Upon the incorporation limited liability companies acquire separate legal personality separate from that of its members. Therefore, the company can sue and be sued in its own name and has its own rights, obligations and liabilities which are separate and distinct from those of its shareholders and directors. This legal fiction provides numerous advantages to traders, who can trade behind the protection of separate legal personality, leaving their assets separate from that of the company. However, this safety valve is not always an absolute notion and is subject to exceptions.
As provided for by the Companies Act (‘the Act’), shareholders are merely responsible for that amount, if any, not paid on their shares. Maltese law, therefore, upholds the free flow of business and investment and mitigates any potential risk which may come about when entering into transactions. Despite its advantageous nature, the notion of separate juridical personality is not absolute. Maltese law, in fact, caters for certain instances where the ‘lifting of the corporate veil’ may occur.
By ‘lifting of the corporate veil’, one refers to situations where the law or the courts decide to consider factors that go beyond the juridical personality of the company. This, essentially, means that directors, company secretaries and even shareholders could be found liable for any actions or debts with which the company would have been burdened.
The lifting of the corporate veil happens by operation of the law in many instances, such as fraudulent and wrongful trading. Therefore, in these and other similar instances, the corporate veil would be lifted through the provisions of the Act.
In the case of fraudulent trading, where a company is being wound up and there are indications that its business operations have been carried out with the sole intention of defrauding its creditors or other persons, the court may, when allowed by law, hold any persons who would have been knowingly parties of such acts, personally responsible for all or any of the debts or other liabilities of the company.
In such cases, the law imposes criminal sanctions on the wrongdoer, potentially leading to imprisonment. In this regard, the law is quite vast, making explicit reference to ‘any persons’ that may have been involved in the wrongdoing, in such a way that the persons responsible could also be shareholders, managers or even employees who would have been involved, not merely the company’s directors or officers. However, with the penalty here being criminal in nature, the burden of proof for criminal law is required.
On the other hand, wrongful trading arises where a company has been dissolved and it appears that a director of said company knew, or ought to have known prior to the actual dissolution, that there were no reasonable grounds on which to avoid the dissolution due to its insolvency. Here, the court would declare the director liable to make a payment towards the company’s assets as it deems fit.
Even though the wrongful trading provision is limited to directors only, one should take cognisance of the existence of shadow directors, meaning persons who, while not recognised officially as directors of the company, exert such a considerable influence over the affairs of the company that the law considers them to bear identical responsibilities as those of directors. In contrast to the provision for fraudulent trading, for a person to be found liable under this provision, the burden of proof required is that for civil proceedings due to the nature of liability being of a civil nature.
A company may be wound up through initiatives of the court which go beyond the provisions of the Act. Here, the Court would have been asked to lift the corporate veil, particularly in certain situations not catered for by the Act. Fraud, in these contexts, is wider than the interpretation used in the criminal law sphere, since it goes beyond the mere deliberate attempt to be deceitful.
In conclusion, while the concept of separate juridical personality is a staple of Maltese corporate law and, arguably, the point of departure, it is in no way absolute. There are cases where Maltese corporate law and the Maltese courts have gone beyond this notion, with a view to protecting the general body of creditors of the company.
Author: Karl Cauchi
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