Shareholder may use directors of struck-off company only on personal rights

A shareholder of a company which is now struck off the Companies Register is allowed to sue directly the former directors, as long as the claim refers to the shareholder’s personal right. This was held by the Court of Appeal in Ingrid Fiorini -v- Anna Zerafa and Josianne Miceli decided on 14 December 2022.

Fiorini filed a sworn application against two former directors of Nova Co Limited. The Plaintiff explained that her father had set up the company in 1998 and after his death she became a shareholder together with her three other sisters. The Plaintiff was being edged out of the company and Zerafa took complete control of the company. Zerafa’s children set up a competing company Women’s Costmetics Limited and Zerafa was deviating business from her company to her children’s company. Zerafa who controlled Nova Co Limited refused to present to the Companies Register the audited accounts and annual return of the company. This resulted in the company being struck off from the Register. The Company has sufficient funds to pay for its statutory obligations. The Plaintiff asked the court to condemn the Defendants to pay damages caused.

The defendants filed a statement of defence and pleaded amongst other pleas that the Plaintiff did not have juridical interest in this case because the directors’ obligations are towards the company and not the shareholders and that she cannot filed a damages claim against the directors.

The Civil Court in its Commercial Jurisdiction rejected this plea, where the parties had to produce evidence on the personal rights of the Plaintiff as a shareholder against the other shareholders.

The Defendants appealed from this judgement. The Defendants submitted that the judgement was erroneous that this action is a personal one and not on damages as it is the company which should have taken action against the shareholders or directors of the company.

The Court dealt with each of the grounds of appeal separately. The first ground of appeal dealt with whether the action was a damages case instituted by a shareholder. The Defendants argued that the Plaintiff is causing a confusion of the rights of the company and her personal rights as a shareholder. The Plaintiff according to the Defendants, is acting on behalf of the company and not in her name. In fact, the Plaintiff is claiming lost profits, which the company suffered and not the shareholders.

The Court of Appeal disagreed that there was an error by the Court of First Instance in that this action is in fact a damages case. One has to see the premises of the sworn application and not by the pleas. The application makes it clear that since the Plaintiff is claiming that she did not receive dividends from 1998 is a damages cases, especially if the claim includes that she is personally responsible for fines and penalties imposed by the Malta Business Registry and the tax departments. Therefore, the action was not instituted in the name of the company, but in her name personally.  This ground of appeal was rejected.

The Court of Appeal then dealt the ground of appeal that this action could have never been instituted against the directors personally.

Since according to Article 136A of the Companies Act the directors obligations are towards the company Nova Co. Ltd. The Defendants have no juridical relationship with the Plaintiff and therefore, it should have been the company which should take action against the company. The lifting of the corporate veil takes place in exceptional circumstances. Furthermore the Defendants argued that the damages case was instituted in terms of Article 402 of the Companies Act which allows individual shareholders to seek a remedy in the name of the company, but it cannot be used to sue a director.

Neither should the action have been instituted because the company was struck off, because the company could have been revived.

The Plaintiff rebutted these arguments on whether she has juridical interest in the case, she emphasised that she had a loss because of the actions of the Defendants. Zerafa had taken the company s money and the company made a loss because of maladministration. The plaintiff further argued that it was impossible for the company to take action on its own.

The Plaintiff argued that if the company had to be revived, this would cause more prejudice because Zerafa took all the company s money and therefore the company would not pay the fines and penalties.

The Court of Appeal then held that a director is a mandatory of the company and the company has a distinct personality and therefore in general the directors are answerable to the company. If the director is not in conformity with his duties, then it is the company which should take action. The general principal is found in the UK judgement Foss vs. Harbottle and Edwards vs. Halliwell.

The general principle of law is not without its exceptions. One is when there is an act or an omission of the director which violates the plaintiff s personal rights.

The Court of Appeal disagreed with the Defendants that a shareholder cannot file a damages claim as allowed in Article 402 3 f of he Companies Act. This can take place when the company is still trading. Furthermore the damages claim can take place in the general principle of law. This was outlined in various judgements and authors.

However this does not give the plaintiff a carte blanche to sue for any type of damages against the director. The action against the director must be strictly personal and separate from damages  incurred by the company from acts and omissions of the director. This principle was outlined in other judgements Martin Bonello Cole vs. Kenneth Cole decided by the Court of Appeal on 5th October 2021 and M J Folla -v- JH Soratas decided on 12th March 1976 decided by the Court of Appeal.

As to the Court of Appeal listed which actions were deemed as personal damages a shareholder could take against a shareholder could take against a director. As to profits and dividends the claim should be sought by the company Nova Co. Ltd. since the loss is suffered by the company. This was outlined is Prudential Assurance Co. Ltd. Vs. Newman industries Ltd. decided in 1982.

The Court of Appeal explained that the Plaintiff could not claim in this action the sale of the stock and the fact that Zerafa took for herself the money from this sale. It is the company that should have a claim on this since this money could have been used by the company to prepare the accounts and present these to the MBR.

The Plaintiff held that she was receiving letters from the MFSA, VAT and tax department since 2008, where she was informed that the company was incurring fines and penalties. She blamed the Defendants for the company to be struck off and consequently she lost her shares in the company. The Court of Appeal held that the loss of her shares could be decided in this action.  The same goes for the fines and penalties that are attached to the Plaintiff personally, since she did occupy the position of director for a considerable time. Although the Plaintiff has joint and several liability on what is owed to MBR, MFSA and the tax departments, is actionable directly against the Defendants, if her claim is that they are in fact responsible for totting up these fines and debts.

The Court, then ordered that the case be referred back to the Commercial Court to decide on these claims.