Correct procedure to follow on the loss of benefit of time

The First Hall Civil Court, presided over by Mr Justice Raymond C. Pace on February 24, 2011, in the case “Anthony Abela & Venues Company Ltd vs Ronald Cordina and, by decree of July 8, 2010, Lombard Bank (Malta) plc was joined to the proceedings” held, among other things, that Mr Cordina as creditor should have first obtained a judicial declaration that his debtor, Mr Abela, had lost the benefit of time under a contract dated May 30, 2008, and that as a result the company was obliged to pay as guarantor. The court maintained that Mr Abela should not have proceeded to exercise his rights under article 256(2) Chapter 12 before obtaining such a judicial declaration.

The facts in this case were as follows.

Anthony Abela and his wife Nadine Abela signed a notarial contract dated May 30, 2008, constituting themselves debtors of Ronald Cordina.

The company Venues Company Ltd appeared only as guarantor. As security it created a special hypothec over its property, Villa Madama in Balzan.

It was stated in the contract that the debt had to be repaid by May 30, 2013. But in case Mr Abela defaulted on three scheduled repayments, which did not have to be consecutive, it was agreed that he would forfeit the benefit of time to repay the debt and all the outstanding amount would become due at the request of the creditor, in one payment.

On November 19, 2009, Mr Cordina sent Mr Abela a judicial letter requesting payment, with the intention of rendering the notarial contract enforceable.

On December 11, 2009, Mr Cordina filed an application requesting a warrant of seizure of the guarantor company’s immovable property, Villa Madama.

The application was accepted and the court ordered the judicial sale of Villa Madama. During the court auction proceedings, Lombard Bank, which enjoyed prior ranking by virtue of a special hypothec and ranked before other creditors, participated in the auction.

The bank made a bid animo compensandi for Villa Madama and its garden. It paid €182,918 cash and set off a debt of €807,081 for the property, which was sold for the price of €990,000 on June 22, 2010. Thereafter the Registrar of Courts released the property to the bank.

By these proceedings Mr Abela attacked the procedure followed by Mr Cordina to initiate the court auction proceedings. Mr Abela claimed that Mr Cordina could not exercise the procedure under article 256 (2) of Chapter 12 as the amount was not certain, liquid and due. The amount had to be paid by May 30, 2013, unless it was confirmed that he had forfeited the benefit of time to pay up to an agreed date.

Mr Abela put forward the argument that Mr Cordina had to file against him a lawsuit requesting the court to declare that he had lost the benefit of time: re: S. Cauchi vs J. Muscat dated August 24, 1993.

It was argued that the guarantor company, Venues Company Ltd, had never constituted itself the certain, true and liquid debtor or guarantor of Mr Cordina.

For this reason, Mr Abela asked the court to declare that the judicial letter dated November 19, 2009, did not give Mr Cordina any right to file executive warrants against the guarantor company; to declare null the court auction proceedings of Villa Madama, to declare the release made by the Registrar to be null and without effect and to order the cancel-lation of the release, by giving such orders as it might deem appropriate.

In reply, Mr Cordina contested Mr Abela’s legal action.

Lombard Bank also disputed Mr Abela’s requests. It maintained that in terms of article 346 of Chapter 12 the bank could proceed as though it were the original creditor that applied for the sale by court auction of the property, and this regardless of any act which could affect the validity of the original creditor’s action.

The bank further maintained that it always had the right to exercise the jus redimendi under article 355 (1) Chapter 12. It said that Mr Abela’s request for the release of the property in favour of the bank should be declared null and void, and that his requests were wholly unfounded.

On February 24, 2011, the First Hall Civil Court decided in favour of Mr Abela. It declared that Mr Cordina’s judicial letter of November 19, 2009, did not entitle him to file executive warrants against the guarantor company. It declared the court auction of Villa Madama to be null. It found the release of the property in favour of the bank was also null and void, and accordingly ordered its cancel-lation.

The following reasons were given for the court’s decision.

There was no doubt that Mr Abela had failed to make certain payments to Mr Cordina on time.

Reference was made to the decision in S. Cauchi vs J. Muscat dated August 24, 1993, where the court had held “u l-qrati tagħna dejjem irritenew illi għandha ssir l-ewwel it-talba għad-dikjarazzjoni tad-dekadenza tal-konvenut mill-benefiċċju tat-terminu, u mbagħad il-kundanna ħlas u l-bejgħ in subbasta’’. There had to be a claim for a declaration that the debtor had forfeited the benefit of time, followed by a request for payment and sale by court auction.

However, in C. Ciantar vs F. Grech dated May 21, 1965, it had been held that when the forfeiture of the benefit of time was expressly stated, it was not necessary to obtain a judicial declaration that the debtor had lost the benefit of time.

A lawsuit was necessary only if the court had to determine whether in the circumstances the debtor had forfeited the benefit of time.

Reference was made to Lapsi Holdings Ltd vs HSBC Bank Malta plc dated October 7, 2005, where it was held that a creditor could not enforce his claim for the whole amount before the expiry of the time limit or before the court confirmed that the debtor had forfeited the benefit of time.

In the circumstances, the court was of the opinion that Mr Cordina was claiming that Mr Abela had forfeited the benefit of time to repay the debt.

The court pointed out that Mr Cordina should have obtained a judicial declaration that Mr Abela had lost the benefit of time under the contract dated May 30, 2008, and that as a result the company, Venues Company Ltd, was obliged to pay as guarantor. It maintained that Mr Cordina should not have proceeded to exercise his rights under article 256(2) Chapter 12 before obtaining such a judicial declaration. As a consequence, it held that the court auction proceedings were null.

The court concluded that under article 346 of Chapter 12, the bank was in the same position as the original creditor (Mr Cordina). It followed that the bank was also affected, in view of the fact that it had participated in the court auction proceedings initiated by Mr Cordina. The jus redimendi under article 355(1) Chapter 12 was not relevant because this pre-supposed that the court auction proceedings were valid, concluded the court.

Dr Grech Orr is a partner at Ganado & Associates.