The separate juridical personality of companies is a foundational principle of company law which emphasises that incorporations are separate and distinct from the owners and shareholders which comprise it. Stemming from the landmark judgement of Salomon vs. Salomon & Co. Ltd. decided in 1897, this longstanding concept has defined the scope of the Limited Liability Company, however, courts have established exceptions to the general rule by piercing the corporate veil to uncover those who fraudulently abuse of this legal principle to avoid fulfilling legal obligations to the detriment of creditors and third parties alike.
In Maltese Company Law, piercing the corporate veil (also known as lifting the corporate veil) has been established in cases related to wrongful and fraudulent trading as laid out in Articles 315 and 316 of the Maltese Companies Act (Chapter 386 of the Laws of Malta). Wrongful trading and fraudulent trading are serious offences that can lead to personal liability for directors and other individuals involved in the management of a company. Although one can find ample jurisprudence whereby shareholders have been held personally liable for misuse, abuse and or dereliction of duties, these concepts have been restrictively applied in the context of company insolvency designed to safeguard creditors.
In recent judgements, Maltese Courts have pierced the corporate veil in circumstances which fell outside the scope of insolvency proceedings or cases of wrongful and fraudulent trading. These judgements have provided a saving grace for those Creditors who faced difficulty holding shareholders accountable for their actions under the guise of complex corporate structures devised for unjustified enrichment to the detriment of innocent third parties. In the case, Citadel Insurance plc (C-21550) v. Shield Services Limited (C-23079) et., decided by the Court of Appeal on the 25th October 2023, the Court was requested to lift the corporate veil and hold Co-Defendants, as shareholders of the Company, personally liable for the credits due to Plaintiff. The Defendant company was a sub-agent in charge of issuing insurance policies for and on behalf of the Plaintiff company. It transpired that the shareholders of the defendant company, who also acted as directors of the defendant company, failed to reimburse the insurance premia and withheld commissions due to Plaintiff. The Court of Appeal held that lifting or piercing the corporate veil should not be applied restrictively in those cases whereby the insolvency or dissolution of a company is called into question. Rather, the Court of Appeal argued that should bad faith result, it would be indeed appropriate and suitable for the court to set aside the veil of a commercial company so that the same person acting on behalf of the company does not hide behind the legal personality of a company whilst nullifying the consequences of his behaviour. While citing previous cases, the Court of Appeal argued further that the law should not allow those guilty of such conduct to take advantage of their bad faith. Maltese law is built on “bona fides”. No legal business or entity has immunity based on the principle of “fraus omnia corrumpit”. If the Court deems it necessary to steer away from the separate legal and juridical personality of incorporated entities, to neutralise the effects of bad faith, the Court should be ready to take that step.
Hence, although local jurisprudence in this regard is not too extensive, it clearly emerges that those who use a company, under their absolute control, as an extended arm to evade and escape from contractual or legal obligations, will not be left unpunished.
Dr. Zachary Zammit
Associate
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