On the 1st of December 2021, the Court of Appeal (the “COA”) delivered a judgment confirming a decision of First Hall Civil Court (“CC”) given on the 30th of September 20161Application No. 115/15 LM in the names Gonzalo Jose Gomez Perez for and on behalf of Catapult Holding Limited (the “Applicant” or “Plaintiff”)) vs Dr. Joseph Ellis and P.L Veronica Rossignaud pro et noe2Application No. 115/15/1 LM(the “Defendants”), after an appeal was lodged by the Defendants requesting the Court of Appeal to revoke the CC’s decision which had concluded that:
- Defendant directors (the “Defendant Directors”) had acted in bad faith and fraudulently in their functions as the directors of Red Baron Corporation Limited (“the Defendant Company”);
- Defendant Directors were responsible personally for the financial losses suffered by Defendant Company as a result of the bad faith and fraudulent behaviour of the Defendant Directors in their role as the directors of the Defendant Company; and
- Declaring and ordering Defendants to pay plaintiff company the sum of €323,082.48c equivalent to US Dollars 401,462.29c.
Facts of the Case
The Applicant, an operator in the gaming sector, engaged the Defendant Company to carry out administrative services in its favour, including the processing of payments pursuant to a services agreement entered into in 2013.
In 2014, the Defendant Company informed the Applicant that it was unable to process an instructed payment to the Applicant because of an alleged claim made by Master Card International, that the Applicant had not properly listed its areas of activity on its website. The Defendant Company claimed that it was being fined as a result of the Applicant’s alleged failure to maintain its website.
The Applicant argued that it had always acted in good faith and that the shortcomings complained by the Defendant Company were solely attributable to Defendant Company which was tasked with the processing of payments for which it was not duly licensed, and which was therefore fraudulently retaining funds that did not belong to it.
Moreover, Applicant’s further submitted that Defendant Directors had failed to sufficiently rebut its allegation of fraud against them by simply stating that they were only ‘acting in their capacity as directors in representation of the company which holds separate judicial personality’.
Considerations of the CC
The CC considered that the Defendants had acted fraudulently and in bad faith by having entered into an agreement which stipulated that the Defendant Company was duly licenced to provide payment services when in truth it was not. It found that the reason for the Defendants’ refusal to transfer the funds to the Applicant was fictitious.
The Court, quoting from Article 137 of the Companies Act3Chapter 386 of the laws of Malta and related jurisprudence, stated that this article was intended to ensure that the Defendant Company remained responsible for the actions of the directors or other persons involved in its administration. However, despite the separate legal personality of companies, ‘directors may also be subject to administrative and penal sanctions under various laws’.4ibid (n.1) p. 11-12
Fraud, under Maltese company law and as confirmed by our Courts on several occasions, constitutes one of those instances where directors assume personal liability for their actions.5Vide : Anthony Briffa vs Vincent Oliver Abela, decided on the 28th of March 2003, FHCC (App No.486/1994/3) Quoting from Palmer’s Company Law621st Edition, 1969, p. 572, the CC stated that ‘Any director who is party to a fraud or to the commission of any other tort is personally liable to the injured party’. Similarly, quoting from Professor Andrew Muscat, it confirmed that ‘every criminal act may give rise to civil responsibility and therefore fraud, which constitutes a criminal act, carried out by the directors of a company, may also be personally liable for civil damages’.
In light of this, the CC found the directors of the Defendant Company responsible for having acted fraudulently and in bad faith and ordered the directors personally to pay the Applicant the sum of €323,082.48. The Defendant Directors’ attempt at hiding behind the corporate veil and at shifting liability for payment onto the Defendant Company they represented, was rejected.
Considerations of the COA
Defendants filed an appeal from the CC’s decision on the basis of the arguments that:
- Plaintiff had already instituted arbitration proceedings against the Defendant Company which had also been won by the Plaintiff, hence they could not also institute these proceedings against the Defendant Directors as they would potentially obtain two judgments against the Defendants on the basis of the same facts;
- The Plaintiff had not proven the bad faith and fraudulent behaviour of the Defendant Directors;
Plaintiff argued that the two grievances were totally unfounded as:
- the arbitration proceedings were based on a contract between the Plaintiff and the Defendant Company sued in the same arbitration proceedings and hence the Arbitration Tribunal would not have been vested jurisdiction over the acts of the Defendant Directors who had not signed the contract on a personal basis and would have obviously raised defence pleas to this effect.
- The Plaintiff had fully proven itscase in respect of the fraudulent behaviour of the Defendant Directors who had conjured various unfounded reasons to refute a payment which was entirely due and had stated the Defendant Company was fully licenced to offer its services when in actual fact it was not;
The COA dismissed the Defendants’ first grievance as frivolous as the Defendant Company had been sued based on the arbitration clause between the parties, whereas Defendant Directors were being sued on the basis of their actions qua directors. The COA dismissed this grievance stating that a payment made by either the Defendant Company or by Defendant Directors would extinguish the obligation of the other;
The Court also dismissed the second grievance. It noted that there was ample evidence to show that the Defendant Directors had misrepresented the facts and had denied payment on the basis of reasons which were not corroborated by any correspondence.
The COA hence concluded that Plaintiff had proven, up to the required probative degree, that Defendant Directors had acted fraudulently and in bad faith and confirmed the decision of the COA in its entirety, with costs of both action against Defendants.