“Deadlock” Among Various Grounds Of Sufficient Gravity That Warrant Dissolution Of A Company

Posted on: 03 Nov 2020

Category: Articles, News

Article 214 (2) (b) (iii) of the Companies Act, Chapter 386 of the laws of Malta empowers the Maltese Courts ordering the dissolution of a company where the Court “is of the opinion that there are grounds of sufficient gravity to warrant the dissolution and consequent winding up of the company”. The law falls short of providing a concrete, exhaustive list of instances which constitute ‘grounds of sufficient gravity’, however, drawing inspiration from English Insolvency law and English jurists, our courts have delivered a wealth of case law clarifying the practical parameters of this provision.

The Maltese Courts have generally held that the provision is closely related to its English counterpart, which refers to ‘just and equitable’ grounds. Notions developed under English law have in practice served as guidance for determining what constitute grave and sufficient reasons under Art.214 (2) (b) (iii). On their part, English jurists have devised a list of instances which constitute ‘just and equitable’ grounds of dissolution, including situations of so-called ‘deadlock’.

Professor Andrew Muscat, defines ‘deadlock’ as those circumstances in a company where it ‘becomes impossible to manage its affairs because the voting power at board and general meetings is divided between two opposing groups’ 1Ludwig Calleja et vs Samuel Abela et, 14 July 2016, (FHCC) . Situations of deadlock can be made less difficult to handle with some foresight at planning stage, such as providing for a chairman’s casting vote, or other conflict management provisions in the constitutional documents of the company. Where such mechanisms are not put in place or are otherwise unsuccessful, the court may find that there exist grounds of sufficient gravity to warrant the dissolution and consequent winding up of the company. In Ivan Calleja et vs M.I.M.S Supplies Limited 2Ivan Calleja et vs M.I.M.S Supplies Limited ,15 Sep 2014,(FHCC), the strained relationship that existed between the two shareholders had persisted for a number of years, and had led the company to completely cease operations. In the eyes of the court, the breakdown in mutual confidence and trust’ between the shareholders lead the company to ‘a point of no return’. Hence, it had no other option but to order its dissolution pursuant to Art.214 (2) (b) (iii) Companies Act.

In another judgment delivered by the First Hall Civil Court on the 1st November 2012, in the names Av. Henri Mizzi noe vs Robert Damkjaer, the court made reference to a UK landmark judgment dating back to 1916 where the UK Court of Appeal held that :

Refusal to meet on matters of business, continued quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly cooperation have been held sufficient to justify a dissolution…. All that is necessary, is to satisfy the Court that it is impossible for the partners to place that confidence in each other which each has a right to expect…”. 3Yenidje Tobacco Co Ltd.

In view of the above, where the court is satisfied that there exists a constant state of conflict or opposing positions between the shareholders, lack of compromise and breakdown in mutual confidence, where the Company can no longer objectively continue trading, the Courts can be persuaded that there are grave and sufficient reasons which are sufficient to warrant the dissolution and consequent winding up of the company.

As illustrated in Ballut Blocks Services Limtied vs Unibuild Company Limited (FHCC) 2017 4Ballut Blocks Services Limtied vs Unibuild Company Limited (FHCC), 30 May 2017 the wide terms in which the provision is couched grants the court a wide discretion to analyse the facts presented before it and to decide whether there subsist sufficient grounds to dissolve a company beyond simply situations of deadlock.  Other grounds which may possibly constitute grounds of sufficient gravity include the abandonment of the main objects set out by the company in its Memorandum and Articles of Association, or the loss of a company’s central management as a result of criminal action which as a consequence results in the loss of  its statutory required licenses for operations 5Maltese Cross Financial Services Limited vs X, 201, (FHCC) . Other grounds which have been suggested to constitute grounds of sufficient gravity include situations of unfair prejudice, oppression and discrimination among shareholders. Such circumstances can give rise to personal liability of particular directors pursuant to Article 402 of the Companies Act, but commentators have argued that insofar as the court finds its sufficient may also warrant the dissolution of the company pursuant to Art. 214 (2) (b) (iii).

In conclusion, while “deadlock” is a typical situation that triggers the remedy of Article 214(2)(b)(iii), the grounds for such remedy remain open-ended, thus allowing the Court to adapt the remedy to changing circumstances in the travails of 21st Century corporations.

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