APS Bank not negligent in the enforcement of pledge

The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Albert J. Magri and Mr Justice Tonio Mallia, on June 24, in the case APS Bank Ltd vs Joseph Paul Bonello and his wife Rita Bonello held, among other things, that the bank was not negligent in the enforcement of the pledge of securities, despite any diminution in their value between the date of “call in” and the date of payment. It acted in the best interest of the debtor. The bank proposed to arrange a private sale to fetch a higher price than if the sale were to be held by court auction.

The facts in this case were as follows:

APS Bank held Dr J. P. Bonello and his wife to be jointly responsible as principal debtors for the amount of Lm15,991, representing the balance on an overdraft facility (Lm14,695) and the balance of the interest disposal current account with interests, with effect from December 31, 2005 up to the date of payment.

APS Bank eventually proceeded by filing legal proceedings against Dr Bonello and his wife. In their writ the Bank asked the court:

To declare that Dr Bonello and his wife were jointly responsible as debtors for the amount of Lm15,991 with interests from December 31, 2005, and,

To condemn them to pay this amount with interests.

In reply, Dr Bonello and his wife contested the legal action against them. They submitted in defence that:

The bank’s action was premature. It was stated that although negotiations were well under way and that they were doing their utmost to resolve the issue amicably, the bank went ahead by instituting these legal proceedings; in this respect its action was filed too early.

The amount was excessive and not due. Allegedly the interests and costs were not calculated according to law.

By delaying to liquidate the pledged securities, the bank was negligent. This meant that owing to a drop in the value of the pledged securities, they had to pay additional amounts to the bank.

On November 27, 2008, the First Hall of the Civil Court decided in favour of APS Bank, and condemned both Dr Bonello and his wife in solidum to pay APS Bank €37,251.

According to the sanction letter dated March 18, 1999, Dr Bonello was granted an overdraft facility of Lm5,000 and as security, he pledged in favour of the bank his life insurance policy.

The facility was later increased and additional security was granted – in the form of a pledge of stocks and shares which were granted by a third party guarantor.

It resulted that Dr Bonello defaulted in his loan repayments and the bank issued a call-in letter dated February 28, 2002.

It requested the cooperation of his debtors to sell the pledged securities privately. The required form permitting the private sale of the pledged securities was, however, not forthcoming.

Eventually, on February 4, 2005, the third party guarantor paid the bank the value of the securities as of February 2005 (Lm19,600). This payment reduced the principal debt to Lm14,581.

Attempts by the bank to enter into a notarial “constitution of debt” contract with Dr Bonello were fruitless.

The First Hall of the Civil Court did not find the bank’s legal action to be premature in the circumstances. Nor was it proven that the bank was claiming an excessive amount.

It said that the bank had not acted negligently, in the enforcement and in the liquidation of the pledged securities.

Article 1970 (1) of the Civil Code provides

“The creditor, unless such creditor be Il-Monti, cannot dispose of the thing pledged in case of non-payment: but he may cause the thing to be sold by auction under the authority of the court.”

A creditor was not free to sell the pledged item. He had a right to request its sale by court auction proceedings.

In the circumstances, the court said the bank acted correctly when it agreed with the third party guarantor. The private sale of the pledged item required the consent of the pledgor. In this case, no such consent was given by the pledgor.

It was permissible for a debtor to authorise his creditor to sell the pledged item without any formalities: – re E.Ripard et vs P. Ripard et – P. A. (T. G.) dated January 11, 1944. This was confirmed in Lombard Bank Malta plc vs L. Sultana et (PA GV) November 31, 2003 where it was held that an agreement for a creditor to sell the pledged item, after a pledge was taken, was valid.

The court refused to accept Dr Bonello’s claim that the bank acted negligently. It had not been proven that Dr Bonello had given the bank instructions to liquidate the pledged securities, in case there was no-payment by February 5, 2001. Besides, such sale could not take place before there was a call-in, which occurred on February 28, 2002.

The debtor as well as the third party guarantor had not consented to the sale of the pledged securities.

The court noted that it was also possible for the pledgor/debtor to request the sale by court auction of the pledged securities but they did not do so.

On February 4, 2005, the third party guarantor paid APS Bank, Lm19,600, the value of the securities, in order to obtain their release from the bank.

There was no previous dispute on the quantum of the amount. Dr Bonello as debtor had only tried to re-negotiate the period/schedule of repayment; however no agreement had been reached.

Aggrieved by the decision of the First Hall of the Civil Court, Dr Bonello entered an appeal, calling for its revocation.

Dr Bonello reiterated his argument that the bank was negligent, and failed to take timely action to enforce its pledge, in terms of article 1970 of the Civil Code.

On June 24, 2011, the Court of Appeal gave judgment by dismissing the appeal and by confirming the decision of the First Court.

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

There was no doubt that Dr Bonello and his wife were the debtors. It was only incidental that the guarantees were granted by a third party. The court noted article 1970 of the Civil Code. It resulted that between the date of call-in and the date of payment, there was a diminution in the value of the securities. The bank gave Dr Bonello a form, to allow the private sale of the pledged securities but this had not been returned.

Instead, Dr Bonello made several offers to pay but in the end, nothing materialised. The court considered that under article 1970 of the Civil Code, the pledgor could also request the court auction of the pledged items. It followed, therefore, that Dr Bonello had no good reason to hold the bank to be responsible for the consequences of any delay in liquidating the pledged securities, as he himself could have taken action.

The court said that in the circumstances, the bank was not negligent. It acted in the best interest of the debtor. The bank proposed to arrange a private sale to fetch a higher price, than if the sale were to be held by court auction.

Nor was the bank responsible for acting prematurely. It app-eared that despite calls to pay, Dr Bonello procrastinated by making several offers and later back-tracking.

For these reasons, the court concluded by dismissing the appeal. As it also found the appeal to be frivolous, it condemned Dr Bonello to pay double the costs in terms of Article 223 (4) Chapter 12.

Dr Grech Orr is a partner at Ganado & Associates.