The First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, on December 12, 2011 in the case “NIBC Bank NV vs Chemmaster Shipping Limited, Chemjasmin Shipping Ltd, Chemiris Shipping Ltd and Seachem Shipping Ltd” held, among other things, that it was more appropriate if the control of the vessels was not left with defendant companies and placed instead under the responsibility of the provisional administrator, to be appointed by this court. The court appointed a provisional administrator as a precautionary measure to bring the vessels under its control.
The facts in this case were as follows:
Unless the court provided otherwise, the provisional administrator did not terminate the role of the directors who continued to exercise their powers.
NIBC Bank NV in its capacity as lender, agent, Swap Bank and Security Trustee filed legal proceedings in Malta against Chemmaster Shipping Ltd, Chemjasmin Shipping Ltd, Chemiris Shipping Ltd and Seachem Shipping Ltd requesting their dissolution.
In this case the court had to decide whether to accept the bank’s request to appoint a provisional administration to take custody and control of all the assets of defendant companies, under Article 107 of Legal Notice 223 of 2004.
Article 107 provides:
“107. (1) The court may appoint a provisional administrator at any time after the presentation of a winding up application.
(2) The provisional administrator shall carry out such functions and shall have such powers as the court may confer on him by the order appointing him.
(3) The provisional administrator holds office until such time as the winding up order is made or the winding up application is dismissed unless before such time he resigns or he is removed by the court upon good cause being shown.
(4) The court shall appoint a liquidator on making up a winding up order and the liquidator shall not resume office until he has notified the acceptance of his appointment to the Registrar in accordance with the Seventh Schedule to these regulations.”
The bank said that it was owed $34,196,245 by defendant companies jointly and severally under a loan agreement and a guarantee dated July 31, 2003. The debt was secured by two mortgages in its favour over the Malta-registered vessels Acacia official number 9824 and Jasmin official number 9539858. Acacia was owned by Chemmaster Shipping Ltd and Jasmin by Chemjasmin Shipping Ltd. Seachem Shipping acted as joint and several guarantor.
All defendant companies were ultimately owned and controlled by the Turkish National Mumtaz Yildiz.
It resulted that defendant companies ceased operations and that the two vessels were laid up in a Turkish port, which was not a convenient place for the bank to enforce its mortgage rights.
The bank stated that as the ships were not being maintained, they were deteriorating and losing value and that it was in its interests to move the vessels to Malta or to a more convenient port where it could enforce its rights.
Faced with this situation, the bank requested the court to appoint Richard Galea Debono as provisional administrator and to give him the function and powers to take control, administer and take possession of all assets of the companies, in particular the two vessels MV Jasmin and MV Acacia.
The bank asked the court to empower the provisional administrator to do what was necessary for the vessels to be brought to Malta or to some other jurisdiction, in order to be sold, and to authorise him to represent the companies, to the exclusion of their director.
The curators representing the defendant companies in reply, opposed the appointment of the provisional administrator.
The argument put forward in their defence was that there was no good reason justifying his appointment. It was submitted further that:
A provisional administrator did not substitute the directors;
The bank’s motive was to take control, before the court decided the issue of liquidation;
Contrary to what the bank alleged, the ships were well maintained.
On December 12, 2011, the court gave judgement by appointing Dr Debono as provisional administrator of all defendant companies. It gave the provisional administrator full, unconditional and free access to any information and document in possession of defendant companies to enable him carry out his task according to law.
The provisional administrator was vested with all powers necessary to discharge his function. These powers included:
• The authority to take under his custody and control all property of defendant companies, including the two vessels, MV Jasmin and MV Acacia, which were located in Turkey.
• The authority to bring the vessels to Malta, if he felt appropriate.
• All costs of relocating the vessels to Malta as well as the costs of keeping the vessels in Malta were to be borne on a provisional basis by the bank. The bank in addition had to pay Dr Debono €10,000 within 15 days, on an account basis as part of his fees, in addition to settling his final fees.
The following reasons were given for the court’s decision.
Merchant Shipping Regulations legal Notice 223 of 2004: The court said that in view of the similarity of the provisions of legal notice 223 of 2004 and the Companies Act, the general company law/ case-law and doctrinal considerations were applicable mutatis mutandis to Legal Notice 223/2004.
It appeared that Article 107 of Legal Notice 223/2004 was wider in scope than its corresponding provision in the Companies Article 228. Under Article 107, the law gave power to the court to appoint a provisional administrator any time, after an application was filed for company dissolution and before the court decided definitively whether the company should be dissolved.
The provisional administrator was obliged to carry out his task until the court ordered the dissolution of the company or unless he was removed or resigned.
The court did not have to decide at this stage whether defendant companies were insolvent.
It had to consider, however, whether the bank’s interests would suffer if the vessels were to be left in Turkey.
Our law did not define the role of the provisional administrator under Legal Notice 223/2004. It was up to the court to decide what powers to confer to the provisional administrator, having regard to all facts and circumstances. The court could not allow a company to carry on its business to the prejudice of its creditors; in particular when a request was made for its dissolution.
If the court did not specify his powers, the provisional liquidator could only attend to the ordinary administration of the company. Upon his appointment, the provisional administrator took under his control the property, assets and rights of the company.
Unless the court provided otherwise, the provisional administrator did not terminate the role of the directors who continued to exercise their powers.
If the provisional administration felt that a director was acting against the interests of the company, he could request direction from the court. He operated its business, with the authorisation and under the control of the court, dealing with the liquidation of the company. As a rule a company had to act in the interests of its shareholders. Reference was made to Davies Company Law where it was stated that:
“The traditional answer of the common law has been the classical one that duties are owed to the members of the company as a whole, the members being the persons who created it or who have subsequently become members, normally by buying shares in it.
The usual justification for this way of defining ‘the company’ is that the shareholders stand last in line to receive the economic benefits of the company’s activities and therefore have the strongest incentive of all the groups involved with the company to monitor the board effectively.”
In the case when a company was facing insolvency, the interests of creditors had to be safeguarded, first and foremost before its members.
“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors aris... but where a company is insolvent the interests of the creditors intrude.
“They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency or the imposition of some alternative administration.”
In Colin Gwyer & Associates Ltd vs London Wharf (Limehouse) Ltd 2003 (BBC 885) it was stated that the directors had fiduciary duties to the creditors of a company which was on the brink of insolvency.
The court noted that defendant companies ceased to trade and did not have money to carry out their operations.
The court appreciated the concerns of the bank, to remove the vessels from the control of its debtors, to bring them under the control of this court in order to ensure that the vessels would be maintained properly.
In the circumstances the court felt that it was more appropriate if the control of the vessels was not left with defendant companies and placed instead under the responsibility of the provisional administrator, to be appointed by this court.
The court concluded by appointing a provisional administrator as a precautionary measure, in order to bring the vessels under its control.
Dr Grech Orr is a partner at Ganado & Associates.