Corporate and Mergers & Acquisitions (M&A)
Separate Corporate Personality Unveiled
Separate Corporate Personality Unveiled
13 min read
An outline of the exceptions to the separate corporate juridical personality under Maltese law and jurisprudence.
The landmark case of “Salomon v Salomon” in the UK established the principle of separate juridical personality and today represents a fundamental pillar of company law doctrine. This principle has however created problems of its own. It has been the object of significant abuse, being invoked in instances where parties with ignoble motives sought to have the corporate form protect them for some form of wrongdoing. And it is primarily these instances that have led courts in various parts of the world to develop elaborate exceptions to this central principle of separate legal personality, ensuring that the general public interest is adequately protected from wrongdoing, and avoiding the rigidity of a system where form would invariably triumph over substance.
This article serves to outline those instances where Maltese law specifically provides for a “look through” beyond the corporate form, and other instances where the Maltese courts have considered it justifiable to set aside a company’s separate legal personality in specific circumstances.
A General Backdrop
A Maltese company acquires formal legal existence or “legal personality” on the day the Registrar of Companies issues a certificate of incorporation. This legal personality continues until the company is struck off the company register.
Once a company has acquired separate personality, it may sue and be sued in its own name, and acquires rights, obligations and liabilities which are separate from those of its shareholders and officers.
However situations arise in which the notion the of distinct personality is done away with and what is known in legal circles as “the corporate veil” is set aside, “lifted” or “pierced”. The lifting of the corporate veil is a mechanism which helps combat any abuse which members and/or officers of the company abuse from the notion of the separate legal personality of the company.
The corporate veil can be pierced in one of two ways, that is either through statutory or judicial inroads. Each of these routes will be considered under the respective headings below
Maltese law caters specifically for instances in which the “veil” may be lifted. The provisions are mainly targeted at the management of the company rather than its shareholders and such laws do not seek to neutralise the separate personality of the company as such, but rather to penalise any wrongdoing on the part of company’s “constituents”. Statutory inroads constitute an exception to the general rule that a mandatory should not be held responsible for the acts of the principal.
1.1 Number of shareholders falls below statutory minimum
According to the Maltese Companies Act, a company is not validly constituted unless the Memorandum of Association is entered into and subscribed to by at least two persons, although an exception is conceded in the case of single member companies satisfying specific requirements. In the event that the number of members fall below two for a period longer than 6 months, that company can be dissolved and wound up by the court.
If the number of members remain below two for a period longer than 6 months, the law provides an additional 30-day grace period within which the company may rectify the situation.
If the situation is not rectified within the first grace period of 6 months, and the remaining member continues to carry on business, then that member may be held unlimitedly and jointly and severally liable with the company for those obligations contracted after the six-month period, until the date when the company is dissolved and wound up, or the situation is rectified. The remaining member can only be held liable if it is proven that he was aware that he was the sole remaining member of the company. In these circumstances, the ‘veil’ is lifted and liability is imposed on the sole remaining member, however the separate personality of the company effectively remains intact.
1.2 Fraudulent trading
Another statutory inroad provides that, if in the course of the winding up it appears that any business of the company has been carried on with the intent to defraud creditors, or for any fraudulent purpose, the court may hold responsible any person who was knowingly a party to that fraud without any limitation for the liability of debts of the company. The challenge with such an action is that the promoter of such a claim must successfully prove fraudulent intent on the part of the persons involved.
These provisions may be invoked against any person who is involved in such fraud such as directors, shareholders, managers and any other persons who are knowingly parties to the fraud and may only be brought when the company is in the course of being wound up. The burden to prove the intent to defraud creditors represents the most significant challenge for a successful claim of this nature to be brought, and lies with the applicant. Additionally, any individual found responsible and/or contributing to such fraud may also be liable to criminal sanctions.
1.3 Wrongful trading
The action for “wrongful trading”, on the other hand, can only be exercised when the company goes into insolvent liquidation and may be brought exclusively by the liquidator against the Directors, thus being much narrower in scope than the action for fraudulent trading. However, the creditors may instigate the liquidator to bring this action.
For an action of wrongful trading, the Court may declare the Director liable to contribute towards the company’s assets, as long as it is proved that the Directors knew, or ought to have known, that there was no reasonable prospect for an insolvent liquidation to be avoided. This approach clearly sheds light on the nature of Directors’ fiduciary duties not only towards shareholders but also towards creditors as stakeholders, in view of the limited liability of the company.
It is noteworthy that any Director acting in good faith is afforded some protection and the Court will not grant an application for wrongful trading against such director/s if it is satisfied that the person concerned took every step he ought to have taken with a view to minimise potential losses to the creditors.
The fraudulent trading and wrongful trading provisions have been extensively applied by the Maltese Courts in the ‘Price Club case’ where the liquidator filed an action against the directors of the company in question, alleging that these directors were guilty of fraudulent trading and requesting the Court to pierce the corporate veil and hold the directors personally liable for the company’s debts. The first Court accepted the plaintiff’s arguments and found the directors guilty of fraudulent trading. Consequently, the Court held all three directors jointly and severally liable for the debts due to the creditors.
1.4 The group of companies as a single entity
Statutory inroads are also provided for in the Companies Act and the Income Tax Act which cause the separate juridical personality of companies in a group to be set aside for the purpose of viewing the group as one single entity for financial or fiscal reasons.
The statutory inroad in the Companies Act provides that, besides needing to prepare individual accounts for that company, the parent company of a group must also prepare a consolidated financial statement for the whole group of companies, as if it were a single entity. These consolidated accounts will provide a true and fair view of the assets, liabilities and financial position of the group of undertakings as a whole.
The statutory inroad found in the Income Tax Act on the other hand relates to ‘group relief’. When a company forming part of a group incurs losses, in certain circumstances these losses can be set off by other companies within the same group. The definition of group of companies found in the Income Tax Act is different to that found in the Companies Act. Therefore, for the purposes of ‘group relief’ provisions, the companies need to form part of the same group for income tax purposes, and in this light, the Income Tax Act provides those circumstances where group relief may be availed of across companies within the same group.
Clearly these statutory inroads to the “lifting of the veil” do not have liability implications for the officers of the company, and are intended as accounting and fiscal measures to look at groups of undertakings on a consolidated basis.
1.5 Premature Trading
A company which has not yet been issued a certificate of registration in terms of the Companies Act does not formally enjoy the attribute of separate legal personality. Consequently, any agreements or business entered into on behalf of the company before the date of issue of its certificate of incorporation exposes the person conducting such business to personal liability for all such dealings. In any circumstances where premature trading occurs, it is possible for the company to ratify and accept such obligations once all the formalities according to law are satisfied to give the company its own autonomous legal existence.
1.6 Misstatements in prospectus
Any person who has authorised the issue of a prospectus by a Maltese company renders himself personally liable for any damage that may be sustained by a person subscribing for shares or debentures, if any damage was sustained due to untrue statements in the prospectus.
1.7 Unlawful distributions
In circumstances where a distribution or part of a distribution of profits or assets is made by a company to one of its members, and at the time of the distribution that person to whom the distribution was made, knew or had reasonable grounds to believe that the distribution is in contravention of the said provisions, the person receiving such distribution will be liable to repay back to the company the full amount so received by way of distribution.
1.8 Liability of Past Directors and Shareholders in relation to the redemption or purchase by company of its shares
Liability is imposed on directors and shareholders of a company in circumstances where, before its dissolution, the company had made a payment out of the capital in respect of the redemption or purchase of any of its own shares, and following its dissolution, it results that the aggregate amount of the company’s assets, together with the amounts paid by way of contribution, is not sufficient for the payment of its debts, liabilities and expenses of the winding up.
Where the dissolution has occurred within 12 months from the date on which the relevant payment was made, then the person from whom the shares were redeemed or purchased will be liable to contribute an amount not exceeding the relevant payment which was made by the company in respect of the shares.
1.9 Restriction on Company Names
A person who has acted as a director or shadow director of a company which was dissolved due to insolvency in the 12 months prior to dissolution, cannot act as a director of another company that is known by the same name or by a similar name which might suggest association. The director cannot take part in any promotion, formation or management of the company, be it directly or indirectly, be concerned or take part in the carrying on of that business. The director will be liable for debts incurred during the time he acted as director or otherwise took part in the management, promotion or formation of that company.
2. Judicial Inroads
There are several instances throughout Malta’s legal history where the Court have been requested to ignore the separate personality of a company, particularly in situations where no statutory inroads exist. The Courts have been amenable to such arguments and, basing itself largely on UK case-law, it has developed a well-structured doctrine for the granting of judicial inroads.
2.1 Fraud or improper conduct
The interpretation of fraud in this context is wider than that given to it in a criminal law context, as it encompasses fraud and improper conduct which goes beyond a deliberate attempt to deceive.
Maltese courts have been faced with situations where they decided to lift the corporate veil in order to issue judgments which are in line with the principles of good faith. Most of these cases have involved an attempt at evading contractual obligations by hiding behind a corporate personality.
The court confirmed its readiness to lift the corporate veil in situations of bad faith in the landmark judgement of Dr Jose Herrera noe et vs Tancred Tabone et noe. The Court stated that the principle of separate legal personality is not a universally applicable principle and that the Court has the ability to look beyond what is at the surface, in order to achieve justice. Essentially, the Courts have held that the principle of good faith overrides that of separate personality.
The Court has also been faced with situations of evasion from the effects of a judgement. In ‘Supermarkets Limited vs Le Cram Developments Co. Ltd’, the defendants attempted to argue that a judgement issued against them in their personal capacity was to have no effect on the company they formed part of. The Court remarked that when determining the good faith of a company, one must look at whether the representatives of that company were acting in good faith.
Therefore, one can imply that where bad faith exists and circumstances so warrant, the Court may lift the corporate veil, attributing responsibility to persons beyond the company itself. However bad faith can in no case be presumed and must be proved by the party alleging it.
2.2 Economic Integration
Commentators have argued that economic integration of companies should result in enterprise liability, meaning that the separate personality of each comprising company should be ignored and the enterprise should be held responsible as a whole.
This was not the position adopted by the Maltese Courts in ‘Alfred Pisani et noe vs Joseph Borg Bartolo et’. The Court held that although the term ‘group of companies’ denotes the existence of a number of affiliated companies, this does not mean that this ‘group’ is to have a separate existence. A group of companies cannot be seen as a separate juridical person as it is merely a descriptive term.
Therefore, as outlined above, besides the statutory inroads crystallised in Maltese law, our Courts have been willing to lift the corporate ‘veil’ in situations of fraud and improper conduct and economic integration.
It is clear from the above that whilst the doctrine of separate legal personality is paramount for the proper operation of companies as entities being distinct economic entities from their shareholders and/or directors, and also for supporting the principle of limited liability, it is essential for any developed legal system to take account of specific circumstances where the setting aside of the company’s separate legal personality would be justifiable to protect third party interests. In this vein, the development of Maltese company law principles has taken cognisance of this reality, striking the balance between respecting the form of separate legal personality and the avoidance of any abuse of such principle.
 Dr. Andrew Borg Cardona v. Victor Zammit, Christopher Gauci u Wallace Fino  Civil Court, First Hall
 Specific exemptions from this requirement exist.
 Dr Jose Herrera noe et vs Tancred Tabone et noe  Commercial Court
 Supermarkets Limited vs Le Cram Developments Co. ltd  Court of Appeal
 Alfred Pisani et noe vs Joseph Borg Bartolo et  Civil Court, First Hall
For further information on how GVZH can assist you with your corporate requirements, please contact us here.
Authors: Dr. Andrew J. Zammit and Dr. Katia Cachia