step to minimise the potential loss to the company's creditors.

In this case, it had resulted that during the six years the Priceclub group of companies had operated, there were a number of occasions when the directors (who were also the owners of the companies within the group) had ignored the creditors' interests and had only looked after their own personal interests.

The group's structure was such that PCO, which was the company operating the supermarkets, had no assets, while it was paying off debts to third parties incurred by the property-owning companies within the group.

Mr Zammit, Mr Gauci and Mr Fino had created a company, Priceclub (Holdings) Ltd (PCH) which owned all the group's assets.

The properties were hypothecated to make good for PCH's liabilities. The directors had set up PCO to operate the supermarkets.

PCO had incurred debts with trade suppliers when it had no means to repay these debts.

The various trade suppliers to PCO only had a legal relationship with this company which operated the supermarkets.

None of the other companies within the group had assumed responsibility for the debts accumulated by PCO.

The three directors had given personal guarantees for the debts incurred by PCH. But they had not done the same in the case of PCO. On the contrary, they had made use of PCO's creditors to finance the group's expansion.

When the Priceclub group started operating, it had taken over the operation of Priceclub supermarket from Frans Gauci (Christopher Gauci's father). At that time, after paying Frans Gauci, PCO had a working capital deficit of Lm1.2 million. Apart from this debt, PCO was burdened with paying rent to other companies within the group, for the supermarkets it was operating.

As a result, PCO was paying PCH's debts to the bank.

The court added that the directors had taken action to satisfy their creditors who were commercial banks to the prejudice of their simple trade creditors.

Mr Justice Mallia noted that from the very start the directors knew the business had to be restructured, but they had taken no steps to do so.

When PCO had expanded and the Day To Day supermarket was bought from the Gauci family, the directors had obtained a loan from Bank of Valletta plc.

The owners of Day To Day were paid Lm1.4 million and the sum of Lm450,000 was supposed to have been paid back to PCO which had advanced this sum. But this refund did not take place by way of a cash payment to PCO.

On the contrary, part of the sum of Lm450,000 was paid to Biochemicals International Ltd (owned by Mr Zammit) as payment for products that would, in the future, be sold to PCO. Another part of this sum was set off against debts owed by Day To Day supermarkets to Taormina Holdings Ltd, a company owned by Mr Gauci's parents.

The court said that this manoeuvring took place to facilitate the workings of the private companies owned by Mr Zammit and Mr Gauci to the detriment of PCO's creditors.

Mr Justice Mallia added that PCO had commenced operating with a deficit and without a capital base. But this company had been burdened with debts that had not been provided for and that it did not have the structure to cope with.  

The plight of PCO's creditors had also been ignored by the directors.

Rather than taking every step to minimise the creditors' losses, the three directors had instead implemented a process of expansion financed by the creditors. The directors had always denied to the creditors that there were serious financial problems with PCO.

In the circumstances, the court ruled that the three directors were to be held together, unlimitedly responsible for the all debts incurred by PCO.

In a separate judgment, delivered yesterday Mr Justice Tonio Mallia, also held Priceclub Holdings Ltd (PCH), Priceclub Birkirkara Ltd (PCB), Priceclub Swatar Ltd (PCS), and Priceclub Burmarrad Ltd (PCBU) unlimitedly responsible for the debts incurred by Priceclub Operators Ltd (PCO).

The court, however, declined to find Biochemicals International Ltd and 2000 Holdings Ltd, shareholders in PCO, unlimitedly liable in this case.

Lawyer Andrew Borg Cardona, liquidator of PCO, claimed that all defendant companies had abused of the privilege of limited liability, and that they were, therefore, unlimitedly liable towards PCO.

All defendant companies, save for Biochemicals International and 2000 Holdings were the owners of the various properties and assets forming part, of the Priceclub group. PCH was the holding company of the group.

Mr Justice Mallia found that the company structure within the group was not of itself illegal. However, after the group was created, PCO was not only a subsidiary company within the group but it had been burdened with the group's liabilities.

PCH ought to have intervened in the interests of the sustainability of the Priceclub group as ought the other subsidiary companies.

But Biochemicals International and 2000 Holdings were not members of the Priceclub group of companies. These two companies were shareholders in PCH but were not involved in the running of the group.

The two companies belonged to Victor Zammit's family but no proof of their abuse of responsibility had been shown.

It was Victor Zammit, Christopher Gauci and Wallace Fino who had brought PCO to a state of insolvency and left the company's creditors tossing in a stormy sea.

The court concluded by holding PCH, PCB, PCS and PCBU unlimitedly liable, but dismissed the claims against Biochemicals Ltd and 2000 Holdings Ltd.