The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Tonio Mallia and Mr Justice Joseph Azzopardi, on March 28, 2014, in the ‘Bank of Valletta plc v Crown Hotels Ltd’ held, among other things, that Bank of Valletta had a right of preference to recover all judicial expenses, including those relating to the judicial acknowledgement of its claim, before all other creditors.
The facts in this case were as follows.
This case involved ranking of creditor proceedings of three creditors of the Crown Hotels Ltd – Bank of Valletta, the director general of Inland Revenue and the director general of VAT – over the proceeds of sale of certain immovable property of the Crown Hotel.
Bank of Valletta first filed legal proceedings for its claim against Crown Hotel to be judicially acknowledged and subsequently applied to court auction two immovable properties.
The bank had a general hypothec, with prior ranking and requested to bid animo compensandi, to set off its claim, but other creditors objected.
BOV said that, if the set-off was not approved and if a deposit had to be made under article 340 of chapter 12, it should be allowed to give a guarantee instead of making a deposit. The guarantee was made by BOV to the Registrar of Courts.
The bank did not guarantee third-party obligations but only its own obligations, so an essential element of a ‘guarantee’ was missing. In this respect the court refused to approve BOV’s guarantee.
By the decree of the First Hall, dated September 26, 2011, the court accepted the bank’s request for the opening of the ranking of creditor proceedings and ordered the issuance of notices in terms of article 416(1) of chapter 12.
By a court decision on June 27, 2006, Crown Hotel was condemned to pay the bank Lm536,701, equivalent to €1,250,177, with interests.
The director general of VAT had a claim of €51,841 and penalty of €4,545 with interests. The director general of Inland Revenue was owed in total €634,755. In respect of basis years 2004-2009, it was owed €185,315. The Inland Revenue enjoyed a privilege over the proceeds and wished to compete in the ranking of creditor proceedings over the proceeds.
On November 16, 2012, the court declared that the €135,000 deposited in court should be taken by the director general of the Inland Revenue on account for sums due by the Crown Hotels whose claim ranked before the director general for VAT and BOV. It authorised the director general of Inland Revenue to withdraw this amount.
With regard to the claim of the VAT Department it was stated that “the VAT Department had a special privilege over the assets comprising the estate of the debtor. The unpaid VAT had to be paid before other debts save for other claims having a general privilege and the debts mentioned in article 2009 (a) and (b) Civil Code”.
There was no dispute that the VAT Department did not register its special privilege. Though chapter 406 gave preference, in the sense that tax had to be paid before any debt, as regards immovables, such privileges had to be registered in order to obtain prior ranking.
The court said that the claim of the director general of VAT had to be registered at the Public Registry in respect of immovable property unless registered; the special privilege over the immovable property had no effect. As regards movables, there was no need for registration in the Public Registry.
The claim of the Inland Revenue, as per article 116(3) of chapter 318, had priority over all other claims (save for wages secured by a privilege or hypothec). This privilege in the court’s opinion was general. A general privilege need not have to be registered. Its claim was executive under article 116 of chapter 318.
The court said it had no doubt that the claim of the Inland Revenue, under article 116(3) of chapter 318, ranked before that of BOV. It considered that the claim of the Inland Revenue had a general privilege and, in view of article 62 of chapter 406, the VAT Department’s claim did not have preference over the Inland Revenue’s general privilege. The court felt that the director general of Inland Revenue’s claim ranked before the claim of the VAT Department.
Aggrieved, BOV appealed, requesting the court to vary the decision of the First Hall of the Civil Court of November 16, 2012. BOV asked the court:
• to revoke the decision of the first court where it said that €135,000 had to be withdrawn by the director general of Inland Revenue and instead should provide that it should be paid first in respect of all judicial expenses and all costs in the ranking of creditor proceedings, leading to the decision of November 16, 2012, and the surplus remaining to the director general of Inland Revenue; and
• to revoke that part where the First Hall of the Civil Court held that the director general of VAT had a privilege on the proceeds of the court auction of the immovable property and instead the court should give priority and preference to the secured claim over such immovables, existing prior to the court auction.
The director general of Inland Revenue contested the appeal and asked the court to confirm the decision dated November 16, 2012.
Although a privilege could not existwithout a claim, a claim could exist independently from a privilege
The court considered BOV’s first grievance – that it should be paid all judicial costs which were privileged according to law. Reference was made to ‘Aquilina v Camilleri’ dated May 22, 1950. The legal privilege extended to the costs which were incurred ‘in the common interest of the creditors’ – re Bugeja et v Monreal noe’, (PA) dated April 7, 1886.
The court said BOV had to be authorised to withdraw all judicial costs before other creditors.
The Court of Appeal agreed with BOV that it had a right to be repaid before all other claims. This covered all judicial acknowledgment of its claim. Reference was made to ‘Busuttil v Busuttil’ dated November 29, 1873:
In the ranking of creditor proceedings of R. Farrugia dated October 14, 1937 (Vol. XXXIX PTIII p.380), it was held that it was more legally correct to accept that such expenses were included in the judicial expenses; otherwise there would have been no court auction.
The court noted that the judicial costs amounted to over €50,000 and, once established, BOV had a right to withdraw such amount, before other creditors.
The second grievance related to the right of the state to be paid its fiscal dues before other creditors.
In the ranking of creditors Testing Ltd, which was confirmed on appeal, on March 3, 2006, it was held that the claim of the commissioner of Inland Revenue was of a fiscal nature and, in terms of article 23(8) of act 18 of 1994, it was privileged and had to be paid after the employees and the claims of the Director of Social Services with preference to all other claims whether privileged, or secured by a hypothec.
In the ranking of creditors of Carmelo Gauci Ltd, dated February 27, 2009, the court noted that the law gave a special privilege to the commissioner, which had to be understood in the civil law sense.
While special privileges over movables need not be registered (article 2032 of the Civil Code), special privileges over immovables had no effect unless registered in the Public Registry. Special privileges over immovables also had the diritto di seguito. Registration was necessary in the interest of third parties otherwise it would not have any effect.
Maltese law did not say that the special privilege of the VAT commissioner ranked with preference but that the tax had to be paid with preference. In ‘Zammit v Caruana noe’ dated January 8, 1958, it was held that the claim and the privilege were separate. Although a privilege could not exist without a claim, a claim could exist independently from a privilege. This meant that the failure of the VAT commissioner from registering his privilege did not extinguish the claim and, according to article 62 of chapter 406, this claim had to be paid with preference to those of other privileged debts.
If the special privilege of the VAT commissioner had been duly registered, he could enforce his claim over the immovable property in question and, if it was not registered, he could only claim over the other assets of the debtors and, even if those assets were subject to a privilege, the commissioner had to be paid first, save as provided by article 62 of chapter 406.
The court said that payment had to be taken from the assets of the debtor and had to be made with preference of any other debt irrespective of what was provided in other laws. The court said that, in this case, once the funds consisted of proceeds from the sale of Crown Hotel’s assets, the tax due had to be paid with preference and before other debts, including BOV’s.
On March 28, 2014, the Court of Appeal gave judgment by accepting the appeal in part. It declared the ranking of creditors to be as follows:
First: BOV for all judicial costs incurred for obtaining the judicial acknowledgment of its claim and for the court auction 127/07;
Second: The director general of Inland Revenue was authorised, as decided by the First Hall of the Civil Court, to withdraw the remaining amount from the sum deposited of €135,000 an account of what was due to him. As there would be no surplus, it was not necessary for the court to further add other claims on the list of ranking of creditors.
Dr Karl Grech Orr is a partner at Ganado Advocates.