The judgment of the Commercial Court of March 28 in the names of Alessandro Farrugia et v John Mercieca et (8/2018JZM) ventured into areas of company law previously untouched by our courts, in turn achieving what can be described as nothing short of a landmark judgment.

Disagreements in a company are increasingly common and can often escalate into hostile disputes which could lead to the collapse of an otherwise successful business concern. Disputes may arise in a number of ways, with common reasons being disagreements about the management or direction of the company, or concerns over possible suspicious activities by any of the directors, among others.

The law does provide for some effective and efficient remedies, mostly through the principle of ‘protection of shareholders against unfair prejudice’, found in article 402 of the Companies Act. Simply put, any member of a company who complains that the affairs of the company have been, are being, or are likely to be conducted in a manner that is likely to be, oppressive, unfairly discriminatory or unfairly prejudicial towards members of the company in a manner that is contrary to the interests of the members as a whole, can seek remedy. The Registrar of Companies is granted a similar remedy.

The court then has the power to provide for a myriad of orders, ranging from simply regulating the conduct of the company’s affairs in the future, to actually going to the extreme of dissolving the company and providing for its consequential winding up.

In this case, the plaintiffs proceeded against the defendant, who had occupied the position of director and general manager of a company the plaintiffs were members of. They alleged that the defendant had been guilty of a number of abusive acts against the interest of the company and its members, including by concealing information about the financial state of the company, authorising dealings without the other director’s knowledge, withholding the payment of creditors, and withdrawing money from the company’s bank accounts. All of this – the plaintiffs said – led to the ruin of the company, so much that the company had been dissolved and was in the process of being wound up.

Once the company was in liquidation, the remedy against unfair prejudice could not be availed of

They sought an action for damages as a remedy under article 402 of the Companies Act.

There were many questions to be discussed during the case, but one of them was particularly remarkable: can a remedy against unfair prejudice be proposed when the company involved was all but dead? Can an action in terms of article 402 be instituted when the company involved is dissolved but yet to be wound up? What can be done once the affairs of the company had been put on life support, and all that remained was for one to pull the plug so that the company ceased to exist?

In trying to settle this quandary, the court went into great detail, quoting several sources, including celebrated authors, local and foreign judgments. In its seat, it likened itself to a medical practitioner presented with a patient who is alleged to be suffering from one or more ailments which can be treated by an appropriate remedy applied during the course of the continuing life of the company. Indeed, it was said that if the objectionable conduct did not recur, there is no scope for giving relief under this law.

Ultimately – the court observed – the remedies provided at law had one common denominator: the necessity of the court’s intervention at a time when a company was still fully functioning, and not on the brink of demise. Indeed, in its nature, the remedy against unfair prejudice presupposed the existence of a company; or else, there would not be any purpose for the existence of the action itself.

The logic behind this rationale is hardly arguable.

But the court decided to go a step further, setting to lay any doubts to rest.

It compared the action under article 402 to what used to be known as the ‘derivative action’, an action which prior to the coming into force of the Companies Act (the law regulating company affairs in Malta), our law had borrowed from English common law. A shareholder could, even before the introduction of article 402, act on behalf of a company against the company’s own directors, to seek remedy against the director’s wrongdoing where the company does not institute the action itself. With the birth of the Companies Act in 1995, the derivative action was put aside and replaced with the remedy against unfair prejudice in article 402. Indeed, this new law was somewhat of a statutory form of the now succumbed derivative action.

The court observed that it had been said time and time again that the derivative action became inaccessible once the company went into liquidation. As the court suitably noted, there was nothing to suggest that the same reasoning cannot be applied to the remedy under article 402 of the Company’s Act. Indeed, if anything, such tradition reaffirmed the sound thinking of the court in respect of article 402.

The Commercial Court therefore concluded that once the company was in liquidation, the remedy against unfair prejudice could not be availed of, and moved on to dismiss the plaintiffs’ case.

Carlos Bugeja is senior associate at Azzopardi, Borg & Abela Advocates.