Insights

The case of AMG Cold Stores Limited et vs Bank of Valletta P.L.C et was decided by the Court of Appeal in its Superior Jurisdiction on 25 October 2023. The Court of Appeal, presided by Chief Justice Mark Chetcuti, Judge Giannino Caruana Demajo and Judge Anthony Ellul, analysed whether Bank of Valletta p.l.c. (the ‘Bank’) had prejudiced the other creditors of the late Mr. Jonathan Pace (the ‘Debtor’) when it failed to inform them and the curator of the bankrupt (the ‘Curator’) of a number of life insurance policies pledged in its favour (the ‘Policies’) at the time when the Debtor had declared bankruptcy.

Facts of the Case

This case was filed in the First Hall of the Civil Court (the ‘First Hall’) in March 2015 by a number of the late Mr. Pace’s creditors (the ‘Plaintiffs’) against the Bank, who was another creditor of Mr. Pace.

On 28 November 2013, the Debtor had been declared bankrupt, and subsequently passed away in August 2014 at the age of 31 years old. Approximately 2 months following the Debtor’s passing, the Plaintiffs discovered that to secure its credit, the Bank had required that the Debtor take out several life insurance policies, which were subsequently pledged or assigned in favour of the same Bank. Additional life insurance policies pledged in favour of the Bank and issued by another insurer were only discovered by the creditors during the proceedings of this case (the ‘Policies’).

Notably, each of the Policies in question stipulated a grace period for the payment of the premium. Additionally, they also provided the policy holder with a revival period. Therefore, if the premium was not paid on the due date or during the grace period, the policy would lapse but could nevertheless, at the discretion of the insurer, be revived if the policy holder makes a ‘revival declaration’ indicating that he is still in good health.

Prior to the declaration of bankruptcy, the Debtor had stopped paying the premiums on these Policies, to the effect that, at the time of the Debtor’s passing, or when the other creditors discovered that such policies existed, many of them had lapsed and no benefit was paid to the beneficiaries upon the policy holder’s death. Notably, during the grace period, the Bank, as pledgee, could pay the premiums to keep the Policies in effect. While both the Debtor and the Bank had been informed that the payment of the premium on each of the Policies had fallen due, no action had been taken. In fact, in one instance the Bank had informed the insurer that it no longer had any interest in the life insurance policies, and it released the pledge.

The Plaintiffs held that by not informing them or the Curator of the existence of these Policies the Bank had caused them serious prejudice. They argued that, given that the Debtor passed away shortly after the bankruptcy proceedings had commenced, had the Policies been kept in effect, the obligation to imburse the beneficiaries of the Policies would have been triggered and such proceeds would have formed part of the Debtor’s property available for the general body of creditors. They proposed that the Bank had acted in such a manner because it was secure in the knowledge that its credit, which ranked higher than that of the other creditors, would be paid from other assets in the Debtor’s patrimony and thus it had no interest in preserving the assets of the Debtor in the interest of the other creditors.

The Court was thus asked to liquidate the amount which could have been potentially realised in terms of the same Policies and to order the Bank to place an equivalent amount into the possession of the Curator for the benefit of the general body of creditors.

Apart from raising several other pleas, the Bank held that while it could, at its own discretion, renew the Policies at its own expense, it was not obliged to do so and thus it had not caused the other creditors any damages by not doing so. Additionally, the Bank argued that it had no obligation at law to provide the Curator with any information when the latter was making up the inventory of the bankrupt’s property. Such obligation exists solely with regards to the bankrupt himself.

The First Hall accepted all but one of the pleas brought forward by the Bank and rejected the Plaintiffs’ claims. A few of the Plaintiffs in the original case felt aggrieved by the decision of the First Hall and filed an application of appeal on 13 November 2017.

Considerations of the Court

Both the First Hall and the Court of Appeal, while disagreeing on several preliminary pleas, agreed that the case rested on two pillars, namely:

• Whether during the bankruptcy proceedings, the Bank had a legal obligation to inform the Curator of the existence of the Policies pledged in its favour; and
• If such obligation did in fact exist, whether such omission did in fact prejudice the other creditors.

With regards to the first point, the First Hall had decided that the Bank had no obligation at law to pay the premium on the Policies, particularly since the same had been taken out solely in the Bank’s own interests.

In doing so, the First Hall had quoted Article 1712M(4) of the Civil Code (Chapter 16 of the Laws of Malta), wherein it is stated that;

“Subject  to  any  prior  rights,  the  pledgee  of  an  insurance policy shall enjoy all the rights of the policyholder to receive notices under the policy, to receive any proceeds of the policy, when due, on maturity or earlier surrender and the right to exercise all options of the pledgor under the policy, except the designation of a beneficiary, but shall not be liable for the performance of any obligations of the policyholder towards the insurer unless otherwise expressly agreed in writing”

Additionally, the First Hall opined that since the life insurance policy had been entered into solely for the benefit of the Bank, the Bank did not have an obligation to inform the Curator or the other creditors of the existence of such Policies either.

The Court of Appeal reasoned differently and held that if there had indeed been a possibility that proceeds from the Policies would enter the patrimony of the bankrupt, the Bank did, in fact, have a good faith duty to inform the Curator and the other creditors of the existence of such Policies during the bankruptcy proceedings. In this way, any creditor having an interest therein could take the necessary steps to ensure that the Policies remain effective. The Court of Appeal opined that the mere fact that the Bank was secured in the knowledge that its credit would rank higher than that of the other creditors did not exempt it from this good faith duty.

In this regard the Court of Appeal agreed that considering the young age of the Debtor, who was only 31 at the time of his death, it had not made commercial sense for the Bank to continue paying the premiums on such Policies when its credit was so thoroughly secured through other means. However, it held that the Debtor was obliged to inform the Curator and the creditors of the existence of any Policies which were still in effect, or which could have been renewed or revived, when the Debtor was declared bankrupt.

Having established that such obligation existed, the Court of Appeal proceeded to consider whether the Bank’s shortcomings resulted in the creditors suffering any actual losses. In doing so, the Court of Appeal analysed the likelihood that, had the Bank made such a disclosure, any additional proceeds would have been made available to the Curator for the benefit of the general body of creditors.

To make such a determination, the Court of Appeal effectively divided the Policies into two categories; (i) those which were in force, or could be renewed or revived, at the time of the declaration of bankruptcy, and (ii) those which were in force, or could be renewed or revived, at the time of the Debtor’s passing. With regards the first category, the Court of Appeal agreed with the First Hall that, given the young age of the Debtor, it was highly unlikely that any of the creditors would have paid the premiums themselves to stop the Policies from lapsing, even if they had been aware of the Policies. With regards to the second category, the Court of Appeal concluded that, given the timing of when these Policies expired, the creditors would not have been able to renew or revive the policies, or benefit from the proceeds of such Policies.

Conclusion

Based on the abovementioned considerations, the Court of Appeal upheld the decision of the First Hall and rejected the Plaintiff’s claims. It concluded that while the Bank did have an obligation to inform the creditors and the Curator of the existing Policies, the omission had not caused the creditors any losses. Therefore, no sum was due.

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 judgement being covered in this law report.

This article was fist published in The Malta Independent on 10/01/2024.