Fresh bench, same result: Court rejects second Article 402 action

On the 17 October 2025, the First Hall Civil Court (the “Court”), presided by Mr. Justice Mark Simiana delivered judgment in the names James Cassar & Marcelle Mangion nee Cassar (the “Plaintiffs”) vs Cassar Bros. Giftware Ltd & Adrian Cassar (the “Defendants”). The Court confirmed that an earlier decision based on Article 402 of the Companies Act, albeit by a differently constituted court was correctly decided and did not warrant a different outcome.

Background

The Plaintiffs filed proceedings following a decree decided on the 16 December 2021 (the “Decree”) requesting the Court to re-examine their claims which had previously been rejected by the Court differently presided. These proceedings were filed under Article 402 of the Companies Act (Chapter 386 of the Laws of Malta) (the “Act”).

The dispute arose between members of the Cassar family who were shareholders and directors of the defendant company, Cassar Bros. Giftware Ltd, formerly operating under the name “Craft Point” (the “Company”). The Plaintiffs together with Adrian Cassar were shareholders of the Company.

Subsequently, the Plaintiffs alleged that Adrian Cassar had misappropriated company funds and, on this basis, instituted proceedings under Article 402 of the Act (Application No. 966/2010) (the “Previous Proceedings”) seeking, inter alia, the winding up of the Company and the payment of damages corresponding to the sums allegedly misappropriated.

By means of the Decree, Madame Justice Joanne Vella Cuschieri rejected the Plaintiffs’ claims, declaring them illicit. As no right of appeal lies from decrees delivered under Article 402, the only remedy available to an aggrieved party is to institute fresh proceedings challenging the decree itself. It was in this context that the present action was filed.

Considerations

The current proceedings were filed in response to the Decree whereby the Plaintiffs requested the court to:

1. Annul and revoke the Decree (in so far as certain claims were concerned);
2. Declare that Adrian Cassar had breached his obligations towards the Company by failing to manage its affairs properly and by acting contrary to the Company’s best interests;
3. Declare and decide that Adrian Cassar acted against the interests of the minority shareholders by defrauding them of their rights and by diverting Company profits for his own benefit;
4. Liquidate and award damages in favour of the Plaintiffs, including compensation for losses suffered, loss of profits, the diminution in the value of their shares and payment of sums allegedly misappropriated.

The Court immediately noted that the Plaintiffs correctly instituted these proceedings to attack the Decree given by a previous court. However, the Court also noted that claims 2 to 4 above were identical to those raised and decided in the Previous Proceedings. Since these issues had already been conclusively determined by the Court as differently presided, the Court held that the Plaintiffs could not bring forward the same claims which were brought in different proceedings and which were rejected by a previous judge. The Court therefore limited its examination to the request for annulment of the Decree as outlined in (1) above.

The defendant Cassar also tried to bring forward certain preliminary pleas, including that the action was prohibited by law and contrary to morality or public policy. The Court rejected this argument, reiterating that while no appeal lies from an Article 402 action, such decisions may nevertheless be challenged by means of a separate action.

A further plea alleging lack of interest on the part of the Plaintiffs was also dismissed. The Court observed that the Plaintiffs’ interest stemmed directly from their unsuccessful outcome in the earlier Decree, which was sufficient to establish juridical interest.

Grounds of Challenge and the Courts’s Assessment

The Plaintiffs advanced 5 grounds to support their claim that the earlier Decree was erroneous. These were as follows:

1. The illegality of the claim was secondary rather than primary and therefore the Court should have nevertheless considered the Plaintiffs’ claims.
2. Even if such illegality exists, this does not mean that all amounts claimed were illegal. The Court should have distinguished between such amounts.
3. The party who appropriated such company funds was effectively sanctioned by the Court to retain those funds.
4. The Previous Proceedings were instituted by the Plaintiffs in their capacity as shareholders and therefore the Court should not have penalised them for shortcomings allegedly committed in their capacity as directors.
5. The Plaintiffs did not manage the Company’s business and therefore could not have known that tax evasion was taking place.

The First Ground

The Court noted that courts have consistently held that no action may be brought to seek compensation for illicit gains. Such actions cannot succeed even where the claims themselves are not unlawful, if the underlying purpose of the action is illegal. The Court further observed that it cannot grant a remedy to a person who has acted unlawfully in order to obtain or enjoy the proceeds of that illegality. In the present case, the Plaintiffs, in their capacity as directors of the Company, were under a duty to prevent the conduct attributed to Adrian Cassar.

Any misappropriation allegedly committed by Adrian Cassar, if established, would have caused damage to the Company rather than to the Plaintiffs personally. The Company possesses a separate legal personality and must therefore take the necessary measures to safeguard its interests where it emerges that its directors failed to discharge their duties towards it.

The Court further held that a party who is released from the opposing party’s claims by virtue of the plea of causa illecita is not, by that fact alone, absolve from the consequences of their conduct. Where such conduct constitutes a breach of criminal or administrative law, it must give rise to proceedings against the person responsible, together with the corresponding penal or administrative consequences. Indeed, the previous judge had ordered that the decree be transmitted to the Police Commissioner for the purpose of carrying out the appropriate investigations.

Finally, the Court stated that a person who violates the law must answer for their actions before the State but is not required to answer to an accomplice for the same breach. In such circumstances, none of the parties involved is entitled to a civil remedy in respect of the facts constituting the illegal act.

The Third Ground

The Plaintiffs referred to a number of claims raised in the Previous Proceedings. The Court held that those claims were not in themselves illicit. It nevertheless emerged during the proceedings that the funds which the Plaintiffs alleged had been misappropriated by the defendant Cassar were, in fact, undeclared profits and therefore illicit.

The sums which the Plaintiffs claimed had been taken by Cassar and were due to them were shown, on the basis of the Company’s books, to constitute undeclared profits. The Court therefore held that it could not uphold the claim, as this would have resulted in the Plaintiffs benefiting from an illegal activity, which, in their capacity as directors, they were under a duty to prevent.

The Court accordingly found this ground to be unfounded, noting that the Plaintiffs had not alleged that Cassar misappropriated funds declared by the Company. Rather, their claim was premised on the retention of undeclared amounts and on their lack of an effective means of ensuring receipt of what they considered to be due from those funds.

The Fourth Ground

The fourth ground was also found to be entirely unfounded by the Court. The fact that the Plaintiffs were also directors and shareholders of the Company cannot in any way mean that what they knew in their capacity as shareholders was not known to them in their capacity as directors. Where the individuals occupy both roles, knowledge and responsibility cannot be compartmentalised.

The Fifth Ground

From various testimonies it transpired that the Plaintiffs were well aware that the Company was not declaring certain income. This is proven by the fact that the Company had a book specific to declared sales and a book specific to undeclared sales. What is relevant to the Court is that the Plaintiffs knew that certain income was not being declared. For this reason, this ground was also rejected by the Court as being entirely unfounded.

Conclusion

This judgment firmly reaffirmed a core principle of Maltese law: the courts will not come to the aid of parties who are themselves complicit in illegality. Despite the case arising from a family dispute over the management of the defendant Company, the decisive factor was the Court’s finding that all directors were aware of and/or participated in the systematic non-declaring of sales and consequential tax evasion.

The Court held that, once the object of the dispute is rooted in illicit profits, no civil remedy can be granted, even where the claims themselves are not inherently unlawful. Attempts to distinguish between “primary” and “secondary” illegality were rejected, as was the argument that the claimants acted purely in their capacity as shareholders rather than directors. Where the same individuals wear both hats, knowledge and responsibility cannot be compartmentalised.

The Court also clarified that while Article 402 decisions are not subject to appeal, they are not immune from challenge. Nevertheless, such challenges will fail where they amount, in substance, to an attempt to re-litigate issues already decided or to extract civil compensation from an unlawful course of conduct.

Disclaimer: Ganado Advocates is responsible for contributing this law report but was not in any way involved as legal advisor for the parties in the judgment being covered in this law report. This article was  first published in ‘the Malta Independent’ on 28/01/2026.