Fraudulent trading claim

The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit Mc Keon, on April 7, in the case Albert Mizzi (on behalf of Mizzi Associated Enterprises Ltd) vs Noel Agius, Andrè Agius, Ronnie Agius and Kenneth Dimech as liquidator of Triangle Investments Ltd held, among other things, that the fact alone that directors of a company filed a statement of defence, when their company was in liquidation, did not constitute fraudulent trading.

The facts in this case were as follows

By a private agreement in the acts of Notary Charles Mangion dated May 14, 2001, the company Triangle Investments Ltd acquired from Mizzi Associated Enterprises Ltd a number of shares in Lapsi Court Ltd. Triangle also incurred a penalty of €59,096 under the agreement.

The company, Triangle Investments Ltd, was registered on January 6, 1999. Originally the shareholders and directors were Ronnie Agius, and his two sons Noel and Andre.

Ronnie Agius resigned as director on February 19, 2001. His shares were transferred equally to his sons Andre and Noel on February 20, 2001.

According to the last annual return filed on May 20, 2003 for a period up to October 31, 2002, Noel and Andre Agius had equal shares and were the only two directors of the company.

On October 30, 2003 an extraordinary resolution was passed according to article 265(1) of Cap 386 to place the company into voluntary winding up. Noel and Andre Agius on October 30, 2003, made a declaration of solvency according to article 286 of Cap 386, declaring that “the said company will be able to pay its debts in full within six months from the date of dissolution which shall take place on the 30th October, 2003.”

They filed a statement of assets and liabilities dated October 30, 2003. Ronnie Agius continued to effect payment of Triangle’s debts to Mizzi Associated Enterprises. However, a balance of €23,254 remained outstanding.

Mizzi Associated Enterprises filed legal proceedings against Noel and Andre Agius in their own name and on behalf of Triangle (writ no 356/2005).

It obtained a favourable judgment against Triangle and Triangle now represented by the liquidator to pay €22 254.

Mizzi Associated Enterprises felt aggrieved.

It claimed that when writ no 356/2005 was instituted, Noel and Andre Agius presented their statement of defence, they failed to inform the court, that Triangle Investments was in a state of dissolution.

It was argued that:

Noel and Andre Agius acted in breach of article 309 (1) (d) of the Companies Act, which provides: “makes any material omission in any statement relating to the affairs of the company”;

At the time a request for an extension of the repayment period was made, the company Triangle was in liquidation,

This was deceitful and amounted to fraudulent trading in terms of article 315(1). Article 315 provides that: “If in the course of the winding up of a company, whether by the court or voluntarily, it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of the official receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in the manner aforesaid be personally responsible, without any limitation of liability for all or any of the debts or other liabilities of the company as the court may direct”.

Mizzi Associated Enterprises filed separate legal proceedings requesting the court to declare Andre and Noel Agius as directors of Triangle, as well as Ronnie Agius, and the liquidator K. Dimech to be held personally liable for fraudulent trading and for the debt of Triangle per the court decision dated December 16, 2008 (writ no 356/2005).

All defendants, in reply, contested the claim of fraudulent trading.

It was stated, among other things, that the fact that the company was in liquidation was public knowledge. Mizzi Associated Enterprises Ltd had not been prejudiced as it had obtained a judgment against the company Triangle Investment.

Defendants pleaded that there was no case for fraudulent trading. The alleged infringement of article 309 (1) (d) did not constitute fraudulent trading. All defendants denied carrying out any business activity with the intention of defrauding creditors.

It was stated that by failing to notify Mizzi Associated Enterprises Ltd that Triangle Investments was in liquidation did not render them personally liable for Triangle Investment’s debt.

On April 7, 2011, the court gave judgment by dismissing Mizzi Associated Enterprises requests.

Reference was made to English law on fraudulent trading. There was fraudulent trading if creditors were deceived.

Our Article 315 incorporated criminal and civil sanctions.

In R. vs Grantham 1984, the English courts held: “...proper inference of intent to defraud could be made if a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment.

A finding that a person was knowingly party to the business of a company having been carried on with intent to defraud creditors may be made if the following two conditions are satisfied:

If that person realised, at the time the debts were incurred, that there was no good reason for thinking that funds would be available to pay the debt in question when it became due or shortly thereafter; and

There was actually dishonesty involving, according to current notions of fair trading amount commercial men, real moral blame.”

A proper influence of fraud could be made if there was no good reason to believe that payment could be made.

As regards the degree of proof, Brenda Hannigan in Company Law stated that “proving that the company continued to trade while insolvent is not enough. The person bringing the action must prove that the respondent has carried on business with intent to defraud creditors or for any fraudulent purpose … For a person to be held knowingly party to carrying on a company’s business with intent to defraud creditors requires findings and inferences as to the facts known to that person at the relevant times. At those times the business might either have succeeded or failed.”

The term ‘fraud’ has different meanings depending in which context it is used. The test was both subjective and objective. Article 315 (1) indicates what constitutes fraudulent trading but did not define fraud. Farrar writes: “the term fraud has different meanings depending in which context it is used”.

The court noted that when the agreement was reached on May 14, 2001, the company, Triangle Investments, was still in operation. There was no doubt on its solvency.

It maintained that the fact alone that Noel and Andre Agius filed a statement of defence as directors on behalf Triangle Investments, when its company was in liquidation, did not alone constitute fraudulent trading.

Even if for the sake of argument there was a breach of article 309 (1) (d) of the Companies Act, this alone was not sufficient proof of fraudulent trading under Article 315.

The court said that there was no evidence of any intention of fraudulent trading. There was no dishonesty or fraud. The fact alone that the company continued trading when insolvent was not fraudulent trading.

The court was not satisfied that fraudulent trading had been established. It did not notice any act by defendants, which manifested their intention to deceive creditors of Triangle.

The court said that that it had not been established that the defendants attended to their personal interests, at the expense and risk of creditors of Triangle. There was no evidence of abuse or that the directors, the liquidator or Ronnie Agius had intended to defraud creditors.

Nor was it proven that Triangle Investments was structured, capitalised or operated in a manner prejudicial to creditors.

There was no indication that the defendants had not taken measures to look after the company’s interests or that they had bankrupted the company Triangle.

By requesting additional time to repay the debt it was not shown that defendants or any of them, intended to deceive Mizzi Associated Enterprises.

The court concluded that the claim of fraudulent trading had not been proven, for the purposes of Article 315 of the Companies Act.

Dr Grech Orr is a partner at Ganado & Associates.