Insights

Introduction

In ‘Ruth Magro v. Ir-Registratur tal-Kumpanniji’ decided by the Court of Appeal on the 25^th of February 2025, the Court of Appeal held that the guarantee of peaceful possession granted by the seller to the buyer in the context of a real estate transaction does not amount to a contingent liability, where such guarantee is not capable of being valued.

Facts of the Case

In May 1995, the plaintiff purchased a flat in St. Paul’s Bay (the “Property”) from D.A.G. Limited (the “Company”). The Company guaranteed the peaceful possession of the Property to the plaintiff via a general hypothec over all present and future assets of the Company (as seller).

In October 2013, the shareholders of the Company unanimously resolved that the Company be dissolved under the Civil Court First Hall’s (the “First Court”) supervision by virtue of Article 265(1) of the Companies Act (Chapter 386 of the Laws of Malta) (the “Companies Act”). Subsequently, on the 11^th of February 2014, the First Court ordered that the Company be dissolved and liquidated and for these purposes, appointed the Official Receiver to act as liquidator. Following the completion of the liquidation process, the First Court ordered that the name of the Company be struck off the register of companies.

Proceedings before the First Court

The plaintiff instituted a case before the First Court in an attempt to reverse the Company’s dissolution and winding up and have the Company reinstated in order for the plaintiff’s right to peaceful possession to be safeguarded. In his testimony, the Official Receiver held that the liquidation process of the Company was relatively straightforward, however admittedly he had not carried out searches in the Public Registry to determine whether the Company owned any immovable property or whether it had granted any general hypothecs in favour of third parties.

The plaintiff argued that under Article 300B of the Companies Act, the First Court was under an obligation to order that the name of the Company be restored to the register and the winding up be reopened due to the following considerations:

1) the guarantee of peaceful possession created a contingent liability in the Company’s regard, which should have been taken into consideration during the liquidation process;

2) the liquidator’s failure to properly carry out the necessary searches in the Public Registry is tantamount to an illegality of a material nature; and

3) the reintegration of the company is the only remedy available for the plaintiff to ensure that its right is protected.

The Court rejected the plaintiff’s demands on the basis that the liquidator’s failure to carry out the searches was not an illegality of a material nature, and that the general hypothec granted in favour of the plaintiff did not amount to a contingent liability.

The Article 300B procedure under the Companies Act

Article 300B of the Companies Act affords the possibility of a company which has been dissolved and subsequently struck off the register of companies to be reinstated, and for the liquidation to be reopened. The court would proceed to reinstate the company and reopen the liquidation process only when it is satisfied that the winding up and striking off of the company has been vitiated by fraud or illegality of a material nature. The court can only accept such a request where it is satisfied that this is the only remedy available to the aggrieved person making the application. Such process can only be resorted to where an application is made within 5 years from when the company’s name was struck off the register.

Proceedings before the Court of Appeal

The plaintiff appealed the First Court’s judgement before the Court of Appeal based on two grounds. In the first instance, the plaintiff argued that the First Court should have classified the guarantee of peaceful possession as a contingent liability and secondly, the First Court failed to declare that the liquidator’s failure to uncover the existence of the guarantee of peaceful possession amounts to a material illegality.

In her submissions on appeal, the plaintiff made reference to the definition of a contingent liability as found in Black Law’s Dictionary. Summarily, a contingent liability is defined as an obligation which is not fixed and absolute but which, will become absolute on the occurrence of some future and uncertain event. In this respect, the plaintiff submitted to the First Court that the guarantee of peaceful possession fits squarely within this definition in view of the fact that it will only come into play on the happening of a future and uncertain event. The plaintiff further argued that the First Court’s sentence will lead to an unfortunate scenario where any guarantee of peaceful possession that has been granted by a company can be done away with by liquidating the company that granted it. In essence, a company may circumvent its obligations of guaranteeing peaceful possession by opting to dissolve the company.

In her submissions, the plaintiff also argued that the First Court failed to explain why the guarantee of peaceful possession does not amount to a contingent liability. The plaintiff submitted that the First Court had stipulated that for a contingent liability to exist, the following requisites must be satisfied:

1. There must be an existing obligation;
2. the obligation must be able to be valued or estimated; and
3. The obligation must be dependent on the happening of an event which may or not occur.

The plaintiff argued that the guarantee of peaceful possession satisfied all the three requisites above. In brief, she argued that the guarantee of peaceful possession is an existing obligation which is created as soon as the contract concluding the sale is published. She further argued that the obligation created by this guarantee can easily be valued or estimated. Here, reference was made to Article 1413 of the Civil Code which holds that where a promise of warranty exists and a buyer has been evicted from his property, he shall be entitled to the return of the price, the relevant judicial costs and damages, including the lawful expenses of the contract together with any other lawful expenses which may have been incurred. In so far as the third limb, the plaintiff submitted that this guarantee comes into play whether the buyer is eventually evicted from the Property or not. This clearly illustrates that the obligation created by the guarantee is dependent on whether a future event happens or not, and the fact that no claim has been put forward thus far by the plaintiff, is immaterial to satisfy the third limb of the contingent liability test.

The Court of Appeal agreed with the plaintiff’s view that the guarantee of peaceful possession satisfied the criteria to constitute a contingent liability. However, the Court of Appeal held that regard must be had to the First Court’s analysis regarding how plausible the occurrence of the contingent liability is. Reference was made to Roy Goode, who concluded in his analysis that the key factor in determining whether a contingent liability exists is whether there is a realistic prospect of the contingency occurring.

In applying Roy Goode’s theory to the current case, the Court of Appeal noted that the plaintiff has held ownership of the property for nineteen years without any allegations from third parties challenging her title. Nor is there any evidence to show that the title was defective. In this respect, the Court of Appeal stated that the possibility of the plaintiff’s title being challenged was based on a remote hypothesis rather than on any tangible evidence. In the Court of Appeal’s view, this possibility was so remote that it was not necessary for it to be assigned a value, and it is in this context that the guarantee of peaceful possession should be valued, rather than on a valuation based on the purchase price of the property or the property’s present or future value. Therefore, if the liquidator had to assign a value to the guarantee of peaceful possession it would, in the current circumstances be negligible.

Conclusion

The Court of Appeal’s decision provides significant insights into the nature of contingent liabilities in the context of guarantees of peaceful possession, particularly the importance of how contingent liabilities should be valued.

Disclaimer: Ganado Advocates is responsible for contributing to 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 first published in ‘The Malta Independent’ on 23/04/2025.