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The unconstitutional nature of property devolving on the Government of Malta following the procedure to render a company defunct 

Introduction 

On 12 October 2023, the First Hall of the Civil Court in its Constitutional Jurisdiction delivered a landmark ruling in the case Carmel Cortis et vs. Office of the Prime Minister et. Essentially, the Court held that the procedure whereby property devolves upon the Government, as part of the provisions set out in the Companies Act to render a company defunct1, is unconstitutional, draconian and disproportionate because it breaches the fundamental right to property enshrined in the Constitution and in the European Convention on Human Rights (the “European Convention”).  

Facts of the Case

Vassallo & Cortis Ltd (the “Company”) was struck off the Register of Companies (the “Register”) in terms of article 325 of the Companies Act (the “Act”) because it was not carrying on business and was not in operation. The Company had immovable property, namely a stable which was valued at €450,000, which in accordance with article 325(2) of the Act, devolved on the Government after the Company was struck off the Register. The Plaintiffs, who were shareholders in the Company, claimed that the Government never notified them that it took ownership of the property and in fact the property remained in their possession. The Plaintiffs noted that article 325(4) of the Act provides a remedy whereby the members of a company which was struck off the Register in terms of article 325 can file a court application, within 5 years from the publication of the notice of the striking off, for the company to be restored to the Register and for the company to be restored to its position status quo ante in accordance with the principle of restitutio ad integrum. The Plaintiffs, however, stated that this 5-year period lapsed, and that no remedy was sought by them because of the difficult circumstances which befell the Company, following the untimely death of Cristino Cortis, one of the founding shareholders of the Company and one of its directors. The Plaintiffs therefore argued that they had no practical, effective and legal remedy to safeguard their fundamental human right to property. The Plaintiffs further argued that the loss of the property in favour of the Government and the prejudice to their financial interests breached their fundamental human right to enjoy their property as enshrined in the Constitution and the European Convention on Human Rights. The Plaintiffs also argued that it was unjust and disproportionate that, while having to comply with the provisions of the Act by filing statutory returns and/or paying administrative penalties for late filings, they were deprived of their property which had a monetary value significantly higher than the amounts owed to the Registrar of Companies (the “Registrar”). In addition, the Plaintiffs submitted that its was unfair that their rights, as members of the Company, were prejudiced because the Company’s officers failed to abide by their statutory obligations set out in the Act.  

Plaintiffs’ Pleas 

In light of the above, the Plaintiffs contended the the provisions of the Act have draconian effects which prejudiced their right to the enjoyment of property. For these reasons, the Plaintiffs inter alia requested the Court to: 

1. declare that the devolution of the property on the Government in terms of article 325 prejudices their fundamental human rights as enshrined in article 37 of the Constitution and article 1 of the First Protocol to the European Convention; 
2. declare that the devolution of the property on the Government in terms of article 325 of the Act prejudices their fundamental human right as enshrined in article 13 of the First Protocol to the European Convention; and 
3. provide all remedies it considers appropriate including ordering that the property which belongs to the Company devolves not on the Government but on the Plaintiffs as shareholders of the Company.  

Defendants’ Responses 

In response, the Prime Minister, the Minister of Finance and the Attorney General stated inter alia that: 

1. they were not legitimate defendants in terms of article 181B of the Code of Organisation and Civil Procedure; 
2. the plaintiffs did not exhaust all ordinary remedies as contemplated in the law; 
3. if the property devolved on the Government, this was because the Company was defunct and moreover it was rendered defunct because of failures by its shareholders;  
4. the 5-year period to apply to the Court for the Company to be restored to the Register and for the Company to be restored to its position status quo ante is reasonable; and 
5. the fundamental right to the peaceful enjoyment of property enshrined in article 37 of the Constitution and article 1 of the First Protocol to the European Convention is not absolute and exceptions exist.  

Similarly, the MFSA submitted that it was not a legitimate defendant, and that the legitimate defendant was the Registrar.  

The Registrar responded by inter alia stating that the Company failed to submit statutory returns as required by the Act (leading the Registrar to have reasonable cause to believe that the Company was not carrying on business or was not in operation). Consequently, the Registrar adhered to the procedure set out in article 325 of the Act and declared the Company defunct. Significantly, the Registrar stated that: (i) correspondence was received by one of the directors of the Company that the Company was not only not in operation but in fact never operated; and (ii) the procedure to render the Company defunct was not instituted because the Company failed to pay amounts due to the Registrar but because the Company was not filing statutory returns and because it appeared that the Company was not carrying on business or was not in operation. 

 

The Court’s Considerations 

Legitimate Defendants  

In relation to the defence that certain defendants were not legitimate defendants, the Court cited article 181B of the Code of Organisation and Civil Procedure and case law and reasoned that while the Attorney General and the Registrar were proper defendants, the other defendants (the Prime Minister, the Minister of Finance and the MFSA) were not so.  

Exhausting Ordinary Remedies   

In relation to the defence that the Plaintiff did not exhaust all ordinary remedies, the Court examined various provisions of the Constitution and of the Act as well as relevant case law. The Court held that the procedure set out in article 325(2) of the Act was not adhered to because the Registrar did not “publish a notice in a daily newspaper circulating wholly or mainly in Malta”. The Court held that the procedure set out in article 325(2) was draconian and that it had no doubt that it must be strictly followed. The Court therefore commented that this draconian procedure was unfair. The Court also examined whether the Plaintiffs were properly notified with letters as required by law and found that there was no concrete proof that the Plaintiffs were in fact properly notified.  

Independently of these observations, the Court held that it has the discretion not to exercise its powers in terms of article 46 of the Constitution and that abundant case law exists which sets out situations in which the Court may decline to exercise its power. However, the Court reasoned that if circumstances could give rise to unfairness or if there are serious illegalities, injustices or manifest mistakes in the way the law is applied, the Court should not decline to exercise its powers. Consequently, the Court opined that article 325(2) of the Act was intrinsically wrong, served no public purpose and denied economic value. Moreover, the Court also noted that the Act offered no means of compensation but rather continues to impose liability on every director, officer and member of the company thereby creating an injustice. 

Merits of the Case 

The Court examined similar (but not identical provisions to article 325 of the Act) in English and Cypriot law in which property deemed to be bona vacantia2 devolves unto the government, as well as relevant case law. The Court was of the firm belief that the effect of article 325(2) of the Act was equivalent to the deprivation of economic value owed to the shareholders and was a form of de facto expropriation without compensation masked in a legal provision. Therefore, the Court questioned the legitimate scope of this provision because it did not serve a public purpose. The Court referred to case law which noted that property which was not distributed during the course of the winding up of a company becomes bona vacantia and that this should be the position in Maltese law. The Court concluded that the effects of article 325(2) of the Act were similar to the concept of bona vacantia in English and Cypriot law. In this regard, the Court commented that when a company is dissolved, the liquidator divides and distributes the company’s property amongst its creditors and members. The liquidated property is therefore transferred to natural persons and, accordingly, the Court could not understand why this was not the case in Malta. The Court noted that, in this case, the property in question was funded by the Company’s shareholders in 1986 and even if the shareholders did not show any interest in property, they still retained an economic interest in the Company and should have the right to any economic interest derived therefrom. The Court opined that it is acceptable for a company to be struck off but that distributing the company’s property to persons other than the members is incomprehensible. The Court was also convinced that the procedure on defunct companies was included in Maltese law because Malta followed English law and the procedure was not prompted by any public or social interest. Indeed, the Lands Department indicated that the property in question did not actually fall into the hands of the Government but remained in the possession of the Plaintiffs and at no time did the Government show any interest in the property. In addition, the Court found that the Plaintiffs had lost their patrimonial interest in the property but did not receive any compensation, as compensation was not contemplated in the law. The Court observed that compensation for expropriation was a principle established in the Civil Code long before the Constitution and the European Convention. 

The Court’s Ruling

The Court accepted and upheld all three requests put forward by the Plaintiffs. Therefore the Court: 

1. declared that part of article 325 of the Act (through which property devolves on the Government) prejudices the fundamental human rights of the Plaintiff enshrined in article 37 of the Constitution and article 1 of the First Protocol to the European Convention; 
2. declared that part of article 325 of the Act prejudices the fundamental human rights of the Plaintiff enshrined in article 13 of the First Protocol to the European Convention; and  
3. ordered the Registrar to restore the Company to the Register and for the property to revert to the Company.

The Way Forward

This judgment is subject to appeal and is therefore not res judicata. Despite not being a final judgment, some comments could be made: 

1. The Registrar (and the Government) could potentially be faced with several actions by members or creditors of defunct companies who may request the court to order the Registrar to restore defunct companies to the Register and to restore the company to its position status quo ante.  
2. Article 325(2) of the Act could be amended to say that property will only devolve onto the Government if the defunct company has no successors.  
3. Article 325(4) of the Act could be amended by either removing the 5-year period entirely or extending the 5-year period to 20 or 30 years.  
4. The procedure on defunct companies could be amended entirely in that if a company is considered not to be carrying on business, the Registrar would have the right to apply to the court for the company to be wound up by the court.  
5. Prior to including provisions from other jurisdictions, the legislator should conduct an analysis to determine whether those provisions would be well suited for the Maltese context and to ensure that those provisions do not fall foul of a person’s fundamental human rights and freedoms.  

 

 

This document does not purport to give legal, financial or tax advice. Should you require further information or legal assistance, please do not hesitate to contact [email protected]

The post Landmark Judgment – Property Devolving on the Government After a Company is Rendered Defunct Breaches Human Rights appeared first on Mamo TCV.

 

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