The Court of Appeal, presided over by Mr Justice Raymond C. Pace, on February 7, 2012, in the case “Dr Andrew Chetcuti Ganado and John Abela as liquidators in representation of Sea Malta Company Ltd vs Gollcher Company Ltd”, held, among other things, that once there existed an account current between the parties, set-off was excluded. Gollcher Company Ltd was therefore ordered to pay Sea Malta €8,634 for carriage of goods.
The facts in this case were as follows:
Set-off could not occur in respect of a debt that was not accepted by the other party
The liquidators of Sea Malta Company Ltd filed legal proceedings to recover €8,634.00 from Gollcher Company Limited. This amount represented the balance outstanding in Sea Malta’s favour, for the carriage of goods and other related services.
Gollcher, in reply, contested the legal action and submitted in its defence that:
1. Sea Malta’s legal action was time barred in terms of Article 544(a) and or Article 544(e) of Chapter 13 of the Laws of Malta; and
2. This amount was set-off ipso jure, by the debt owed by Sea Malta to it.
On November 16, 2010 the Court of Magistrates decided in favour of Gollcher Co. Ltd and dismissed Sea Malta’s claims. It concluded that there existed mutual/reciprocal debts between the parties, which were liquid and due.
It said that the debts arose before Sea Malta was placed into liquidation and that set-off took place by operation of law.
The court considered the testimony of the former general manager of Sea Malta.
It resulted that Gollcher engaged Sea Malta for the carriage of goods while Sea Malta contracted Gollcher for other activities. In practice, Gollcher would pay for each shipment, while Sea Malta would pay Gollcher periodically and not for each transaction.
There was an account that was current between the parties.
Gollcher’s plea of prescription was rejected by the Court of Appeal on December 11, 2009.
On December 12, 2005, Sea Malta was placed into dissolution. By this date, both companies had mutual debts towards each other.
On March 21, 2006, Sea Malta, represented by its lawyer, requested Gollcher Co. Ltd to pay it Lm7,817. On March 27, 2006, Gollcher issued a cheque for Lm4,110, drawn from an HSBC account but claimed that it set off the remaining balance with amounts owed to it.
To determine whether set-off took place in the circumstances, the court considered Article 1196 of the Civil Code which provides that:
1. “Where two persons are mutual debtors, a set-off takes place between them.
2. Set-off operates ipso jure, and even without the knowledge of the debtors. The moment two debts exist simultaneously, they are mutually extinguished to the extent of their corresponding amounts.”
Set-off could take place without the knowledge of the debtor, provided there were two mutual debts for the same amount, at the same time.
Article 1197 provides that:
1. “Set-off shall only take place between two debts both of which have for their subject-matter a sum of money or a determinate quantity of fungibles of the same kind, and which are both for a liquidated amount and exigible.
2. A debt shall be deemed to be for a liquidated amount if it is certain even with respect to the quantity thereof.”
In “M. Spiteri et vs J. Vella” (PA) dated May 3, 1993 it was held that, when a plea of set-off was raised, such amounted to an admission that the debt was due but that it need not be repaid as it was set off by a debt due by the creditor.”
In the case “Paul Abela noe vs P. Laferla noe” dated May 18, 1953, it was stated that set-off could not occur in respect of a debt that was not accepted by the other party.
The court noted that Gollcher had accepted its debt, towards Sea Malta. However, it did not accept to pay the balance as, in its opinion, this amount was set off by the amount owed by Sea Malta.
Sea Malta made reference to article 303 of the Companies Act which provides that: “Every privilege, hypothec or other charge, or transfer or other disposal of property or rights, and any payment, execution or other act relating to property or rights made or done by or against a company, and any obligation incurred by the company within six months before the dissolution of the company shall be deemed to be a fraudulent preference against its creditors whether it is of a gratuitous nature or an onerous nature if it constitutes a transaction at an undervalue or if a preference is given, unless the person in whose favour it is made, done or incurred, proves that he did not know and did not have reason to believe that the company was likely to be dissolved by reason of insolvency, and in the event of the company being so dissolved every such fraudulent preference shall be void.”
However, the court noted that this rule was subject to an exception provided in Article 3(1) of Chapter 459, “Set off and Netting on Insolvency Act” which provides that:
“Notwithstanding the provisions of any other law, any Set-off and netting, close-out netting provision or any other provision in any contract providing for or relating to the set-off or netting of sums due from each party to the other in respect of mutual credits, mutual debts or other mutual dealings shall be enforceable in accordance with its terms, whether before or after bankruptcy or insolvency, in respect of mutual debts, mutual credits or mutual dealings which have arisen or occurred before the bankruptcy or insolvency of one of the parties, against:
(a) the parties to the contract,
(b) any guarantor or any person providing security for any party to the contract,
(c) the liquidator, receiver, curator, controller, special controller or other similar officer of either party to the contract, and
(d) the creditors of the parties to the contract.”
Aggrieved by the decision of the Court of Magistrates, Sea Malta entered an appeal, calling for its revocation.
On February 7, 2012, the Court of Appeal accepted the appeal and revoked the decision of the Court of Magistrates. Gollcher Co. Ltd was condemned to pay Sea Malta €8,634 representing the unpaid balance for the carriage of goods and other services rendered by Sea Malta.
The following reasons were given for the court’s decision.
Sea Malta put forward the argument that, as the relations between the parties was regulated by an account current – and that according to Article 264 of Chapter 13 – no set-off could occur in the circumstances.
In addition, it asked the court to apply article 303 of the Companies Act, and not Chapter 459.
Article 264 of Chapter 13 provides that:
“Account current is a contract whereby two persons covenant that their mutual remittances be entered in an account as items of debit and credit, subject to the obligation of the party against whom a balance is found at the time the account is wound up to pay such balance.”
For every transaction, Sea Malta would make an entry in the account current, and would expect payment a short while later. Sea Malta would also effect payment periodically.
The court had no doubt that between the parties there existed an amount current, which meant that set-off was excluded.
Gollcher Company Ltd had to suffer all judicial costs.
Dr Grech Orr is a partner at Ganado & Associates.