COA calls for legislative action to address a lacuna identified in Article 402 of the Companies Act

Basing its argument on the Latin maxim ‘ubi lex voluit dixit, ubi noluit tacuit’ (“Where the law willed, it spoke, where it did not want, it was silent”), the Court of Appeal in Miclis Company Limited v. Kevin Fitzpatrick et. (July 2023) upheld the claim that the law does not grant an appellant the right to appeal an order given under Article 402(3) CA.

In so doing, it called for legislative intervention to address this lacuna.

Facts of the Case:

In its judgment, the First Court upheld the plaintiff’s claim that its rights had been prejudiced by the actions of the majority shareholder of the company. The applicant, Miclis Company Limited (“Miclis”) held 20% of the shares in FM Environmental (Malta) Ltd (“FEM”), whilst the remaining 80% were held by FM Environmental Ltd (“FEL”). In so doing, the First Court issued an order under Article 402 of the Companies Act (Chapter 386 of the Laws of Malta) (“CA”), wherein it ordered, inter alia:

  1. The reinstatement of a director who had been pushed out of the company previously;
  2. That the margins on the sale of products manufactured by FEM and sold to FEL are to be reverted increased; and
  3. That FEM pay Miclis the sum of €602,000 (with interest) by way of damages.

In dismissing the arguments brought forward by the appellants, the Court of Appeal (“COA”) upheld the First Court’s decision.

This publication will not focus on the details or the merits of the judgment itself but will however centre on the unanticipated opinion expressed by the COA in delivering its judgement.  Indeed, in its adjudication, the COA unexpectedly took a step back from its role as an adjudicating body to leave an academic note for jurists reading the judgment, whilst also calling for legislative intervention to address a lacuna in the law.

The COA called into question the basis upon which there is no prescribed possibility for the recipient of an order under Article 402(3) CA to lodge an appeal. It held that this is especially perplexing when considering that other orders, such as those issued by the Registrar of Companies under Article 401(17) CA, may be appealed.

In referring to jurisprudence, the COA explained that typically orders issued under Article 402(3) CA are interpreted as a ‘quick solution [which] can be requested from the court, so that, after it is put into effect, the company, if possible, continues to run”, therefore rendering an appeal as unfeasible.  Article 402(3) CA is in practice considered a mere ad interim measure, or as serving as an interlocutory decree and not as a final judgment.

However, in Miclis, the COA opposed this interpretation, stating that whilst most orders under Article 402(3) CA do tend to be interim measures, the case is not true for all. It referred to the present case as an example, wherein the Civil Court obliged the defendants to pay a substantial sum (€602,000) to make good for the unfair prejudice caused to the plaintiff. The COA stated that this substantial sum, coupled with the fact that the judgment is of a res judicata nature, ought to render it equivalent to a final judgment. It is on the basis of this rationale that the COA rendered the inability to appeal such an order as being inconceivable, therefore necessitating a legislative revamp of this provision.

What Article 402 Entails:  

Article 402 CA, outlining the unfair prejudice remedy, is a legitimate legal instrument often utilised by minority shareholders who feel aggrieved by the manner that the company’s affairs are being handled. Indeed, such a member may apply to the Civil Court for redress when there is, or is likely to be, as a direct result of an act or omission of the company: an element of oppression, unfair discrimination, or unfair prejudice at the disadvantage of such member, or else when the affairs are run in a manner opposed to the interests of the members as a whole.

If the Civil Court renders the application as material, it is empowered by virtue of Article 402(3) CA to give an order to rectify the situation in the manner it deems appropriate. This sub-article empowers the court to issue interim orders wherein it (a) regulates the conduct of the company’s affairs in the future, or (b) restricts or forbids the carrying out of any proposed act, or (iii) requires the company to do an act which the applicant has complained it has omitted to do, or (iv) provides 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) directs 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) provides 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) dissolves the company and providing for its consequential winding up.

As can be seen from the wide range of orders which may be issued by the Court, it is no wonder that certain orders may be, by their very nature, considered to extend beyond “interim” since the effects of such orders may be far-reaching.

It will be interesting to see whether any legislative developments will follow since the Court of Appeal has expressly called upon the legislature to do so. 

It is more than critical to ensure that any proposed measures which are taken are adequate, effective and proportionate to continue to protect minority shareholders’ interests whilst at the same time ensuring that majority shareholders themselves are not unfairly prejudiced.

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 co-authored with Chantal Borg, a student at Ganado Advocates.