The standard of proof required in ‘Unfair Prejudice’ actions

On 18 March 2021, in the case of ‘Naico Limited v Rosa Limited et.’, the Civil Court (Commercial Section), presided over by Judge Joseph Zammit McKeon, delved into the standard of proof required for ‘unfair prejudice remedy’ actions under Article 402 of the Companies Act (Chapter 386 of the Laws of Malta) (“the Act”) to be successful.

Facts of the Case

The shareholders of Rosa Limited (“the defendant company”) were Naico Limited (“the plaintiff”) and Piccinino Franchising International Venture Limited (“Piccinino”) as minority shareholders and A. Hamruni as majority shareholder. Hamruni was also a director of the defendant company, together with his sister. The defendant company was created to operate as a joint venture between Piccinino and Clothes Import Company. These three companies would make contributions to open a number of shops in Libya.

Consequently, the defendant company started to rent a property in Tripoli, to be used as a shop. This property was suggested by Hamruni. A few weeks after the shop opened, the shop had to close temporarily due to instability in the country. The shop eventually re-opened for business but had to face a number of operational issues, including lost stock, discrepancies in bank balances, as well as a lack of sales.  In February 2017 the situation continued to deteriorate, and it was therefore decided that the defendant company would be dissolved. The defendant directors insisted that the company had not done well due to the type and the price of the stock, and that the location of the shop did not have a bearing on the low sales numbers. It was in this context that the plaintiff company found out that the property which was rented out belonged to Hamruni’s spouse. Hamruni had not informed the plaintiff company about this fact, despite the plaintiff company’s repeated queries about the ownership of the property. The plaintiff company believed that this caused prejudice and hence decided to utilize the ‘unfair prejudice remedy’ under Article 402 of the Act. The plaintiff company sued the defendant company and the defendant’s company’s directors, A Hamruni and F. Hamruni, and claimed that the affairs of the defendant company had been conducted in a manner that was oppressive and unfairly prejudicial to the plaintiff company, as a minority shareholder of the defendant company. The plaintiff company also requested for the Court to give appropriate orders, under Article 402 of the Act, for the unfairly prejudicial and oppressive acts to be remedied.

The Court’s Considerations

In its considerations, the Court described the standard of proof required in unfair prejudice remedy actions. The Court provided that for it to give orders under Article 402 of the Act, it is pertinent that the plaintiff proves that the acts challenged have the effect of being:

  1. unfairly prejudicial, or;
  2. oppressive, or;
  3. unfairly discriminatory.

The Court explained that if the acts challenged have the effect of satisfying one or more of the criteria of Article 402(1), the Court may then give orders under Article 402(3), (4) and (5).The Court also clarified that proving one of these effects is sufficient, and therefore it is not necessary for the plaintiff to prove that the act challenged creates all these three effects. Nonetheless, if none of these effects are proven, then the Court cannot give orders under sub-articles 402(3) – 402(5). Therefore, in simple terms, the proof of unfairly prejudicial, or unfairly discriminatory, or oppressive acts against the plaintiff is crucial for the continuation of the action under Article 402 of the Act. The Court proceeded to quote the case of ‘Cutajar pro et noe v S.C. & Company Limited et’, wherein the Court had explained that since the terms ‘unfairly prejudicial’, ‘oppressive’, and ‘unfairly discriminatory’ are not defined under Maltese company law, it was at the Court’s discretion to intervene as appropriate and grant any relevant remedies on a case-by-case basis. As part of its considerations, the Court also referred to a number of local and UK court judgements as well as legal doctrine on Article 402.

Ruling of the Court

The Court then moved on to analyse whether the plaintiff company managed to satisfy the standard of proof required in unfair prejudice remedy actions. The Court observed that the shop was opened at a time of great instability in Libya. Therefore, the shareholders of the defendant company took a big risk, and the failure of the defendant company could not be blamed on the fact that the shareholders did not know that the shop was being rented from Hamruni’s spouse. The Court noted that representatives of the plaintiff had travelled to Tripoli in search of an adequate and central site for their shop, however, they had ultimately decided to trust their Libyan partners due to their better understanding of the Libyan market. The Court also noted that the plaintiff had not insisted to see the rental agreement of the shop, and that furthermore, no searches had been carried out on the site. Consequently, the Court ruled that the rental situation was not the reason why the shop failed and does not fulfil the requirements of Article 402. On the basis of the proof presented, the Court stated that plaintiff company failed to satisfy the requisites of an unfair prejudice action in terms of Article 402, and accordingly the Court decided not to give an order under Article 402(3).

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 first published in ‘The Malta Independent’ on 10/10/2023.