The Court of Appeal, composed of Chief Justice Vincent De Gaetano, Mr Justice Albert J. Magri and Mr Justice Tonio Mallia, on July 30, 2010, in the case “Paul Falzon vs Joseph Zahra, Andrè Zahra, Maria Dolores Zahra and Zahra Ltd and JP Blocks Ltd”, held, among other things, that a contract which was signed by a person whose appointment as director was vitiated, was deemed to be not valid and binding upon the company.

The facts in this case were asfollows:

Originally in 2003, Paul Falzon and Joseph Zahra had agreed to establish the company JP Blocks Ltd, for the purpose of manufacturing building material and bricks. The company had two shareholders with equal shares, and two directors: i.e. Mr Falzon and Mr Zahra. Legal representation was vested in two directors, acting jointly.

On January, 14, 2003, another company Zahra Ltd granted JP Blocks Ltd the temporary “sub-ċens” for the next 30 years of a quarry measuring 4,000 square metres, to enable it to build its factory to produce the building material. In the course of time, relations between Mr Zahra and Mr Falzon deteriorated, to the extent that they finally agreed to split. By way of a private agreement dated October 7, 2004, Mr Falzon accepted to sell all his shares in the company JP Blocks Ltd to Zahra Ltd, and to resign as director. The agreement was extended several times, as Mr Falzon was not satisfied with the “finish” of a flat in Qawra, which was to be paid to him, as payment in kind.

However, at one point, Mr Falzon refused to extend it further. He decided to keep his shares and not to resign as director.

Thereafter, without the consent of Mr Falzon, on November 24, 2004, Mr Zahra filed two Form K’s (notification of change of directors), to register the change of directors: the resignation of MrFalzon as director and the appointment of Andrè Zahra (his son) as the new director.

In truth, Mr Falzon had never tendered his resignation. He was not even aware that he had been removed. Nor had the company ever resolved to appoint Andrè Zahra as director.

Mr Falzon realised that he had been removed in January 2006. He also discovered that Andrè Zahra, acting on behalf of JP Blocks Ltd, entered into a contract on January 16, 2006, agreeing to terminate the sub-ċens of the quarry and to return the land to the company, Zahra Ltd. Mr Falzon pleaded that both the change of directors as well as the rescission of the grant was fraudulent, to the prejudice of his rights.

Faced with this situation, Mr Falzon proceeded by filing legal proceedings against Joseph Zahra, Andrè Zahra, Maria Dolores, Zahra Ltd and JP Blocks Ltd. He asked the court:

• To annul the Form K’s dated October 22, 2004 filed at the Registry of Companies by Joseph Zahra;

• To order the rescission of the contract whereby the sub-ċens had been terminated, which contract was done with deceit, and fraud to the prejudice of his rights;

• To order the defendants to appear for the publication of the relative acts and to appoint a notary to publish the acts;

• To declare defendants to be responsible for all damages.

Joseph Zahra, in reply, contested Mr Falzon’s claims, denying fraud. It was submitted in his defence that:

• It was not possible to request the nullity and rescission of a Form K, as this form was only a notice to the Registry;

• The contract of termination was not done fraudulently.

Joseph Zahra claimed that as JP Blocks Ltd had serious financial problems, the contract of termination was intended to reduce the company’s losses and return the property to Zahra Ltd. Zahra Ltd in return renounced all arrears in the payment of the sub-ċens. Joseph Zahra said that the contract of termination was in the better interests of JP Blocks Ltd and served to reduce its debts.

On May 30, 2008, the first court accepted Mr Falzon’s requests, and ordered defendants to appear for the relative contract. A curator was appointed to represent any person who happened to be contumacious.

Form K’s: The Form K’s which were filed by Joseph Zahra were false. There was no proof, such as any company resolution approving the changes. While Joseph Zahra had no right to register these forms, Mr Falzon was entitled to request their cancellation. The fact that Mr Falzon filed another Form K to inform the public that he was still a director, did not mean that he accepted Joseph Zahra’s acts or that he accepted his removal from the post of director. He did so to affirm his position, the court said.

Contract of termination: The company had never resolved to rescind the contract. Mr Falzon had not even been informed of the termination. The court noted the company JP Blocks Ltd provided material to Zahra Ltd, from which it set off the amounts due to it.

A Form K alone was not enough to change the directors in a company, pointed out the court. It was necessary to have a company resolution. The Form K only served as a notice to the public.

In the circumstances there was no company decision. Andrè Zahra had never been appointed director by the company nor did he have a right to represent the company in a contract of rescission. For these reasons the first court declared the contract of termination dated January 16, 2006 to be null, on the basis of fraud.

Aggrieved by the decision of the first court, Joseph Zahra entered an appeal calling for its revocation.

On July 30,2010, the Court of Appeal gave judgment by dismissing the appeal and by confirming the decision of the first court, in its entirety. The Form K’s were to be annulled and a copy of the decision had to be sent to the Registry of Companies. The following reasons were given for the court’s decision:

The Form K’s: The court noted that these were false. Mr Falzon never resigned nor was there only resolution to remove him, as required by the company’s statute.

It was not permissible for Joseph Zahra to act unilaterally.

It considered that Joseph Zahra acted fraudulently in the circumstances.

Termination of grant: The court felt that this was not done in the interest of JP Blocks Ltd. As the person signing on behalf of the company did not have authority to represent it, the act was not binding upon the company.

It followed therefore that the sub-grant to JP Blocks was not rescinded.

The court maintained that there were effective remedies in our company law against deadlock between shareholders and directors.

It concluded that no one should act unilaterally and declared that the contract of rescission was prejudicial to Mr Falzon.

Dr Grech Orr is a partner at Ganado & Associates.