The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, on June 9, 2011 in the case “Victor Borg Barthet exercising trade under the name B.B 2000 ST vs Carnik Construction Ltd, Carmelo Formosa and Nicholas Formosa” held among other things that the court could not order the dissolution of the company under article 214 (2) (ii) Companies Act unless sufficient evidence was produced to establish the enforcement of the executive warrant against the company.

Victor Borg Barthet exercising trade under the name B.B 2000 ST obtained a favourable judgment against the company Carnik Construction Ltd.

In its decision on October 13, 2008, the Court of Appeal condemned Carnik to pay him Lm22,243 (€51,812) with interests from December 16, 2002, from which amount Carnik was authorised to deduct Lm1,000, owed to it by Victor Borg Barthet.

As Victor Borg Barthet remained unpaid, he proceeded to enforce his executive claim against Carnik by requesting the issuance of an executive garnishee order against the banks, to seize funds of the company in the hands of the banks. Despite this, however, he still did not manage to recover the amount due to him.

Facing this situation, he proceeded to file legal proceedings against the company and its two directors, Carmelo Formosa and Nicholas Formosa on the basis of article 214 (5) (a) of the Companies Act. Article 214 (5) (a) provides:

‘‘ For the purposes of subarticle (2)(a)(ii), a company shall be deemed to be unable to pay its debts ­ – Cap. 12 (a) If a debt due by the company has remained unsatisfied in whole or in part after 24 weeks from the enforcement of an executive title against the company by any of the executive acts specified in Article 273 of the Code of Organisation and Civil Procedure’’.

It was stated that in the circumstances, there existed serious grounds to liquidate the company. While Mr Borg Barthet did not contest the solvency of the company at the time when the works were carried out, he claimed that the company was wrongly administered to his prejudice.

He said that there were serious doubts whether the accounts of the company gave a true and fair view of its financial situation.

No provision of his claim against the company was made in the company accounts. This, he said, allegedly rendered the directors Carmelo and Nicholas Formosa personally responsible for the company’s debts.

It appeared that the company did not have any turnover from 2004 onwards.

In his legal action, Mr Borg Barthet asked the court:

1. To declare that Carnik Construction was not in a position to pay its debts and that, therefore, the court should apply Article 214 (2) (a) (ii) and Article 214 (5) (a).

Article 214 (2) (a) (ii) provides: ‘‘A company may be dissolved and wound up by the court in the following cases: The company is unable to pay its debts”.

2. To dissolve Carnik Construction, to appoint a liquidator and to give such directions, it deemed appropriate.

3.To declare that the directors Nicholas and Carmelo Formosa did not manage the company properly; that they acted deceitfully and that the accounts did not give a true and fair view to his prejudice. For these reasons both directors should be declared and be condemned to be personally responsible for the debts of the company.

4. Mr Borg Barthet reserved to take ulterior action against Carnik Construction, the company’s accountant, financial controller and company auditor.

In reply, the company and its directors disputed V. Borg Barthet’s legal action. They submitted in defence that:

• This action was possible if it had been filed against the company’s shareholders. In addition, they denied that the company was administered wrongly, or that they acted fraudulently.

• Contrary to Mr Borg Barthet’s allegations, the defendants, Carnik Construction and its directors, put forward the argument that the company accounts gave true and fair view of its financial situation.

• The directors denied personal responsibility for the debts of Carnik Construction.

• The defendant company, Carnik Construction and its directors, maintained that it was up to Mr Borg Barthet to prove the allegation of wrongful and fraudulent trading; and if no proof was brought, this claim should be dismissed.

On June 9, 2011, the First Hall of the Civil Court rejected Mr Borg Barthet’s claims.

The court said that under Article 214 (5) (a) of the Companies Act, Mr Borg Barthet had to establish the execution of executive garnishee order against the company. This was very important as the 24-week period mentioned in the law commenced to run from the date of the enforcement of the executive warrant.

As Mr Borg Barthet failed to produce such sufficient evidence, the court was not satisfied that the execution of the warrant had been proven for purposes of Article 215 (5) (a) of Chapter 386.

The following reasons given for its decision were:

The court noted that Carnik Construction Ltd acted as a construction contractor and that it was the principal contractor in the construction of Bella Vista Hotel, Qawra.

The original shareholders and beneficial owners were Nicholas and Carmelo Formosa, two brothers.

The court said that it did not appear that Mr Borg Barthet’s claim appeared in the accounts of the company, up to 2009. The accounts referred to long-term borrowings from related companies but not do any third party claims.

It had an account current with related companies. In 2005, it owed its sister companies in the group Lm90,000. In 2006, this increased to Lm99,000 and by 2007 to €231,000. In the period between 2007 and 2008, it was due €267,000 but was owed €231,000.

If Mr Borg Barthet’s claim had to be reflected in the company accounts, Carnik Construction would have a liquidity deficit. By 2008, Carnik Construction ceased operating as another company and was used instead to carry out the business.

It resulted that on basis of its accounts Carnik Construction was unable to pay Mr Borg Barthet’s claim. The company had no accounts with any of the local banks, Lombard, HSBC, BOV and APS.

Under Article 214 (2) (a) (ii) the court could order the dissolution if a company was unable to pay its debts. Article 214 (5) establishes when a company was deemed to be unable to pay its debts.

On June 28, 2005, in case writ no. 1431/2002 the court condemned Carnik Construction to pay Mr Borg Barthet Lm22,243 with interests from December 16, 2002 and from this amount the court authorised Carnik Construction to deduct Lm1,000.

On October 13, 2008 this decision was confirmed on appeal.

Thereafter, on January 26, 2009, Mr Borg Barthet requested the issuance of an executive garnishee order (no. 122/09) against Carnik Construction. Carnik Construction failed to pay the debt. It resulted that Mr Borg Barthet failed to exhibit as documentary evidence a complete copy of the garnishee order, which included the riferti as evidence of its enforcement. In absence of such proof, which was crucial to establish the enforcement of the executive title, the court could not order the dissolution of the company under Article 214.

The court noted that none of the witnesses were asked to confirm the notification and execution of the garnishee order. The court said that it could not assume that the garnishee order was in fact executed.

Plaintiff Mr Borg Barthet should have produced a complete copy of the garnishee order which included the riferti and the notes of the Court Marshall, pointed out the court.

For these reasons, it could not accept the request of Mr Borg Barthet to dissolve the company under Article 214 of Chapter 386.

It concluded that, as the request to dissolve Carnik Construction was rejected, it was unable to consider the wrongful and fraudulent trading under Articles 315 and 316 of Chapter 386. These claims could only be considered if the company had to be dissolved and liquidated.

Dr Grech Orr is a partner at Ganado & Associates.