The Court of Appeal gave a landmark judgment on the 30th
September 2016 concerning a particular legal action, commonly known
as the "Derivative Action". This legal action finds its
roots in English company law, and it essentially makes it possible
for a company's members to institute a judicial action on
behalf of a company in instances where the company does not
institute the action itself.
In this particular case, the action was instituted by plaintiff
both in his own name and as a shareholder of a company in which he
held half of the shares, with the other half of the shares being
held by defendant Anthony Parlato Trigona and other persons.
The Court considered the classical derivative action as known in
English Company Law and the action contemplated under section 402
of the Companies Act which gives a remedy to the shareholder of a
company in respect of any conduct which is or could be unfairly
prejudicial to the shareholders of the company or the interests of
company itself. This was an appeal from a decision taken by the
First Hall Civil Court on the 26th May 2015.
Facts of the case
The plaintiffs filed what they termed as "the classical
derivative action known in English Company Law" against the
defendants and therein asked for the Court to declare the
defendants responsible for causing damages and loss of earnings to
Parade Limited and its subsidiary company Windsor Holdings
The plaintiff brought this lawsuit both in his own name and as a
shareholder of Parade Limited in which he held half of the shares
with the other half of the shares being held by defendant Anthony
Parlato Trigona. Plaintiffs stated that Vassallo and Parlato
Trigona were the only two directors of Parade Limited with the
latter acting also the company secretary, and that Windsor Holdings
Limited was under the control of Anthony Parlato Trigona together
with the other defendant architect William Carbonaro.
The plaintiff alleged that he had filed the "derivative
action" as developed under UK Company Law in order to protect
the interests of Parade Limited against what he claimed constituted
fraudulent conduct and the conflict of interest by one of the
defendants in collusion with the other defendants.
First Court's Judgement
The First Hall of the Civil Court declared that the derivative
action is not part of Maltese Company Law since the legislator, in
drafting the Companies Act (which is based principally on the
United Kingdom Companies Act) opted to disregard the derivative
action, instead widening the grounds of article 402 of Cap 386.
Notwithstanding, the provisions of the Companies Act the First Hall
of the Civil Court held that in the scenario where misconduct and
conflict of interest were being alleged and due to the particular
circumstances of the case then plaintiffs could not institute
proceedings under section 402 of the Companies Act because such an
action cannot be instituted by a "second-tier
shareholder" i.e. a shareholder of a company holding shares in
the company in which the wrongdoing is alleged.
Defendants entered an appeal from the judgement given by the First
Hall of the Civil Court, asking the court of Appeal to revoke the
judgement and to strike out the case on the grounds that the
"classical derivative action" as prosecuted by plaintiffs
cannot be exercised in Malta since it is not contemplated by
Maltese law and also the fact that in its judgment the First Hall
did not give detailed reasons for the decision reached.
Judgment of the Court Appeal
The Court of Appeal's final judgement given on the 30th
September 2016 gives a thorough analysis of the development of the
derivative action under Common law and its relevance under Maltese
law. However, the Court of Appeal basing itself on Maltese legal
provisions and case law stated that the derivative action is now
regulated by Article 402 (3)(e) of the Companies Act.
The Court of Appeal declared that plaintiff could not institute
an action as a second tier shareholder given that he was not a
shareholder in the first-tier company where the wrongdoing was
alleged and that he couldn't institute proceedings on behalf of
such second tier company unless he had (i) the consent of the other
director to institute the action against the first-tier company
where the wrongdoing was alleged or, if this was not forthcoming,
(ii) Court authorisation to institute the action as contemplated by
Article 402(3)(e) of the Companies Act.
The judgement, which is in Maltese can be viewed on this link:
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