Insights

In its judgement delivered on the 18 March 2021 in the names of Brace Adonis v Braai Masters Co Ltd et, the First Hall of the Civil Court, presided over by Mr Justice Joseph Zammit McKeon, considered in quite some depth the various nuances of the ‘unfair prejudice’ remedy found under Maltese company law.

In brief, the pertinent facts of the case are as follows.

Background

Having known each other for a number of years via a well-known restaurant in Ta’ Xbiex, defendants Pullicino and Bonavia entered into a business venture with applicant Brace (who had worked at said restaurant for a number of years as a chef) with the aim of opening a new catering establishment in Bahar ic-Caghaq. For this purpose, all three parties agreed to incorporate a private limited liability company going by the name of Braai Masters Co Limited (the “Company”), whose shareholding was split amongst all three individuals into unequal amounts (namely, 40% held by Pullicino and two portions of 30% held by Bonavia and Brace, respectively).

Completion of the project proved to be rather costly, and in order to finance the various renovations made, the Company entered into a loan agreement with Mamma Mia Company Limited in the amount of EUR 400,000. This amount was guaranteed by Brace, Pullicino and Bonavia in their personal capacities. Unfortunately, the returns made on their investment proved to be lower than expected, and the catering establishment closed its doors after a year and a half in business.

In the face of adversity, applicant Brace submitted a sworn application to the court on 11 August 2017, claiming, inter alia, that the Company had been poorly run by its directors in breach of the general duties set out under Article 136A of the Companies Act (Cap. 386 of the Laws of Malta) (the “CA”). Brace alleged that the Company failed to present its management accounts, cash-flow statements, profit and loss, as well as proof of its loan repayments (in instalments) to Mamma Mia Company Limited, and further added that he had been arbitrarily pushed out of the business by Pullicino. On this basis, the applicant submitted that the court ought to grant the ‘unfair prejudice’ remedy found under Article 402 of the CA.

In turn, the defendants vehemently denied the applicant’s allegations and noted that Brace had cut off all ties with the Company of his own accord and stopped reporting for work without any prior warning. Furthermore, being a director himself, the applicant’s behaviour was manifestly incompatible with his obligations under Article 136A of the CA.

The law

Article 402 of the CA is geared towards protecting shareholders against unfair prejudice. It effectively holds that any member of a company who complains that the company’s affairs have been, or are being, or are likely to be conducted in a manner that is, or that any act or omission of the company have been or are or are likely to be, oppressive, unfairly discriminatory against, or unfairly prejudicial, to a member or members or in a manner that is contrary to the interests of the members as a whole, may make an application to the court to make an order under such terms as it deems fit: (i) regulating the conduct of the company’s affairs in the future, or (ii) restricting or forbidding the carrying out of any proposed act, or (iii) requiring the company to do an act which the applicant has complained it has omitted to do, or (iv) providing for the purchase of the shares of any members of the company by other members of the company or by the company itself, or (v) directing the company to institute, defend, continue or discontinue court proceedings, or authorising a member or members of the company to institute defend, continue or discontinue court proceedings in the name and on behalf of the company, or (vi) providing for the payment of compensation by such person as may have been found by the court responsible for loss or damage suffered as a result of the act or omission complained of, to the person suffering the said loss or damage, or (vii) dissolving the company and providing for its consequential winding up.

The Court’s deliberations

At the outset, the Court remarked that in applying any one of the remedies set out in Article 402(3) of the CA (listed above), it must first be satisfied that the allegations put forward by the complainant in accordance with Article 402(1) of the CA (i.e. that the affairs of the company have been or are being or are likely to be conducted in a manner that is, or that any act or omission of the company have been or are or are likely to be, oppressive, unfairly discriminatory against, or unfairly prejudicial, to a member or members or in a manner that is contrary to the interests of the members as a whole) have been proven to a sufficient degree. Indeed, the Court cited Professor Andrew Muscat’s Principles of Maltese Company Law in establishing that the onus of proving the act or omission lamented by the complainant in accordance with Article 402(1) of the CA falls squarely on the said complainant.

The Court went on to cite Cutajar pro et noe et v. S.C & Company Limited et (30/01/2008) wherein the First Hall of the Civil Court had noted that our law remains silent on what would constitute oppressive and unfairly discriminatory and prejudicial behaviour and that the merits of each case would therefore need to be considered on a case-by-case basis. In this context, the Court also cited Brenda Hannigan’s Company Law, wherein the author posited that:

“Whether the company`s affairs are being or have been conducted in a manner which is unfairly prejudicial to the petitioner`s interest is an objective, not a subjective, matter. The prejudice must be real, rather than merely technical or trivial, and the petitioner does not have to show that the persons controlling the company have acted deliberately in bad faith or with a conscious intent to treat him unfairly.

The conduct complained of must be prejudicial in the sense of causing prejudice or harm to the relevant interest of the member (usually, but not limited to financial damage) and also unfairly so (usually connoting some breach of company law or the constitution but not limited to that) and it is not sufficient if the conduct satisfies only one of these tests.”

The Court noted that Hannigan’s objective test was fleshed out further by Slade J’s dictum in the UK judgement In Re Bovey Hotel Ventures Ltd (1983) wherein it was remarked that the objective test would effectively equate to “whether a reasonable bystander observing the consequences of their conduct, would regard it as having unfairly prejudiced the petitioner’s interests”. Interestingly (and quite pertinently, given the circumstances of the case under examination), the Court remarked that the unfair prejudice remedy may be said to be derived from principles of equity and that therefore, a complainant’s ‘legitimate expectations’ ought to be taken into account – particularly in the context of relatively small private companies where the shareholders would invariably have a personal relationship with one another (Ebrahimi v. Westbourne Galleries Limited [1973] A.C. 360).

Further to the above, the Court cited the First Hall, Civil Court’s dictum in Av. Dr Pio M. Valletta noe v. Jeno Torocsik et (2016), where it was held that in order to establish unfair prejudice: (1) one would need to satisfy the objective test, (2) the complainant need not prove bad faith, (3) the complainant need not prove the other party’s intention to cause prejudice, (4) the other party’s behaviour need not necessarily be unlawful, and (5) the other party’s behaviour must have a negative effect on the complainant qua shareholder.

In Hannigan’s words, therefore, “[m]ere deadlock between the parties who have lost trust and confidence in one another is insufficient then to merit relief… in the absence of prejudicial conduct.”

The Court’s conclusions

The Court noted that one of the complainant’s main bones of contention lay with the fact that he had not been provided with sufficient information as to the company’s finances, yet (ironically) he himself admitted during his testimony that he had at no point asked for such information point-blank. More so, the applicant had further informed the Court that Pullicino and Bonavia used to consult him on a regular basis and that they even shared receipts and other documentation relative to the investment being made in the restaurant. The Court was further informed that the applicant tended to not take any interest in the company’s affairs and would never attend weekly meetings wherein business-related matters would be discussed. Moreover, the applicant had stopped reporting for work without considering his role as director of the company, and the responsibilities which this entailed. Indeed, he had not even endeavoured to resign from his role as director. Hence, it clearly transpired that the applicant had not given due consideration to his responsibilities as set out in Article 136A of the CA.

In view of the above, the Court concluded that unfair prejudice had not been sufficiently proven by the applicant as per Article 402(1) of the CA and that consequently, it need not proceed to assess any of the applicable remedies found under Article 402(3) of the CA.