Procedural Considerations in Fraudulent Trading Actions and Winding-up Proceedings

Limited liability companies in the business are separate persons from their shareholders and directors. This is regarded as one of the fundamental cornerstones of modern international commerce. Shareholders and directors are given the privilege of “limited liability” such that creditors can take recourse against the company’s patrimony and cannot resort to the assets of the shareholders and directors. Naturally, this privilege suffers many exceptions to deter abuse and to empower creditors who have been wrongfully or fraudulently deprived of their money. One such exception is the concept of responsibility for fraudulent trading.

The Companies Act (the “Act”) provides remedial action for creditors (but also other parties) who feel aggrieved by fraudulent conduct by directors, shadow directors and sometimes shareholders. Article 315 of the Act grants creditors and liquidators, amongst others, the right to sue such persons personally where, during the course of the winding-up of the company, “it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose”. This right may only be exercised where the company has been dissolved and is being wound-up. Article 214 of the Act list the grounds for a company’s dissolution and consequent winding-up by a court.

Within the context of the articles mentioned above, two legal actions were instituted by Michele Peresso Limited against De Tigne Limited and its directors respectively, on 20 July 2020.

Two separate court orders entitled “Michele Peresso Limited vs De Tigne Limited” and “Michele Peresso Limited vs John Sammut & Mark Sammut” were delivered on 25 February 2021 by the First Hall Civil Court (Commerical Section) (the “Court”) upholding preliminary pleas raised by the respondents in their respective cases.

By way of background, the claimant in the above-mentioned cases was owed €211,978.80 by the respondent company, as was established by a separate final and definitive judgement obtained against the respondent company. The claimant issued a garnishee order against the respondent company to seize its funds held with third party banks in satisfaction of debts owed to the claimant. This order proved to be ineffective given that no funds to be seized were located. This, in turn, led the claimant to initiate the two above-mentioned proceedings.

In “Michele Peresso Limited vs De Tigne Limited”, the claimant sued for the dissolution and winding up of the respondent entity, basing its claim on three (3) different sub-articles listed under Article 214 of the Act. The three (3) sub-articles, quoted respectively, state that it is the court that issues the order for the dissolution and the consequential winding up of a company, whenever: a company is unable to pay its debts; the business of a company is to be suspended for an uninterrupted period of 24 months; and that there are grounds of sufficient gravity for the court to warrant the dissolution and winding up of the company. The respondent company disputed this claim by raising a plea of nullity as otherwise allowed under the Code of Organisation and Civil Procedure, arguing that the act violates the form prescribed by law due to the plurality of articles on which the applicant’s claim was based. The Court denied the respondent’s plea, arguing that a plea of nullity due to a violation of the form prescribed by law can only succeed in cases wherein the prejudice caused by a said violation can only be rectified by having the whole act nullified. Within this context, the court argued that despite the multiple sub-articles upon which the claimant’s application was based, the claim put forward was singular and common within all sub-articles, namely, to have the respondent company dissolved and wound up. The court concluded that annulling said application on account of a procedural oversight, which is not prejudicial to the respondent, would be vexatious in nature and contrary to the interests of justice. Based on this, the Court denied the respondent’s plea and ordered for the case to proceed.

In “Michele Peresso Limited vs. John Sammut & Mark Sammut”, the same claimant sued De Tigne Limited’s directors, in their own personal liability, for the funds owed by the company to the claimant based on Article 315 of the Act. The claimant claimed that the respondent directors engaged in fraudulent trading given that they were all too aware of the fact that the company was in a state of insolvency and was incurring debts without there being any prospects of these debts being repaid. The claimant also alleged that the respondents were appropriating the remaining funds within the company to their own personal wealth, at the creditors’ expense. The respondents raised a preliminary plea in response to this action, claiming that it is procedurally null and void. The respondents argued that an application based on Article 315 of the Act can only be raised in circumstances where the company is in the process of winding up, as otherwise stated within the first part of the Article, and that this reality was not present within the case at hand, since the company is still operative and not dissolved. The court found this preliminary plea to be well-founded, stating that the company’s status of being in the process of winding up is a vital component that is indispensable to the validity of the application under Article 315 of the Act. The case under Article 315 of the Act was prematurely brought forward before the preceding case against the respondent company was actually decided. Given the absence of the respondent company’s winding up status, the court accepted the respondent’s preliminary plea and declared the claimant’s application null.

The decisions taken by the Court in the two separate, albeit linked applications discussed above, should come as no surprise. These decisions are to serve as a reminder that the primary scope of the rules of procedure in court proceedings lies in promoting the effective enforcement of one’s rights and obligations. In this regard, the absolute adherence to said rules of procedure should never trump the primary interests of justice that the courts aspire to achieve. One must also appreciate that the absence of essential elements, otherwise pivotal to the validity of a legal action put forward by a claimant, cannot be overlooked by the courts when effectively faced with it, as this would jeopardise the legislative integrity of the law.

Ultimately, the key element which maintains the balance between procedural integrity and the pursuit of justice lies in the courts’ discretion in their adjudication of the cases put before them.