The Court of Appeal, composed of (outgoing) Chief Justice Vincent De Gaetano, Mr Justice Joseph A. Filletti and Mr Justice Geoffrey Valenzia, on September 6, 2010, in the case Mid-Med Bank Ltd (now HSBC Bank Malta plc) vs John and Marcelle Leone Ganado et, held, among other things, that in enforcing its rights of hypothec, the bank had to notify all in solidum guarantors in terms of article 2072 of the Civil Code.

The facts in this case were as follows:

HSBC Bank Malta plc (formerly Mid-Med Bank) filed legal proceedings to request the court to order the sale by auction, of property in Wardija, known as Thursday’s Disco, now called The Studio Disco.

The bank had a special hypothec over this property and sought to obtain payment from the proceeds of sale.

The bank had obtained a favourable judgment in its favour against its principal debtor, John Leone Ganado, on May 3, 1993, whereby it was declared a creditor for Lm42,954, with legal interests from September 29, 1985.

John Leone Ganado’s wife Marcelle and John Camilleri were in solidum guarantors.

John Camilleri as guarantor paid part of the debt and was subrogated to the bank’s rights.

On October 10, 2006, the first court decided in favour of the bank, and ordered the court auction of the property.

It resulted that Joseph and Giuseppa Farrugia, Carmelo and Carmen Farrugia, Anthony and Carmen Farrugia and Nazzareno and Josephine Farrugia had acquired the property by court auction on December 9, 1987. The property was thereafter transferred to spouses Ronald and Mary Gaeity. The Farrugias and Mr and Mrs Gaeity appealed from the first court decision, and requested its revocation, or alternatively to vary the first court’s decision by limiting the amount guaranteed by the hypothec to Lm13,101, with interests never exceeding the capital.

It was submitted, among other things, that the bank failed to comply with article 2072 (1) of the Civil Code, in order to enforce its hypothecary rights.

Article 2072 of the Civil Code provides “If the third party in possession fails to surrender the immovable or movable or to pay the debt fallen due, it shall be lawful for the hypothecary creditor to demand judicially the sale of the immovable or movable charged with the hypothec after having by means of a protest called upon the debtor to discharge the debt, and upon the third party in possession either to discharge the debt or to surrender the immovable or movable”.

At issue was whether the term debtor included the in solidum guarantor

The bank’s failure rendered its action, null and void as the bank’s judicial protest was not served upon, John Camilleri, the in solidum guarantor of principal debtor John Camilleri.

Defendants in addition pleaded that:-

• The hypothecs were null, since at the time the debtor was in a state of insolvency , as well as in terms of article 352 (1) chapter 12 of the Laws of Malta.

The bank, in reply, contested the appeal, maintaining that the first court decision was fair and just, and that it should be confirmed, save for the costs, in respect of which it filed an incidental appeal. In its incidental appeal, it claimed that the first court should have condemned defendants to pay all the costs of the suit, jointly and severally. Defendants Farrugia and Gaiety disagreed with the bank, on the issue of costs.

On September 13, 1994, the bank filed a judicial protest in terms of article 2072 (1) of the Civil Code against John Leone Ganado, the Farrugia’s and Gaiety. It claimed that the transfer of the property was done in violation of their hypothecary rights. John Camilleri guarantor, was not notified of this protest.

On February 23, 1995, within the time stipulated under article 2072 (2) of the Civil Code, the bank filed legal proceedings, so that the property be sold by court auction.

On September 6, 2010, the Court of Appeal gave judgment by accepting the appeal and by revoking the decision of the first court. The bank’s incidental appeal was rejected. It ordered the bank to pay all the costs of the suit. The following reasons were given for the court’s decision. The Farrugias and Gaiety put forward the argument that:

• A joint and several guarantor was in the same position as the debtor. He could not oppose the benefit of discussion and division. A creditor had the right to sue directly the guarantor without first having to take action against his debtor. In terms of articles 1094 and 1935 (b) of the Civil Code, the in solidum guarantor was always liable together with the debtor. A third party in possession of the property was legally in a different situation. A creditor had to first request payment from the debtor before proceeding as enforce the hypothec against the third party in possession. The third party who paid the debt had to be subrogated in the rights of the creditor against the debtor. The in solidum guarantor on the other hand, was deemed at law to be a co-debtor. He had to be notified of the judicial protest and be requested to pay.

• The court did not accept the bank’s argument that once defendants, the Farrugias and Gaeity had not raised the plea of nullity before the first court, this plea should not be considered at this appellate stage. This point had been considered and indirectly decided upon by the first court, when it declared that the bank’s judicial protest was duly notified according to law.

The purpose of the judicial protest was to notify the debtor, in order to avoid additional legal action. The in solidum guarantor was to be considered a “debtor” for all intent and purposes, in terms of article 2072. John Camilleri was obliged to pay the bank, equally with the principal debtor. He had in fact paid a significant part of the debt, on December 2, 1997, noted the court.

The court said that the bank put forward the argument that the presence of the guarantor was not necessary, once article 2072 did not specifically mention the “guarantor”. It contended on this basis that the guarantor did not have to be notified of the judicial protest.

This court, however, disagreed with the bank. It said that the notification of the guarantor John Camilleri of the judicial protest had a practical value.

For these reasons, this court concluded that in terms of article 2072 of the Civil Code, it was essential for the bank to give all the guarantors notice of the protest. It was not sufficient for the bank to notify just one of the guarantors.

As this was not done in the circumstances, the bank’s legal action was not acceptable, pointed out the court. It said that the first court was incorrect to state that the judicial protest of September 13, 1994 had been notified according to law.

Nor did this court find the bank’s incidental appeal to be acceptable, in particular when the bank failed to comply with article 2072 of the Civil Code.

Dr Grech Orr is a partner at Ganado & Associates.