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 Mediterranean Flower Products Ltd vs Flower Power (Sales) Ltd et, held, among other things, that a company under provisional administration did not need court authorisation in terms of article 224(2) of the Companies Act before taking legal action to collect its debts.
The facts in this case were as follows:
The company Mediterranean Flower Products Ltd, was owed €57,184 under a private agreement dated November 6, 2002, with Flower Power (sales) Ltd, its debtor and guarantor George Sammut, now deceased.
It was stated that although Flower Power (Sales) Ltd made regular payments, it failed to continue its payments, with the effect that the total amount due up to September 30, 2008 amounted to €57,184.
Thereafter on January 4, 2005, the court appointed a provisional administrator for Mediterranean Flower Products Ltd in terms of the Companies Act, Article 228.
This article 288 provides that: The court may by order appoint a provisional administrator at any time after the presentation of a winding up application and before the making of a winding up order, and either the official receiver or any other competent person may be so appointed.
The company Mediterranean Flower Products demanded payment and proceeded to file legal proceedings against Flower Power (Sales) Ltd and the heirs of George Sammut: Jason, Maria and Nathalie Sammut.
It requested the court to decide this case by special summary proceedings in terms of article 167 of Chapter 12 of the laws of Malta, and to condemn defendants or any one of them in solidum to pay €57,184, with interests.
George Sammut, guarantor, died intestate on October 1, 2003 and by court decree of June 2, 2005, the inheritance was opened in favour of his children Jason and Nathalie Sammut.
The argument put forward by defendants, Maria, Nathalie and Jason Sammut was that the company’s legal action was null and in breach of article 224 (2) of the Companies Act.
Article 224 (2) provides that: Where a winding up order has been made or a provisional administrator has been appointed in accordance with the provisions of section 228 of this Act, no action or proceeding shall be proceeded with or commenced against the company or its property except by the leave of the court and subject to such terms as the court may impose.
At issue was whether the company required court authorisation before instituting legal proceedings. The defendants raised additional pleas.
Maria Sammut pleaded in defence that she was not the heir of her husband George Sammut; that the amount claimed was not due; that the execution of the agreement by her husband was done without her consent and therefore not binding upon her. She also denied being the guarantor in solidum of Flower Power (Sales) Ltd.
Jason and Nathalie Sammut contested the company’s legal action. They disputed having in solidum guarantee obligations, and or any indebtedness towards the company. They maintained that the company’s legal action should comply with article 1934 of the Civil Code. This article stipulates that: the surety is only bound to pay in the event of the default of the principal debtor whose property must first be discussed.
It was argued furthermore that the amounts claimed were not due, as the conditions under the agreement had not been fulfilled.
On June 10, 2009, the First Court rejected the plea that the company’s legal action was null, on the basis of article 224 (2) Companies Act, Chapter 386 of the laws of Malta.
The court maintained that article 224 (2) only referred to legal action against the company, which was in liquidation. It did not apply to any legal action filed by a company in dissolution or under a provisional administrator.
Article 224 (2) did not affect the right of a company to take legal action. Court authorisation was necessary only if a company in liquidation was sued.
Reference was made to Corporate Insolvency: Law and Practice. Bailey, Groves & Smith: where it was stated that “The appointment of an administrative receiver does not have any effect on the company as a separate legal personality; it remains in existence and it does not cease to exist or incur liability as a result of the appointment.”
The company as a legal person had a right to sue. The court was of the opinion that restrictions in the law should not be given a wider meaning. In addition, in so far as possible, a court should not annul an act.
Aggrieved by the decision of the First Court, defendants Jason and Nathalie Sammut and Flower Power (Sales) Ltd entered an appeal, calling for its revocation. They reiterated their argument that the company’s legal action was null and in violation of article 224 (2).
On July 30, the Court of Appeal gave judgment by dismissing the appeal and by confirming the decision of the First Court.
The following reasons were given for the court’s decision:
(1) Article 224 (2) of the Companies Act did not require a company under a provisional administrator to seek court authorisation before filing a lawsuit. This article was only intended to preserve the status quo of creditors of a company in dissolution. A creditor should not be allowed to take advantage by filing unilateral proceedings against a company, to the prejudice of other creditors. Once a company was in liquidation and a provisional administrator was appointed to regulate the administration of a company, it was logical that no judicial act should be filed against the company, if not with the court authorisation.
(2) Provisional Administrator: Our law did not define the role of the provisional administrator and left it in the hands of the court to appoint an administrator and to determine his powers. In HSBC Bank Malta plc vs Sovereign Hotels Ltd dated September 7, last year, it was held that the law empowered the court to regulate the appointment of a provisional administrator at its discretion. The court had the power to appoint an administrator ex officio, if necessary. The court had to indicate what powers were conferred upon the provisional administrator. If his powers were not specified, his role was limited to ordinary administration, with the task of attending to the day to day administration of the company. This did not mean that the provisional administrator substituted the directors. The directors remained in office and their powers were only curtailed, subject to an order of the court.
In case of the court-appointed provisional administrator, an administrator had the duty to look after the company’s finances and accounting issues, and in respect of this administrator, he acted on behalf of the company but did not assume the powers of the directors save as otherwise directed by the court.
If the provisional administrator felt that the directors were acting against the company he could request the court to increase his powers, and to decrease the powers of the directors the provisional administrator’s obligations and rights were different and distinct from those of a director. The company did not need the permission of the court to recover a debt. The function of debt collecting was in the hands of the administrator, unless the court gave orders to the contrary, so concluded the court.