The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Tonio Mallia and Mr Justice Joseph Azzopardi on April 29, 2016, in the case ‘HSBC Bank (Malta) Plc v Pirella Supermarkets Ltd’ held, among other things, that for there to be novation, a new debt had to be created to replace the original debt, which was extinguished. According to article 1180 of the Civil Code, novation was never presumed. It had to be clear that the parties intended to have novation. If the original debt was simply varied by an extension to the repayment schedule, there was no novation.
The facts in this case were as follows:
HSBC Bank (Malta) plc filed legal proceedings to enforce a notarial deed of ‘constitution of debt’, published in the acts of notary Pierre Cassar dated January 28, 2002, by debtor Pirella Supemarkets Ltd, in terms of article 258 of Chapter 12.
HSBC asked the court to authorise the enforcement of its executive title.
Pirella Supermarkets, in reply, submitted in defence that the notarial deed had no legal effect as it had been extinguished by novation. It said that the debt was not certain, liquid and due once the bank had agreed to grant an extension of the repayment programme.
Allegedly, the bank no longer had an executive title. It was stated that the bank could not enforce this deed as it had been superseded by a new agreement, which agreement remained binding unless it was declared null and void by the courts.
On April 12, 2012, the First of the Hall Civil Court discussed the defence pleas of Pirella Supermarkets and accepted the requests of HSBC. It declared enforceable the deed of January 28, 2002.
In this public deed, defendant company:
“...constitutes itself real, certain and liquid debtor in favour of the bank which accepts in the sum of Lm970,960.30 by way of capital and Lm24,027.47 by way of debt accrued interest to date with regards to the overdraft account; and Lm30,025.91 by way of capital and Lm739.94 by way of debt interest accrued to date with regards to the loan account.”
There was no doubt that this public deed gave rise to an executive title.
The first court did not accept defendant company’s submissions that novation had taken place. The original debt had not been extinguished, it said. It was only varied: re: ‘Mary Borg et vs Joseph Micallef’ dated October 22, 1998.
If there was any doubt, novation had to be excluded, said the court.
In its letter dated April 14, 2004, HSBC granted additional time to Pirella Supermarkets to repay the debt, subject to the condition that HSBC could invoke the original agreement, if the debt was not repaid on time.
Pirella Supermarkets Ltd failed to comply with the terms of this letter but this did not mean that the bank had renounced its rights under the public deed. The first court said that there was no ‘animus novandi’. There was only an understanding that if the defendant company complied, the bank would not enforce its rights under the public deed. The bank still had an executive title.
For there to be novation, a new debt had to be created to replace the original debt, which was extinguished
Any reduction of part of the guarantee did not bring about an extinguishment of the original obligation. A guarantee was an accessory to the principal obligation and any additional abatement did not amount to a novation. Nor did the bank have to file a lawsuit to obtain a judicial declaration that Pirella Supermarkets lost the benefit of time.
The court was of the opinion that the bank had no intention to renounce its executive title: re: ‘Jun Lui et noe v Salomo Ulrich noe’ dated October 3, 2002:
Aggrieved by the decision of the first court, Pirella Supermarkets entered an appeal, calling for its revocation. At issue was whether the letter dated April 14, 2004, brought about novation.
Pirella Supermarkets argued that the ‘animus novandi’ need not be expressed; it could be tacit. Reference was made to the jurist Ricci.
For there to be novation, a new debt had to be created to replace the original debt, which was extinguished. According to article of 1180 of the Civil Code, novation was never presumed. It had to be clear that the parties intended to have novation. If the original debt was not terminated, even if varied, there was no novation.
The court said that the letter dated April 14, 2004, had to be read in the light of the notarial deed. The court felt that this letter was an accessory to the principal obligation under the notarial deed. This letter did not create a new debt: re: ‘Anthony Galea v Mario Hallett pro et noe’ dated June 28, 2001, where it was held that novation could not be presumed, in particular once novation gave rise to a renunciation of rights of a creditor.
The court was of the opinion that the letter of April 14, 2004, only varied the repayment schedule. This letter did not say that the bank as creditor was releasing its debtor from repaying the original debt nor that the bank was renouncing its rights.
Nor could it be argued that this letter of April 14, 2004, was incompatible to the notarial deed. On the contrary, the two agreements could exist side by side, pointed out the court.
Reference was made to ‘Francis Paris et vs Maltacom plc’ dated July 7, 2008.
In this case, this letter explained the court, did not create a new debt but only modified the repayment schedule.
An extension to the repayment schedule did not constitute novation. The court maintained that the bank did not have to obtain a judicial declaration that its debtor lost the benefit of time, nor that its debtor was obliged to pay the original debt.
It was noted that the letter was subject to a suspensive condition and once Pirella Supermarkets failed to comply, the bank reverted to its original position, under the notarial deed.
The rule that a creditor had to obtain a judicial declaration that a debtor lost the benefit of time was not absolute: re: ‘Ciantar v Grech’ dated May 21, 1965, and ‘Dr David Tonna noe v John Ros et noe et’ (CA).
The court said that by virtue of the letter dated April 14, 2004, Pirella Supermarkets was given the benefit of time and if it did not pay in time, the notarial deed applied. The bank had to render its title under the notarial deed to be enforceable once again.
The court said that the bank had not renounced any of its rights under the notarial deed. Not could it be stated that as a result of the letter the debt was no longer certain, liquid and due or that the bank lost its executive title, or that it had prejudiced its rights to enforce the notarial deed.
For these reasons, April 29, 2016, the Court of Appeal gave judgment by dismissing the appeal and by confirming the decision of the first court.
The court upheld the bank’s requests to render enforceable the public deed of January 28, 2002, as published by notary Pierre Cassar.
Dr Karl Grech Orr is a partner at Ganado Adovates.