Company revival: An exceptional remedy

The Civil Court (Commercial Section) presided by Mr Justice Joseph Zammit McKeon on September 1, 2020 in the case “Ruth Magro vs Registrar of Companies” held, among other things, that that the failure of the liquidator to make provision for the company’s guarantee, as seller, of peaceful possession, which was secured by a general hypothec to its buyer in the winding up of the company, did not justify its revival under art 300B Companies Act. This guarantee was not a contingent liability. It was not a debt which had to be paid upon a contingency. Nor was it a future claim which could it be valued.

Ruth Magro purchased an apartment in St Paul’s Bay from the company DAG Co Ltd, which was in the business of property development. In the deed of sale dated 15 May 1995, which was published in the acts of the late Notary John Hayman, the company as the seller, among other things, guaranteed the buyer’s peaceful possession of the flat, and granted a general hypothec over all its assets, present and future in security.

Eighteen years later, on 25 October 2013, the company DAG CO Ltd passed resolutions to go into dissolution in terms of art 265 (1) of the Companies Act under the supervision of the court. The winding up process was completed and on the 12 May 2016, the Court ordered that the company be struck off the company register. In fact, the Registrar of Companies struck the company off the register with effect from 12 May 2016.

In the course of the winding up proceedings, Ruth Magro did not present any claim in relation to the performance of this guarantee. However, on the 12 September 2019, she proceeded to file legal proceedings, requesting the court to restore the company on the register and to re-open its winding up, in terms of art 300B of the Companies Act. She complained that the liquidator made no provision for her “guarantee of peaceful possession”, which had not yet lapsed. She claimed that this omission infringed several provisions of the Companies Act, in particular art 301 and 302, as this guarantee was allegedly a contingent liability, which should have been considered in the winding up proceedings.

Ms Magro insisted that there were sufficient grounds to revive the company under art 300B Companies Act to ensure that provision would be taken of the alleged contingent liability, arising under the guarantee of peaceful possession in order to safeguard her rights. It was evident that no public registry searches were carried out and that the guarantee of peaceful possession had been overlooked by the liquidator. She argued that the liquidation was illegal, as several provisions of the Companies Act had been violated.

Art 301 Companies Act provides that: “in every winding up of a company the assets of which are sufficient to meet the liabilities, all debts payable on a contingency, and all claims against the company, present and future, certain or contingent, ascertained or which may be due in damages, shall be admissible as proof against the company, a just estimate being made, so far as possible of the value of such debts or claims as may be subject to any contingency or which are due in damages but not ascertained, or which for some other reason do not bear a certain value.”

Art 302 : “In the winding up of a company the assets of which are insufficient to meet the liabilities, the rights of secured and unsecured creditors and the priority and ranking of their debts shall be regulated by the law for the time being in force”.

“Art 300B (1) where a company has been struck off the register, any interested person may, by an application, request the court to order that the name of the company be restored to the register and the winding up reopened.

(2) Where on an application made in terms of subarticle (1) of this article, the court is satisfied that the winding up and the striking off of the company has been vitiated by fraud or illegality of a material nature, the court may order that the name of the company be restored to the register and the winding up be reopened for such purposes and such period as the court may specify in its decision, and the court shall give such directives and impose such conditions as it may consider appropriate.

(3) The Court shall only accede to the application where it is satisfied that this is the only remedy available.

(4) In its decision the court shall also determine whether its orders and directives shall be effective in favour of all persons or shall apply limitedly to the specified persons mentioned in the decision.

(5) No application may be made under this article after the expiration of five years from the date on which the name of the company has been struck off the register.”

The Registrar of Companies, in reply, did not contest the revival of the company, if the court deemed it to be appropriate, in which case it had to specify the period, and purpose. It also had to give such directives and impose such conditions as it deemed fit.

This remedy was of an exceptional nature and should only be granted for reasons of justice and equity, the Registrar cautioned.

The court stated that by way of art 300B of the Companies Act, an application could be made to restore a company on the register, after it had already been struck off provided the following requisites were established:

the applicant was an interested person;

It was satisfied that the liquidation was vitiated by fraud or some illegality of a material nature;

this had to be the only remedy: and

legal action had to be taken within five years from its striking off.

In this case, Ruth Magro qualified as an ‘interested person’. Her legal action was her only remedy which was filed within the five-year time limit.

As regards the requisite of a ‘material illegality’ or ‘fraud’, once the revival of a company was an extraordinary and exceptional measure, the Court noted that it had to act carefully and not permit any abuse. What constituted a material “illegality” was not defined by law and had to be such that it actually vitiated the liquidation of a company. In a liquidation, a company was wound up; its assets and liabilities determined; liabilities settled and a final distribution to its members was made.

Reference was made to Andrew Muscat “Principles of Maltese Company Law”:

“It should be remarked that the courts have been willing to provide such a remedy even where the omission by the liquidator to take into account a pending claim against the company was purely inadvertent……A wide interpretation ought to be afforded to the term ‘illegality’. A liquidator who whether negligently or fraudulently fails to take into account a pending claim will, it is submitted, have acted unlawfully….”

At issue in this case was whether the liquidator committed a material illegality during the liquidation of the company by failing to carry out public registry searches and by making no provision for the guarantee of peaceful possession granted by the company.

The court also referred to “The principles of Corporate Insolvency law, 4th Edition”, 2011, by Roy Goode as guidance in considering ‘contingent liabilities’.

After considering at length the concept of ‘contingent liability’, the Court did not think that the guarantee and general hypothec granted by the company to be a contingent liability. It maintained that both art 301 and art 302 were not applicable in the circumstances. The company was not insolvent, and the guarantee / general hypothec was not a debt which had to be paid upon a contingency. This guarantee could not be considered as a future claim nor could it be valued.

The failure to carry out public registry searches was not an ‘illegality of a material nature’; even if the general hypothec was brought to the attention of the liquidator, it would not have altered much the liquidation proceedings.

Otherwise, if the court were to accept Ruth Magro’s submissions, the company could never be dissolved until the guarantee of peaceful possession expired, and the liquidation of the company would have to kept in suspense indefinitely. This was not the ratione legis of art 300B of the Companies Act, pointed out the court.

For these reasons on September 1, 2020, the Court dismissed Ruth Magro’s application in absence of proof of all requisites required under art 300B Companies Act.