Court annuls sworn reply

The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, on November 29, 2011, in the case “Michael Debono nomine vs Mario Debono in his own name, and as secretary and director of The Village Pharmacy Limited and Karizia Company Limited” held among other things that the general provisions in Chapter 12 did not apply within the context of an unfair prejudice action. The court held that a defendant in an unfair prejudice action could not file a sworn reply nor lodge a counterclaim.

The facts in this case were as follows:

In unfair prejudice proceedings, a defendant could not file a counter claim in terms of the Companies Act

In two companies, The Village Pharmacy Ltd and Karizia Co. Ltd, Mario Debono and Joseph Saliba (now deceased) were the only two shareholders and directors.

In The Village Pharmacy Ltd, Mario Debono held 35,000 fully paid up shares while Joseph Saliba had 10,000 fully paid up shares. In Karizia Co. Ltd, the share structure was split with Mario Debono having 28,500 shares, and Joseph Saliba, having shares.

After Joseph Saliba passed away, Mario Debono the surviving shareholder refused to approve the registration of the transmission of Mr Saliba’s shares in the companies to his universal heir: Michael Debono as trustee for the The J. Saliba Trusts and his widow Mary Saliba.

The argument put foward by Mario Debono was that, according to article 4(h) of the Articles of Association of the Companies, the unanimous approval in writing of all existing members was needed for the registration of the shares in the name of a certain class of persons.

Upon the death of a member, a descendant in direct line and/or any other member of the company becomes entitled to be registered as holder of the share or shares inherited. Any other person being an heir shall become entitled for registration only if it is unanimously approved in writing by all the existing members of the company.

The Articles of Association provide that:

“Any person being an heir and who does not become entitled for registration of the inherited shares shall, within three months from date of death of holder of shares, give notice to the directors in writing by registered post. That notice, on the lapse of three months from date of death of holder of shares, shall constitute the company his agent for the sale of the said shares to the members of the company at the price to be assessed by the auditor/s of the company on the basis of the last audited accounts.

“Upon the price being ascertained as aforesaid, the board of directors shall give notice in writing by registered post to all members of the company, other than the deceased member, of the number and price of shares which must be purchased and paid for within 60 days from notification. The shares may be purchased either, so far as may be, pro-rata between the members or as may be unanimously determined by the members themselves.”

Mario Debono intended following the above procedure in the Articles of the Companies to acquire the shares appertaining to the estate of the late Joseph Saliba.

Faced with this situation, Michael Debono as trustee and Mary Saliba filed an unfair prejudice action under article 402 of the Companies Act against Mario Debono in his own name, as well as secretary and director on behalf of each company.

It was submitted that:

• If the shares were sold to Mario Debono, the price for the shares would not be fair. In the case of the company, The Village Pharmacy Ltd, as no audited accounts were filed, the company auditors would be unable to value the shares on the basis of the last audited annual accounts. In the case of Karizia Co. Ltd as the last annual accounts were for the financial period ending March 31, 2002, the shares could only be valued as of 2002, and no regard would be given to the increase in value of the shares over the years.

• A second director in both companies had to be appointed for the proper running of the companies. The quorum for board meetings consisted of two directors and if there was no quorum, article 64 of the First Part of the First Schedule of Chapter 386 applied.

• According to law, the board of directors and not an individual member had the power to refuse to register a transfer of shares.

• The procedure for the sale of the shares by the company could only be initiated if the heirs sent notice to the company. In fact no such notice was given. Our law (article 20 of the First Part of the First Schedule) gave power to the directors to send notice to the heirs for them to decide within 90 days whether to be registered as shareholder or not. Article 20 was intended to avoid any abuse.

• Mario Debono had tacitly recognised them as shareholders in correspondence. It was stated that Mario Debono’s refusal to proceed with the registration of the new member in the companies was malicious and in bad faith.

In addition Mary Saliba claimed that her rights were also infringed.

In their application Michael Debono and Mary Saliba requested the court to give such orders, which it felt to be just and equitable:

• To declare the acts of Mario Debono to constitute unfair prejudice under article 402;

• To prohibit Mario Debono as shareholder from acquiring these shares, and from transferring these shares;

• To order the registration of Michael Debono and Mary Saliba as members;

• To order such acts to complete the registration and or the amendment of the statute of the companies; including the representation clause; that the management would be vested in two directors; that any member had a right to appoint one director that the directors of the two companies would be Michael Debono and Mario Debono.

Mario Debono submitted his defence by filing a sworn reply, whereby he contested the unfair prejudice action, under article 402 of the Companies Act.

He also proceeded by lodging a counterclaim where he requested the court:

• To declare that Michael Debono nomine had not given notice under article 4(h) of the Articles of the Companies;

• To declare that the companies Karizia Co. Ltd and The Village Pharmacy Ltd were to be deemed agents of the heirs, in order to sell the shares in terms of the Articles of Association of the Companies;

• To condemn them to appear for the transfer of the shares at the place, time and hour to be fixed by the court as well as to appoint curators.

On November 29, 2011, the First Hall of the Civil Court gave judgement, limitedly – on the issue whether Mario Debono’s sworn reply and counterclaim were regular, and legally permissible, within the context of an unfair prejudice action, article 402, Companies Act.

The court said that article 402 stipulated when and who could take action, by making an application to court. Article 402 did not specify what form the reply should take. It left this in the discretion of the courts.

In fact on January 24, 2011, the court gave Mario Debono 20 days to submit his reply.

Mario Debono maintained that the fact that his reply was “sworn” did not render it, to be irregular.

The court noted, however, that the general provisions in Chapter 12 did not apply within the context of an unfair prejudice action. The unfair prejudice provision (article 402 of the Companies Act) did not cross-referred to the provisions in Chapter 12.

The procedure under article 402, Chapter 386 was a sui generis procedure. It was initiated by an application and not a sworn application. A defendant did not have to reply in the form of a sworn statement of defence.

In unfair prejudice proceedings, a defendant could not file a counter claim in terms of article 396 et seq of Chapter 12, pointed out the court.

For these reasons, the First Hall of the Civil Court confirmed that Michael Debono noe had not filed a sworn application to make his unfair prejudice action under article 402.

The court declared null and void Mario Debono’s counterclaim and ordered him to replace his sworn reply by another reply, that was not sworn.

Dr Grech Orr is a partner at Ganado & Associates.