Company Law – The derivative action as contemplated in the case L-Arkitett Raymond Vassallo Et vs Anthony Trigona Parlato Et, Court of Appeal 30/09/2016 – Case 716/11 AF

Author: Jonathan Demaria

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 Limited.

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 here on this link.

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