Maltese Law on Trusts and Fiduciary Obligations: Recent Experiences

Author: Max Ganado
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The Maltese legal system is a mixed legal system.  It contains strong elements of Roman Law and the Code Napoléon (on which the Civil Code[1] is based) and has also been influenced by English law, especially in the case of public law, private international law and commercial law.

During the period in which Malta was a colony, trust law and equity relating to trusts were never absorbed or statutorily incorporated and trusts were only rarely mentioned in Maltese laws[2] and the Courts only referred to trusts in specific cases.[3]

In 1988, Malta was launched as an offshore centre and the first law on trusts, the Offshore Trusts Act[4], based on the law of Jersey, made trusts available to non-residents and to property outside Malta, apart from movables which were in Malta for the purposes of the trust.  This Act imposed the use of a Maltese nominee company, licensed by the Malta Financial Services Authority, as the trustee of a Maltese trust.  The trust deed also had to be registered, and this ensured that the trustee was subject to regulatory supervision and access.

Offshore trusts also continued when offshore structures were phased out in 1993 following the trend towards developing Malta as a financial centre.  In 1994, the Recognition of Trusts Act, which incorporated the Hague Convention into Maltese law, was introduced.  This resulted in the division of trusts into two groups:

(a)    Maltese law trusts which were regulated by the Trusts Act[5].  These were fiscally exempt and were available only to non-residents; and

(b)   Foreign law trusts which were recognized in Malta by the Recognition of Trusts Act. This meant that all Anglo-Saxon investment structures formed as trusts could operate in Malta subject to their governing law.  There was no formality at all – they were automatically recognised and did not need to go through radical alterations to comply with Maltese Civil Law.

Trusts started to be used in ship finance structures and in the banking and capital market sectors.  Following the introduction of investments services legislation, the importance of segregated assets became evident and in 1998 distinct patrimonies were introduced in the Investment Services Act (Control of Assets) Regulations.[6]  The creditors of operators were excluded from recourse to a segregated patrimony.

In 2004, trusts were fully integrated into Maltese law as the Trusts Amendment Act[7] amended around 17 laws to eliminate offshore rules applicable to trusts. The introduction of trusts into Maltese law also involved amendments to the Maltese Civil Code, which was amended to include, inter alia, the regulation of fiduciary obligations (and trusts are one source of fiduciary obligations).

The new provisions on fiduciary obligations were referred to expressly in a judgement in 2007, although there were cases where the Courts could have implemented the new provisions but either remained silent[8], disregarded them but came to the same conclusion[9] or missed a valuable opportunity and awarded the wrong remedy.[10]

The general trend in the Courts has, however, been positive and the amendments gave the Court extensive powers to resolve disputes affecting fiduciary obligations.  Between 2005 and 2007 there were numerous cases dealing with prestanome mandates (undisclosed mandates or nomineeship) where the Courts generally declared the ‘beneficiary’ of the property to be the real owner.  The holder was ordered to transfer the property to the beneficiary.

The Civil Code (Amendment) Act, 2007 amended the Civil Code so as to introduce a new Second Schedule which deals with legal personality, foundations and associations. The Act also included consequential amendments to other laws, including the Trusts and Trustees Act[11].  Indeed, throughout the years, this Act has been amended numerous times essentially for alignment purposes and to clarify certain areas were necessary.

The general observation regarding the period between 2009 and 2013 is that fiduciary obligations could be better supported by the Courts. Could this lack of results be attributed to:

– the perception that trusts are instruments of fraud and abuse, to hide assets, evade tax?

– the approach taken by the Courts which is excellent at times but not so impressive at others?

– the fact that the laws of trusts and fiduciary obligations are not keeping up in the detailed reaction to weak interpretation and application of the law?

Nullity Cases

Some of the judgements delivered during this period deal with nullity and such judgements epitomise the problems which arise in the application of strict civil law as opposed to the wider concepts of fiduciary obligations.

The main case in this regard is Bettina Vossberg pro et noe vs Equinox International Limited et[12], which sought to annul a settlement of property into a trust due to prejudice suffered by a spouse and her children who were not receiving maintenance from the husband.  The plaintiff claimed that the trust was used to hide assets and the Court of Appeal found in favour of the plaintiff concluding that the settlement of the property into the trust was intended to harm her interests. The assets settled in trust were returned to the estate of the settlor.

The First Hall had concluded that a settlement was an onerous transaction, and therefore, fraud had to be shown to exist on the part of the transferor and the transferee. Fraud was not proved on the part of the trustee, and thereofore, the transaction was not null.

The Court of Appeal on the other hand, held that a settlement was a gratuitous transaction and that it was sufficient to prove fraud on the part of the transferor. The settlement was null but the Trust was valid as it alone and with other property did not cause prejudice.

Illicit Causa Cases

Other cases during this period related to illicit causa: Maltese fiduciaries acquired and held immovable property for the benefit of non-resident persons who failed to obtain the necessary Government permits

One such case is Dr. Carmelo Galea noe vs Anthony Farrugia[13] in which a non-resident acquired a field to extend the area he already owned and on which there was his house, lawfully acquired with a permit. He used a Maltese nominee to circumvent the law which at the time allowed only one property to each non-resident. The non-resident paid for the property and enjoyed it as part of his home. When he passed away, however, the Maltese nominee claimed that the property was his and that he allowed the foreigner to use it gratuitously. The non-resident’s heirs sued the nominee to force him to transfer it to them but failed due to unlawful causa.[14]

Matrimonial Property Cases

There were also several matrimonial property cases in which the Courts used the facts to find that a person owning property is actually a prestanome (a fiduciary) for his/her spouse or partner and did not acquire such property in his/her own name and interest. This ensures that the parties are treated fairly when the relationship fails.

In principle there are no trusts between a husband and wife. However, fiduciary obligations are impossible to avoid in community property, which emerges in nearly all marriages of persons domiciled in Malta, by operation of law. When a marriage breaks down, some spouses claim that certain assets belong solely to them and are not community property and try to hide property through the use of nominees and trusts.

One such case was AB vs CB[15], where a plot of land was purchased to build the matrimonial home: this was purchased only by the husband (at the time the boyfriend) but paid for by both.  Both also paid for the construction of the building over such plot.  The Family Court found that there was a prestanome mandate in relation to the acquisition, and therefore, in the interest of justice declared that the house formed part of the community of acquests although purchased before marriage. The Court ordered the sale of the house so that both parties could take their share of the value.[16] The Court could, more correctly, have found co-ownership and achieved the same result.

Cases involving family and friends

There were also numerous cases involving fiduciary obligations which arise when a family member or a friend acts for another. In Saviour Cremona et vs Anthony Cassar et[17], a nominee acquired land for two of his friends but also acquired for himself a bit more than agreed.  The two friends sought a court order for damages suffered.  The Court of Appeal held that the defendant was fraudulent and analysed the legal effects of fraud. It failed to give importance to the dishonest behaviour: the person who breached fiduciary obligations was allowed to keep the land and benefits (minus a sum of money in damages).

The Court of Appeal reached a different conclusion in Rosario Agius et vs Carmelo Agius et[18].  This case involved a brother who acquired property for development with funds collected from his brothers and sisters, all in equal share. Upon purchasing the property, the brother refused to transfer the interests to the others.  Both the First Court and the Court of Appeal stated that the brother was a mandatary prestanome and ordered him to transfer the property shares to his siblings.[19]

Timing and application of the 2004 Amendments

Some judgement held that the provisions on fiduciary obligations introduced in the Civil Code in 2004 do not apply to cases pre-2004.  Such judgements unfortunately disregard legal principles which have long formed part of our legal system. One such case was Carmen Xuereb vs Anton Micallef[20], wherein the defendant claimed that he acted as a lawyer and within the parameters of that role and did not act as a trustee, as was claimed. The Court held that article 1124A regarding fiduciary obligations came into force in 2005 and so decided  that the defendant could never have assumed fiduciary obligations because he was engaged in 2003.

In reality the 2004 amendments bring efficiency to a legal remedy which already existed under Maltese Law, as fiduciary obligations and trusts find their basis in the Roman Law fiducia[21].

This has now been very clearly reversed in the Court of Appeal judgement of Anthony Caruana & Sons Limited (C7512) vs. Caruana Christopher[22] where the Court unequivocally stated that the 2004 amendments apply in all cases even pre 2004.

The Trusts and Trustees Act was amended again in 2014. The Trusts and Trustees (Amendment) Act, Act XI of 2014, was the result of a five year review initiated by the Malta Financial Services Authority (MFSA). The amendments made various changes to the Act such as:

–       an amendment to the term of the trust[23],

–       the introduction of a new article on the powers of the settlor[24],

–       limitations of the applicability of the article of law which mirrors the Saunders v Vautier rule[25],

–       an express duty on trustees to avoid conflict of interests, to draw up an inventory of trust assets upon accepting to act as trustee,

–       the appointment of an enforcer in trusts established for a charitable purpose[26],

–       trustees may not acquire by acquisitive prescription – actions against trustees for fraud or for the recovery of trust property is no longer time barred,

–       any person residing in Malta, operating in or from Malta, must be authorized by the MFSA to act as trustee (and additional requirements have been imposed on trustees so as to acquire authorisation)[27],

–       auditors of authorized trustees must report to the MFSA in certain cases,

–       the introduction of Private Trust Companies for family trusts, which, subject to certain conditions, are required to register with the MFSA (and do not require authorisation),

–       the MFSA has been given powers so as to protect the public interest[28].

Malta’s case proves that Civil Law and trusts are not incompatible as originally thought. There are points of divergence but this does not mean incompatibility but rather diversity. Malta passed through different phases in the adoption of trusts.  Although Malta was a colony, trusts were not introduced in any relevant manner until 1988 when the offshore model[29] was adopted.

At about the same time, trusts were permitted to be formally used in mortgages taken over ships registered in Malta, and therefore, trusts were introduced in a very limited context.

This was then enhanced by the recognition model[30] in 1994 with the Recognition of Trusts Act, which incorporated the Hague Convention into Maltese law.  There was total incorporation of trusts into Maltese Law in 2004.  However, the recognition elements under the ratification of the Hague Convention naturally remained in place.

Malta has now a specific Trusts and Trustees Act which was tailor-made to dovetail with the Civil Code and other statutes to cover the international and domestic system in a holistic manner.

 

Dr. Max Ganado LL.D., LL.M. (Dal.), Dip (ITM)

4th October 2014.


[1] Cap. 16, Laws of Malta;

[2] For example the Immovable Property (Acquisition by non-Residents) Act, Cap. 246, Laws of Malta;

[3] Buttigieg v. Avellino, First Hall, 26th April, 1969 – this case concerned proceeds of a bank deposit left on trust.  The Court had to decide whether this bank deposit formed part of a testamentary deposit.  The Court held that as a will was made after the trust, the testator intended to revoke the trust.  The beneficiary could only claim what was bequeathed to her in the will;

[4] Cap. 331, Laws of Malta;

[5] Note that “offshore” was removed from the title of the Act and in the law itself;

[6] L.N. 240 of 1998;

[7] Act XIII of 2004;

[8] The Zeturf Case, First Hall Civil Court, 16th May, 2006;

[9] The Courts relied on principles which were, through the amendments, included within the law;

[10] In the Ta’ Cenc Case, Court of Magistrates (Gozo), 30th March, 2007, the judge awarded damages for breach of fiduciary duty rather than a proprietary remedy which the law caters for in breaches of fiduciary duties;

[11] Cap. 331, Laws of Malta;

[12] Court of Appeal, 9th November, 2012;

[13] Court of Magistrates, 6th December, 2013;

[14] Reference should also be made to Kok vs Faure, Court of Appeal, 29th November, 2013;

[15]First Hall 25th October, 2013;

[16] A similar case is Yvonne Borg vs Christopher Borg – Court of Appeal 25th June, 2010; Cons. Court, 1st Inst. 29th October 2012. The First Court held that property acquired solely by the wife (at the time the girlfriend) was hers alone. The husband had only a right to credits for his contribution to costs. On appeal, the Court decided that although the property was acquired before marriage it was intended to be part of the community – it was acquired by the woman as prestanome for the man.  A Constitutional application was made for breach of the human right to a fair hearing.  The Court held that the Court of Appeal did not deny rights to a fair hearing nor did it expropriate the property rights of the plaintiff when it interpreted the intent of the parties to acquire jointly when only one party appeared on the legal documentation of acquisition. Reference should also be made to Deborah Ciappara vs Mario Zammit – First Hall, 23rd March 2012;

[17] Court of Appeal, 23rd September, 2009;

[18] Court of Appeal, 26th June, 2009;

[19] A somewhat similar case was Victor Pisani vs Grazio Mizzi et, Court of Appeal, 29th October, 2010. In this case, a husband and wife were separating and the wife and her new partner wanted to buy the share of the matrimonial home from her estranged husband. As the husband did not want to sell his share to the partner, the father in law purchased the husband’s share for his daughter. The partner and the wife both provided funds so that the father in law could acquire the husband’s share. The relationship between the partner and the wife failed and her father stated that he bought the husband’s share only for his daughter. The Court declared that the partner owned one-fourth of the property and ordered that it be sold so the partner could take his share in value;

[20] First Hall, 12th December, 2013;

[21] See David Johnston, “The Roman Law of Trusts”, (1988) Clarendon Press, Oxford. Conceptually the trust is a derivation of the Roman law on fiducia and so there necessarily are some similarities in the Common law and the Roman law on the basic elements of this institute. The institute of fiducia developed throughout the history of Roman law and received different approaches at different eras. In Roman law, fiducia was an agreement “appended to a conveyance of property, involving a direction or trust as to what was to be done with it.” Fiducia was, even at that time considered to be a separate agreement to a main contract and need not be in writing. Interestingly, it is debated whether it was a contract as it never featured in the list of nominate contracts. Some authors considered it to have been a pactum. “The reason for its non-appearance in the lists [of contracts] may be its parasitic character; it could occur only as an appendage to a conveyance.” See W.W. Buckland, A Textbook of Roman Law, Cambridge University Press, 2nd Edition – pg. 431. In Roman law fiducia features in many different applications, two main ones being the fiducia cum creditore, which eventually leads to security law of pledges and hypothecs, and fiducia cum amico which pre-dated the contracts of deposit, loan and mandate, all of which were later classified as bonae fidei contracts, giving rise to a higher level of care. Today, these are contracts where fiduciary obligations can feature very strongly. There were also fideicommessa, which were testamentary dispositions whereby a person leaves property to another under obligation to transfer it to a third person;

[22] Court of Appeal (Civil, Superior), 28th February, 2014;

[23] Trusts may now be established for 125 years; Trusts established in connection with a commercial transaction – defined in the Trusts and Trustees Act – and charitable trusts can continue indefinitely;

[24] While it was already possible for the settlor to reserve powers, such powers have now increased and the settlor may appoint, add or remove trustees, protectors or beneficiaries, appoint an investment adviser or investment manager, or grant to himself a beneficial interest in the trust property;

[25] This rule does not apply in the case of protective trusts so as to safeguard the interests of the protected beneficiaries;

[26] The enforcer ensures that the trust is administered according to the terms of the trust deed;

[27] Trustees who are exempt from obtaining such authorization must comply with the other general duties imposed on trustees and with other provisions of the Act;

[28] For example appointing a person to advise the trustee in the proper conduct of business;

[29] The offshore model includes countries where trusts have been introduced only for non-residents, non-citizens or non-domiciliaries, only for property outside the relevant country, and with an exemption from the rules of domestic fiscal law, which therefore basically introduce trusts as an “offshore” product, and stop it entering the domestic system;

[30] This has resulted in the use of trusts within the domestic system governed by the trusts law of other countries, but has not brought about much change in legal rules per se.

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