The First Hall of the Civil Court, presided over by Madame Justice Anna Felice, on March 26, 2015, in the case ‘APS Bank Ltd v MD Holdings and others’, rescinded a public deed and hypothecs granted by the borrower, under article 1144 of the Civil Code (actio pauliana) made in defraudation of APS Bank’s rights as creditor.

APS Bank lent €582,500 to MD Holdings, secured by a general hypothec over all its borrower’s property present and future, and a special hypothec over two farmhouses in Marsalforn Street, Gozo, with a total land area of 550 square metres.

MD Holdings bound itself not to give guarantees to third parties and not to create additional hypothecs over the farmhouses.

The bank later discovered that the notary had delayed registering its hypothecs, and that by a public deed dated February 25, 2004, MD Holdings had guaranteed the debts of Ronald Azzopardi to a third party and created a general hypothec, as well as a special hypothec over the same two farmhouses in Gozo, without the consent of the bank. The bank claimed that this had been done fraudulently and was prejudicial to its rights.

The bank proceeded by filing an actio pauliana to rescind the public deed of February 25, 2004, in the acts of notary Margaret Heywood as well as the general and special hypothec. It claimed that this violated its rights under the public deed in the acts of notary Nicholas Vella dated November 24, 2003.

It asked the court to declare:

• that the general hypothec and special hypothec over the two farmhouses in Gozo infringed and prejudiced its rights; and

• to appoint a notary to rescind and to cancel the contract in the acts of notary Heywood insofar as MD Holdings had constituted itself guarantor of the debt of Ronald Azzopardi to Mario Galea Testaferrata.

In reply, Mariella Azzopardi claimed not to be a legitimate defendant and requested to be freed from the proceedings. She denied having legal relations with the bank, and said that she had been separated from her husband for several years and was not aware of his business dealings.

Galea Testaferrata submitted he had acted in good faith. He defended the validity of the constitution of debt contract in the acts of notary Heywood, as well as the hypothec in his favour, and saw no reason to order their cancellation. It was stated that any prejudice suffered by the bank was a result of its gross negligence when it had failed to register its hypothecs, granted by MD Holdings.

Article 1144 of the Civil Code provides that:

1. It shall also be competent to any creditor in his own name to impeach any act made by the debtor in fraud of his claims, subject to the right of the defendant to plead the benefit of discussion under the provisions of articles 795 to 801 of the Code of Organisation and Civil Procedure.

2. Where such acts are under an onerous title, the creditor must prove there was fraud on the part of both contracting parties.

3. Where such acts are under a gratuitous title, it shall be sufficient for the creditor to prove fraud on the part of the debtor.

4. The action competent to the creditors under this article cannot be exercised against minors, except to the extent of any benefit which they may have derived, saving any other right of action competent to the creditors against any tutor who may have taken part in the fraud.

The court had to be satisfied that the two elements for the actio pauliana to succeed existed: eventus damni and consilium fraudis, and, in onerous transactions, the participatio fraudis.

“The damages had to be certain and actual but could also consist of a lack of guarantees by the creditor. The damages had to be the result of the impugned act.” (Vol. XLV-II-700).

The fraudulent intention of the debtor was presumed if he knew he was insolvent or would be reduced to insolvency by such act

In ‘Emmanuele Calleja v Carmelo Grima et’ dated January 10, 1955, (PA) it was held that the actio pauliana was used to attack deceitful acts of a debtor, which prejudiced the rights of the creditor.

In ‘Gio. Maria Chircop v Rosario Mifsud’ dated January 25, 1954, it was stated that the eventus damni was proven when it resulted that as a result of the impugned act, the debtor became insolvent or worsened his financial position to the prejudice of his creditor.

As regards consilium fraudis, there was no need to have the intention to defraud. It was sufficient if the debtor was aware that his creditor was prejudiced by his act as he had become insolvent or worsened his financial position: re ‘Camilleri v Agius’ dated November 23, 1934 (PA).

In ‘LP Adrian Borg v Carbone’ (PA) dated May 30, 2002, the court confirmed that the fraudulent intention of the debtor was presumed if he knew he was insolvent or would be reduced to insolvency by such act. It could be assumed that a person was aware of his state of affairs.

In this case, this court was satisfied of the concurrence of the two elements of the actio pauliana. The bank’s position had been prejudiced as a result of its debtor’s acts.

There was no doubt that the hypothecs and guarantees granted by its borrower MD Holdings prejudiced the bank, in particular as the bank had not been repaid.

The court noted that MD Holdings had not pleaded that it had sufficient assets to pay the bank. The director of MD Holdings was fully aware of the company’s financial position.

The guarantee granted by MD Holdings was a gratuitous act. MD Holdings had not been compensated for giving the guarantee. Besides, even if the act was onerous, the court said there was the participatio fraudis of the third party. The third party in the circumstances was aware of the poor financial condition of Ronald Azzopardi and MD Holdings, and in this respect, the court maintained that the elements of the law were satisfied.

The court did not agree with Mariella Azzopardi and rejected her requests. It resulted that on November 7, 2003, she had signed the guarantee in favour of APS Bank to act as surety of MD Holdings.

In addition, on June 25, 2004, she had ratified the contract of constitution of debt in the acts of notary Mario Burlò which her husband had signed on February 25, 2004. She had therefore become party to the guarantee which was now under attack. By ratifying the guarantee she had prejudiced, together with her husband, the first guarantee given to APS Bank.

For these reasons, on March 26, 2015, the First Hall of the Civil Court gave judgment by accepting the bank’s requests. It declared null and without effect the contract published in the acts of notary Heywood dated February 25, 2004, insofar as MD Holdings constituted itself guarantor of the debts of Ronald Azzopardi to Mario Galea Testaferrata and granted a general and special hypothec over the same two farmhouses in Gozo, defrauding the rights of APS Bank under the contract in the acts of notary Vella dated November 24, 2003.

The court declared that the contract in the acts of notary Heywood be rescinded and cancelled.

The court appointed a notary to publish the act of rescission and as curator, in case any of the defendants failed to appear.

Dr Karl Grech Orr is a partner at Ganado Advocates.