Pilatus Bank months from losing licence as caretaker’s wages drain capital resources

Pilatus Bank is mere months away from losing its banking licence after the courts refused to order the MFSA-appointed caretaker to stop drawing his wages from the bank’s capital resources.

Pilatus Holdings Limited, the sole shareholder of Pilatus Bank, instituted court action against the local financial services regulator and Lawrence Connell, a former US financial regulator tasked by the MFSA since March to administer the bank’s business following the arrest of its former chairman Ali Sadr Hasheminejad on charges of money laundering and violation of US sanctions.

As lawyers for both sides exchanged arguments in open court yesterday, it emerged that the action filed by Pilatus Holdings Limited was not intended to remove Connell from office but, rather, to ensure that the payment of his fees were withheld.

According to its lawyers, the foundering bank currently has around €5.2 million in capital resources, a mere €200,000 above the threshold below which a banking licence is revoked, and is paying $100,000 monthly $50,000 to the MFSA-appointed Competent Person who runs the bank as a caretaker and another almost $50,000 for his staff, lodging and travel expenses.

The Competent Person’s role was to assume all powers, functions and duties of the bank in respect of all assets and had exclusive judicial representation of it. This is a step intended to preserve the assets of the bank in the interest of depositors and investors.

Lawyer Jean Farrugia appearing for Pilatus Bank told Judge Giannino Caruana Demajo that the MFSA had the option of appointing a new Competent Person with different conditions, not that he be removed.

“We contend that charging $50,000, apart from five-star accommodation and expenses is not justified… There are also two foreign assistants who are being paid over and above this amount.”

Farrugia’s colleague, lawyer Jonathan Thompson, argued that the person requesting the payment would also be the same person who issued it.

“Normally the other party has discretion whether or not to pay, on the basis of the job done, if contested. Here the same person authorises the payment. The only remedy will be to sue afterwards, but the bank will have lost its licence as its capital will have gone below the minimum threshold… This is irremediable.”

An injunction to preserve the status quo, together with the rights and licence of the bank was filed.

Prof. Andrew Muscat for Lawrence Connell argued that this was not the case. The lawyers for the MFSA and the Competent Person argued that the MFSA had discretion whether to revoke the licence or not, should the capital fall below the minimum threshold.

“The amounts we are speaking about are normal for persons running a bank. Compared to the capital they are not substantial. The original MFSA directive was that there should be no income or outlay without its permission, not a complete ban.”

But lawyer Jean Farrugia contended that the amounts were exaggerated when taken in the context of the restrictions on the bank. “Whilst such a fee might not be considered as exaggerated in a situation where a person is effectively running a bank, in view of the directives imposed by the MFSA, the Competent Person has been precluded from exercising such control and therefore such a fee is excessive.”

The judge rejected the request for an injunction preventing the Competent Person from withdrawing his €350 per hour salary, saying that the prejudice suffered would be greater if the Competent Person was unremunerated.

The defendants would not be able to continue carrying out their functions if the request was upheld, which would be prejudicial both to the bank itself, to its creditors and the financial sector, said the court. This prejudice would be greater than that potentially suffered by the applicant, which would be recoverable as damages.

Lawyers Jean Farrugia and Jonathan Thompson appeared for Pilatus.

Lawyers Kris Borg and Deborah Mangion appeared for the MFSA.

Andrew Muscat and Joseph Camilleri appeared for Connell.