The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, on June 13, 2011, in the case “Ronald Azzorpardi vs Taormina Holdings Ltd and Sovereign Hotels Ltd”, held, among other things, that the courts should not intervene and exercise their wide powers under the unfair prejudice provision (Article 402 of the Companies Act) just to provide a solution to any corporate problem when effectively there was no “unfair prejudice”.

The facts in this case were as follows.

Ronald Azzopardi was a minority shareholder and director of Sovereign Hotels Ltd, and holder of 78,750 ordinary shares and 92,250 ordinary B shares.

Taormina Holdings Ltd was the majority shareholder, holding 825,000 ordinary C shares.

It resulted that, in the financial years 2001, 2002 and 2003, the company had four directors. The draft accounts for these years were prepared by one director, C. Gauci, who represented the majority shareholder. The accounts were sent to the auditors in draft form and were not yet approved by the board.

After several years, in 2009, Mr Azzopardi collected the draft audited accounts from the auditors for the years 2001-2003.

Under pressure to conclude the accounts for the years 2001, 2002 and 2003, he convened an annual general meeting to approve the accounts.

The accounts at this stage had not been signed by the directors nor approved by the board. While in the years 2001-2003, the company had four directors, in 2009 Mr Azzopardi was the sole director.

As neither the majority shareholder nor any of the former directors appeared for the annual general meeting, Mr Azzopardi acted in accordance with regulation 37 of the First Schedule to the Companies Act.

The meeting was adjourned and held by one shareholder. The accounts were approved and signed by Mr Azzopardi and sent to the auditors for finalisation.

As the former directors refused to sign back-dated accounts, to a time when they no longer served as directors, the auditors refused to accept the accounts, in terms of article 178 of the Companies Act.

In the meantime, fines were incurred and the sole director, Mr Azzopardi, was in breach of his statutory duties under the Companies Act.

Faced with the situation, Mr Azzopardi said he was placed in a position where it was impossible for the accounts be signed by two directors.

He proceeded by filing an unfair prejudice action against Taormina Holdings Ltd and Sovereign Hotel Ltd, in terms of Article 402 of the Companies Act.

He requested the court to declare that Taormina Holdings Ltd acted against the interests of the company and its members. The failure of the company to file the audited accounts for the years 2001-2003 was harmful to the company, its members and directors.

Taormina Holdings Ltd in reply contested the legal action. It was submitted that:

• The court was requested to pass an order against the company’s two former directors, C. Gauci and J. Gauci, who were not a party to these proceedings.

• The accounts should not be signed retroactively and back-dated by persons who were no longer directors. The current director, Mr Azzopardi should sign the accounts and the annual general meeting should not be presented with accounts which were not signed and not accompanied by the auditor’s report.

On June 13, 2011, the First Hall of the Civil Court dismissed Mr Azzopardi’s requests under Article 402 of the Companies Act.

Article 402 provides:

“(1) Any member of a company who complains that the affairs of the company have been or are being or are likely to be conducted in a manner that is, or that any act or omission of the company have been or are or are likely to be, oppressive, unfairly discriminatory against, or unfairly prejudicial, to a member or members or in a manner that is contrary to the interests of the members as a whole, may make an application to the court for an order under this article...”

The court said that it enjoyed wide discretion under Article 402. If the court felt that the application was well founded, it had wide powers to make such order, as it deemed fit.

The court noted that Article 402 was based on the English Companies Act 1985 Article 459.

Reference was made to English writers. In Company Law – Theory, Structure and Operation (Oxford University Press 1998), B. Cheffins writes on pages 285:

“Under this provision, a judge can grant relief on the grounds that a company’s affairs have been conducted in a manner which is unfairly prejudicial to the applicant. Section 459 is an example of an open-ended rule since the legislation does not define in any way the type of conduct which qualifies as unfairly prejudicial and provides a judge with broad powers to grant to a successful applicant whatever remedy is appropriate.”

Legal action could be taken against the majority shareholder, the company and third parties.

In Minority Shareholders: Law, Practice and Procedure (2000), by V. Joffe, it is stated on page 218 that “the petitioner will be the member seeking relief, and the company of which he is a member and in relation to whose affairs he alleges unfairly prejudicial conduct will be made a respondent. Additionally, every member of the company (other than the petitioner) whose interests might be affected by the relief sought should be joined as a respondent, whether or not allegations of unfairly prejudicial conduct are made against him; in the case of a small private company, this will usually mean that every member ought to be joined as a respondent to the petition. The category of potential respondents (other than the company) is not, however, limited to a member of the company. In an appropriate case, relief may be sought against a non- or former member.

The width of the category of potential respondents is indicated by “Lowe vs Fahey” where it was held that, if the unfairly prejudicial conduct alleged was a diversion of corporate funds, a petitioner could seek relief not only against the directors involved or third parties who knowingly received or improperly assisted in the diversion. Even a person who is not actively involved in the conduct of the affairs of the company complained of may be made a respondent, at least if he would be affected by the relief sought.”

In “Vella et vs Vella Brothers”, dated March 9, 2007, the Court of Appeal held that, under Article 402, the court had wide authority to protect the minority shareholders.

An applicant had to show that he or another member or the general body of shareholders would be unfairly prejudiced, oppressed or that he would suffer an injustice or a discriminatory act. It was not necessary to prove that he would certainly be prejudiced. A reasonable basis of possibility of prejudice was sufficient, pointed the court.

In Bovey Hotel Ventures Ltd (1983) BCLC 290 it was held that: “The court will not give a list of situations when this remedy may be resorted to. However, one principle remains clear. A shareholder may make use of this article when his shareholding in the company has been seriously diminished or at least seriously jeopardised by reason of a course of conduct by those who have the de facto control of the company, which has been unfair to the member concerned.”

The court had also to consider the legitimate expectations, of an applicant, re: “Ellul vs Ellul pro et noe” (CA) dated January 31, 2003.

Reference was made to Farrar’s Company Law, third edition. The court had to ensure that there was fairness.

In the circumstances the court said that it was not disputed that the company was a private company, with one director.

It took into account that the auditors insisted that, once the company had four directors in 2001-2003, the accounts had to be signed by at least two directors.

There was no evidence, however, that the accounts were approved by the board for each accounting period.

The court maintained that Mr Azzopardi should have first insisted that the accounts were approved by the board and were duly signed before they were sent to the auditors.

The auditors should not have accepted the accounts unless they were first approved by the board and signed by the directors.

Reference was made to Principles of Maltese Company Law (Professor Muscat “The directors are obliged to ensure that the accounts are drawn up clearly and in accordance with the provisions of the Act and with generally accepted accounting principles and practice. An overriding principle, however, is that accounts must give a true and fair view of the company’s assets, liabilities, financial position and profit or loss.

“The company’s annual accounts should be approved by the board of directors and the balance sheet should be dated and signed on behalf of the board by the two directors of the company. Every copy of the balance sheet which is laid before the company in general meeting or which is otherwise circulated, published or issued is to state the name of the directors who signed the balance sheet on behalf of the board. The same directors are to sign on behalf of the board, the copy of the balance sheet which is to be delivered to the Registrar.

“Directors need to exercise considerable caution in relation to the approval of the annual accounts. Indeed, if accounts are approved which do not comply with the provisions of the Companies Act, every director of the company who was party to their approval and who knew that they not so comply or was negligent as to whether or not they so complied is liable to a penalty. For the purposes of this rule, every director at the time accounts were approved is considered to be a party to their approval unless he proves that he took all reasonable steps to prevent their being approved.”

In the circumstances, the accounts were retained by the auditors, until settlement of their fees. After several years, Mr Azzopardi decided to pay the auditors and collected the set of accounts for financial years 2001-2003, as he was under pressure to conclude the accounts. The court said that Mr Azzopardi had no right to insist that the persons who today no longer served as directors of the company should sign these accounts back-dated to the time when they were directors.

This was not the way a company was to be administered.

Mr Azzopardi, who was both shareholder and director, was obliged to ensure that the accounts were approved as required by law.

It was true that the Companies Act, Article 402 of Chapter 386, conferred upon the court wide powers to dispense an equitable remedy. The Companies Act, however, also contained detailed provisions on several issues – the breach of which triggered penalties.

There were provisions on the duties of directors, the keeping and approval of accounts, the role of auditors and the function of an annual general meeting. The court was not of the opinion that it should intervene, in the absence of any “unfair prejudice”, “oppression”, “discriminatory act” or abusive act in the manner contemplated by Article 402.

It suggested that the shareholders of the company may wish to consider winding up the company. It was obvious that they had internal problems, and had lost trust in each other.

For these reasons the court dismissed Mr Azzopardi’s application under the unfair prejudice provision, Article 402.

Dr Grech Orr is a partner at Ganado & Associates.