The Court of Appeal, composed of Chief Justice Silvio Camilleri, Mr Justice Geoffrey Valenzia and Mr Justice Giannino Caruana Demajo, on June 24, 2011, in the case “Architect Raymond Vassallo and others vs Anthony and Ingrid Parlato Trigona, architect William and Gabriella Carbonaro, architect Edward and Anna Micallef, WCO Ltd, TPT Ltd, Parade Ltd, Windsor Holdings Ltd, Regent Holdings Ltd and Winex Holdings Ltd,” held, among other things, that the unfair prejudice action under article 402 of the Companies Act could only be filed by a member. It was not available to a “second tier shareholder”.
The facts in this case were as follows:
Architect Raymond Vassallo personally as shareholder and or as director of the companies, Parade Ltd, Windsor Holdings Ltd, Regent Holdings Ltd and Winex Holdings Ltd filed an unfair prejudice action in terms of article 402 of the Companies Act. He was not a ‘direct’ registered shareholder in Windsor Holdings Ltd.
Article 402 (1) of the Companies Act provides that: “Any member of a company who complains that the affairs of the company have been or are being or are likely to be conducted in a manner that is, or that any act or omission of the company have been or are or are likely to be, oppressive, unfairly discriminatory against, or unfairly prejudicial, to a member or members or in a manner that is contrary to the interests of the members as a whole, may make an application to the court for an order under this section.’’
Action was taken against Anthony and Ingrid Parlato Trigona, architect William Carbonaro and his wife Gabriella, architect Edward Micallef and his wife Anna, WCO Ltd, TPT Ltd, Parade Ltd, Windsor Holdings Ltd, Regent Holdings Ltd and Winex Holdings Ltd.
Architect Vassallo complained that there was a conflict of interest among defendants, which was prejudicial to him as well as for all the companies. He requested a judicial remedy; for the court to declare any of the defendants to be responsible; for an award of damages, comprising both material losses and loss of earnings, in the amount to be determined by the court, and to give such orders, as the court might deem to be appropriate.
He asked the court to order that there should be no cash transactions, no transfer of assets from the companies, Winex Holdings Ltd and Windsor Holdings Ltd without the authorisation of the court and without the approval of the board.
In its decision, the Court of First Instance decided the preliminary pleas, raised by defendants: Architect William and Gabriella Carbonaro pleaded that this action was null and void. They claimed the derivative action was confused with the unfair prejudice remedy under article 402.
It was not legally possible, they said, for the same party to be both plaintiff and defendant, in legal proceedings.
WCO Ltd, and TPT Ltd claimed that they were incorrectly sued and they should be freed from the proceedings.
The Parlato Trigonas and the Micallefs submitted that the action was a nullity. It was not clear what was being claimed from the defendants.
As regards the merits, the basis of the action was the removal of a director. However, it was already decided, the defendants pointed out that a removal of a director was not “unfair prejudice”.
Defendants submitted that all allegations of conflict of interest and bad management were unfounded.
Parade Ltd also argued it was incorrectly sued. It said it held 50 per cent of the shares in Windsor Holdings Ltd and that it was not connected to the other companies, Winex Holdings Ltd, Regent Holdings Ltd, WCO Ltd and Parade Ltd.
Windsor Holdings Ltd also pleaded that it was not a legitimate defendant.
The “unfair prejudice” action was available only to members and once architect Vassallo was not a shareholder in Windsor Holdings ltd, he could not file this legal action against it, it maintained.
In addition, the companies Winex Ltd and Regent Holdings Ltd denied causing any damages to architect Vassallo.
On September 30, 2010, the Court of First Instance decided that the unfair prejudice action (under section 402) could be taken against WCO Ltd. TPT Ltd, Regent Holdings Ltd and Winex Holdings Ltd, the Parlato Trigonas, the Carbonaros and the Micallefs, – the Parlato Trigonas, the Micallefs, and the Carbonaro’s were shareholders in the companies. The court dismissed Vassallo’s action against Windsor Holdings Ltd and Parade Ltd. It noted that the unfair prejudice remedy was based on equity and principles of justice to protect the legitimate expectations of members: re: Ellul vs Ellul pro et noe (CA dated 31/01/2003). This action was available to any member of a company.
In Monreal et vs Delia noe dated 13/05/1999, the court held that this action was intended to protect shareholders. Any member could make an application, and show that he suffered, was suffering or was likely to suffer unfair prejudice, oppression, injustice or discrimination. The harm had to be suffered by the shareholder making the application, by a group of shareholders, or all shareholders.
Proof had to be brought on the basis of reasonable probability. The court could make an order if the complaint was justified and if it felt that it was fair and equitable.
It resulted that architect R. Vassallo was shareholder in WCO Ltd, TPT Ltd, Regent Holdings Ltd and Winex Holdings Ltd.
Reference was made to Profs. Muscat in his book Principles Of Maltese Company Law: “The derivative action is an action brought by a shareholder in respect of a wrong to the company where the wrongdoers are in control and prevent the company itself from suing. The benefit of the action would accrue not to the benefit of the shareholder instituting the action but to the company. To succeed in a derivative action, the minority shareholder must prove (i) fraud on the minority, and (ii) wrong doer control which prevents the company itself bringing the action in its own name.
The derivative action is accordingly available where the company itself has been wronged and the directors of the majority shareholders who control the composition of the board fail to take the necessary action to institute the necessary legal proceedings to remedy the wrong suffered by the company.
The derivative action is therefore an exception to the rule in Foss vs Harbottle that in respect of a wrong alleged to be done to a company the company itself is the proper plaintiff”.
The court said that in Malta the derivative action was now regulated by article 402: Mizzi et vs Grech et dated 29/10/2008.
Article 402 was modelled on the English provision article 459 UK Companies Act, 1985. V. Joffe in Minority Shareholder Law, Practice And Procedure 2000 writes;
“The petitioner will be the member seeking relief, and the company of which he is a member and in relation to whose affairs he alleges unfairly prejudicial conduct will be made a respondent. Additionally, every member of the company (other than the petitioner) whose interests might be affected by the relief sought should be joined as a respondent, whether or not allegations of unfairly prejudicial conduct are made against him: in the case of a small private company, this will usually mean that every member ought to be joined as a respondent to the petition. The category of potential respondents (other that the company) is not, however, limited to members of the company. In an appropriate case, relief may be sought against a non- or former member. The width of the category of potential respondents is indicated by Lowe vs Fahey (1996) 1 BCLC 262, where it was held that if the unfairly prejudicial conduct alleged was a diversion of corporate funds, a petitioner could seek relief not only against members and former members, but also against directors involved or third parties who knowingly received or improperly assisted in the diversion. Even a person who is not actively involved in the conduct of the affairs of the company complained of, may be made a respondent, at least if he would be affected by the relief sought”.
In Farrar’s company law (4th Edition) pages 457-8, it is stated: “The fact that the petitioner could have brought a derivative action with respect to the alleged conduct does not preclude him seeking relief under the fairly prejudicial provision.” Mr Vassallo entered an appeal. He informed the court that he was a shareholder in Parade Ltd and an “indirect” shareholder in Windsor Holdings Ltd. As a ‘second tier shareholder’ he had an interest to file the unfair prejudice action against it. It was contended that the court should hear all the evidence before freeing defendant Windsor Holdings Ltd. The Parlato Trigonas and the Micallefs also appealed, reiterating their claims.
On June 24, 2011, the Court of Appeal gave judgment by confirming the decision of the Court of First Instance, save for that part where the First Court released Parade Ltd.
The Court of Appeal declared that Parade Ltd was a legitimate defendant in these proceedings.
The following reasons were given for the court’s decision.
Nullity: The Court said that Vassallo’s claims were clearly formulated. Defendants were able to prepare their defence, and it did not appear that they suffered irremediable prejudice. It was clear action was taken under article 402.
His action was not a derivative action but an unfair prejudice action under S402, of the Companies Act. While in an unfair prejudice action, the company could be a defendant, in the derivative action, the company was the plaintiff. In this case, architect Vassallo was not acting in the name of several companies. He sued personally. The fact that he also identified himself as director, did not invalidate his legal action nor change the nature of the action. Even if Mr Vassallo had no locus standi as director, he had the right to sue in his capacity as a member.
Unfair prejudice action: As architect Vassallo was not a direct member of Windsor Holdings Ltd, he could not bring the unfair prejudice action against it. In our law we did not have the concept of second tier shareholder. A person had to be a registered member, to be considered as a shareholder. It was not possible to ignore the separate personality of the corporate shareholder. The fact that there was a parent-subsidiary relationship was not relevant. If a person was not a member, he had no right of action under article 402.
The same could not be said as regards Parade Ltd. Mr Vassallo was a shareholder and director of Parade Ltd and, therefore he could take action against Parade, Ltd.
Dr Grech Orr is a partner at Ganado & Associates.