Corporate and

Business Law
ACCA – LW (F4)

Short notes
Table of Contents

1 - Essential Element of the Legal System .......................................................................................... 3

1.1 Court Structure....................................................................................................................................3
Civil Jurisdiction ........................................................................................................................................4
Criminal Jurisdiction..................................................................................................................................7
1.2 Sources of Law ................................................................................................................................9
1.3 Human Rights .................................................................................................................................... 13
2 – The Law of Obligations .............................................................................................................. 21
2.1 Formation of a Contract ..................................................................................................................... 21
2.2 Breach of Contract & Remedies ......................................................................................................... 33
2.3 The Law of Torts ................................................................................................................................ 36
2.4 Professional Negligence ..................................................................................................................... 39
3 – Employment Law ....................................................................................................................... 43
4 – The Formation and Constitution of Business Organisation .......................................................... 51
4.1 Agency .............................................................................................................................................. 51
4.2 Partnerships ...................................................................................................................................... 59
4.3 Corporations and Legal Personality .................................................................................................... 66
4.4 Company Formation .......................................................................................................................... 75
4.5 Important Changes to the Companies Act .......................................................................................... 81
5 – Capital Maintenance and the Financing of Companies ............................................................... 83
5.1 Share Capital ..................................................................................................................................... 83
5.2 Loan Capital ...................................................................................................................................... 91
5.3 Capital Maintenance and Dividend Law ......................................................................................... 94
6 – Management, Administration and Regulation of Companies .................................................... 100
6.1 Company Directors .......................................................................................................................... 100
6.2 Other Company Officers .................................................................................................................. 116
6.3 Majority Rule .................................................................................................................................. 120
6.4 Company Meetings and Resolutions ................................................................................................ 123

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7 – Legal Implications relating to companies in difficulty or crisis ................................................... 130
7.1 Insolvency .................................................................................................................................. 130
7.2 Corporate Recovery (Corporate Rescue) ...................................................................................... 134
8 – Corporate Fraudulent and Criminal Behaviour.......................................................................... 139
8.1 The Prevention of Market Abuse Act ........................................................................................... 139
8.2 The Prevention of Money Laundering Act .................................................................................... 144

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1 - Essential Element of the Legal System

1.1 Court Structure

In society there is the need of restrictions, obligations and rights. Law is rules of conduct needed to
recognize, regulate and enforce how we should act in society in order to maintain social order.

Public Law VS Private Law

Public Law Private Law
Governing relations Between state and its citizens Internal between individuals
Aim General welfare Protection of private interests
Sanctions imposed by State Ordinary courts
Branches - Criminal law - Civil law
- Administrative law - Commercial law
- Laws of procedure
- Fiscal law

Criminal Law VS Civil Law

Criminal Law Civil Law
Prosecuted by Courts of criminal jurisdiction
Courts of civil jurisdiction
Demand Punishment of the offender Compensation caused by the
offence
Action (different standards Vested in the state in the name Plaintiff against the defendant
apply) of the Republic of Malta - Individual has to bring case
through forward
- Police (Court of
Magistrates)
OR
- Attorney General (Criminal
Court)

Every offense gives rise to criminal action or civil action but not every civil action is a criminal offense.

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Division of Maltese Courts
First Instance Second Instance
- Civil Courts - Court of Appeal
- Courts of Magistrates o Civil Jurisdiction
o Criminal Jurisdiction
- Constitutional Court
Entry point – you file or are a defendant in a Chance of an appeal for the decision in the first
lawsuit instance

Two Courts of Second Instance

Court of Appeal Constitutional Court
Composition 3 judges which include Chief Justice of the courts
Competence - Hears and determines appeals - Hears cases as a court of first
from judgements of Civil Court instance for parliamentary elections
(Malta & Gozo) and electoral corrupt practices
o First Hall - Hears appeals from
o Family Section o First Hall if dealing with
o Commercial Section Fundamental Human
o Court of Magistrates Rights
 1 judge o Any court of original
 Referred to as jurisdiction on the
Court of Appeal in interpretation of the
its inferior Constitution and validity
jurisdiction of laws also if an appeal
- All other causes assigned to it by law has been made to the
Constitutional Court

Civil Jurisdiction
Courts of Justice in Civil Jurisdiction
 One point of entry – one appeal
Superior Courts Inferior Courts
General Jurisdiction Limited Jurisdiction
Preceded by a judge (practiced law for 12 years) Preceded by magistrates (practiced law for 7
years)
- Civil Court (1st) - Court of Magistrates (Malta & Gozo) (1st)
- Court of Appeal (2nd) - Or tribunal (less important than inferior
- Constitutional Court (2nd) courts)

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Superior Courts
Civil Court (1st instance)
- Registrar of Courts assign each section to handle specific matters
General Jurisdiction Family Section Voluntary Commercial
Section – First Hall Jurisdiction Section Section
Matters All cases in civil court - Marriage - Adoption Companies
related that are not assigned to - Filiation - Minority & Act
the Family or Voluntary - Parental tutorship
Jurisdiction Section authority - Majority,
- Maintenance interdiction &
orders incapacitation
- Marriage act - Absentees
- Child abduction
& child custody
act
Composition 1 judge
Jurisdiction Contentious Involves litigation Voluntary Over matters
thus judgement regulated by
Competence All cases of civil and Civil nature causes Grants decrees the Companies
commercial nature Act
which exceed
jurisdiction of inferior
courts
- Violations of human
rights
- Expressly assigned to
it by law
Appeal Can appeal to the Court No appeal for Decisions are final - Can appeal to
of Appeal decrees but can No appeal but can the Court of
bring action to The bring action to The Appeal.
Civil Court (First Civil Court (First
Hall) but can appeal Hall)
for judgements
Hold sittings in both Malta & Gozo; If person resides in Comino – sitting will be held in
Gozo

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Inferior Courts
Court of Magistrates (Malta) Court of Magistrates (Gozo)
Composition 1 Magistrate 1 Magistrate
Jurisdiction Contentious Contentious & voluntary
- Inferior – causes which
would be tried by the Court
of Magistrates (Malta)
- Superior – causes which
would be tried by First Hall
excluding violations of
human rights
o Family section –
same as Malta
o General
Jurisdiction
Section – same
powers as
assigned to the
Civil Court in its
voluntary
jurisdiction and
any cases not
signed to the
Family Section
Competence - All claims of an amount not - All persons residing in Gozo
exceeding EUR 11,647 & Comino
- All persons residing in
Malta
- Other causes provided by
law
Appeal Can appeal to the Court of Inferior – can appeal to the Court
Appeal with 1 judge presiding of Appeal in Malta
Superior – it is a Court of Appeal
from decisions of the Court of
Magistrates in Gozo of primary
instance

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 Criminal Jurisdiction
Attorney General will decide whether the case will be heard by the court of magistrates or a judge.
Superior Courts Inferior Courts
General Jurisdiction Limited Jurisdiction
Preceded by a judge (practiced law for 12 years) Preceded by magistrates (practiced law for 7
years)
- Criminal Court - Court of Magistrates (Criminal Inquiry &
Judicature)
- Juvenile Court
Court of Appeal – 3 judges Court of Appeal – 1 judge

Courts of Justice in Criminal Jurisdiction

1. The Court of Magistrates
Court of Criminal Judicature Court of Criminal Inquiry
Composition 1 Magistrate
Competence - All contraventions - Collect evidence for crimes
- Trail of (summary) offences (punishment of minimum of 2 years
imprisonment) of: - Never judge about guilt or
o Up to 6 months innocence
o 6 months to 4 years - Never decides upon
 If Attorney General makes convictions
request & not opposed by - Determines bail
the accused - Determines if there is
 If both parties give consent sufficient grounds for
– Court of Magistrates as a indictment
court of criminal inquiry is - Can discharge an accused
eliminated and converted for want of evidence
as criminal judicature - Can be converted into court
 Accused has option to be of criminal judicature
tried by jury system before
the Criminal Court – does
not apply to drug cases
o 4 years to 10 years if accused
makes request & not opposed by
the Attorney General
o Not exceeding 10 years
imprisonment if accused does not
oppose
Appeal Can appeal to the Court of Criminal Appeal
presided by 1 judge

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 2. The Criminal Court
o 1 judge and 9 jurors
o Hears cases where:
 Bill of indictment is filed by Attorney General
 Punishment exceeds 10 years to life
 Attorney general files bill of indictment where punishment is 6 to 10 years
 Punishment is less than 10 years but the accused refuses to be tried by The Court
of Magistrates of Criminal Judicature and elects to be tried by a jury in the Criminal
Court instead
o Judge determine points of law and punishment
o Jury determine points of fact
o Can appeal to the Court of Criminal Appeal presided by 3 judges with the Chief of Justice
included

3. The Court of Criminal Appeal

o 3 judges with the Chief of Justice included
o Inferior Appeals – from 1 magistrate to 1 judge
 Prosecutor can only appeal in limited cases
 Accused can appeal in all cases
o Superior Appeals – from 1 judge and jury to 3 judges
 Both prosecutor and accused can appeal on preliminary pleas
 Only accused has right to appeal on final verdict

4. The Juvenile Court

o 1 Magistrate
o Cases relating to children under age of 16
o It is Court of Magistrates of criminal judicature and inquiry
o Can appeal to the Court of Criminal Appeal presided by 1 judge
o Public is excluded from hearings
o Restrictions on reporting of proceedings in the media

European Court
o Court of Justice of the European Union
o Hears cases from courts of member states on matters of European Law
o Can overrule decision of any court of member states on European Law
Competence of each court depends on:
 Value of subject matter
 Place of commission of the crime

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1.2 Sources of Law
Sources of Law are areas of authority from where law is derived. They have hierarchal structure –source
in higher authority should be used when there is discrepancy between two sources.
Primary VS Secondary Sources of Law
Primary Sources Secondary Sources
Directly made applicable Authoritative nature – referred to enlighten
meaning of law
Come directly from parliament Do not come directly from parliament thus not
necessarily binding

Case Law (Jurisprudence) VS Doctrine of Precedent (Precedent Law)

Case Law
Judges refer to previous decisions as a source of
guidance. Consistency is needed for this to work
thus rules were developed
Judgements do not create law or binding
precedent
Not a primary source of Law
Used in Malta
Precedent Law
Absolutely binding on parties & courts – a judge
has to take the same decisions on the same lines if
the merit is the same even if judge does not agree
Judgement is final & not subject to appeal
Primary source of Law
- Used in the United Kingdom but with
certain amount of flexibility
- Not used in civil law systems

Precedent Law
 Only statements of law made by judges can form precedent
 Hierarchy of Courts
- House of Lords – binds all lower courts and not itself
- Court of Appeal – binds all lower courts and itself
- High Court – binds all lower courts and not itself
- Crown, Magistrates, County – bind no-one at all
 A precedent is not binding if:
- Not made with reference to earlier judgement or statutory provision
- Unclear
- Conflicts with another precedent
- Conflicts with fundamental rule of law
- Overruled by statue or higher court
- Set by a lower court
- Can be distinguished on the facts

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  Advantages:
- Detail
- Flexibility
- Consistency
- Fairness
- Stability – outcome is known
 Disadvantages
- Bulk
- Judge cannot change direction – only superior court can thus restrict judicial discretion
- Lack of democratic accountability
Persuasive authority – decisions which are not binding but may influence decisions of judges in future
cases

Two types of Legislation

Primary Legislation (Acts of Parliaments) Secondary Legislation (Subsidiary Legislation)

All of the decisions that come out of parliament Not directly passed through parliament
Parliament is the only body that can authorize, Enacted by subsidiary authorities with authority
amend or remove laws
Two types:
1. Five main codes
- Civil code – relations between persons
- Commercial code – commercial and
trade matters
- Criminal code – lays acts which are
considered as a criminal offence and
relative punishments
- Code of Organisation & Civil Procedure
– provides court structure and how
courts are administered & function
- Code of Police laws – rules on police
and minor contraventions
2. Other laws enacted by parliament not
incorporated in the codes above
given to them by Parliament. Example: local
council, government ministers
Three types:
1. Legal Notices/ Regulations
 Instruments of law (delegated regulations)
made by a minister empowered to do so.
 Usually there to expand or amend existing
legislation to make law workable
 If one objects – it will not become law. It
only becomes law if there is not objections
in 28 days
 Can be annulled if it goes beyond the
powers of the minister issuing it
 Cannot be retrospective (looking at past
events) as this would violate the
constitution
2. Bye-laws
 Rules limited to locality or special area over
which these are intended to apply
 Must be approved by a central government
allow authority
3. Statutory Instruments

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 Stages:
 First Reading – bill is proposed with
objects and reasons for such act
 Second Reading – clauses are examined by
Parliament and suggested amendments
can be made. Voting is made:
o Constitutional nature cases need
to be approved by 2/3 majority
o Other cases need to be approved
by a simple majority
 Third Reading – signature of the President
of the Republic
Advantages:
Disadvantages:
Controls:
 Parliamentary control – laying procedures
before parliament
 Political control – through consultation of
interested bodies
 Juridical control –
 Flexible and adaptability
 Little formality (saves time)
 Technical expertise
 Swift alterations
 Possible violation of separation of powers
principle
 Lack of democratic accountability
 Lack of publicity
 Complex and bulk
 Power is in the hands of civil servants

Rules and presumptions – (not important)

Interpretation is examining a principle or law to understand its meaning and how it should be applied
given a set of facts. Today a judge cannot refuse to give a decision on the merits before him as a result
of there being no applicable law governing merits of case.
 Authentic interpretation – made in the law itself
o Example interpretation clauses inserted at the beginning of an act of parliament example
interpretation act 1975
 Doctrinal interpretation – law made by the courts, lawyers, professors etc
o It is the surge for the spirit of law through provision through provisions and understanding
those provisions
o Grammatical – direct meaning of word used unless technical
o Logical – discovering the legislator’s will through ideas contained in the law, political and
juridical reason and circumstances connected to the law
o Declarative – wording of law does not correctly express the intention of legislator.
Through this the correct meaning of law is declared. Interpreter must ascertain wording
of law and real meaning intended by legislator

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  Widening – ratio of law is wider than the words actually employed
 Restrictive – narrowing down the field of application of the law and is used when
cases do not fall within its ratio. If not, you applied with caution will of interpreter
will be substituted with that of the law
4 main theories put forward on the interpretation of law
1. The traditional theory
 Based on an objective examination of the law itself
 Based on the following main rules:
o First duty of interpreter is to ensure grammatic and logical meaning of law
o Role of legislator to draft the law and interpreter must discover legislator’s will
and intention
o It is possible to find legislators intention with other provisions of the law has
omitted to deal with a particular case
 Main fault with this theory is that it is presumed that legislator had had in mind all possible
scenarios

2. Historical school of thought

 Law continuously involves in accordance with the needs of society
 Four elements that lie on the basis of interpretation:
o Grammatical – helps discover meaning of law
o Logical – helps discover meaning of law
o Historical – presents law in its proper perspective
o Systemic – correlates all provisions together

3. The theory of free law

 Text of law is given a secondary position where the judge is authorized to interpret the law
the way he thinks best meets the justice of the case
 Deemed impractical since certainty of law could be wiped out

4. Eclectic theory
 Frequency is very series by deeming them as complementary to each other
 Whilst adhering to the text of law, the interpreter must also be open to change in finding
solutions to the case before him

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1.3 Human Rights
There is a third appeal for human rights as one can appeal in Strasberg.
Human beings are entitled to fundamental rights and freedoms. They are an evolution of natural right
therefore rights which cannot be denied. People see them conveniently as diverse right depending on
their circumstances at this moment in time. Example: property rights, right to abortion, right of the
unborn child.
 Moral rights are those which we recognize that they exist but are not yet translated into law.
 Legal rights are the rights that are translated into law.
Rights may be inherited or expressed:
 Inherited rights are our natural rights which are not granted to us by anyone and cannot be taken
away by anyone
 Expressed rights are written down and recognized by state
Limited rights are rights limited in their conceptualization because ones rights corresponds to other
people’s right.
Malta's perspective of human rights is based on two pillars:
1. The Constitution of Malta
 Chapter 2: Declaration of principles – economic and social rights. Not justiciable i.e. cannot
be enforced in court since decisions are based on principles that formulate policy
o Principles which Republic of Malta should work as much as possible to achieve
 Chapter 4: Fundamental rights and freedoms of the individual – political and economic rights.
Justiciable i.e., can take administrative bodies to court if felt aggrieved by the decision.
o Doctrine of precedent – minimum fundamental rights that states recognizes
2. European Convention Act (Act 14 of 1987)
 Was passed through the Maltese parliament and the low collect and became part of the Maltese
legislation
There are 16 articles in chapter four of the constitution which declare an individual's minimum
fundamental rights and freedoms which the states recognize and protect through its courts. It looks at
the rights of all individuals with protection
Article 1: Requires contracting parties to secure rights and fundamental freedoms which are included in
this convention in order to signify both negative and positive obligations.
 Negative obligations – state is prohibited from interference thus respect human rights
o Example: refraining from torture and restrictions of freedom of expression
 Positive obligations – one state takes action to ensure human rights which are generally
associated with economic, social and cultural rights.
o Example: prison conditions which are not inhuman

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Article 2: the right of life
 No person may ever take such life away, but Law recognizes that this may be done if absolutely
necessary such as if:
o ordered by the court
o loss comes from self-defense
o prevention of person who is legally detained from escaping
o in effecting a lawful arrest
o the act of war
o lawfully done to stop a riot
 Positive obligation up one states to protect life and negative obligation not to take life
 Up to the state to decide how to classify action resulting from taking a life
(criminal/civil/voluntary/involuntary)
 Law is silent on controversial areas such as hunger strikes, abortion, euthanasia

Article 3: right not to be subjected to torture, degrading or inhuman treatment

 No lowering of threshold to permit any such treatment
 It is there to protect against the most serious cases of inhuman treatment
 It is never permitted, not even for the highest reasons of public interest or in times of war
 Covered in this article:
o torture
o inhuman treatment & punishment
o degrading treatment & punishment

Article 4: freedom from slavery and forced labor

 Never permitted even in time of war or public emergency
 Slavery is the situation where one exercises priority rights over and an individual.
o This requires the individual to reside on third party’s property and it is impossible to
change one's condition
 Forced labor is when a person is forced to do jobs which he does not want to do thus the person
has not offered himself voluntarily
 Exclusions:
o Work during detention
o Military service
o Community services in a public emergency
o Normal civic obligations

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Article 5: right of liberty and security of person
 Exceptions:
o Cannot be deprived from his personal liberty but there are exceptions revolving around
three points
I. Deprivation following a court order
II. Deprivation to prevent spreading of disease
III. Deprivation as a result of addiction to drugs
 Deprivation of this right will have a direct effect on the enjoyment of your other rights
 Three considerations:
1. the grounds under which a person can lawfully be deprived from his Liberty
2. the procedural safeguards that need to be observed when implementing the lawful
deprivation of Liberty
3. unlawful deprivation of Liberty results in unenforceable right to compensation for such a
breach
 The provision should be exceptional, justified and with a duration which is no longer than
absolutely necessary
 An arrested person must:
i. Be given a reason for his arrest
ii. In a language which the person understands
iii. Right to be brought promptly before a judge
iv. Accused can request bail if provision cannot be complied

Article 6: the right to a fair trail

 A fair, public trial by an independent and impartial tribunal established by law
 Press may be excluded from trial because of morality, public order or national security
 Guarantee the right to access the court
 Fair hearing means oral hearing where the accused is present therefore has the right to
participate effectively therefore has the opportunity of presenting his case to the court without
a disadvantage to his opponent
 Accused has a right to legal representation and to be granted legal aid were necessary
 Justice should be delivered within a reasonable time thus justice delayed is justice denied. There
is a duty not to leave the individual in a state of uncertainty for an unreasonable long time

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Article 7: freedom from retroactive criminal offences and punishments
 Individual should only be convicted and punished on the basis of the law
 An offence must clearly be defined by law
 Law must be accessible
 accused has no guarantee that there will be an A benefit from any alteration of the law to his
advantage
 There shall not be imposed heavier penalty then the one that was applicable at the time the
criminal offence was committed

Article 8: the right to respect for private and family life, home and correspondence
 Right for individual to be protected against activities of other private individuals that would
prevent them from enjoying their rights
 Exemptions include when this violation is necessary in the public interest and for the
enforcement of a judgment or search warrant
 This article protects 4 interests:
o Private life – Personal identity, moral or physical integrity, private space, sexual activities,
social life, and the enjoyment of personal relations
o Family life – extends beyond formal relationships and legitimate arrangement. It is the
right to protect family life and not to establish a family.
o Home – where one lives and is settled. It could include the place where one intends to
live and not only where one actually is living. It includes the right of access, occupation &
peaceful enjoyment
o Correspondence – the right to uninterpreted and uncensored communications with
others. Exceptions are confidentiality (lawyer-client, doctor-patient) and telephone
conversations

Article 9: freedom of thought, conscience and religion

 Freedom to change or manifest religion or belief in worship, teaching or practise – either alone
or in a community with others and could be in private or in public
 Subject to limitations prescribed by law which are necessary in a Democratic society in order to
ensure public safety, order, health or morals and protection of rights and freedoms of others
 One has an unrestricted internal aspect of the right which means one’s belief but has to control
the external expects of this right which is exercising this belief
 No person is to be subjected to any indoctrination before the age of 16

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Article 10: right of freedom of expression
 One can express himself without holding opinions and communicating without interference from
state or third parties
 Several other protected rights and freedoms have aspect of this freedom
 This right may conflict with other protected rights. When a conflict arises, the Court of Strasburg
determines which right has priority over the other

Article 11: Freedom of Assembly and Association

 Right to freedom of peaceful assembly and to associate related parties.
 Includes the right to join a trade union.
 Only exceptions are rights imposed in the national interest and for administration of same like
security.
 This is to permit individuals coming together and for the expression of common interests.
 It permits the creation of political parties.
 Protection of all personal interests. Including political, economic, social and cultural.

Article 12: the right to marry and to found a family

 This right overlaps with Article 8 of Private and family life.
 Convention permits national state to decide issues revolving around the conditions necessary for
marriage as long as state does not deny the individuals from the right to marry.

Article 13: The right to know an effective remedy

 Every person has the right to have any freedom under this convention, which is protected and
enforceable under National law, therefore, it is the requirement of the national authority to
provide the remedy.

Article 14: Freedom from discrimination and protected the rights

 Non distinction of race, sex, language, colour, political opinion and religion.
 Discussing non-discrimination and not equality. There are positive obligations in equality, which
do not exist in discrimination. Therefore, different treatment offered to individuals is not
automatically a breach of this article.

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Article 15: derogation in time of war or other public emergency
 In exceptional circumstances, the article permits that a Member States can take certain measures
which interfere with the enjoyment of the other rights that are being protected under the
Convention and protocols
 The power given to the members state is limited to time of war or other circumstances which are
threatening the nation and only if the measures taken must be necessary

Article 16: the imposition of restrictions on aliens carrying out political activities
 Restriction on persons participating in political activities
 The restrictions imposed by Article 10 (freedom of expression), Article 11 (freedom of assembly)
and on Article 14 (freedom from discrimination) do not prohibit this

Protocols of the Convention

 Origins of the convention trace back to the desire of states to protect fundamental rights and
freedoms.
 Various protocols were introduced connected with right but some with the administrative sector
of the enforcement machinery.
Protocol 1: protection of the rights to property
 Every natural or legal persons entitled to the peaceful enjoyment of his possessions.
 Deprivation is only permissible in the public interest and on conditions provided by law.
 Corporate bodies are also protected.
 It is important that the victim complains.
 Divided into 3:
1. Principle of peaceful enjoyment of possessions – properties which were not expropriated for
years breached this principle
2. Deprivation of positions subject to certain conditions
3. Contracting states to control use of property according to general interest
Protocol 2: the right to education
 Can be classified under all the five traditionally protected rights. Being civil, political, economic,
social and cultural.
 State must provide education and must not abuse its position by emphasising one set of beliefs
over other opinions.
Protocol 3: The right to free elections at reasonable intervals and by secret ballot
 Characteristic principle of Democratic society.
 Which system to adopt fall within the ambit of the state.

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Protocol 4
 Four articles under this protocol:
o Prohibition of imprisonment for debt – No one shall be deprived of Liberty on the ground
of an inability to fulfil a contractual obligation.
o Freedom of movement giving Liberty of movement and freedom to choose his residence.
o Probation of expulsion of Nationals.
o Prohibition of collective expulsions of aliens.
Protocol 6 talks about the abolition of the death penalty and further regulates the use of death penalty
in the time of war.
Protocol 7 lays down safeguards relating to the expulsion of aliens, therefore, individuals who are about
to be deported are given a fair trial to contest the deportation.
Protocol 12 secure probation of discrimination.
Protocol 13 is in addition and strengthens the resolve against the death penalty. It abolishes the death
penalty and does not permit reservations for those countries who ratified this protocol.
The EU was created with the intention of contributing to the enhancement of common values based on
the principles of human dignity, freedom, equality and solidarity in a Democratic environment. It is
necessary to strengthen the protection of fundamental rights in the light of changes in society, social
progress and scientific and technological developments. This Charter subdivides into seven titles:

1. Dignity
 The respect for the dignity of the individual
 The right of life
 Prohibits the death penalty.
 Right to physical and mental integrity, insisting on free and informed consent.
 Prohibition of torture, inhuman and degrading treatment or punishment, probation of slavery
and forced Labour.

2. Freedoms
 Right to Liberty and security.
 Respect for private and family life.
 Protection of personal data.
 The rights to marry and found a family.
 Freedom of thought, concise and religion
 Freedom of expression and information.
 Freedom of Arts and research.
 The right to education.
 The rights to conduct business.

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3. Equality
 Prohibition of discrimination between race, sex, colour, social origin, genetic features, language,
religion or beliefs or political opinion.
 Equality between men and women.
 Protection of children.
 Integration of persons with disabilities.

4. Solidarity
 The right of workers to be informed on matters which concern them.
 Right of collective bargaining and action.
 Protection in case of unjustified dismissal.
 The rights to fair working conditions.
 Protection of young children at work.
 Right of the family to enjoy legal, economic and social protection, social and security Assistance,
Healthcare and Environmental Protection.

5. Citizenship
 The right to vote.
 The right to stand as a candidate at the elections of the European Parliament and local Council.
 The right to good administration to make union more transparent and more accessible to its
citizens.
 Rights to move freely around the union and reside in a place of your own choice.

6. Justice
 Fair trial.
 Presumption of innocence.
 Right not to be tried twice for the same offence.

7. General provisions regarding applicability, restricting it to the members of the Union

When there is an allegation of a breach of a fundamental human right, one is to file an application in
front of the Civil Court Constitutional Jurisdiction which is a first instance. One has a right to appeal to
the Court of Appeal in its Constitution Jurisdiction. After a local remedy have been utilised and within six
months from the date of last judgement in Malta, one can file an application before the European Court
of Human Rights in Strasburg, France. The ECHR hear applications from individuals, group of individuals
or other states where there are allegations that one state has breached one or more of human rights
provisions according to the convention and its protocols.
1. Civil Court Constitutional Jurisdiction
2. Court of Appeal (Malta)
3. Court of Appeal (Strasburg)

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2 – The Law of Obligations

2.1 Formation of a Contract

Maltese law of Obligations – based on code Napoleon
 Based on the idea of all people being equal
o Freedom of will
o Consent – free, informed and proper

 Obligation is a duty to be done for the benefit of another person – a person committed himself
to do something & he has a duty to do it resulting in a formation of contract
 Law of Obligations regulates relationships entered into between two or more persons
Four sources of obligations
 From where contracts come from
 Give rise to a type of legal commitment
Contracts Quasi-contracts Torts Quasi-torts
Ex contracto Ex quasi-contracto Ex delicto Ex quasi delicto
Based on consent of Based on consent of Arises when one person Arises when one is
two or more persons – one person & causes damage to responsible for
can be a verbal consent presumed consent of another person damages caused by
another person (Direct Responsibility) another person
(Indirect
Responsibility)
Voluntary Non-Voluntary
Both parties entered A person does not want to but find themselves into them by circumstances
into the commitment
voluntary
Example: buying a car

Requisites for a valid contract

 If internal and external requisites are not present, there is an error of consent thus one can
withdraw from contract
 If internal and external requisites are present when we enter into a contract, but one party fails
to abide to the obligations, other party can force legal consequences

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 Internal Requisites External Requisites
Four essential elements:  Requisites that we can see i.e. written
 Capacity of parties contract
 Consent of parties  Form of contract is free (can be any form or
 Object – subject matter of contract degree of formality & in writing or word of
 Lawful consideration (causa) – purpose of mouth) unless law specifically states
contract otherwise
 There are 7 types of contracts that must be
done in writing required by law – if this is not
done by writing and registered, contract is
considered as void & not legally enforceable
in a court of law thus one cannot get the
other party sanctioned for not holding the
obligation

External Requisites
 7 contracts that must be done in writing
i. Rights of immovable property; buying, selling or transfer of ownership – promise of sale
ii. Promise of loan for consumption; to buy food – overdraft
iii. Suretyship – a person guarantees third person that if you don’t pay, the person will pay
on your behalf
iv. Compromise – to resolve a dispute
v. Leases exceeding 2 years for urban tenements & 4 years for rural tenements
vi. Civil partnership
vii. Any agreement in relation to the Promises of Marriage Law
 There are other instances where law requires contract to be done by writing
 Public deed – have to have a notary present and published by such notary
 Private deed – does not need to be witnessed or published but simply an agreement signed by
both parties

Internal Requisites
1. Capacity
 All persons are subject of rights, but some are incapable of exercising them due to
incapacity
 Capacity is presumed because all persons are capable with the exception of the incapacity
 Causes of disability cannot extend these two limits:

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 Natural Incapacity
A person who does not have sufficient reason to Causes specifically laid down by law – to whom
contract. Conditions:
 Intelligence – does not have the use
of reason thus does not have the
intelligence required to give
consent knowingly
o Minors under the age of 7
o Persons of unsound mind
 Liberty – cannot independently or
willingly choose to enter a contract
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Legal Incapacity
law forbids certain contracts
 Minors
o Under 7 – contract is absolutely
null (absolute incapacity)
o 9-14 – only valid if obligations are
entered into by another person in
the minor’s favor. Obligations
taken by the child are null.
o 14-18
 Parental authority – same
as 9-14 conditions
 Tutorship – capable of
contracting but can annual
contract on grounds of
lesion. Consent of court is
needed when it comes to
transfer or pledge
immovable property
o Emancipated at 16 – deemed as a
major thus has full capacity and
cannot annual contract on the
grounds of lesion
 Can also be a shareholder
of a limited liability
company if authorized by
court
 Can charge, transfer or
pledge immovable
property without consent
of court
 Incapacitation – does not have use of
reason
o Cannot enter into acts which law
specifically prohibited
 Interdiction – unable to consistently make
decisions since the court interdicts a
person for a period of time due to a crime
done by such person
o Cannot enter into any type of
contract
 2. Consent
 Will between parties to create, regulate or dissolve an obligation
 Without consent of the parties entering the contract, contract is not valid
 Two acts must exist being the promise of one party and acceptance of the other party
i. The two parties must agree to the same thing
 Proposal can be withdrawn if not accepted by the other party
 Consent must be:
i. Correct – wanted to do that specific thing
ii. Free – not forced
iii. Informed – know what you are getting into
 Four stages to the conclusion of contract (contract is valid if all 4 are present)
i. Consent must exist internally
 Formulate intention and manifest it externally; if these are inconsistent
(voluntary or involuntary), the contract is invalid
o Involuntary inconsistency (defects of consent); factors when one can
withdraw from commercial contract and can only be brought forward by
person whose consent is defective
 Error; error in giving the consent. Can only be brought by the person
who was in error. Error has to be:
- Determining – error must be substantial to contract & not
incidental. It must affect the substance of the subject.
- Excusable – person enters contract which otherwise would not
have
 Error of person – did not mean to give consent. It is not void if
error relates to person with whom the agreement has been
made.
 Error of law – thought they had to due to the law. It is void if
one does a positive act on account of error of law.
 Error of fact – made an error as a result of circumstances. Not
void unless it affects the substance of the subject matter.
In corpora; regarding object of contract
In negotio; regarding type of contract
In substantia; regarding substance of contract. It depends on
how the subject views it.
 Violence; only victim can claim this.
- Violence can be:
 Physical – forcing you to do something
 Moral – putting someone under pressure to do something
- Violence must be:
 Unjust – contrary to law

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  Grave – age, sex and condition of person will be taken into
account to determine how serious the violence was
 Determining – without it the party would not have entered
contract; it is the only reason you entered it
- Violence led to contract and contract would be annulled because
of it
 Fraud
- Four principal elements:
 Intention to deceive – must prove that one enters into a
commercial obligation whilst deceived
 Grave
 Determining
 More than one person has to be involved
- Silence must be accompanied with the intention to deceive
 Lesion – minor & adult get into a contract, but they have difference in
understanding due to inequality between ages. If the minor is acting
without parental authority, only minor can withdraw from contract
since this is there to protect minors
- Example: minor thinking that his watch costs EUR 50 & adult knows
it costs EUR 100 but tell the minor that it costs EUR 50
 Simulation – must prove fraudulent intent
- Absolute; did not want to enter contract but forced to. Example:
marriage of convenience
- Relative; enters into a contract which is different from which they
are contesting to. Example: contract of sale instead of donation.
Court brings into effect intended contract
ii. Consent must be manifested externally
 Solemn form – public deed
 Free form – oral or written, express or tacit
iii. Consent of one party must be the same as other party (identity)
 No obligation if there isn’t consent from the two parties on the same matter
iv. Unity of two consent
 Theory of information requiring that a person who made the offer is aware of
the acceptance of the other party
3. Object
 It may be movable or immovable
 Contract can be anything which is:
o In commercio – cannot form part of a person’s patrimony
 Extra commercio are human beings, human organs, religious objects and public
property

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 o Possible – contract is void if object is not physically possible
o Lawful – one must enter into a contract for a lawful reason
o Specified – something which is determined although not necessarily identified
 Possibility of an object of a contract to refer to a future thing.
o Pactum de re sperta – Conditional contract; the contract will come into being when the
object comes into existence in the future.
o Pactum de spei – Risky contract; whatever comes into being in the near future, one will
purchase.
o A future succession cannot be the object – not allow speculation on the death of a person.
Only exceptions are prenuptial contracts where a child may enter into agreement with his
parents to regulate succession before marriage or personal separation.
4. Causa (consideration)
 The purpose behind the transaction thus the consideration that each party gives or receives from
the other
 An obligation cannot be without consideration, false or unlawful consideration
o Objective test (theory) – used by the court to determine whether there is a consideration or
a false consideration
 Inexistence of causa – does need to be mentioned in contract as long as there is a
causa which can be proven by the person making a case on the contract. The person
who is contesting it must prove that there is no obligation when the causa is stated on
the contract.
- Never existed, ceased to exist or was related to a future event that never
materialized
- Causa is sought at the moment of conclusion of contract – contract is valid if it
is present at that point in time. One cannot argue that contract lacks causa if it
fails to exist in the fulfillment of contract but it might be a reason for contract
to not be fulfilled
 False causa – simulation
o Subjective test (theory) – to determine whether consideration is unlawful i.e. if the motive
is legal
 Refers to the causa of obligation not the causa of the contract
 It is the advantage that one party intends to gain from the obligation of the other party
 It is considered unlawful when prohibited by law, contrary to morality or public policy.
Up to the court to decide which considerations goes against these.
 Example: sale of house not covered by building permit, persons carrying work without
required permit
 Onerous contracts – causa is the consideration that each party binds himself to
 Gratuitous contracts – party who binds himself does not stipulate any consideration in his favour
thus the intention of performing an act is the consideration
Nature of a simple contract

26
1. A contract two or more persons by which an obligation is created, regulated, or dissolved.
2. A contract differs from the other causes of obligations since it is created by the free will of both
contracting parties. A contracting party can be a person (individual) or a legal person (company) since
a company has its own identity.
3. A contract can be:
 Bilateral – both parties have reciprocal obligations.
 Unilateral – only one party binds himself towards the other while the other party has no
obligation.
4. An obligation in a contract may be:
 Onerous – Both parties intend to get something in return or pay something in return. Example:
one has to pay the bill.
 Commutative – each party has to give or do something considered as equivalent in
value to what is given or done to him. Example: one hour = 100 EUR.
 Non-commutative – each party does not have to give or do something which is
equivalent to what is given or done to him. (inequivalent in value) Example: 50% of
flat price cause you’re my friend.
 Gratuitous – one party does not get some something in return or pay something in return.
Example: giving a tip.
5. A contract may be:
 Aleatory (hazardous) – advantage or loss depends on an uncertain event. Example: insurance
 Non-aleatory – no risk involved.
6. A contract may be:
 Principal – exist independently of another contract thus is stand alone and does not need an
accessory. Example: buying a car.
 Accessory – tight to the principal contract thus is not stand alone and need the principal. Example:
offering maintenance service for 1 year when buying a car.
7. A contract may be:
 Solemn – has to be formal i.e. in writing.
 Non-solemn – does not have to be in writing.
8. A contract may be:
 Nominate – special value & special form subject to the special title of the code. Subject to certain
rules of their own besides the general rules.
 Innominate – non particular value & form. Subject to the rules of contracts in general.

FIRST – negotiating stage The offer and acceptance are

unilateral & independent acts
SECOND – the offer
of the contracting parties.
THIRD – the acceptance These show us that both parties
CONCLUSION – union of wills of the parties want to do the contract. They
must be clear & definite.

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 THE OFFER
 A valid offer is
o Unilateral – made by one party
o Indivisible – cannot be divided meaning that it has to be accepted in its entirety with
the term proposed or otherwise refused
o Juridical proposal – a legal offer
 One has to make an offer to get into contract
 It is the first step – intention of one party to enter into an obligation with one or more parties
 An offer is of a transitory nature – if contract is concluded; it loses its individuality. If contract
is not concluded; it does not have legal existence
 A counteroffer is an automatic refusal of the original offer
 Distinguished from invitation to trade since the latter is not considered to have made the
offer but expresses that is ready to consider offers made to him. Contract is concluded when
the offer which follows is accepted
 An offer is capable of producing legal effects if:
o Externally manifested – if offer is accepted then one will enter into a contract.
Manifestation can be:
 Tacit – without talking. Example: buying a newspaper for EUR 1
 Express – Example: want EUR 5 for it?
 If law requires that contract is to result from a public deed or a private writing;
offer must also be made in writing
o Proposal must be done with a specific intention; to create legal relationship with
person and to hold himself bound to it if the offer is accepted
o Offer must be complete – must have all elements that are essential for the conclusion
of the contract
o Offer must be made to the person with whom one intends to conclude contract with
Offers can be made to the public – in this case, contracting party is not determined from the start but
as soon as one of the public accepts the offer
 By means of catalogues or advertisements, exhibition of goods in shops, shop-windows etc.
 Only amount to an invitation to offer thus not binding unless expressly declared
 Offer binding to the person exhibiting items if accompanied by price and all other conditions
of sale
 Offer is deemed as complete even if person exhibiting items does not specify quantity
available for sale
 Offeror cannot refuse to sell exhibited goods to anyone from public who accepts offer
 Examples: sales by auctions, automatic machines

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THE ACCEPTANCE
 Once a contract is accepted, it becomes legally binding
 For acceptance to be valid it must be definite, unconditional and fully complaint with the
offer
 A delayed acceptance due to conditions, additions, restrictions or alterations is a refusal of
the original offer
 To be valid at law, an acceptance must:
o Must correspond integrally to offer i.e. must be accepted absolutely and on same
terms offered
o Acceptance must be made by whom the offer was addressed to unless it is a public
offer
o Acceptance must be forwarded to person who made offer
o Must be externally manifested
o Acceptance must also be in writing if offer was made in writing
 It must be manifested in tactic form – all those positive acts where person
shows his intention to conclude contract. Inaction can never be acceptance.
o Acceptance must be known to the offeror within prescribed time or if no fixed time
has been given, within the ordinarily time required to exchange offer and acceptance.
If time is exceeded, it cannot be enforced.
A contract is concluded when there is unison of wills by both parties – it becomes legal. Until moment
of conclusion, both offer, and acceptance may be withdrawn.
 Offeror may revoke offer until he has knowledge of acceptance. One can only revoke offer if not
accepted yet. Once offer is accepted, contract is complete and cannot get out of it
o This right is restricted when offeror declares that offer is open for a certain time and
when time is implied by nature of contract
 Acceptor may revoke acceptance until it is known to the offeror
Shares & bonds don’t get offer – you get invitation to treat
 You don’t have a guarantee that you will get EUR 10,000 even if you want that amount
 Acceptance is not given immediately
Offer & acceptance lapses by death, interdiction, incapacitation or bankruptcy of the other party if this
happens prior to the conclusion of contract.

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Doctrine of privity
 Contract only binds persons who sign it & are part of it.
o A person cannot by a contract entered in his own name bind anyone else but himself. It
does not concern other third parties.
 Third parties shall not be of prejudice or advantage except if established by law
o Exceptions:
 When A enters into an obligation promising the performance of C – A carries the
responsibility for C to enter a contract with B thus contract is valid but the
responsibility is between A & B, C is not responsible.
 A contract for the benefit of the third party – if two persons sign the contract, the
third party is a beneficiary thus he will benefit from it but since he did not sign it,
third party is not binded.
 Two parts of contract:
o Stipulation that benefits the party making the contract
o Stipulation that benefits a third party
Presumptions relating to the intention to create legal relations
 Contracts legally entered into shall have force of law for contracting parties
 Courts will interpret contract using the normal rules of interpretation
 If both parties agree, contract may go against what is stipulated in the general law unless
prohibited by the law itself
 Revocation of contract is only allowed if there is mutual consent. One party alone can annual
contract if:
o Mandate
o Contract of work
o Contract of civil partnership
 Contracts must be carried out in good faith and binding only in the regards they are expressed in
or any consequence which is incidental to the obligation according to its nature
 Interpretation of contracts must be made in literal sense but also include incidental matters to
the main obligations
 Transfer of ownership and effects of such transfer is done:
o By registration for immovables
o By delivery for movables
o By notification for incorporeal movables (debt)
An agreement is not binding as a contract if it is made without intention of creating legal relations
even if it is by a lawful and existent causa. The court can discover the intention by applying the objective
test and judge situation by what is said and done i.e. question of fact & evidence.

30
Law divides agreements into two:
Social & Domestic Agreements Business Agreements
1. Agreements done between family members, 4. Agreements of commercial nature – they are
friends and workmates i.e. not done by people presumed by courts to be entered with the
in commerce intention of creating a legal and enforceable
2. Social agreements are not legally binding, but relationship
it can be shown that transaction had the 5. Mere puffs – vague, exaggerated claims in
opposite intention adverts in order to attract customers and are
o A contract between husband & wife not intended to form a legally binding contract
living together as one household is not but more specific pledges are likely to be
presumed to be legally binding unless o Example: we will refund you the
agreement states the contrary but this difference if you find someone selling
presumption does not apply if spouses it at a lower price
are not living together at the time of 6. A statement will not be binding if court
agreement considers that it was not seriously meant
3. Example: promise by parent to pay child
pocket money

Letters of intent or of comfort

 Document supplied by a third party to a creditor with a concern to ensure that debtor meets
obligations to the creditor.
 These may be binding contracts or informal depending on the terms.
 One person indicates to another that he is likely to place a contract with him but not yet ready
to be bound.
 If letter does not have negative contractual intention, courts can hold parties bound by document
but if the letter states that it is to be superseded by a later stage, the contractual document does
not prevent it from taking effect as a contract.
 Question of contractual intention is one of fact as a last resort. The test is usually an objective
one.

Collective Agreements
 Agreement between trade union and employer regulating rates of pay and conditions of work. Such
agreements are not meant to be legally binding unless written and expressly states so.

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Content of a contract
Mere representations – determining terms of a contract to establish what parties said or wrote.
o Pre contractual statements – does not form part of the contract since these are made during
the negotiations and thus not enforceable. These may be classed as representations or terms.
 Representation is a statement of fact made by one party which convinces the other
to enter the contract. If it is incorrect, other party may sue for misrepresentation.
Breach of term of contract – fulfilled to take obligation but failed to deliver on that obligations. This
entitles injured party to claim damages and also able to terminate contract if deprived substantially what
he bargained for.
Intention is the overall guide as to whether statement is a term of contract. These four factors are
considered when deciding whether statement is term or mere representation:
1. Timing – time between statement and contract’s conclusion.
 More likely to be term if interval is short
2. Importance of statement – importance of truth of statement must be that injured party would
have not otherwise entered the contract
3. Reduction of terms to writing – if written contract does not incorporate such statement, this
would suggest that parties did not intend statement to be a contractual term
4. Special knowledge skills – check if maker of statement was in a better position than other party
Terms – once it is decided that statement is a term, it is necessary to decide which type of term it is on
order to determine what remedies are available fit its breach. Three types of terms:
1. Conditions – major term vital to the main purpose.
 A breach of condition entitles injured party to stop contract and claim damages or go
on with the contract and recover damages.
2. Warranties – less important term and not vital.
 A breach of warranty entitles injured party to claim damages but cannot stop contract.
3. Intermediate (Innominate) Term – impossible to determine whether term is a condition
or a warranty.
 Can only be assessed in the consequences of breach – injured party can stop contract
if deprived of the whole benefit of the contract but can only claim damages if it was a
minor loss.
Exclusion clauses – an attempt to exclude liability for negligence or contractual liability.
o Will not come into effect if it was not brought to attention to the other party
o Cannot exempt liability for dolus and cannot be relied upon if there is a fundamental breach of
contract
o For exemption to be relied upon, there has to be performance of contract

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2.2 Breach of Contract & Remedies
A breach of contract is when one fails to deliver on the obligation one entered in.
 If one fails to fulfil their part of the deal, the other party can hold the other person responsible.
 Creditor may be authorized to perform the obligation himself at the expense of debtor.
 Debtor who infringes obligations is liable for damages for such infringement.
 Creditor may demand that any breach of obligation to be undone.
 Debtor is liable for damages if obligation could only be done within a certain time and time
expired.
 Debtor is liable for damages to non-performance & delayed performance due to extraneous
cause.
 Debtor is not liable for damages if there was forced measure resulting in no control or fault on
the debtor.
Damages payable to creditors
The victim decides the remedy at that point in time. The debtor is not liable only if there is forced
measure.
Damages due to creditor are: Loss sustained, or Profit deprived of
Exceptions:
1. Debtor is only liable for damages if such damages could have been foreseen at the time of the
agreement unless it was due to fraud on the debtor’s part.
2. If damages are due to fraud on the debtor’s part, the creditor can only be compensated for the
damages that are immediate and direct consequence of the lack of fulfillment of the obligation.
3. If agreement is that the party who fails on the obligations has to pay pre-liquidated damages, such
amount cannot be greater or lower than the agreed amount.
 Pre-liquidated damages are the consequences of the failure of fulfilment of
obligations. Example: agree to pay EUR 100/day for each day delayed from the
fulfillment day.
 If the parties agreed on pre-liquidated damages, it is possible to be reduced but you
can put clause in the agreement that it cannot be reduced.
Damages where obligation consists in payments of a sum of money
 Damages arising from the delay meaning that one is depriving a person of the use of his own
money result in interest on the sum of money of 8% per annum. Total damages would be capital
+ interest. One can charge less than 8% per annum but cannot charge more than 8% - it is a crime
even if it is in agreement of two parties and written in contract.

33
 o Commercial nature – interest starts occurring immediately and due as from the day on which
obligation should have been performed
o Civil nature – interest starts occurring once it is asked for i.e., when judicial act is filed

Quantification of damages – torts & quasi-torts

Damages in tort are meant to bring about a damnum in restitution integrum – try to put person as far
as possible in the same position before the damage occurred. This is in theory since in practice, it does
not mean that I out you back in the same position as before. Example: I had a brand-new car and it was
repaired but the car is not brand new anymore.
Damages must be the expenses which occur out of the damage. The person doing the damage is liable.
Damages are only payable in money. Our courts do not compensate for moral damages but only real &
material damages i.e. for out of pocket expenses. Moral damages can be granted only in the case of:
 Violation of human rights
 Press law
 Betrothal under the promise of marriage law (the promise to get married)
Damages that need to be made good by the responsible party:
 Actual loss suffered from actual act
 Expenses incurred by the injured party due to consequence of the damage
 Loss of actual wages & other earnings
 Loss of future earnings due to permanent incapacity

Damnum emerges – actual loss suffered by the injured party from the act done. Example: repairment
of damages of car.
Lucrum cessans – loss of profit due to the accident. Example: cannot rent car whilst the car is being
repaired from the damages.

Method of compensation for lucrum cessans adopted by Maltese courts:

I. Weekly wage (gross salary – after deduction) the individual earned at the time of the accident
adjusted to take into account future wage (changes & chances of life) and cost of living increases
(inflation) multiplied by 52 weeks to calculate yearly wage.
II. Yearly wage is multiplied by the multiplier – how long individual who suffered the damage would
have worked i.e., the % of working life one has left (purchase years) which is the retirement age
minus age of individual at time of accident.

34
 III. Multiplied by % of disability determined by medical experts. Must take into consideration if
disability will affect future chances of employment. One should wait 9 months to get % of
disability.
IV. Amount due in compensation is given soon after accident as a lump sum, there is a 20% deduction
from sum. This is since the injured is given all salary that one would have received throughout a
number of years in advance and at once thus person can invest it.
a. 8 years pass from the date of accident to the date of judgement – no lump sum deduction
b. 4 years pass from the date of accident to the date of judgement – 10% lump sum
deduction
V. Death of person injured – 20% lump sum deduction and further 25% deduction equivalent to
personal consumption (food etc) since person is dead and heirs should not keep it.

Penalty clause – clause where person binds himself to something in case of non-fulfillment in order to
secure fulfillment of agreement. This represents compensation for the damage which creditor sustains
by the non-fulfillment of obligation.
 Creditor may sue for the performance of the obligation instead of the penalty incurred by debtor,
but one cannot demand both.
Two exceptions where court can abate or mitigate penalty:
 Debtor performed obligation in part & creditor accepts the part performed
 Debtor performed obligation in part & is manifestly useful to the creditor
But cannot be done if debtor waived his right for this to be done and if penalty is due to mere delay.

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2.3 The Law of Torts
 Contract – pre-determined agreement
 Tort – no pre-existing contractual relationship
Torts are obligations which arise out of actions which cause harm to someone else. It is voluntary harm;
a person intended to make harm.
 Direct responsibility – person is responsible for his own acts
Quasi-torts are caused by negligent (involuntary) harm; did not intend to make harm.
 Indirect responsibility – person is held responsible for the acts of someone else
Civil liability Criminal liability
Not every tort gives rise to criminal action thus Every criminal act gives rise to a civil action for
can be civilly responsible but not criminal damages.
responsible
Proof is on the balance of probabilities Proof is required to be beyond a reasonable doubt
If criminal action is not successful, it does not
mean that civil action will also fail

A tort is based on fault – one cannot be responsible of harm and is deemed at fault if he does not use
the prudence, diligence and attention of a bonus paterfamilias – father of family is the responsible party
of family thus it is the level your father has to keep to protect you
4 requisites must be satisfied for a tort to exist:
I. Must be an act or omission with the capacity to commit tort. This depends on:
o Understanding
 Persons of unsound mind and children underage of 14 cannot commit a tort
o Free decision to commit the act
II. Act must be unjust i.e. contrary to the law
o Act will give rise to liability to compensate for damages
o Omission to act will give rise to liability only if there is a breach of obligation imposed by law
III. Act must be committed through dolcus or culpa of person
o With one’s knowledge that it is contrary to the law and such act or omission of act will cause
damage to others
o Culpa consist lack of due diligence
IV. Act must directly cause damage
o If damage is a result of force majeur i.e. by an irresistible force or Act of God, person is not at
fault and not liable in damages

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INDIRECT RESPONSIBILITY (QUASI-TORT)
 A person is responsible to make good for the damaged caused by other persons
 6 cases of indirect responsibility laid down in our law:
1. Employer for employing incompetent persons
2. Person in charge of minor or person of unsound mind
3. Hotel-keepers
4. Owner or user of animal
5. Owner of building for defects in construction
6. Occupier of a building from which something falls
Quasi-contracts
 It is not a traditional contract; it is almost a contract thus gives the same obligation thus same
consequences
 Based on the consent of one person and presumed consent of another person (unilateral)
 Lawful and voluntary act which creates an obligation
 3 types of quasi-contracts:
1. Negotiorum Gestio – taking decisions on behalf of someone because you are the most
natural person to do so. One undertakes the business without being contracted by the
principal but you think that the principal would have wanted that person to take over if
he could have made that decision
 Agent must be of age and capable
 Affairs of principal must be lawful
 Intention of agent to bind the principal
 Agent must have acted freely, without bound or mandate
 If there was prohibition on agent, agent cannot take management of affairs
 Agent is bound to continue management and carry it out until principal is able to
take charge himself
 Agent must do everything which is incidental or dependent on those affairs and is
liable to all obligations that arise from a mandate
 If principal dies, agent must continue with management until heirs are in a
position to provide themselves
 Use the diligence of a bonus paterfamilias in the management of business
 Can be exercised even if no additional advantage is gained
2. Indebiti Solutio – when someone gives something to someone by mistake and person is
bound to give it back.
 Examples:
 Person pays something thinking there is an obligation to pay when there isn’t
 There is an obligation to pay but person paid is not to the creditor

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  There is an obligation to pay but person who pays it is not the debtor
 Conditions for existence:
 Payment with intention of fulfilling an obligation
 The indebitum i.e. mistake – must be one of fact or of law not natural
 Person must have paid under the mistaken belief that such debt was due to
him – if person knowingly pays, it is a donation and there is no right for
recovery
3. Actio De In Rem Verso – one is seeking compensation because someone received
something which should have not been received or without paying it.
 Elements are:
 Enrichment – defendant must have got some sort of advantage. It does not
have to be quantified in money terms or increase in value
 Causality (relationship between cause & effect) – between act and
advantage
 Unjust character of the advantage
 Not exercised if person who suffers loss may take another action to make up for
such loss
 Can only be exercised if there is an advantage take and a profit made
4. Compensation for services rendered (Servigi)
 Capacity and consent from the beneficiary is not required
 Arisen especially in family situations
 Courts do not look at any enrichment (gain) or impoverishment (loss) – court set
its own criteria for compensation
 Services rendered to a family member is presumed to have been done with the
intention of compensation unless there is clear evidence of the contrary
 Example: no compensation is given to person left job to take care of his mother as
the extent of his loss or extent to gain on his mother’s side
 Criteria taken into account for compensation:
o Plaintiff may have already been awarded for his lost earnings
o Compensation that the plaintiff hopes for
o Relationship between plaintiff and defendant
o Value of estate of defendant
o Benefit derived by defendant
o Deduction of any meals, accommodation enjoyed by plaintiff
 Action of person who rendered service is usually directed against heirs of the
person

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2.4 Professional Negligence
An auditor by contract with his client owes duty to perform the audit, report or investigate with
reasonable care and in accordance with the Accepted Accounting Standards and Standards of Audit
Practice.
Standard of care – exercised by an auditor with all legal and professional standards and is not clearly
limited or defined. It is a measure of care which is more than the reasonable care required in ordinary
circumstances.
Duty of care – doing things that a prudent man would do in the circumstances and refraining of doing
things he would not do i.e. acting with prudence and diligence of bonus paterfamilias. To whom is this
owed?
The duty of care require that audit is:
 Properly pre-planned according to the inherent risks of the client company
 Carried out by qualified personnel who are supervised by experienced auditors
 Reviewed by an audit partner
 Situations should be subject to further investigation to eliminate possibility of mistake or fraud
If an auditor fails on their responsibilities i.e. the duty and standard of care of carrying out their job; they
are liable since it is a breach of their professional responsibilities and can be prosecuted.
To whom is duty of care owed to?
1. To the client – an auditor almost always owes duty of care to the client and is part of their
contractual duty
2. To third parties – this arises out of the Law of Torts; auditor will owe a duty of care to someone
who the auditor knows might rely on the advice given
- Accountant is by law liable towards third parties who suffer damages by relying on prospectus
wherein an untrue statement is later revealed. Persons responsible for issue of prospectus
shall be jointly and severally liable for any damage sustained by person subscribing for shares
on the faith of the prospectus in case of untrue statement
- Every partner in a partnership of accountants is jointly and severally responsible for the
actions and omissions of each and every one of them in performance of duties, maintenance
of required professional standards and conduction and fulfillment of their obligations under
the law
3. To investors – when auditor’s report is prepared for management purposes, liability will not rise
when someone make use of report for a different purpose but if report is made for the purpose
of giving information to others, auditor has a duty to the investors to not misrepresent the
subject of report

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 4. To banks/ creditors – comparable principles apply but there are fewer instances where courts
find that duty of care exist because of the absence of any proximate relationship between
creditors and companies’ auditors. Moreover, subject audit is usually not performed in relation
to the lending or credit transactions.
3 criteria defined by the House of Lords for the imposition of duty of care:
1. Must be foreseeable by the defendant that statements will be relief on by the plaintiff
2. Has to be relevant degree of proximity between the parties
3. Must be just and reasonable to impose a duty of care on the defendant to the plaintiff
Court held that auditor will only be liable to someone who used the advice for the specific purpose for
which the advice was given. The audit’s opinion purpose is to assist shareholders in overseeing the
management and affairs of firm and not to assist in making personal investment decisions. Auditors can
be liable to the shareholders of their client only if shareholders as a group suffer a loss due to inaccurate
financial statements that prevented them from holding management of the firm. The auditor is well
advised to state clearly in retainer agreements and on the reports themselves the intended use of the
report.
Duty to report Fraud
Auditor’s primary duty is their client company which is considered as a confidential relationship but if
fraud is suspected or there is absence or weakness of internal controls, auditors have duty to report to
the board on such matters. If this is not reported, it will give risk to civil claim which can give rise to
criminal liability. Auditor’s professional and legal obligations will conflict with the client’s wishes, but the
auditor has the duty to report such cases.
Local legislations regard to professional negligence
 Civil Code
- Provisions which regulate tort and quasi-torts state that a tort is a wrongful act against an
individual which gives rise to a non-contractual civil claim which is usually for damages
- Liability in tort is usually based on principle of fault
- Aim of quasi-tort is to provide compensation for those injured through the fault of someone
else – an action due to professional negligence must show that party at fault owed a duty of
care to the person injured as a result of their actions and that party of fault foresaw that
damage would occur and that there was sufficient proximity in time, space and relationship
between the two
 Accountancy Profession Act and Accountancy Profession Regulations
- Article 8 – minister may on recommendations of the Accountancy Profession Board make
regulations to regulate the profession of accounts with respect to the establishment and
definition of accounting and auditing standards by issuing Directives or Guidelines.

40
 - Article 11 – every firm or practitioner is required to be covered by an indemnity insurance
against any liability incurred due to compensation of loss or damage to client as a result of
any negligent act, error or omission, or dishonest, fraudulent act by any of their employees
- Article 12 – an offence laid down for any person who acts or omits to act in breach of
professional duty – person shall be liable on conviction to imprisonment for a term not less
than 1 year and not exceeding 5 years and may impose fine not exceeding EUR 60,000 plus
suspension or cancellation of warrants. Board can also issue administrative fines and take
such other appropriate measures.
- Article 13 – any agreement to exempt a warrant holder from liability or responsibility to the
statutory audit shall be null and void. This excludes policy of insurance in article 11
- Article 15 – warrant may be suspended or subjected to other conditions if person has been
found guilty of any of the following acts or omission following an enquiry held by disciplinary
committee:
 Dishonesty, serious misconduct or gross negligence in the exercise of profession
 Material contravention of regulations or directives with respect to professional
standards, practices or integrity
 Grievous conduct discreditable to the profession
 Directive Number 2 in terms of the APA and APR
- Code of ethics is based on the recommendations and guidelines made by the international
Federation of Accountants (IFAC) and the European Commission Recommendation on
Statutory Auditors and Independence in the EU
- Establishes the fundamental principles of professional ethics for warrant holders and
provides conceptual framework for applying those principles – equally valid for all warrant
holders unless a limitation is stated. Fundamental principles include:
 Integrity – straightforward, honest, fair dealing, truthfulness. Shall not be associated
with materially false, misleading, recklessly furnished, omission of information
statements
 Objectivity – shall not allow prejudice or bias, conflict of interest or undue influence of
others override professional or business judgments
 Professional competence and due care – continuing duty to maintain professional
knowledge and skill required so that client receives professional services based on
current developments in practice, legislation and techniques. Professional competence
requires high standard of general education, followed by specific education, training
and examination and work experience. Warrant holders should make clients aware of
any limitations of service in order to avoid misinterpretation
 Confidentiality – respect confidentiality of information acquired and should not
disclose any information to third parties without proper and specific authority unless
there is a legal or professional duty to do so

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  Professional behavior – comply with relevant laws and regulations and should avoid
any action that discredits the profession
 Development of the law relating to standard of care
- Auditor has to perform audit in compliance to generally accepted accounting principles
(GAAP) and generally accepted auditing standards (GAAS), however, compliance with these
do not guarantee that auditor will be viewed favorably in the eyes of the law
- Standard of care often has been defined that when a professional commits a mere error of
judgment, that error does not constitute negligence thus distinction between errors of
judgement and negligence has become the analytical focus
Public interest – there is a responsibility to act in the public interest not just the interest of individual
client or employer. Public interest is considered as the wellbeing of the community that the warrant
holder serves such as clients, lenders, government, employers etc.

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3 – Employment Law

The Employment and Industrial Relations Act 2002 (Chapter 452 of the Laws of Malta)
 It’s an act that regulates employees, employers and trade unions.
 Since the nature of employment changed over time, the act changed as well.
 Two parts:
Employer & relation with employees Industrial relations
 Helps individuals know what is  Industry
necessary and put down their rights on  Trade unions
paper  Employee associations
 Regulates voluntary settlement of disputes that needs to go Infront of tribunal
 Sets up Industrial Tribunal empowered to determine:
o Settlement of employment disputes between employers and employees
o Settlement of trade disputes

Employee – person who works under a contract of service or who undertaken personally to execute
work under control of another person including outworker but excluding work done in a professional
capacity when work is not regulated by a specific contract of service.
Worker – employee who works, normally works or seeks to work
 Under a contract of employment
 Under any contract (express – oral or in writing or implied) that the employee undertakes to
perform for another party who is not a professional client
 In employment for the department of Government – only applies if employment does not fall
under the private sector or self-employed
A worker under the act includes:
 Employees in private sector
 Self-employed persons excluding professionals
 Employees in public sector excluding members of a disciplined force
 Persons who seek to work or normally works even if worker is not employed with that employer
Employer – can be physical i.e. a person or legal personality i.e. a company
Trade Union – organization whose purpose is to regulate relations between workers and employers or
employers’ associations
Employment Relations Board – board composed of representatives of employers and employees to
regulate what happens when issue arises by making recommendations and give advice to Minister of
employment and industrial relations issues

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National Standard Orders and Sectoral Regulations Orders (Article 4)
 Form of delegated legislation through which amendments and proposals can become law
without passing through parliament
 Minister has the power to issue orders on a national scale or orders relevant to sector of working
field by laying down certain minimum conditions of employment such as:
- Working hours and overtime
- Maternity, parental and urgent leave
- Conditions of employment
- Financial conditions such as cost of living increases
Protection of wages
 Laid down under Article 11 of the EIRA
 Conditions which protect the wages which an employee is entitled to receive
 Unless otherwise expressly permitted, wages have to be paid in legal tender i.e. something which
is a legal form of payment – cheque, cash in the current currency, bank transfers. Any payment
made in any other form shall be null and void
- Article 12
 Wages must be directly paid to the employee
 Exceptions:
o Garnishee order (sekwestru) – court order where part of your money goes to a third party. The
first EUR 700 cannot be taken away from the wage as these are considered the money needed
to live. This cannot be against a member of the armed forces.
o Maintenance order (mantiniment) – child support, spouse support
o Income tax
o National insurance
 No conditions on how to spend wages
 No conditions attached – if one works, one will get the salary
 Cannot assign wages to someone else
- Article 14 – employer cannot collect interests on advanced payment of salaries
- Article 15 – there shouldn’t be any excuses for deducting amounts of money from the
wage of an employee. The exceptions are few and strictly regulated by law, otherwise it
is illegal.
 Only if ordered by a competent court
 If permitted in agreement between employer and trade union
- Article 19 – employer does not have the automatic right to impose fines unless this forms
part of the collective agreement or in employee’s contract. In those cases, law can be
imposed
Discrimination related to employment (articles 26-32)
 Procedures to be followed for the determination of such discrimination and penalties involved

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  4 discriminatory protections:
- Pre-employment and conditions offered
 Applicant is recognized as a worker and thus subject to discrimination. When
recruiting one cannot give advantage to a person who is employed vs a person not
employed. It is not lawful to discriminate in the process of:
 Advertising vacancies
 Offering jobs – must be transparent
 Selecting applicants – select participants with no preference
 Discriminatory treatment included any distinction, exclusion, restriction or
difference in treatment whether direct or indirect which is not justifiable in a
democratic society and includes harassment
- Work of Equal Value
 Article 26 – discriminatory treatment is where:
 Person selected is less qualified than a person of the opposite sex
 Actions which apply to an employee
 Conditions are less favorable than those of another employee in same
work of equal value
 Management of work and distribution of tasks assigned in a less favorable
manner
 This is during employment – in the same class of employment, an employee is
entitled to the same rate of remuneration for work of equal value. Salary scales
may be reached in agreement.
- Victimization
 Somebody who always gets the raw end of the deal
 Victim of circumstances; the victim is the person undergoing the abuse i.e. the
employee
 This can be done by other employees or the employer
 It is not lawful to victimize a person for:
 Making a complaint to lawful authorities
 Participating in proceedings for the alleged breach of law
 Disclosing information of illegal activities to a designated body
- Harassment
 Have no right to do so thus is unwelcome behavior
 Harassment can be physical
 Fighting, physical intimacy, request for sexual favors
 Harassment can be moral
 Promotions, not reporting something done wrong, intimidation

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Who can discriminate?
 Employers
 Officers of the union
 Employment agencies – particular group of people sent for vacancies
 Co-employees
Manner of termination of contract of service
 Contract of service regulate the terms and conditions with which one is recruited to work.
 Conditions one is employed with shall not be different if one is employed for fixed or indefinite
term
- Specified term contract – definite; fixed for a period
 If an employee has a 4-year definite contract and is kept in employment with no
new contract of employment within 12 days of the expiry of previous contract;
then the contract turns into an indefinite nature
 After the fixed period of time lapses, employer and employee are no longer
contractually bound to each other
- Indefinite term contract – no fixed period or termination
Termination of a contract of service
 A definite contract can be terminated:
- During probation without giving any reason provided one week’s notice is given if
employment already lasted 1 month
- For a good and sufficient cause before termination period agreed on
- By subsequent agreement between two parties
- On the lapse of period agreed on
 An indefinite contract can be terminated:
- Only by the employee unless there is:
 Good and sufficient reason like not working, stealing etc.
 Redundancy – there is no longer a need for such post. If it comes back on within 1
year of redundancy, the job must be offered back to that person on the same
terms and conditions as one is previously employed with or on terms more
favorable. In case of redundancy, the last person engaged in the last class of
employment is the first one out (LIFO).
 Industrial Tribunal considers that if employees have been recruited in the
class they are considered as one grouping, irrelevant of the responsibilities
they perform thus LIFO applies.
 Issue arises when distinction is not so clear like when persons are
employed with different responsibilities but within the same grade.

46
 One exception – when person last employed is related to the employer by
consanguinity or affinity up to the third degrees, employer may make the
person next in line redundant.
 During probation
- An employee has to give notice laid down in the law depending on the length of time
employee had been in employment
Probation
 It is an opportunity for employee and employer to see if they are a good fit for each other thus it
is a trail without consequences
 Both parties can terminate employment in this period without any consequences – both parties
are given the same rights
 First 6 months of any employment under a contract of service shall be the probationary period
of employment
- This can be shorter if employer and employee both agree
- In case of technical, executive, administrative or managerial posts where wages are at
least double the minimum wage, probation period is of 1 year unless otherwise specified
Notice Period
 Employer must give a notice period to the employee which is the same notice period employee
has to give if employee wishes to terminate contract of employment.
 More than 1 month; less than 6 months – 1 week
 More than 6 months; less than 2 years – 2 weeks
 More than 2 years; less than 4 years – 4 weeks
 More than 4 years; less than 7 years – 8 weeks
 More than 7 years – additional 1 week for every year of service up to maximum of 12
weeks
 Notice of termination cannot be given during maternity leave or during period of incapacity for
work.
 It commences to run from the next working day after the receipt of notice.
Indefinite contract
 Employer terminates employment – employer will ask employee to leave and pay employee ½
of notice period or ask you to work notice.
 Employee resigns from employment – employer allows period of notice to expiry or employer
can stop employee from working notice period and pay full sum of the notice period. If
employee does not work notice period, employee has to pay ½ of the notice period.
Definite contract (before contract expires)
 Both employee or employer have to pay ½ of the time remaining in the contract

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NOT Good and Sufficient causes for termination of employment
 Employee is a member or not a member of a trade union
o Manifestation of the right of every worker to be unionized
o Person has right to decide whether to belong or not to belong to a trade union
 Employer no longer have confidence in employee except for private domestic employee
o Private domestic employees are persons employed to carry out domestic work in a private
sphere such as maid in a household or nanny – these may be dismissed if there is a lost
of trust since loss of confidence here could threaten the family unity
 Employee gets married
 Employee is pregnant, is out on maternity leave or within 5 weeks following her return to work
based on the argument that she is incapable of working due to a pathological condition
o If employee terminates her employment within 6 months of returning to work after
maternity without a good and sufficient cause, employee has to pay back the sum of what
she received during maternity leave
 Employees who are out on injury leave as a result of an accident arising out of and during course
of such employment
o Employee is to receive wages due to the employee less the injury benefit for 12 months
from date of incapacity
o For reinstatement – employee has to write within 7 days from termination of the injury
and employer has to reinstate within 21 days of receipt of this request
 Employee whistle blows to a designated authority about an illegal or corrupt activity
 Employee files complaint against employer due to violation of laws
 Transfer of business unless termination was necessary for economic, technical or organizational
reasons – this also apply to transfer of services and not necessarily transfer of assets
o Offers protection to employees since employees are required to be transferred with the
business and do not lose any of their rights which they previously enjoyed
o Exceptions:
 When buying a ship
 When company you’re buying is bankrupt
o Employer has to inform Union about the:
 Date or proposed date of transfer
 Reasons for transfer
 Legal, social and economic implications of transfer
 Measures as a result of transfer that may affect employees
o Employer also has to inform the Director responsible for Employment and Industrial
relations

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Collective redundancies
 This is when a number of people of workforce are made redundant at the same time
 This cannot be done before employer notifies union and give the possibility of discussing the
situation
 Union has to be informed about the reason, number of employees effected and criteria to be
followed
 Employer has to inform the Director of Employment and Industrial Relations about the proposed
redundancies
 Three categories:
o 10 employees out of 20 employees
o 10% of employees if not above 200
o 30 or more if more than 300
Voluntary settlement of disputes
1. The Conciliation Panel
 Appointed by the minister
 Composed of not less than 5 persons to serve as conciliators in trade disputes holding term
of office for two years
 Member of panel cannot also preside on the Industrial Tribunal
 Third party brings parties together, encourages them to discuss and assists them in
developing their own prepared solutions
2. The Industrial Tribute
 15 persons nominated by the Prime Minister. 3 of which must be advocates of 7 years’
experience and their term of office must not extend 3 years
 Chairpersons are nominated by rota
 There to resolve disputes; neither a fully fledges court nor a fully administrative organ – it is
a quasi-judicial board
 Employee goes against employer for not a good & sufficient reason for termination thus for
an unfair dismissal
 Employee or his representative has to file a letter of complaint in the Registry of the Superior
Courts within 4 months from dismissal
 Lawyers can represent parties, but it is not necessary
 Tribunal has no jurisdiction over cases concerning:
- Public officers – they are regulated by government
- Public transport workers or port workers (have their own tribunal)
- Full time employees on a fixed contract
 It acts like a court and decides cases in first instance. There is a right to appeal afterwards
which must be filed within 12 days from date of decision solely on the point of law; one
cannot appeal on merits i.e. interpretation of facts

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  Tribunal is bound by law to decide cases within 1 month unless chairman thinks a longer
period is necessary
 Employee can either get reinstatement of the job or compensation for damages
Employee should be provided with the following information in the agreement that employee should
have a copy of:
- Job description
- Subordinates and superiors
- Wage and amount of hours
- Dress code
- Date of initiation and termination
- Probation periods & notice periods
- Payment of overtime

 A trade dispute may arise between an employer and workers who do not work for him
 A dispute between two employers does not constitute a trade dispute
 There can be a trade dispute between representative organizations without the direct
involvement of their members – example dispute between two trade unions for representation
of workers
 A person who is not allowed to be a member of a trade union can still resort to industrial action
without being dismissed
Right to strike – an essential element of collective bargaining. This notion was always connected to the
notion of equity of arms. Constitutional court rules that right to strike is protected and upheld under
ordinary law thus protection of Constitution is seen as light of ordinary law.
 Person who is not a trade union member may resort to action and be protected unless he is a
member of the management

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4 – The Formation and Constitution of Business Organisation

4.1 Agency
 It is an agreement in order to trade in the commercial world where one (the principal)
authorizes another person (the agent) to act in his name.
 It is a contract since 2 persons are signing it; both parties benefit from it and want it
 The agent must act within the scope of his authority; he is limited by the agency agreement.
o Example: agent cannot sell pasta if in the agreement, agent is said to sell cars.
 An agency presumes the existence of a mandate – there cannot be a mandate without agency.
In the absence of agreement, agency is governed by provisions of mandate. Agency is a non-
natural but not an essential element of mandate. Both terms mean to give authority to do
something on another person’s behalf.
 Agent signs on behalf of the principal and not in his own name thus the obligation arises
between third party and principal and not third party and agent

Mandate (letting of work and industry) Agency

Used in the civil world
Gratuitous – solely benefit the mandator
Entrusted with the management of one’s affairs for
a determinate period of time or a specific thing
May or may not disclose the principal’s name
May act in his own name – directly bound towards
the person he contracted with
Example: give mandate to sign on my behalf
Can be granted by:
 Public deed
 Private writing
 Letter
 Tacitly – acceptance may also be tacit and
may be inferred from acts
Forms:
 Special – for one manner or for certain
manners
 General – relates to all affairs
Used in the commercial world
Onerous; getting paid in return
Given authority to conclude transactions in the
name and on behalf of his principal
Bound to disclose principal’s name and act in
this name
Must declare that they are acting on behalf of
the principal
Example: distribute product in Malta
Agency is an institute of private law applicable
to trade and is derived between agent and
principal
Forms:
 Voluntary nature – agent is freely and
voluntary appointed by the principal
 Necessity – when impose by law or a
court’s order - father is declared to be
the lawful representative of his children

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Examples of Agency
1. The Commercial Traveler & The Salesman – general duties are the same as an agent
2. Commercial Agent
3. The Commission Merchant

1. The Commercial Traveler

 Roams around to sell goods
 A person entrusted by trade with authority to act and conclude business on behalf of trader
and in trader’s name either in the place where a trader exercises his business (il pjazzista) or in
a place away from where trader exercises his business (il commesso viaggiatore)
 Two types of Commercial Travelers:
o Authorized to promote business and transmit orders for acceptance by the principal –
not authorized to conclude business transactions himself
o Pure agent – has power to sell and conclude transactions

The Salesman
 Sits in a shop selling things
 Empowered to receive the price of goods sold by them, within the place of business, unless
receipt of payments is entrusted to a cashier
 There is a geographical limitation – cannot receive price of goods outside the place of business
unless they have authority to do so by the trader
Special duties of the Commercial Traveler and the Salesman
I. Cannot without authority exercise same trade as principal whether this is on their own behalf or
on behalf of others
II. Cannot communicate information about customers to the determent of the principal
III. Non-competition and non-disclosure duty
IV. If the above points are not followed, person is liable for damages and interest, a fine of more
than EUR 5 to EUR 100

2. The Commercial Agent

 Self-employed commercial agents – not in employment with the principal and has continuing
authority to negotiate sale or purchase of goods or services or negotiate and conclude
transactions on behalf of principal
 Not affected by these regulations:
- Commercial agents whose activities are unpaid
- Commercial agents who operate on commodity exchanges or commodity market
- Activities as commercial agents are secondary
 Have the authority to do things on behalf of company but are not commercial agents:

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 - Directors
- Partners
- Insolvency practitioner or liquidator
 The following may not act as commercial agents:
- Person employed by the Government of Malta or any financial institution
- Person holding warrant to practice profession in Malta
- Stockbrokers
- Any person found guilty of fraudulent bankruptcy both abroad and in Malta
 Commercial agent is to obtain a license from the regulatory authority
- Must apply in writing to the regulatory authority with all details of applicant
- Applicant satisfies the regulatory authority that he is a fit and proper person and has
adequate knowledge of commercial laws to act as commercial agent
- Applicant must produce a certificate of good conduct from the Police
 Duties of Commercial Agent
- Look in the interest of principal and act in good faith
- Negotiate and conclude transactions
- Communicate to principal all the necessary information available to him
- Follow reasonable instructions given
 Duties of principal towards Commercial Agent
- Act in good faith
- Provide commercial agent with necessary documentation
- Obtain necessary documentation for the commercial agent
- Notify commercial agent within a reasonable period where he excepts volume of
commercial transactions to be lower than expected
- Inform commercial agent within reasonable period of his acceptance or refusal of
commercial transaction procured for the principal
 Both parties are liable for damages if they do not perform their duties
 Remuneration of the Commercial Agent
- If there is an agreement, one applies the rules of such agreement
- If there is no agreement, one relies on custom; what usually happens – habitual and things
we always do in practice
 Example: estate agencies are paid 5% - it is not written but in practice, it is how it is
always done
- If there is no custom, one looks at the circumstances of the transaction
- If no agreement is arrived at, matter is referred to the court
- Remuneration of agent can be fixed as a commission
 He is entitled to commission on commercial transactions concluded during the period
covered by the agency contract
i. Where transaction is concluded as a result of his direct or indirect intervention

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 ii. Where transaction is concluded with a third party whom he acquired as a customer for
transactions of the same kind
 Can be entitled to commission on commercial transactions concluded after agency
contract is terminated if:
i. Transaction was made mainly due to his efforts during the period covered by the agency
contract and is entered into within a reasonable period after termination
ii. Order of third party reached principal or commercial agent before the agency contract
terminated
 Termination of the Commercial Agent
- If an agency contract for a fixed period is terminated and continues to be performed by
both parties, the contract automatically gets reinstated and turns into indefinite contract
- An agency contract for an indefinite period may be terminated by both parties by notice
- Immediate termination of the agency contract if there is failure of one party to carry out
their obligations under the contract or where exceptional circumstances arise
 Restraint of trade may be imposed for two years following termination where a commercial
agent is restricted and cannot take employment with a competitor for a period of time. This is
since agent has already built relationships thus competitor would be benefiting from this
relationship. This is limited to the nature of employment you had – example, food industry.
- However, this depends since for example an electrician; one can restrain you on contacting
clients but cannot restrain you from working as an electrician since that is your trade
 Indemnity & Compensation in cases of termination
- If agent brought the principal new customers or has significantly increased the volume of
business which principal continues to derive substantial benefits from after termination of
agency contract
- The payment is equal to the commission lost by the agent on the business transacted with
such customers
- This is not to exceed a figure equivalent to indemnity for one year calculated on the agent’s
average annual remuneration over the past 5 years. If contract does not go back to 5 years,
it will be calculated on the average period in question
- Commercial agent shall be entitled to compensation for damages suffered as a result of
termination due to the following circumstances:
 Deprivation of commission based on proper performance whilst providing principals
with benefits
 Not enabled commercial agent to amortize costs and expenses incurred on the advice
of his principal in the agency contract
 Contract is terminated as a result of death of commercial agent
- This entitlement is lost if not claimed within 1 year of termination of contract
- Indemnity & Compensation shall not be payable to the commercial agent where:
 Principal terminated agency contract because of default attributable to commercial
agent which would justify immediate termination

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  Commercial agent terminated contract unless termination is justified by:
i. Circumstances due to fault of principal
ii. Grounds of age, infirmity or illness of commercial agent which result in him not being
able to continue his activities
 Commercial agent assigns rights and duties to another person with agreement with
principal

3. The Commission Merchant

 Agent always work in the name of principal, but commission merchant transacts business on
behalf of principal but act in his own name
 This means that commission merchant is directly liable to third parties and principal has no
direct action against third party
 If you are suing an agent; the principal is responsible but if you are suing a commission
merchant, the carries the commission responsibility

 Obligations of Commission Merchant

- Carry out principal’s instructions with diligence
- Give all benefits to principal
- Cannot act with a party which the principal has a conflict of interest with
- Must act within authority given to him by the principal
- Inform principal about market in which he is operating
- Must tell the principal regarding all business done on his behalf

 Rights of Commission Merchant

- Principal must show good faith towards the commission merchant
- Right to be indemnified by the principal for obligations incurred by him
- Right to be remunerated – commission is due on completion of contract

 Termination
- Death, interdiction or incapacitation of the commission merchant
- Commission Merchant may resign only where a just cause exists
- Principal may revoke at any time but must consider valid all actions performed by the
commission merchant prior to the revocation
- Duration of contract is for a fixed period – principal is liable for damages if contract is
terminated prior to this time without a just cause

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How an agency relationship is established
 No specific form thus can be by word of mouth or in writing
 It must be terminated in the same manner it was created – if it was created by writing, it has to
be ended by writing
 Where a special form is required to create such relationship, then this must be followed since if
the law is not followed, then you cannot enforce it
 Essential characteristic of an agency is that acts done by the agent in the name and on behalf of
the principal are considered by law to be acts of the principal thus legal relationship exists
solely between principal and third party
- Principal takes all profits and losses whilst the agent gets the commission. The latter has
nothing to lose and no liabilities
 Following consequences arise:
- If agent’s consent is given by error or fraud and violence were involved, the act may be null
and void or annullable in terms of law even if principal wanted the act in the terms it was
concluded.
 One exclusion: if principal is in bad faith at the time of the conclusion of the
transaction, he cannot set up good faith of the agent
- Will of agent has boundaries of the juridical capacity of the principal thus it is immaterial to
examine the juridical capacity of the agent thus can be a minor, a married woman or an
incapacitated person if agent is endowed with the power of discernment, capable of
knowing, judging and willing he acts he performs
 To establish whether transaction is of civil or commercial nature, one has to see the profession
or status of principal not that of the agent
Termination of Contract of Agency
 The ways in which mandate is terminated would also apply in respect of the contract of agency
1. Act of the parties
a. By mutual agreement
b. By act of the principal – may revoke agency whenever he chooses either expressly or impliedly
by appointing a new agent for the same business. If he terminates without good cause,
principal has to compensate the agent as the agent suffers a financial loss from the
termination.
c. By act of the agent – by giving notice to the principal but if it is harmful to the principal, the
agent must compensate him unless agent cannot continue to carry out agency without
suffering himself
2. Operation of the law
a. Death
b. Interdiction
c. Incapacitation
d. Declaration of bankruptcy by either agent or principal

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 e. Termination of powers of principal
f. Expiration of time during which agency was to continue

Duties of an Agent
 Cannot go beyond the mandate that agent has been given
 A mandatory is vested with wide powers in order to carry out the mandate
 An agent is presumed to have the power to do all which he thinks to be necessary for the
carrying out of the mandate– also things that mandator would do personally even if such
powers have not been expressly given in the mandate
 May also be defendant on behalf of the mandator in any lawsuit concerning the matter
included in the mandate but mandatory may not sue or be sued on behalf of the mandator
even if mandator gave mandatory to the mandatory
 If mandatory acted in the name of the mandate, the mandate cannot act against with whom
mandatory has contracted
 Mandatory is directly bound towards person with whom he has contracted as if the matter
were his own
 Mandatory cannot substitute another person for himself if he has not been empowered to do
so by the mandator – mandator may act directly against the person who the mandatory has
substituted
 If there are several mandatories appointed by the same instrument, there is no joint and
several liability if it is not expressly so agreed
- Each mandatory may carry out the mandate independently of consent or opposition of their
opposition unless the mandatory ordered that one shall not act without the other or
expressly specified their duties
 Two duties:
- Positive character established in the sole interest of 3rd parties
i. Agent must give 3rd parties every information that he has the authority to unless it was
made public by means of circulars, advertisements or otherwise
ii. If required by third party, agent must deliver a declaration signed by him when doing
transaction – done to safeguard the 3rd parties’ rights since they can convince them that
agent is acting in good faith.
 Refusal of declaration – there are no sanctions since this would be enough to alert 3rd
parties who can choose to not do business with him
 False declaration – considered as corruption of commercial material and shall be
liable
iii. Third parties have an interest to know the extent of authority that agent has since agent
binds principal only in acts within the scope of his authority
- Negative character established in the interest of the principal

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 i. Not lawful for agent to transact with himself a business of his principal without
authority of principal whether it is on his own behalf or on behalf of someone else,
directly or through a third party.
Duties of the Principal
 Carry out obligations contracted by the agent if within the power that he gave the agent
 Pay commission to the agent usually upon conclusion of transaction
 Payment of agent’s expenses and indemnity for losses – cannot refuse even if matter has not
been successful if there is no negligence by the agent
 Payment of commission on orders done from the agent’s territory but not acquired by him
 Payment of commission on repeat orders during the agency agreement; not after
 Inform agent on acceptance or refusal of orders
 Interest is also due by the mandator to the mandatory on the advances and expenses from the
day of the payment of such sums
 If mandatory is appointed by several persons for common business (a lot of mandators -
principals), mandators are jointly and severally liable towards the mandatory

Potential liability of both principal and agent

 Person who performs act must be an agent duly appointed in terms of the law
o If person who performs act is falsus procurator, act done by him is not binding upon the
principal who had granted no authority nor binding upon the falsus procurator who
acted in the name of the principal
o Third party have the right to claim damages against false agent if third party did not
know that agent was false
o Principal have right to rectify act by the false agent
 Agent is to act in the name of principal
o When signing agreement, agent must indicate name and surname or firm-name of the
principal
o If agent has previously acted in the name of his principal, there is no need for an express
declaration each time
o If agent acts in his own name, the agent is bound to the third party not the principal
 Agent to act within scope of his authority
Principal may relieve himself from all liability towards 3rd parties for any further acts done by the agent
by giving notice of such withdrawal by filing a note in the Commercial Cod in the Court of Magistrates
of Judicial Police which is them published in the Government Gazette. This creates a legal presumption
– it is assumed that 3rd parties have knowledge that agency has been terminated

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4.2 Partnerships
 Made of two or more people
 There are 3 structures most used to trade:

1. Partnership en nom collectif

 Formed by two or more persons which are all general partners i.e. all partners have
unlimited & joint and several liability
 3 fundamental characteristics
o The partnership name
- It is the name under which business is carried on and its obligations are entered
into
- It is the name by which partnership and legal personality were created
- How it is known to the public
- Represents external manifestation of the juridical distinction between legal
personality of partnership and members composing it
o Unlimited liability of partners for the obligations of partnerships
- Each partner is liable for the debts and obligations of the partnership with all his
property, present and future
- The liability of an individual partner is not up to the amount he contributes to
the partnership when it comes to third parties since creditors may enforce their
claims against any of the partners even if this exceeds amount that partner
contributes
- The liability of an individual partner is fixed in the deed of partnership and by
law when it comes to the liability between partners – partner may claim the
other partners the share due by each of them
o Joint and several liability of the partners for the obligations of the partnership
- Assets of the partnership must first be discussed; if these are not sufficient to
cover the debt or obligations, creditor can sue individual partners
- Partners are individually liable and also jointly liable since if obligation is not
fulfilled by one individual partner, it falls on the other partners even if it exceeds
the amount contributed by the partner

2. Partnership en commandite – limited partnership

 Obligations are guaranteed by the unlimited and joint & several liability of the general
partners but also by the liability limited to the amount unpaid on the contribution of the
limited partners and in no case are limited partners bound to restore profits received in
good faith
 If there is only one general partner; there is no joint and several liability but there is the
unlimited liability of the general partner

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  2 fundamental characteristics
o Partnership name
- Court will take into account and determine why a person whose name is in the
partnership name is holding himself out from being a partner
- Partnership name may only include name of general partner, but general
partner can add ‘& Co’ for third parties to be aware of the existence of
partnership
o Co-existence of a general partner and a limited partner
- There should be at all times, one general partner and one limited partner
- If at any point, there remains no general partner or limited partner, partnership
is dissolved unless partner is substituted within 6 months
3. Limited Liability Company

A partnership is validly constituted if:

 It is formed by an instrument in writing
 Certificate of registration is issued by registrar
- Deed of partnership for partnerships en nom collectif and en commandite
- Memorandum of association for a company
Deed of partnership en nom collectif an en commandite must include:
 Name and residence of each partner
 Partnership name
 Registered office in Malta of the partnership
 Objects of partnership
- If these objects are to trade in general or in a particular branch of trade (nature of trade
to be included if such)
- If any objects are omitted or excluded from the deed (may not be used against third
parties)
 Period fixed for the duration of partnership
It may often include number of other clauses which are deemed to be valid and binding on the
partners provided that they are not prohibited by law or contrary to morality or public policy. For a
partnership en commandite, there should also be a declaration of who are the general partners
(unlimited) and limited partners (limited to their share in their partnership) since this gives you the
working capital to see who to sue – if not, it is resolved into a partnership en nom collectif

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Changes in deed of partnership
 Can do changes at any time with consent of all partners
 Any alteration or addition to the deed shall be made in writing and duly signed by the partners
authorized to make that change
 Changes become effective when they are registered within the registrar thus become public
 If partnership was done with a public deed, changes need to be done by a public deed
 Specific provisions with respect to particular changes:
- Changes related to the administration or representation of a partnership – it must
specify name and residence of the persons entrusted with the said administration or
representation
- Changes related to the extension of the period for the duration of the partnership – if
such period is included in the deed, the partners that have administration or
representation of the partnership shall deliver a notice of extension of the period of
duration to the Registrar for registration for it to take effect
- Partner ceases to be a partner or a person becomes a new partner – notice specifying
the name and residence of the new partner must within one month be delivered to the
Registrar by the partner who have administration or representation of the partnership
- Assignment of interest – unless provided in the deed of partnership, shall have the prior
consent in writing of all the other partners
- Partner becomes partner of an existing partnership – partner is liable for all the
obligations of the partnership, even if incurred before the date in which he becomes
partner
- Changes to the name of partnership – Registrar shall enter new name on the register in
place of the former name and issue a certificate of registration altered
 The following shall not become operative until 3 months from the date of publication of the
statement made by the Registrar in the Government Gazette – this is to allow creditors of the
partnership whose debt existed prior to the publication to object by writ of summons in the
court; the Court shall either uphold objection or allow change
- Reduction of contribution of partner
- Dissolution of a partnership prior the lapse of fixed duration
- Reduction of fixed duration
- Any assignment by a partner of all his interest in the partnership

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Authority of partners in relation to partnership activity (specific trading structure)
 Created a juridical relationship between the partnership and members composing it which gives
rise to various rights and duties of the partners against and towards the partnership and the
partnership against the partners
 Principal rights of the partners:
- If deed does not state otherwise, each partner is entitled to take part of the
management of the business of the partnership, inspect the books and records,
supervise and control partnership’s affairs
- A partner may sue partnership to recover sums which he has disbursed on account of
the partnership + interest but also for any obligations he contracted in good faith and
risks inseparable from his management
- Partner is entitled to share profits after satisfying loses; if not stated in the deed of
partnership, share is proportionate to the partner’s contribution to the partnership. If a
partner only contributed his personal services, his share is equal to that of the partner
who has contributed the least.
- Partner has right to attend meetings and vote – every partner has one vote irrespective
of his contribution: unless deed of partnership states otherwise
 Principal duties of the partners:
- Partner owed the partnership what he promised to contribute within time and subject
to terms and conditions determined. If partner defaults, partnership can bring action
against him to perform his obligations and pay interest for further damages
- Partner that contributed his skill has to render an account of all profits made by
exercising such skill unless partners release him from such obligation
- Partner may not make use of partnership property or take money from partnership
funds for his own private advantage without consent of the other partners – if he does,
partnership can bring action for further damages against him
- Each partner is liable towards the partnership for any damage caused by his fault and
may not set off such damage against profits derived from his exercise of skill
- Partner must contribute his share of the losses sustained by the partnership; partner’s
share is determined in the deed of partnership or as determined by law
- Partner may without the consent of his other partners associate with himself a third
party in his interest in the partnership with the same rights of a separate creditor of
such partner
- A partner may not introduce such third party into the partnership even if he is a
Managing Partner; this is going to have a net effect thus all partners must be happy with
the risk one is taking – it should be known and accepted by all partners
- Partner may not in competition with the partnership and without consent of other
partners carry on business on his own account or an account of others or be a partner
with unlimited liability in another partnership – if so, partnership may take action for

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 damages and interest or demand payment of any profit made by him in this violation;
this should take place withing 2 years from date of contravention

Management
 Partnerships have a legal but no physical existence thus to carry on the business, the
administration or representation of such partnership is to be vested to individuals to act on
behalf and under the partnership’s name
 In a partnership en nom collectif – managing partners are the partners vested with the
administration and representation of the partnership
o These powers are usually stipulated in the deed of partnership or any subsequent
agreement – it must be with the anonymous consent of the partners
 Appointment made in the deed of partnership – forms an integral part and is to
be consented by all the partners
 If not included in the deed of partnership – each partner is automatically vested
by operation of law and may not be precluded from exercising his rights unless
he contests
 If in the deed of partnership, it is stated the number of partners to be in charge
of administration and representation without mentioning names, the choice
maybe made my majority vote
o Managing partner appointed by the deed of partnership may not be removed since this
would be an alteration to the deed of partnership thus would require unanimous
consent of all partners including that of the managing partner
 If sufficient cause for such removal exists, given that no partners refuse the
removal of the managing partner, including the managing partner himself, then
this could warrant the dissolution of partnership
o Managing partner appointed by other means; it is considered as an ordinary mandate in
civil code thus the will of the majority takes place
o Every change must be made in writing and takes effect from the date it is delivered to
the Registrar of Companies for registration and publication
o The powers, rights and obligations of managing partners must be conditional from the
deed of partnership or any other agreement entered to by the partner; in default,
relevant provisions in the Civil Code would apply thus these are governed by the
provisions relating to the rights, powers and obligations of the mandatory
 If some partners are precluded or have limitations to administer or represent the
partnership, it has to be brought to notice to the third parties in accordance with
the provisions of the law. If not, it is vested in each partner and each would bond
partnership in favor of third parties
o If there is more than one managing partner, each of them may perform separately all
acts but if it is stipulated that one managing partner cannot do something without the
other, one cannot act without the other even if it is impossible for the other managing

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 partner to take part unless matter is urgent and would result in serious and irreparable
loss to the partnership
Managing partner
Must manage business in their own interest as
well as in the interest of the other partners and
partnership
Personally liable jointly and severally for every
obligation undertaken by them under
partnership name
Participate in their vote in their appointment
May continue to act as managing partner against
the will of other partners
Primi inter pares in their relation to the other
partners
Mandatory
Manage business on their behalf and exclusive
interest of their principal
No liable for the acts done within the scope of
their authority whether in favor or against their
principal
Have no say in the granting of a mandate
Authority may be revoked
Dependent of the principal

 In a partnership en commandite – limited partners cannot be nominated as managing partner

except when acting as a power of attorney for specified acts. If limited partner ignores this
prohibition, he is bound to be unlimitedly and jointly and severally liable with the general
partners and may be expelled from the partnership.
o A non-partner cannot be a managing partner
o A limited partner shall not participate in the appointment and dismissal of managing
partners unless partnership deed says otherwise
o Limited partner has the right to access partnership’s accounting records and other
documentation
Liability of various partners for partnerships debts
 There exists an interrelation between the partners and partnership which is regulated by law
 Commercial partnership (in whichever form) is liable for its own obligations with its own
property (assets), present or future.
 The partners are responsible for their own obligations with their own personal property
 Property and assets of partnership belong to partnership itself and not to the individual
partners
 Fundamental distinction between creditors of partnership and creditors of the partners
 Individual partners are not part of the action against a partnership
 If partnership does not have money or assets are not enough to settle its obligations, individual
partners may be liable but first one must sue the partnership – cannot sue any of the individual
partners, subsidiary nature
 Bankruptcy of an individual partner does not necessarily cause bankruptcy of the partnership
 A partner who does not have part of the management of the partnership cannot dispose
partnership’s property or assets or bind partnership in favor of third parties

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End of partnerships
 Causes of dissolution affecting partnership – dissolution of partnership is the only remedy
 Causes of dissolution affecting one or more individuals – a partner quits being a partner

1. Death of partner causes a dissolution of partnership however there could be a provision in the
deed of partnership for the continuance between the surviving partners or between surviving
partners and heirs of the deceased partner. In this case, surviving partners have to liquidate
deceased partner’s interest in the partnership in favor of his heirs unless surviving partners
unanimously elect to dissolve partnership or continue partnership with heirs given that heirs
accept. If not all heirs accept, the partnership is continued between the heirs that accept and the
surviving partners and the share of the heirs that don’t is liquidated in their favor

2. Expulsion of partner – a partner may be expelled from the partnership by a decision of the
majority of the other partners unless a higher majority is included in the partnership deed
 If he does not make his contribution in accordance to the partnership deed
 If he commits a serios breach of duty as a partner
 If he is interdicted or incapacitated
 If he contravenes the provisions of Article 30 of the Companies Act
 Other cases which has a provision in the partnership deed
A decision taken shall be notifies together with the reasons by judicial act served on the expelled
partner and shall not take effect until the lapse of 14 days from the notification. Expelled partner may
in these 14 days object to the decision and the Court shall have power to stay in the execution of the
said decision pending judgement. Partner has the right to have his interest in the partnership
liquidated using a pro rata share of the profits and losses
If partnership is made up of only 2 partners; expulsion of a partner may only be order by the Court
3. Bankruptcy of partner – he ceases to be a partner
4. Court’s direction – court may terminate partnership within 3 months of the judgement for example
if the partnership does not have an appropriate financing or a publishing of audit

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4.3 Corporations and Legal Personality
 Act of trade – anything done in the scope of making money in the commercial world
 Trader – any person who by profession exercises trade in his own name and included any
commercial partnership
Sole trader
 Trades in his own name and runs his own business
 Can employ other people to help them but the sole trader is responsible and carries all debts
and profits
 There is no distinction between the sole trader and the company
 Once the sole trader dies, one cannot trade in his name no matter what; heirs must start
exercising trades in their names if they want to continue operating the company
 If a trader falls ill, you can still exercise trade in his name
 If something goes wrong; the sole trader is personally responsible but if something goes right,
he enjoys it
 Machinery, property, cars, licenses used in the company must all be in the name of the sole
trader – sole trader has ownership of assets
 Less stringent reporting obligations – only financial instrument required is the Profit & Loss;
how much profit and losses one does
Companies
 A company is a partnership because it is a business venture between two or more people
 It is another vehicle of trade which has its own legal identity since the company trades in its
own name
 The company itself owns its property, property is not owned by shareholders of the company
 Has separate legal personality from the shareholders
 Shareholder’s liability to repay the company’s obligation is limited to his part of the unpaid
contribution
 Banks prefer to trade with companies
 Advantages:
o Most important characteristic of a company and an advantage is the Limited Liability of
all members
 Limitation of liability is a valued privilege since it forms an exception to the
fundamental principle that governs obligations which is a person who bounded
himself personally, must fulfil his obligations with all his property, present and
future
 Only make good for its debts if it has assets to pay for such debts

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  In order to lessen opportunities of abuse and strengthen then credit and
reputation of companies, the law requires practicable disclosure of information
including the public accountability of companies
 No contribution may be required from a member exceeding amount unpaid on
the shares he holds
 No member can be forced to subscribe for more shares than the number he
holds or increase in any way his liability to contribute money
 The biggest advantage is that the liability of all members is limited to their
unpaid part of the capital - most capital is paid up on registration thus their
liability is almost immediately covered
o Usually, shareholders of small companies are not always free from personal liability as in
most cases institutions that grant credit facilities require some form of personal
guarantee from the members of the company
o An advantage is that there is freedom that the members enjoy to freely transfer shares
if the company is limited by shares unless otherwise stated in the documents of the
company – the transferee assumes all rights and obligations of the transferor
o Another advantage is having a company that enables the property of the company to be
kept separate and distinct from the personal property of the members
o Disadvantage is where the company is that of the perpetual succession of a company –
it is the freedom to transfer without disturbing firm; the firm does not die until struck
off i.e. put into liquidation and not trading
o If companies are able to give floating charges, lender can obtain effective security on all
the assets of the company either alone or in conjunction with a fixed charge on a
particular property
o Certain jurisdictions offer favorable tax regimes to companies
o Members try to reduce the company’s taxable income by paying themselves directors’
fees or other salaries thus reducing the taxable income of the firm
 Scope of company was to give serenity to traders to invest more money which was important
to create employment and wealth since only firm is liable, not shareholders who are limited
liable for losses – it created barriers between traders and shareholders
o A shareholder is a pro rate owner of the shares of the firm thus company and
shareholders are separate
o Creditors can only sue firm if it has assets that it owes and if something happens, these
assets are distributed to the shareholders
o If a shareholder sells all his shares, he is no longer a shareholder of the firm
Types of companies
1. Public company
2. Private company
3. Private exempt company
4. Single member company

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1. Public company
 A company which is not private
 May be designated by any name but such name must end with ‘public limited company’ or ‘PLC’
 If a public company is an investment company with fixed share capital, the name of the
company must end with ‘INVCO’
 If a public company is an investment company with variable share capital, the name of the
company must end with ‘SICAV’
 A public company should not in its memorandum and articles contain provisions that restrict
the number of its members or excluding the offer of its shares or debentures to the public
 In the memorandum, there must be a document giving details or estimates of all the costs
payable by the company as a result of the forming of the company or all costs relating to the
transactions leasing to the authorization to commence business – shareholders have the right to
know of the costs incurred in the promotion of the company since part of the shareholder’s
investment is the set-up cost. This is since the risk of abuse in the case of public companies is far
greater than private companies thus this is not required for private companies since promoters
are usually the shareholders or directors of the company thus the initial expenses incurred are
known
 Can sell shares to general public and the stock exchange
 Authorized and Issued share capital of the firm
- must not be less than EUR 46,567 (LM 20,000)
- must be subscribed by at least two shareholders
- not less than 25% of the nominal value of each share to be paid upon subscription
 Must have at least 2 directors; if number of directors is reduced below 2 and remains so for
more than 6 months, the company shall be dissolved by court
 A person may only be appointed as director if the gives consent in writing by signing
memorandum and articles or by delivering to the Registrar for registration the consent in writing
– it not necessary to have consent in writing for private companies
 No company shall make distribution of its assets to its members – must be made from out of
profits available but a public company may also not make any distribution unless:
- Net assets are at least equal to the share capital and its undistributable reserves
- Distribution would reduce the net assets below the share capital and its undistributable
reserves
 If company has serious loss of capital i.e. net assets are half or less of the share capital, directors
would set up a general meeting within not later than 30 days from the date that any director
knew that from has suffered a loss in order to determine what steps should be taken to deal
with the situation and if company should be dissolved. The general meeting should take place
not later than 40 days from date of notice
 May change its status to a private company but will be required to redeem shares held by
dissenting members. Directors of the company have to deliver to the Registrar for registration a
declaration that company complies requirements of a private company

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 2. Private Company
 When one forms a company, one is actually forming a public company unless one complies with
the specific requirements of a private company and if it is stated that the company is a private
company
 May be designated by any name but such name shall end with ‘private limited company’ or
‘LTD’
 If company is an investment company with variable share capital, the name must be followed
by SICAV LTD
 Memorandum or articles of association must:
- Restrict the right to transfer shares
- Limit the number of its members to 50
- Prohibit any invitation to the public to subscribe for any shares or debentures of the firm
 Main function is to make available to persons carrying on a family business the advantages of
corporate trading without certain requirements obligatory for public companies
 A private company is divided into 2 categories:
- Ordinary private company
- Exempt private company – satisfies a number of additional requirements and enjoys a
number of privileges such a balance sheet secrecy
 Authorized and issued share capital
- must be less than EUR 1,165 (LM 500)
- Subscribed by at least 2 persons
- Not less than 20% of nominal value of each share to be paid upon subscription
- In case of private companies registered with the approval of the Central Bank of Malta, the
CB will insist in its approval that minimum share capital must be EUR 23,294 (LM 10,000)
with minimum of 50% of nominal value to be paid on subscription
- Must have at least 1 director

3. Private exempt company

 Once a company has been duly formed as a private company, it may comply with other
requirements to become as an exempt company and consequently entitles to not comply with
certain legal requirements
 Memorandum or articles of association must contain the same as a private company but also
- Limit number of persons holding debenture of the form to not more than 50
- Prohibit body corporates from being a director of the company
- Prohibit the company and each of the directors from being a party to an arrangement
whereby the policy of firm can be determined by persons other than the directors
 An exempt company may hold shares in another private exempt company without the latter
being considered as a private exempt company provided that total number of individuals
person holding shares does not exceed 50
 Privileges:

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 - Not prohibited to make loans to its directors or to a director of its parent company or to
enter into any guarantee or provide any security in connection with a loan made to such
director
- If company qualifies to draw up abridged annual accounts, it may deliver to the Registrar
only its abridged balance sheet together with the notes to the accounts – exempted from
submitting its profit and loss and director’s report
- Its sole director may also act as its secretary

4. Single Member Company

 An exempt private company formed and registered with one member or whose membership is
reduced to one member as a matter of circumstances
- Example: in a partnership, a partner dies and the other partner inherits his shares
 It must satisfy the requirements of a private exempt company and also specify in the objects
clause of its memorandum which is its main trading activity and business of the company must
then consist principally of that activity
 When a decision is taken by a sole member of the company in a general meeting, it should be
recorded in the minutes of the meeting
 The single member must record in writing all agreements between him and the company in a
minute book kept by the company
 If a company becomes a single member company through acquisition of all its shares by one-
person, firm must within 14 days deliver to the Registrar for registration a notice specifying the
fact that it has become a single member company and stating the name and residence of that
single member and confirm compliance with the provisions of the companies’ act; same goes if
a company ceases to be a single member company

Effect of separate personality

 Commercial partnership has a legal personality which is distinct from that of its members and
this legal personality shall continue until the name of the partnership is struck off the register
thus cease to exist
 There is personal responsibility if persons continue to trade after struck off
 All Maltese partnership have a separate legal personality – they all trade in their own name
 A company and partnerships shall come into existence as from the date of registration – once
the certificate is published, all liabilities are born to the firm and not the members, however the
members have personal liability for the things they have done before company was created
 There is a distinction between the dissolution of a company and its striking off – in liquidation,
the company will keep its separate juridical personality and still exists. It will cease to exist once
it is struck off the Register
 Each company will enjoy rights and subject to liabilities which are not the same right or
liabilities of its members

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Salomon vs Salomon and Co Ltd.
 Two forms of creditors
- Secured debenture holder – would be paid in full for the amount due
- Number of other creditors – insufficient funds to pay the outstanding unsecured creditors
 First Court Decision
- Considered Salomon and Co Ltd as merely acting as an agent, trustee or nominee of Mr
Salomon himself who was the true owner of the business
- Court decided that it was obligatory for Mr Salomon to pay for the debts of the company
 House of Lords Decision
- Reversed decision and held that company was validly constituted
- Concluded that once a company us validly registered under the Companies Act, its
subscribers would not be liable for the debts of the company thus Mr Salomon was not
responsible for paying any debts of the company
- It held that Salomon & Co Ltd is different from Salomon as an individual
- A company corporate form could also be used for small private partnerships and small
traders
- Corporate form may be used to limit ones’ liability to the amount he invested in the
company but also person investing could further reduce risk of loss of investment by
subscribing to debentures rather than to shares
Instances where separate personality will be ignored – this is known as lifting of the corporate veil i.e.
taking away the limited liability
Two situations that warrants lifting of veil:
- To allow law to reach beyond the separate personality of the firm to the shareholders or
directors to impose personal liability
- Ignore the separate juridical personality of each single company to view a group of
companies as a single entity

 Two classes of inroads (situations of lifting corporate veil):

- Statutory inroads – introduced by statue i.e. judge or court
 A parent company if a group of companies prepares consolidated accounts – financial
statements for each of those subsidiaries and parent company as one economic
activity
 Reduction of members of a company is below 2 – number of shareholders can be
reduced to below two when one shareholder buys out the other’s part thus remain
the sole shareholder of the company or when shares are cancelled and forfeited by
the other shareholder if he fails to pay up the value of his shares
o If company ends up with only one member, shareholder has 6 months to
transfer at least one of his shares to third party – after 6 months, court shall
dissolve the one-member company

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 o If company continues carrying on business without having at least 2 members
beyond the period of 6 months, the sole member is held unlimitedly and jointly
and severally liable for all obligations of the company carried in these 6 months
until the dissolution of the company
o This does not apply for single-member companies and private exempt
companies
 If there is fraudulent trading - this can be required by liquidator or third-party
creditors that are scared of not getting paid whilst firm is winding up
o This imposes personal unlimited liability for all debts and other liabilities of the
company on any person who participated in the fraud – this can be imposed on
directors (responsible for not doing what should have been done thus it is a
lack of standard of care), shareholders and also any person involved in the
fraudulent trading
o Court may impose a higher liability than the amount which has been involved
in the fraud
o Creditors who have not been directly defrauded will also be able to benefit
o Can only come into effect if the company is winding up – it is when you are
going to know if there is fraudulent trading
o Liability to fraud since there is a very heavy burden of proof which has to be
satisfied – if one is seeking compensation for the mismanagement of the
company, the very high standard of proof is not required which resulted in
provisions for wrongful trading
o These fraudulent trading provision impose not just a civil liability but also a
criminal liability subject to fine and imprisonment
 If there is wrongful trading – can only be implied if company is in the course of
winding up
o Court will order the director to make contribution to the assets of the company
for eventual distribution among the creditors themselves
o Can only apply to impose liability either on directors or shadow directors
o For court to be able to make a contribution order, liquidator must:
- Person involved was either a director or shadow director before winding
up
- That director or shadow director must have known or ought to have
concluded that there is no reasonable prospect of the company avoiding
going into insolvent liquidation
o Director or shadow director must show to the court that he took every
reasonable step with a view to minimizing the potential loss to the creditors of
the company as they ought to have taken
o Examples of wrongful trading which apply if company becomes insolvent:
- Company is approaching an insolvent liquidation and directors do nothing
to collect whatever amounts are due to the company

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 - Directors fail to preserve assets of the company
- Liquidation is approaching and directors pay excessive remuneration to
themselves or top management personnel of the company
- When approaching liquidation and company enters into transactions at an
undervalue unless there are good reasons
Objective standard – determine whether directors reached the standard of care required by him;
compares knowledge, skill and experience of director to those which may be reasonably expected for
person carrying same functions
Subjective standard – actual knowledge of director, his skill and the experience of the individual
director; compares actual knowledge, skill and experience which the director has
If these two objectives are combined, the end result will be that for legal purposes, the higher of the
two combined standards that will apply when coming to judge the directors’ actions. One should apply
the higher of the 2 standards.
- Judicial inroads – introduce by jurisprudence (law)
 In Salomon vs Salomon, court established very firmly the principle that once a firm is
dully incorporate and registered then it has a separate legal personality which is
distinct from that of its member and that liabilities of the company are not the
liabilities of its members
 Agency
o Salomon case held that a company was not automatically the agent of its
shareholders, but it did not exclude the possibility of there being an agent
o Occasionally courts are willing to understand an agency whether natural or
legal thus imposing personal responsibility for its members for the company’s
debt but a company is not by its nature act as agent for its shareholders
o Agency principles only apply in very exceptional circumstances
o Elements to be satisfied for there to be an agency relationship and impose
relationship in court is control of the company by the defendant and use of
such control to commit fraud or violate or other legal duty
- Capitalist control – control by ownership of company’s share capital
- Functional control – those actually running the company and provides
ground to infer an agency
o 98% controlling interest in a company by itself does not create or manifest an
agency relationship – in the absence of an agency contract, two distinct legal
entities cannot be said to be an agent to one another
o If it can be proven that subsidiary is acting as an agent for its parent company
then the agency could be held to bind its principle and parent company could
be responsible for liability of obligation of subsidiary who is acting as an agent
 Fraud
o Pierce corporate veil to combat fraud – fraud includes equitable fraud

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 o Contracts must be performed in good faith and contracts are binding on the
matters specified therein and also of any consequence which by equity,
custom or law are incidental to the obligation according to its nature
o In such cases, the court disregards the separate identity of the company and
impose personal liability on the controlling shareholder for his own obligations
 Limited judicial recognition of the group as an economic unit
o May only pierce corporate veil in the following:
- Court is construing a statute, contract or other document
- Court is satisfied that company is a ‘mere façade’ concealing the true facts
– fictitious structure designed simply to allow members i.e. the parent
company to carry on business in a different jurisdiction without incurring
liability for its actions over there
- Can be established that the company is an authorized agent of its
controller or its members
o Cannot lift veil simply because it considers that justice requires it or have
regard to the economic reality and regards a group of companies as a single
entity
 Group Enterprises
o Court is sometimes willing to look upon a group of companies as one economic
unit
o This is done by accounting and disclosure provisions of the company’s
legislation
o Could only pierce veil if court could see that there was a mere sham or façade
 Trust – to look at the characteristics of the shareholders
 Enemy – to see who the controlling shareholders of companies are
 Tax – in case of tax evasion or over-liberal schemes of tax avoidance without any
necessary legislative authority – court dismiss the company as a mere sham
 Companies legislation
o Contains a number of provisions disregarding the separate corporate entity
o If in the winding up of a company it appears that a company’s business has
been carried on with the intent to defraud the creditors or for any fraudulent
purpose, the court may declare persons who were knowingly carrying on
business as personally liable without limitation of liability
o In case of wrongful trading. Directors shall be made liable to make payments
towards the company’s assets
o The Salomon principle will be applied until some reason to the contrary
appears
o Sole remaining member of the company when these fall below the minimum
prescribed by law shall be held unlimitedly and jointly and severally liable with
the company for all the obligations contracted by the company

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4.4 Company Formation

Company promoter – person who takes it upon himself to set up firm. The person is limiting the liability
by setting up firm. This has to be done voluntary; person does not get paid unless there is a valid contract
to pay between him and the company.
 Transfer of Promoter is at the mercy of the directors of the company – if agreement is reached,
promoter may receive remuneration in a variety of ways.
o Shares in the company of substantial amount or having particular rights
o Pay a specified sun to promoters for their services in promoting the company
 Duties of promoter go further than the registration of a company since after registration
promoter is held to owe fiduciary duties to the company.
 A person is deemed to be a promoter from the moment he takes part in forming or getting
going a firm.
 Once the relationship has arisen, the promoter is considered to be in a fiduciary relationship
with the firm and once company has come into existence, it is able to take certain measures to
secure its position vis-a-vis the promoter.
 After registration, Promoter most often will not play any part in the ongoing operation of the
company
 3 basics fiduciary duties which a promoter owes to the company:
o Not to make any secret profit at the expense of the company whether directly or
indirectly – a profit is not considered a secret if there is full disclosure made whether to
an independent board or to all the existing or proposed shareholders. Disclosure is the
only way a promoter may free himself from liability.
o Must account to the company any contracts for the acquisition of property which he
intends to sell to the company since this belongs in equity of the company – no
presumption that he acquired such property as trustee, but he is considered as a
promoter who can sell it at a profit since acquired before promotion
o Must not exercise undue influence or fraud and must not hide his interest through
nominees – promoter is held to owe certain duties and company is entitled to enforce
compliance of such duties. The company’s remedies are rescission (returning
consideration), recovery of secret profit and damages for breach of fiduciary duties
 If property is acquired before the promotion commenced and failed to disclose,
company cannot affirm the contract and claim damages or recover secret profits
since property does not belong to the company, however, an action against
promoter for misrepresentation would be warranted
 Non-case assets to a company – company shall not acquire within 2 years of its authorization to
commence business any asset belonging to a person who subscribed the company’s
memorandum or who is a member of the company for a consideration which is equivalent to at
least 1/10 of the issued share capital of the company unless certain conditions are satisfied

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Procedure for registering companies
 Firm must be set up for a lawful person and can be either private (PLC) or public (LTD)
 Name must not be the same as the name of another commercial partnership or nearly similar –
it has to be correct, unique, not offensive or undesirable or a name which has been reserved for
registration for another commercial partnership. This is in order to identify the company since
there is no characteristic attribute thus it is important to not get confused as one would be
doing business with the wrong company. The registrar shall notify any refusal without delay.
o Any person who knowingly makes use of a name falsely implying the existence of a
partnership shall be liable to a penalty
o If companies form in the same group, exception is made for a company to be registered
with a name similar to its name provided that there is acceptance of the firm that
already exist
o Name cannot have fiduciary, nominee or trustee or any abbreviation unless firm is
authorized to be a trustee or unless permitted by the relevant competent authority
 General rule – two persons must get together and give contribution to form a company which is
the capital of the company equivalent to the limitation of the liability of the shareholders
 Object’s clause – reason why company is set up. Objects must be drafted correctly since it will
determine where firms can trade. One needs to change clause/ memorandum if company
wants to trade somewhere not included or else public liability is no longer enforceable
 Ratio of shares must be decided – company is formed by means of capital divided into shares
which are held by its members; number of shares reflect the ownership of the company
 Shareholders will agree what will be in the Memorandum and Articles thus separate
agreements independent from the Companies Act may be reached but very difficult to amend
once registered and have to be done through an extra-ordinary resolution
 Articles of association must be signed by the subscribers and prescribing regulations may be
registered with the memorandum
 If articles are not registered but do not exclude or modify regulations in the First Schedule, then
these are considered with the duly registered articles
 After finalizing the Memorandum and Articles, this is signed by the shareholders and the capital
is advanced and handed to the lawyer which is to be deposited in the bank as share capital of
the firm.
o Public company – should not have less than EUR 46,587.47 (LM 20,000) – 25% has to be
paid up
o Private company – should not have less than EUR 1,164.69 (LM 500) – 20% has to be
paid up
 Bank hands over a bank slip as evidence of payment of capital to the lawyer who goes to the
MFSA and hands to the registrar a draft of the articles of association and memorandum signed
by the parties, the bank slip, the registration fee and other documents Minimum share capital:
 If any of the shareholders are not physical persons, one has to also file the relevant BO form
with the Registrar identifying each beneficial owner of the company and clearly indicating the

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 nature and extent of the beneficial interest of each. This has to be signed by at least by at least
two of the company’s proposed directors unless company has one director
o A beneficial owner refers to any natural person having ownership or control of the firm
through:
 Indirect or direct ownership of 25% or more of shares
 More than 25% of the voting rights of the Company
 Ownership of interests of more than 25% of the company
o If no individuals satisfy these criteria, law sets out other criteria – registrar of companies
will not proceed unless satisfied in terms of beneficial owner regulations
 Memorandum and articles shall be delivered for registration to the Registrar who shall register
company if all requirements are satisfied – the Registrar shall certify that company is registered,
and company come to existence and is authorized to commence business as from the date of
registration which is indicated in the certificate
 The certificate of registration is conclusive evidence that requirements in respect of
registration have been compiled with and company is duly registered under this act
 If certificate of registration is not issued, person is personally and jointly and severally liable for
their dealings with third parties unless transaction entered into is with effect from the date on
which the firm shall come into existence
 Following documents must be filed in case of registration of a public company:
o Written consent of directors that they are willing to assume the post since directors are
more detached from the shareholders thus there is need to ensure that all directors are
aware of their additional responsibilities of taking post
 Private company – consent of directors is not necessary, but names inserted in
the memorandum of association is sufficient
o Indicating the total amount or estimate of all costs payable by the company due to its
formation up to the time it is authorized to commence business in order for the
shareholders to know what will be left of their investment
o Description of any special advantage granted prior authorization to anyone who has
taken part of its formation
 If company is authorized to commence business at a later date than the
registration date, this document is to be delivered within 14 days from the date
company is authorized to commence business
Documents that must be filed during existence of a company
1. Memorandum and Articles of Association
2. Changes in the board of directors within 14 days from such change
3. Transfer of shares
4. Annual financial statements – audited accounts and must express a true and fair view of the
company’s profit and loss account and a Balance Sheet position
5. Annual returns
6. Notice of dissolution

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Memorandum of Association
 Is the instrument in writing by which a company is formed
 It must be entered into for a company to be validly constituted
 Must contain essential ingredients of every company it forms the company
 Both memorandum and articles are public documents which are open for public inspection at
prescribed fee
 It informs third parties dealing with the company what are its objects, its sphere of activity and
capital thus demonstrates the external aspects of the constitution of the company
 Contents of memorandum – all required ad validitatem
- Whether public or private company
- Name, residence, ID numbers of each subscriber
- Name of company
- Registered office in Malta of the company – since all correspondence will be sent there
such as legal correspondence; this will guarantee that company will be informed
- Object of the company
- Authorized share capital and its division into shares of a fixed amount, number of shares
taken up by each subscriber and amount paid for each share
- Number of directors, name and residence of the first directors. If director is a body
corporate, manner in which representation is to be exercised and name of person
vested with representation must be included
- Name and surname of the first company secretary
- Period fixed for the duration of the company (not required)
Shareholder’s Agreement
 Subscribers sometimes enter into this separate agreement
 It is an agreement which will further regulate the internal relationship between the various
subscribers
 It will include provisions that subscribers did not want to include in Articles of Association and
make public
Articles of Association prescribing regulations for the company i.e. how it is going to function
 No legal requirement to draw up and file
 Regulations for the management of the affairs of the company and conduct of business –
internal relationship of subscribers
 Registered with the memorandum and must also be signed by the shareholders to the
memorandum
 First schedule is a model form of articles – if no articles are registered, the first schedule bind
the company and its members
- Part 1 – regulations for the management of a public company
- Part 2 – regulations for the management of a private company

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  Contents:
- Share capital and variation of rights
- Calls, transfer, transmission, forfeiture or surrender of shares
- Conversion of shares into stock
- General meetings
- Notice and proceedings of general meetings
- Votes of members
- Powers, duties, rotation and proceedings of directors
- Delegation of director’s powers
- Company secretary – can be changed by BOD
- Dividends and reserve
- Accounts
- Capitalization of profits
- Notices
- Indemnity
 Right of first refusal – in a private company, if there is a fresh issue of shares, these have to be
offered first to the existing members and if these members do not acquire those shares, then
the shares are offered to third parties
 Directors can appoint alternate directors at board meetings if they cannot attend such meeting

How memorandum and articles of association can be changed

 A company may by extraordinary resolution alter or ass to its memorandum or articles
 This extraordinary resolution has to be taken at a general meeting of which notice specifying
intention of such addition or change and the principal purpose is to be given
 It must also be passed by members having the right to vote at the meeting and hold not less
than 75% in nominal value of shares entitled at the meeting or not less than 50% of the nominal
value of all shares
 Some issues do not need an extraordinary resolution but simply a resolution of the directors – it
is when alteration consists in a change of the registered office in Malta. In such case, directors or
company secretary must register any changes to the Registrar in the registered office, specifying
date of change and new registered office within 14 days.
- Same apply to changes made by extraordinary resolution but printed copy of resolution
and revised and updated copy of memorandum and articles incorporating all the changes
must also be included
 If authorized by its memorandum or articles, where there is an alteration in the conversion of
any shares into stock or stock into shares, it may be done by ordinary resolution
 If there is a discrepancy between text of any amended memorandum and articles and text of
original memorandum and articles, original text with resolutions registered shall prevail

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  Alteration or addition shall not take effect until registered – the responsibility lies within the
directors that these are correct, complete and in full compliance with the Companies Act and
any other applicable law – a director who is in default is liable for a penalty for every day during
which default continues

Legal representative – person who lay down firm legally to what is required; legally authorized to
enter into obligations in the name of the firm
Juridical representative – represents firm in court proceedings; sometimes two people must represent
firm

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4.5 Important Changes to the Companies Act
Transportation of the EU single accounting directive into Maltese Law which came into effect on
January 1, 2016
1. Removal of the financial holding company exemption
2. Widening of group size exemption threshold
3. Option for small companies to prepare abridged accounts has been removed
4. Removal of form U
5. Clarification of undistributable reserves
6. Time period for submission of accounts of oversea companies within 12 months from the end
of the respective accounting period
7. Accounts of oversea companies must be in accordance to the Companies Act and general
accepted accounting principles and practice
Article 179 – new article in the Auditors Report which deals with audit reporting and what should be
included in the audit report and audit reporting in the case of public interest companies
Legal notice 374 – register of beneficial owners; aims at implementing the relevant provisions on
beneficial ownership information including the register of beneficial owners and on the prevention of
the use of the financial system for the purposes of money laundering or terrorist financing
 Beneficial owner – natural person who own or control the body corporate through direct or
indirect ownership of 25%+1 share or more or more than 25% of the voting rights or ownership
interest in that company or who’s on behalf transaction is conducted
o This is direct ownership if held by natural person
o This is indirect ownership if held by body corporates
 Subject person – any legal or natural person carrying out either relevant financial business or
relevant activity
 This does not apply to companies listed on a regulated market that is subject to disclosure
requirements consistent with the law of the community or international standards to ensure
adequate transparency of ownership information. Does not apply also to all registered
shareholders which are natural persons who are disclosed in the public records at the register of
commercial partnerships
 New obligation for companies to obtain and hold at all times adequate, accurate and up to date
information in respect of each beneficial owner which shall at least include:
o Name and surname
o Date of birth
o Nationality
o Country of residence
o Official ID document number indicating type of document and country of issue
o Nature and extent of the beneficial interest held and any changes

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 o Effective date on which natural person became or ceased to be a beneficial owner of the
company or increased or reduced his beneficial interest
 Company shall obtain information from shareholder or from any natural person whom it has
reasonable cause to believe to be a beneficial owner who must provide said information without
delay
 Company is to enter and hold such information received from beneficial owners at the registered
office of the company
 Company shall not enter the name of a new shareholder or any changes to existing shareholders in
the register of members unless such information is acquired from beneficial owner and carried out
the obligatory customer due diligence on said shareholders
 Any changes in beneficial owners need to be recorded and delivered to the registrar of companies
within 14 days after the date on which the change is recorded within the company; these need to
be signed by at least one director or the company secretary
 The registrar will not register any notice of transfer or transmission unless notice on the beneficial
ownership is also filed
 New companies – beneficial owners signed by 2 of the proposed directors unless the company has
only 1 proposed director together with memorandum and articles of association
 Annual declaration of beneficial owners signed by 1 director or company secretary is to be filed
with the annual returns within 42 days of the anniversary date
 Company and every office, shareholder or beneficial owner who is in default shall be jointly and
severally liable to an administrative penalty of EUR 1000 and daily penalty of EUR 10 for every day
in which default continues; not liable if person exercised all due diligence from his part
 This information on beneficial owners shall be held in accordance with data protection
requirements in a Register of Beneficial Owners and accessible to:
o National competent authorities – for combating money laundering and terrorist
financing
o Subject persons – to carry out customer due diligence in accordance with regulations
o Any person or organization upon a written request that can demonstrate and justify a
legitimate interest in accordance with data protection requirements
 A legitimate interest – if person demonstrate that interest relates and
contributes to the prevention, detection and combating of money laundering or
financing terrorism and shall be justified on the basis of previous activities and
proven track records by means of relevant documentary evidence.
 Access will not be given if such access will expose beneficial owner to the risk of
fraud, kidnapping, blackmail, violence or intimidation or where beneficial owner
is a minor or incapable
 Any person who provides information on beneficial owners to the Registrar that is misleading, false
or deceptive shall be guilty of an offence and is liable to affine of not more than EUR 5000 or
imprisonment for a term not exceeding 6 months or both

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5 – Capital Maintenance and the Financing of Companies

5.1 Share Capital

Capital is the money which is invested into the firm.
 Loan capital – money that firm can use and is legally recognized. This is the money that has to be
repaid back through banks or shares even if firm is not doing well
o It is made up of financing made from banks, loans
o Long term methods of financing of a company which includes bonds and debentures
 Equity capital – true capital of the firm and it will not be repaid back thus shareholder will lose
investment if something goes wrong. It is the money collected for shares bought by shareholders
o Maximum number of authorized shares a firm might have is included in the
Shareholders Clause
Share – represent the interest a shareholder will have in the firm thus it is the pro-rata holding to the
firm and through this shareholder is a proportionate owner of company depending on the amount of
shares shareholder owns. A shareholder does not own company’s assets which belong to the company
as a separate and legal entity. Authority to issue shares is usually vested in the Board of Directors.
Nominal value of shares does not go up or down depending on the strength of the company; it is the
trading value that fluctuates depending on the value of the firm. One can measure the strength of a
company by comparing nominal value and trading value of a share. Shares of no value do not exist
since it will always retain their nominal value even if there is no trading value
Share Capital Clause – share capital is required for every company and if company does not have a
share capital clause; the firm will not be registered. Amount of capital of a company concerns solely
the promoter who will take into consideration the sum needed to start the new business and provide
adequate capital thus shares must be of a fixed amount; not possible to issue no par value shares
except for SICAVs. In this case the number of shares will represent a proportionate part of the value of
the company – it will have a value that will vary depending on the financial strength of the company.
This also applies to the ordinary shares with contrast that since these have fixed nominal value, there
will be contrast between the nominal value and real value.
This clause must clearly state:
 Amount of share capital the company propose to be registered (Authorised capital) – sets limit
of share the company may issue – this can be altered through an alteration in the
memorandum
 Division of shares of a fixed amount
 Number of shares taken by each subscriber (Issued capital) -
 Amount of paid up in respect of each share

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Types of capital:
1. Nominal/Authorised capital – total amount of capital which the company is authorized to issue by
the memorandum. It represents the authority to create new capital up to its limit by the issue of
shares.
 If authorized share capital is equal to the minimum (LM 20,000 or LM 500) prescribed by law, it
shall be fully subscribed to in the memorandum
 If authorized share capital exceeds such minimum (LM 20,000 or LM 500), the minimum shall at
least be subscribed in the memorandum
2. Issued capital – part of nominal capital actually taken up by the shareholders, further issues of
capital are made as required, and company does not need to issue all its nominal capital at once. It
is where the real commitment of the shareholders lies
 This does not represent the true value of the company itself
3. Paid-up capital – amount of issued capital which have been paid up by shareholders
4. Uncalled or unpaid capital – part of issued capital which has not been paid by shareholders and
may be called up at any time by the company
This capital must be distinct from the capital assets of the company i.e. the actual assets.
 Fixed – things acquired and intended to be retained and employed with a view of profit
 Circulating – things acquired or manufactured with a view to being disposed of at profit
A share warrant is a document issued by a company stating that the bearer of the warrant is entitled
to the shares specified therein. It shall not be taken into account for the purposes of determining the
number of persons subscribing to the authorized share capital
Classes of shares
 Capital of a company may often be divided into different classes of shares which may have
different descriptions and rights carried by each class – this is not necessary to mention in the
memorandum
 Shares give certain rights and impose certain duties on the shareholder thus shareholders
participate in the benefits of membership equally
o The memorandum or articles may authorize the company to divide its shares into different
classes which have the same or different rights.
o If company issues its shares with different rights, share capital is divided into different
classes of shares with different rights attached to them
o Scope of having different types of shares is to give people different rights
 There may be sub classes within class of shares and each sub-class is to be considered for all intents
and purposes as constituting a separate class of shares
 In order to look at the various rights attached with different classes, one must refer to the
memorandum or articles or to the term of issue.

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Different classes of shares:
1. Ordinary shares of a company shall not be redeemable (converted into cash) and every company
shall at all times have these.
 It is the backbone of the firm and these carry the risk and also financial reward of the firm
 These are most important for capital since this capital is injected in firm and firm does not have
to pay back; it is a real commitment since shareholder will only get money back if he sells his
shares when firm is doing well
 Never carry forward dividend – dividend is lost if not given to shareholders
 After dealing with distributable profits, the whole profit is distributable as dividends; if
ordinary shareholders are the only class of shares carrying votes, they can have the whole
profits as dividends or can have then capitalized and distributed as bonus shares or debentures
 In winding up, ordinary shares are entitled to the entire surplus of assets remaining after
paying liabilities and after return of capital of all classes of shares unless preference shares are
given the right to participate in those surplus assets
 Rights include – receive notice of meetings, attend and speak at meetings, receive dividends,
participate in the surplus of assets
 Main liability – have to pay up any unpaid share capital

2. Preference shares are treated with preference and enjoy a dividend at a fixed rate before ordinary
dividend are given to shareholders
 In some cases, preference is also made to capital in winding up
 Rights are usually contained in the memorandum – no further rights can be implied
 These are accumulated as regards to the dividend
 Not entitled for their preferential treatment if company has distributable profits as opposed to
debenture holders
 If there are no distributable profits, preference shareholders will not get anything unless he
has a cumulative right
- Cumulative – when firm passes through a year with no profit, and dividend is not
declared or is insufficient to pay at a fixed rate, shareholder does not lose their %
since when firm starts to make profits again, the shareholder will get also the % share
of the year where it was not paid thus dividend is postponed not lost.
- Non-cumulative – if dividend is not declared and paid, shareholders lose their
dividends for the year since it is not made up for it in the next years
 On winding up, the preferential dividend due for previous years is not due unless such
dividends has been declared or if it stated in the memorandum or articles

3. Participating preference shares – receive fixed rate of dividend but also participate in the dividend
of ordinary shares thus receive two dividends. Scope behind this is to attract people to take shares

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4. Redeemable preference shares – firm is going to pay back shares after a period of time. This is
done since firm won’t need that capital anymore, but the firm needed this capital when these
shares were issued
 These must be redeemed all at once and the payment to shareholders will either come from a
fresh call of shares or from profits
 Company can set up a fund for redeemable shares but can only be used to pay back such
shares
 For a redeemable preference share to be issued nowadays it must follow the conditions below
regards to the redemption in the memorandum or articles:
- Dates of redemption must be satisfied or fixed by directors before shares are issued if
the memorandum or articles provide
- Circumstances in which shares are to be or not be redeem have to be specified
- Amount payable on redemption must be specified
- Any terms and conditions of redemption
- No such shares shall be redeemed unless they are fully paid up and term of
redemption shall require full payment on redemption
- Premium is out of profits or out of company’s share premium
 Capital redemption reserve – if shares are redeemed out of the proceeds of a fresh issue thus
out of profits which would otherwise have been available for distribution as dividends, these
should be transferred to this reserve which is a sum equal to the nominal amount of shares
redeemed
- No money than is needed should be taken from the profits which prevents the
balance sheet from showing a paper profit which might be distributed by way of
dividend when in fact such distributable profits would have diminished.
- This may be applied by the company in paying up unissued shares of the firm to be
issued to members of the company as fully paid bonus shares
- Preference shares redeemed shall be treated as cancelled on redemption and amount
of the company’s issued share capital shall be diminished by the nominal value of
those shares accordingly provided that this does not reduce the amount of company’s
authorized share capital
 Company can issue replacement shares to replace preference shares that are about to be
redeemed, in order to not diminish the number of issued shares, prior to redemption without
any increase in the authorized capital figure

5. Deferred/Founders’ shares – taken by promoters and given as fully paid in consideration of

promotion services rendered by them

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Reduction in share capital
 Shall not take effect until 3 months from the publication of the statement for the reduction by
the Registrar unless this reduction is done in order to offset losses or include sums of money in
a reserve (amount must not be more than 10% of reduced issued share capital) which effect is
immediate
 This time gives creditors whose debt existed prior to publication of statement time to file their
objections by sworn application
 Court shall either uphold the objection or allow the reduction on sufficient security being given
 It shall be void if it reduces capital to less than the minimum share capital allowed by law
 This includes total or partial waiving of unpaid part of the issued shares
 Each class of shareholders whose rights are affected by the reduction shall have a vote since
amendments will only affect the members of that particular class thus only members can vote
for amendments in the share class
 Amounts derived from the reduction cannot be used for making payments or distributions of
shareholders
Increase in share capital
 Must be authorized by an ordinary resolution of the company unless memorandum or articles
require a higher percentage than that
 Memorandum or articles of a company may permit the Board of Directors by an ordinary
resolution to issue shares up to a maximum amount and for a maximum period of 5 years,
renewable for further periods of 5 years each
- If not included in the memorandum or articles, Board of Directors are given same
authority through an extraordinary resolution
 Copy ordinary or extraordinary resolution shall be delivered to the Registrar for registration
within 14 days after such resolution – liable for penalty for every day of default
 Same rules shall apply to issue of all securities which are convertible into shares, or which carry
the right to subscribe for shares
 Share capital will increase pro-rata relating to the amount subscribed if not all shares are taken
up I.e increased by the amount of subscriptions received
Consideration for the acquisition of shares other than in cash
 May only consist of assets capable of economic assessment and future personal services
 Undertakings to perform work or supply services may not be given by way of consideration
 If on original subscription there is a consideration other than cash, it shall be transferred to the
company within five years from the date the company is authorized to commence business
 A report for any non-cash consideration must be valued by an independent expert and such
valuation must be given to the registrar before the company is registered or before shares are
issued

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 - This report shall include a description of each asset being considered as consideration
and methods of valuation which has been used and whether values arrived at
correspond to the number and nominal value or to the premium on shares to be
issued for them
 Registrar shall refuse to register company or the return of allotments of the shares so issued in
failure of the above
 Amount standing to the credit of any of a company’s reserve accounts shall not be considered
as consideration other than in cash
Offering on a pre-emptive basis
 When a public company proposes shares to be allotted for cash, the shares shall be offered to
its existing shareholders first in proportion to the share capital held by them
 No offer on pre-emptive basis shall be made to the company itself even though company is
empowered to hold its own shares
 A copy of offer of shares on this basis indicating period within which right is to be exercised
shall be delivered to the Registrar for registration
- If company has not issued share warrants, such registration shall not be required as
long as shareholders are informed in writing
 This right shall be exercised within a period of not less than 14 days from date of publication of
the offer in the Gazette or Registrar’s website or date of dispatch of letters to shareholders
 This right shall not be restricted or withdrawn by the memorandum or articles but may be
superseded by an extraordinary resolution of the general meeting
- Board of directors is required to present a written report indicating reasons for
restriction or withdrawal of such rights and justifying proposed issue price
- This shall be delivered by directors or by the company secretary to the registrar for
registration
Allotment of shares
 If shares are issued by a public company, these must always be purchased in cash – cannot be
for a non-cash consideration.
 There cannot be unpaid shares in a public firm since you have to pay before being given
allotment thus firm has to be paid cash
 In a public company, shares require a prospectus to encourage to invest in the company since
this shows the strengths to see if you want to invest in such company
- When this is done, application for shares may not be withdrawn until after the 3rd
working day from the opening of subscription lists unless some person who
authorized issue of shares excluded his responsibility. Moreover, no allotment shall be
made of any shares and no proceedings shall take place until the 3rd working day
 No allotments if not in cash and mount stated in prospectus should be the minimum amount
payable

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  No allotment can be made unless capital has been subscribed in full i.e. all shares subscribed to
or if offer states that allotment will still take place is capital is not subscribed in full
 If any conditions are not satisfied, all money must be returned to applicants without interest
within 40 days of the first issue of the prospectus
- If not returned within 48 days, directors are jointly and severally liable to repay it with
annual interest at a rate of 2% points over the central bank of Malta’s minimum
discount rate
- Director is not liable if he proves that such default in repayment was not due to any
misconduct or negligence from his part
 All money received from applicants remain property of the applicants until allotment and shall
not be used to pay any debts of the company.
 This money shall be kept in a separate bank account as long as the company may become
liable to repay it – if not, every person in default is liable to a penalty
 Two remedies for the applicant if allotment made does not satisfy the provisions:
- Against company – allotment of such shares is voidable within one month after
allotment even if company is being dissolved or wound up
- Against board of directors – can be sued for any loss, damages or costs one may have
incurred if these permitted or authorized the contravention. These must be brought
within 2 years after allotment
 Application of shares may be made either verbally or in writing; this amounts to an offer and
subject to certain restrictions may be revoked at any time before acceptance
 Allotment letter – person was allocated shares and firm accepter their offer thus there is a
juridical relationship now
 Allotment – one is awarded a number of shares that one wanted to purchase; this power is
exercised by the directors
- Once allotment has been made, a return of the allotment is to be delivered to the
Registrar within one month of the date of allotment
Alternation of class rights
 Shares can be classified in classes A,B,C – they can have different rights or same rights
 These classes must arise from the memorandum – in the memorandum, there can be the right
to amend memorandum to include other classes
 Only shareholders in that particular class can vote for an alteration in that class
 Change of any shares from one class into another or variation of rights attached to any class
may be made:
- with the consent in writing of the holders of ¾ of the issued shares of that class
- with the consent in writing of the holders of ¾ of the issued shares of any other class
affected
- by an extraordinary resolution passed at a separate general meeting of the holders of
the issued shares of that class and of any other class affected

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  Holders of not less than 15% either of the issued shares of that class or of any other class
affected do not vote in favor of the resolution for the change or variation may within 21 days
consent or demand that change or variation to not have effect by writ of summons
 Registrar of courts shall without delay cause a copy of any sworn application filed and of any
judgement include a demand to that effect
 Directors and company secretary are duty bound to deliver any consent or resolution given or
taken to the Registrar for registration a printed copy of any resolution within 14 days

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5.2 Loan Capital
 Money firm is borrowing which the articles must permit – must be in the object’s clause
 Company has power to borrow money for the purposes of its business; such money is usually
exercised by the directors but sometimes limits are placed
 Where no express power is given to the directors, this power should be authorized by the company
in general meetings
 Borrowing is sometimes affected by the issue of debentures
o Form of loan capital given to a firm in the form of stock, bonds, shares which may be
redeemable
o A document issued by a company by which the company acknowledges its indebtedness
in a specified sum and provides for repayment with interest upon endorsement of all
the conditions of issues
o Taken in return to the loan you are giving them
o Do not have a fixed rate of interest
o These may be:
 Unsecured or secured
 Redeemable or perpetual
 Redeemable – repayable at a fixed rate or upon demand
 Perpetual – repayable only in the event of winding up of the company or
serious breach of conditions of issue
 Registered or to bearer
 Registered – transferable in the same manner as shares
 Bearer – transferable by delivery
 Convertible – right to convert them at specified times into shares of the firm
 Issued at a discount
o Duty of every company to keep register of debentures and enter the names and
addresses of the registered holders and particulars of the debentures held by them. This
shall be kept at the registered office of the company or any place specified in the
memorandum
o Debenture holder is not a member of a company; has no right to attend or vote at
general meetings. Relationship is that of a debtor and creditor

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 Share capital Loan capital
Shareholders are entitled to a proportion of the Part of company’s capital structure, which is
company’s profits usually by way of dividends if raised through loans, usually through issue of
company is doing well debentures

Shareholder is a proprietor Debenture holder is a creditor

Return entitles shareholder to distributable
profits
Capital is not repaid back – it is given to
company; only in the case of winding up or if
there is surplus of shares
Restriction on its redemption
Entitles shareholders to voting rights
Cannot be issued at a discount
Shareholders are last to be paid in liquidation
Return is paid at a fixed interest rate
Capital is repaid at end of the period
No restriction on its redemption
Does not entitle debenture holder to voting
rights
Can be issued at a discount
Debenture holders have prior ranking in
liquidation

Registration of company charges

 Pledge – contract creating a security for an obligation
o A security is a form of guarantee
 Securities may be pledged by their holder in favour of any person as security for any obligation
unless otherwise stated in the memorandum or articles or under conditions of issue
 Pledge of securities shall be done in writing between the pledgor and pledgee
o Pledgor – person pledging to get the loan
o Pledgee – usually bank
 Private companies – securities may not be pledge unless provided in the memorandum or articles
 Public listed companies – shares may be pledges and in case you don’t pay, shares will be sold to
the bank
 Notice of pledge – to be delivered by pledgor or pledge to the registrar for registration within 14
days of granting such pledge. This pledge of securities shall be effective after said registration
 Pledges shares cannot be transferred unless any transfer is made with the pledgee’s consent and
securities to be transferred shall continue to be subject to the pledge
 In event of default, pledgee shall be entitled to:
o Dispose of securities which are pledged in his favor
 Obliged to seek best price being not less than their fair value. If no buyer is
found, pledgee shall apply to Court for the securities to be sold at less than their
fair value
o Appropriate and acquire securities himself in settlement of the debt

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 Value of securities has to be established by agreement between pledgor and pledgee – fair value
for the sale or appropriation of securities shall be determined by a certified public accountant and
auditor appointed by the Civil Court, First Hall on application of the pledgee if in disagreement
 Pledged shares in a private company – pledgee is obliged to first offer the shares to other
shareholders of the company in accordance with any pre-emption rights. Price of shares will be
their fair value and such offer shall be kept open for at least 10 working days
 Pledged shares in a public company – above also applied but if there are no pre-emption rights,
pledgee need not offer them to all the other shareholders of the company in proportion to their
holdings
 Pledgee shall only see such number of securities as needed to raise sufficient proceeds to repay the
debt due; all remaining shares shall be released to the pledgor
 Voting rights and right to receive dividends and interest payments may be agreed between pledgee
and pledgor
o If such agreement is absent, all rights shall be exercised by the pledgor until defaults
under the agreement of pledge or until pledgee enforces his security. Upon judicial act
to the pledgor and the company, all rights belonging to pledgor shall immediately
become exercisable by the pledgee
o Dividends or interest payments due on securities which are pledged shall be paid by the
company to the pledgee
 Notice of termination of pledge shall be delivered by the pledgee to the registrar and to the
company, securities which have been pledged within 14 days of the termination of pledge
 BOV cannot accept BOV shares as pledged since this diminish strength of firm

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5.3 Capital Maintenance and Dividend Law
 Maintenance of the capital of the firm
 Four fundamental rules in the Companies Act that make up the capital maintenance doctorine:
1. Purchase by the company of its own shares
2. Company may not give any kind of financial assistance for the acquisition of its own shares i.e.
cannot stand as security
3. Dividends may only be paid from the distributable profits of the company
4. Reduction of share capital can only be affected subject to strict conditions

1. Purchase by the company of its own shares

 Company may not purchase its own shares or redeem its preference shares
 A breach will not nullify the subscription but joint and several liability to pay for the shares is
imposed on the subscribers to the memorandum and on the members and directors
 Diminishes the capital fund available for its creditors
 Advantages of a share buy-back:
- In an active market is to return value to the shareholders
- May have positive impacts on performance ratios used to evaluate the financial well-
being of the company which often leads to an increase in share price
- Company may want to eliminate a particular class of shares and replace it with another
class or with ordinary shares or replace share capital with loan capital
 Allows company to acquire any of its own shares other than by subscription if a number of
conditions are met:
- Memorandum or articles must authorize the acquisition by the company of its own
shares
- Authorization may be given by extraordinary resolution which should determine the
terms and conditions of the acquisition:
a. the maximum number of shares to be acquired
b. duration of period for which authorization is given (not to exceed 18 months)
c. maximum and minimum consideration for a valuable consideration
- Shares already held by the company itself are to be treated as carrying not voting rights
- Nominal value of acquired shares including previously acquired ones are not to exceed
10% of the issued share capital
- No acquisition is to be made if net assets in the company’s annual accounts are or would
become less than the amount of issued share capital together with its undistributable
reserves
- Acquisition must be made from proceeds of a fresh issue of shares made or out of its
distributable profits
- Shares to be acquired must be fully paid-up shares
- Company may not become the only holder of its ordinary shares

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 a. This always has to be complied with
 Company may acquire its own shares without complying to the above conditions where:
- Acquired in the course of a reduction of the issued share capital
- Shares are subject of an application for shares which is revoked
- In case of forfeited or surrendered shares which are acquired by company for the
conversion, amalgamation or division of companies
- Shares acquired in any procedure for the change from a private to public company or
vice versa
- Shares are acquired due to a court order made for the repurchase of shares held by
dissenting shareholders in a change from private to public or member claiming unfairly
prejudicial conduct
- Where shares are fully paid up and acquired by an investment company with fixed share
capital or any other company forming part of the same group of members provided that
it will not reduce net assets below the amount of issued share capital
- Acquired during redemption of redeemable preference shares
 If company acquires its own shares in breach of the above conditions and shares are not
disposed of within one year of their acquisition, company is to cancel such shares within 6
months of the expiry of such year and sanctions for the period of one year are given
 If company accepts its own shares by way of pledge or other form of security, pledge shall be
treated as an acquisition by the company of those shares
Acquisition of redeemable preference shares
Acquisition of its own shares Redeemable preference shares
Acquisition can be of any type of shares A redemption can only take place in redeemable
preference shares

No such restrictions apply in case of buy-back Terms and conditions of redemption must be
shares included in the memorandum or articles prior to
the issue

Company can never impose acquisition of its Can acquire the actual redemption of
own shares on any of its shareholders redeemable preference shares

Shares are not automatically cancelled but may cancelled on redemption and the company’s
be disposed of by the company issued share capital is diminished by the nominal
value of those shares

 In both cases, company acquires the shares from shareholder in return of a payment

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Duties of directors supporting the doctrine of capital maintenance
 A number of provisions indirectly support the capital maintenance doctrine by imposing duties
on directors if capital of company has been or is likely to be seriously eroded
 Main duties arise in the following scenarios:
- No reasonable prospect that company can avoid being dissolved due to its insolvency
– wrongful trading scenario
- There is serious loss of capital in a public company
a. Where net assets of a public company are half or less of its called up issued share
capital
b. Only thing directors have to do is call a general meeting not later than 30 days
from when the firm realizes that it is in trouble and such meeting is to be held not
later than 40 days from the notice of such meeting in order to discuss what steps
is needed to be taken to deal with situation and whether company should be
dissolved – no concreate measures need to be taken
c. This is done to minimize the risks associated with serious loss of capital
d. If in the general meeting it is agreed that way forward is to increase or reduce
share capital or dissolve company, an extraordinary resolution is required thus
another general meeting is required
e. Injecting capital in the firm is not obligatory since it is a public company
f. This rule only applies to public companies
- Company is unable to pay its debts
a. Applies to both private and public companies
b. Company should determine what measures should be taken to deal with situation
c. Does not impose any sanction if no such measures are adopted

Issue of shares at a discount

 Four conditions:
- Authority of such discounts, commission or allowance is given by the memorandum and
articles
- These do not exceed 10% of price at which the shares are issued or amount authorized
by the memorandum or articles, whichever is less
- Rate of discount and number of shares agreed shall be disclosed in the prospectus or a
circular or notice and if share is not so offered, it should be disclosed in a statement
signed by every director of the company or anyone authorised in writing to represent
any director and delivered to the Registrar before actual payment – in default, penalty is
imposed
- Made for an underwriter of shares i.e. agrees to subscribe for shares himself in case of
failure of the public to subscribe shares fully

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  If shares are issued in contravention of these articles, holder shall be bound to pay company an
equal amount of commission, discount or allowance given with annual interest of 2% over the
Central Bank minimum discount rate

Issue of shares at a premium

 This is when a company’s issued shares have a market value greater than the amount paid up on
them
 Value being sold exceeds their nominal value
 If company issued further shares with the same rights, company may require applicants to agree
to pay more than the nominal amount of the new shares
 Company is free to issue shares at a premium but not free to apply the premiums so received – a
sum equal to the aggregate amount or value of the premiums on those shares shall be
immediately paid in full and transferred to account called share premium account
- This account cannot be used to make distributions to the company’s members but can
be used for:
o Paying up unissued shares of the company to be issued to members of the
company as fully paid bonus shares
o Writing off the preliminary expenses of company or expenses of commission
paid, or discount allowed or any issue of shares or debentures of the company
o Providing for the premium payable on redemption of any redeemable
preference shares or debentures
- In the winding up of a company, its assets are used first in paying off the company’s
debts and liabilities and its share capital is then returned to its shareholders. Assets
which represent the share premium account are distributed among all such
shareholders whether or not they paid any premium on the issue of shares they hold
 Directors who fail to require subscribers to pay to the company the full price obtainable for a
new issue of shares may be guilty of breach of duty to the company and liable to compensate
the company in damages for the premium which could have been obtained

Distribution of dividends
 Firm may retain most of its profits to enable it to invest in the company to continue to expand
its operations
 If there is good capital maintenance = profit = firm can give dividends
 A company can only make distribution from out of profits available for this purpose and can be
given from past earnings
 It is a distribution of a company’s assets to its members by way of:
- Issue of shares as fully or partly paid bonus shares
- Redemption or purchase of any of the company’s own shares out of capital

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 - Reduction of issue share capital by reducing the liability of any of its members in respect
of issued share capital not paid up or by paying off paid up issued share capital
- Distribution of assets to members of the company on its winding up
 All dividends shall be declared and paid according to the amounts paid on shares; amount paid
on a share in advance call shall not be treated as paid on the share
 If any share is issued on terms that it shall rank for dividend as from a particular date; it shall
rank for dividend accordingly
 Directors are entitled to deduct from any dividend payable to any member all sums of money
presently payable by him to the company for calls or shares
 No dividend shall bear interest against company
 Profits available for distribution = company’s accumulated realized profits – accumulated
realized losses;
- Profits not previously utilized by distribution or capitalization and losses not previously
written off
- Profits and losses are themselves defined as compromising both revenue and capital
profits and losses plus or minus net balance of its accumulated profits and losses on the
disposal of its fixed assets
- Profits are calculated by reference to its most recent annual accounts which have been
audited and laid before the company in general meeting
 When dividends are distributed, you cannot have assets which are less than ½ of the share
capital

Distribution by public companies – further restriction that if after distribution, amount of its net assets
cannot become less than its called up issued share capital + undistributable reserves
- Net assets = aggregate assets – aggregate liabilities
- Undistributable reserves:
o Share premium account
o Capital redemption reserve
o Excess of company’s accumulated unrealized profits over the company’s accumulated
unrealized losses
o Difference in profit to the participating interest and recognized in the profit and loss and
amount of dividends already received or to be claimed
o Amount of development costs included under assets which have not been written off
- More stringent than ones applicable for private companies thus results in equal or less
distributable profits for a public company when compared with a private company with the
same balance sheet and profit and loss accounts
Called up capital – the company’s share capital that equals the aggregate amount of the calls made on
its shares together with any share capital paid without being called and any share capital to be paid on
a future date

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Payment of dividends
 Unless otherwise stated in the memorandum or articles, dividends are payable only when
authorized and company declares them
 Dividends are to be declared by a resolution passed at a general meeting
 No dividend is to exceed amount recommended by directors
 Directors may exercise all the power of the company required to be exercised by the company in
general meeting if not included in the Companies Act or memorandum or articles
 Board of directors recommend the distribution of a dividend and specify rate and make such
recommendation to the shareholders; shareholders will have then to approve the
recommendation in general meeting
 Directors may before recommending any dividend, set aside profits of the company as reserves
to be applicable for any purpose which profits of the company may be properly applied and may
carry forward any profits which they may think is prudent to not divide

Interim dividends
 Both public and private company may decide to pay interim dividends
 Approval of shareholders for the payment of interim dividends does not appear necessary
 Dividend distributions must be justified by profits
 Public companies – companies act states that interim dividends distributions should be always
made with reference to the company’s accounts thus interim accounts have to be drawn up so
that distributable profits can be determined at that date
 No guidance to private companies thus may not be mandatory to do so but companies act states
that reference has to be made to relevant accounts to determine amount of distributable profits
available

Unlawful distributions
 If distribution is made at a time when a company has no profits or insufficient profits available
for distribution or breach of statutory rules of distribution, any member who knew is liable to
repay the distribution to the company
 If distribution is made in cash, such member would be liable to pay the company a sum equal to
the value of the distribution or part of distribution
 Such unlawful distribution may be recoverable on the basis of the civil rule of indebiti solution
which may broaden the basis for a claim since the civil law rule would not require the
shareholder to have known or believe that distribution was unlawful

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6 – Management, Administration and Regulation of Companies

6.1 Company Directors

 Company directors are needed because firm is a legal person thus directors are the face of the
firm
 All firms must have at least 2 directors with one exception for a single person company
 A company can only act through persons, the directors by whom its business is carried on,
administered and controlled
 A director can be any person carrying out the same functions in relation to the direction of the
company as those carried out by a director
 Role of director is:
o To promote the well-being of the company
o Be responsible for the general governance of the company
o Be responsible for its proper administration and management
o Be responsible for the general supervision of its affairs
 A body corporate can be a director known as corporate directors but if a company has
securities listed on the Malta Stock Exchange, directors must be individuals
o Permissible for private companies but not for public companies
 Directors are expected to act collectively as a board although the memorandum or articles may
delegate certain powers to certain committees or individual directors
 Directors must run company in good faith since they are indirectly representing their
shareholders
 Main powers of directors:
o Promotion of the well-being of the company
o Responsibility for general governance
o Responsibility for supervision of the company
o The power to borrow money
o Power to provide security for its obligations any assets of the company
o Power to issue any debentures for its liabilities or obligations against third parties
 If director has not been given executive power, he has no power to bind the company
Ultra vires
 Object’s clause – determines the acts of trade the company can engage in and thus imposes
parameters on the purposes of the firm and powers of the directors
o Object – principle and aim of the particular business the company intends to carry on
o Power – means whereby the objects of the company can be achieved which will identify
the type of dealings the company will need in order to carry out its objectives

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  Any action carried out beyond the object of the company is deemed to be ultra vires to a
company
 If there is an action carried out by a director which is within the object’s clause but outside the
power of the director, it is considered to be intra vires the company but ultra vires the powers
of the directors since act is within the power of the company but exceeds the limits of authority
given to the directors
o Director will probably be removed, and board does not honor it
 Where board of directors exceed the limits of their authority, the act will still be binding on the
company unless act exceeds powers granted to the board of directors in the Companies Act
o If there is a limitation on a director which came from the Act, such act will not be
binding on the company
o If there is an act which ultra vires to the company’s objects, company can say that act
does not bind the company if it proves:
 Third party knew that it was outside the company’s object
 Third party could not have been unaware of the object’s clause
o Publication of the memorandum and articles is not sufficient to prove the above
o Shareholders of the company may take action against any director for any losses the
company may have suffered an exercise their right of removal
 Protection against third parties is provided only if third party deals with the board or a director
and not with an officer of the company or other individual appointed as attorney of the firm
o Position of the third party remains subject to the rules of agency thus it is necessary for
such third party to bind company in this way
o Persons appointed as attorneys of the company for a particular purpose thus vested
with representation of the firm are not covered by this section
 Remedies given to the company of the shareholders against the directors exceeding their
powers
o May bring proceedings to restrain from the doing of the act that goes beyond the
company’s capacity or powers of directors
o No proceedings may lie in respect of an act to be done in fulfilment of a legal obligation
arising from a previous act of the company
o Validity of acts do not affect any liability incurred by directors for having exceeded their
powers and the company may due directors for breach of duty
o Company in general meeting may remove a board which does not observe the
limitations imposed on its activities before the expiration if its period of office

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Powers vested in the Board of Directors vs powers vested in the General meeting
 All powers which are not given to the General meeting by the companies act or the
memorandum and articles will be vested in the Board of Directors thus directors are known to
have residual power of a company
 Powers reserved for the general meeting:
o Right to alter the memorandum or articles
o Reduction of issued share capital
o Right to dissolve the company and put it into liquidation through a voluntary winding up
or winding up by the court
 Approval of the general meeting is required before the company to:
o Makes a loan to its directors or directors of its parent company to provide funds to meet
expenditure incurred by the director for the purpose the company or to enable him to
properly perform his duties
o Pay director compensation for loss of offices or in connection with his retirement for
office
 Power to issue shares is vested in company in general meeting although company may restore
that power to the directors by an ordinary (authority is given in the memorandum or articles) or
extraordinary resolution (no authority is given)
o Up to a specified maximum amount of shares
o For a renewable period of maximum 5 years
 A power reserved for the general meeting is the power to determine the remuneration of the
directors – remuneration of directors must be decided by shareholders
 General meeting does the control of the firm through the directors
 Articles of association may further limit the powers of directors
 First schedule of the act drastically limits interference by the general meeting in the
management of the company
 Shareholders may interfere if they have a sufficiently large stake in the company and they feel
strongly on a particular matter while giving the directors a free hand in the day-to-day
management of the company
o Some powers are exercised by directors, but certain powers may be reserved for the
shareholders in general meeting
o Shareholders can control the exercise of the powers vested by the articles in the
directors only by altering articles by extraordinary resolution or refusing to re-elect
directors of whose actions they disapprove by an ordinary resolution
o Division of power within an ordinary company is in favour of the board at the expense of
the general meeting with the latter retaining very little managerial powers
 Board has a wide-ranging power under the Companies Act whereas the powers of the directors
are at an individual level very restricted
 If a power is not reserved for the general meeting, then it is exercisable by the board.
Companies act grants virtually no powers to the directors on an individual basis

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Types of Directors
1. Executive directors – directors concerned with the actual day-to-day management of the
company which carry out these functions in addition to their board duties. These powers are
delegated to them by the articles of association or by the board of directors
2. Non-executive directors – do not involve themselves with the daily management of the
company but perform an advisory and supervisory role
a. There should not be a conflict of interest since this will interfere with their independent
and impartial judgment
b. Public limited companies must always have non-executive directors since they want
there to be further checks and these can take decisions against executive directors if
they suspect something is wrong
c. Listed companies must have a minimum number of non-executive directors sitting on
the board in order to ensure a balance
d. Can represent firm in legal proceedings; may act as a legal or juridical representation of
the firm
3. De jure directors – formally appointed to the board of directors
4. De facto directors – not formally appointed but acts and carry responsibility like a director
5. Alternate directors – director appoints alternate director to perform all the functions of the
director in his absence.
a. This power must be catered for in the articles – one cannot delegate his powers unless
expressly empowered by the company to do so thus it should be included in the articles
of association
b. It must include the extent of powers of the director – such as representation of the
company, remuneration and procedure of appointment and removal
6. Shadow directors – act as a director from the shadows; not formally appointed as a director
but acting like a director thus gives directions, have the responsibility, have legal obligations
a. Alternate and shadow directors have the same role
b. In order to be a shadow director, it is necessary to prove:
i. Who the directors of the company are
ii. Defendant directed those directors how to act
iii. Directors acted with such directions
iv. They accustomed to so act
c. A person acting in his professional capacity who merely advices directors of a company
is not deemed a shadow director
7. Permanent directors – does not have to submit himself to periodic re-election
8. Managing director – has all the powers of management entrusted to him. Usually appointed by
the board to deal with day-to-day management of the company
9. Director appointed to represent a class of shares – director who is appointed by a particular
share class

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Specific powers of directors (unless otherwise stated in the memorandum and articles)
 Borrow money for company
 Remove, replace and appoint company secretary
 Fill casual vacancies in the board
 Represent company in judicial proceedings against it
 Appoint the first auditors of the company and fill vacancies of auditors
 Anything required to be done by a company under any provision of the Companies Act shall be
deemed to be done by the officers of the company i.e. the directors
 Call annual general meetings of the company
 Call extraordinary general meetings where necessary
 Appoint agent to act on the company’s behalf
 Appoint a managing director or any other director to an executive position
 Regulate their proceedings as they think fit
 Elect chairman of their meetings
 Pay gratuities or pensions or allowances on retirement to former directors
 Recommend and pay interim dividends (dividends paid in the middle of the financial year) – this
can be revoked if firm suddenly take turn to the worst
 Recommend annual dividends and set aside profits of the company as reserves
 Recommend the capitalization of profits to the general meeting
 Exercise various powers in relation to transfer, forfeiture and surrender of shares
Delegation of powers by directors
 Directors must exercise their powers collectively through the authority of the board
 Articles usually allow the board to appoint a managing director and delegate any of their
powers to any of their number
 Directors may from time to time appoint a managing director or directors holding any other
executive office delegating powers exercisable by them upon such terms and conditions and
restrictions as they may think fit and have powers to revoke, withdraw or vary any of such
powers
 Directors may appoint a committee consisting of one or more persons delegating to it any of
their powers; this delegation may be made subject to any condition or requirement as directors
may impose and directors may revoke, withdraw or vary any of such powers
 Any committee shall regulate its own proceedings in as far as possible manner as if meetings
were meetings of the directors
Ostensible/apparent authority – director can bind the company in a transaction which would normally
be within the power of a director of his type even if his powers have been restricted by the articles of
the board

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Ratification of transactions – a transaction within the powers of the company can be ratified by the
members in a general meeting. If a director merely exceeds his individual authority his action can be
ratified by the board
Appointment of directors
 First directors are appointed by the initial shareholders and listed in the memorandum and
association
 The following must be stated in the management clause of the Memorandum
o Numbers of directors
 Private company – minimum 1 director
 Public company – minimum 2 directors
 If the number of directors of a company is reduced below 2, any member
of the company may at any time after lapse of 30 days make an
application to the court to appoint a director in accordance with its
memorandum
o Name and residence of the first directors
o If director is a body corporate – name and registered office of the corporate and
certificate registration if company is not registered under Maltese law
o ID and passport of each director
o Manner in which representation of the company is to be exercised
o Name of the first person vested in such representation
 Usually, majority of the shareholder would be entitled to appoint all the members of the board
 Articles may link the appointment of directors to the proportion of used share capital held by
its members which gives minority shareholders to appoint directors to the board
 Articles may also provide that the appointment or removal of a director may take place at any
time when the board receives a notice in writing
 Memorandum or articles may provide for the holders of a particular class of shares to have the
right to appoint one or more directors – must hold more than 50% of the nominal value of the
shares and entitled to vote at the meeting of the holders
 If no method of appointment was specified in the articles or memorandum, a director other
than the first directors is to be appointed by an ordinary resolution of the company in general
meeting
 For public companies, for a person to be appointed director, he or his agent must:
o Sign the memorandum indicating his consent to act as a director
o Sign consent in writing to act as a director and deliver it to the Registrar
 Memorandum and articles may require a director to hold a specific number of shares for him to
qualify for the post of director
o Can either sign a memorandum indicating that he is possession of the requisite number
of shares for him to qualify as director
o Can sign and deliver to the registrar an undertaking in writing stating his intention

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  Company secretary cannot be the only director unless of one-party firm
 An auditor of a company cannot at the same time hold the office of a director of the same
company
o Person is not allowed to act as an auditor of the company if he has been a director in
the past 3 years – this is to limit conflict of interests and uphold the importance of
impartiality of the auditor in the reviewing and reporting of the financial situation of a
company
o An auditor can be appointed as director after resigning as auditor

Retirement from office

 At the first annual general meeting of the company, all directors shall retire from office
 At the annual general meeting in every subsequent year, 1/3 of directors shall retire from office
o These are the directors who have been the longest in office since their last election but
if those directors became directors in the same day, it shall be determine by lot
o Retiring director shall be eligible for re-election
o No person other than director retiring at the meeting shall be eligible for election unless
two notices in writing are left at the registered office of the company not less than 3 and
more than 14 days before the date appointed for the meeting
 One signed by a member duly qualified to attend and vote at the meeting
indicating his intention to propose such person for election
 The other signed by the person so proposed indicating his willingness to be
elected
o This is done so that there is rotation of directors which is intended to secure continuity
 Articles of association often provide that directors are to hold office from the annual general
meeting at which they are elected until the end of the next annual general meeting

Qualifications
 No specific qualifications are required since this would hinder the setting up of a company due
to the fact that for small business there may be no one qualified to sit on the board and
appointment of qualified director would increase costs
 It is in the interest of shareholders to appoint directors who are capable in management and
who understand the duties and liabilities imposed by law
 Board of directors would be made up by persons who are fit and proper to direct the business
of the company thus requires directors to be honest, competent and solvent persons

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Disqualifications
 A director may not be appointed if:
o He is interdicted, incapacitated or an undischarged bankrupt
o Has been convicted of any of the crimes affecting public trust or theft or fraud or if
knowingly receiving property obtained by theft or fraud
o He is a minor who has not been emancipated
o He is subject to a disqualification order made under the Companies Act
 For listed companies on the Malta Stock Exchange, a director is qualified for disqualification if:
o He becomes of unsound mind
o Convicted of any crime punishable with imprisonment
o Declared bankrupt during his term of office
 In particular cases, third parties who had an interest could file such proceedings if he proves the
potential harm
 In normal course, the board or general meeting would take action in the name of the company
to obtain a declaration for disqualification of a director

Disqualification order
 Any person against whom a disqualification order has been made may not without leave of
court be:
o Director or company secretary
o Liquidator or provisional administrator
o Special manager of the estate or business
o Concerned with promotion, formation or management of the company whether directly
or indirectly
 Breach of the order renders the disqualified person guilty of an offence and liable on conviction
to a maximum fine of EUR 46,587 (LM 20,000) and/or up to 3 years imprisonment
 Law provides for disqualification orders to:
o Provide control over directors
o Prevent fraud and mismanagement
o Offer an alternative to prosecuting the company involved
o Provide a means for enforcement of reporting requirements
o Encourage directors to act honestly
 The court on the application of the attorney general or registrar may make a disqualification
order against any person
 Ground for disqualification:
1. Offences under the companies act – against a person who is found guilty of an offence
under the act which is punishable by imprisonment; not only with a fine

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 2. Personal liability under the act – against a person who infringed any requirement under the
act with consequence that person becomes liable to contribute to the assets of the
company or becomes personally liable for the debts of the company
3. Disqualification for unfitness – a person who has been or is a director which at any time has
become insolvent or if conduct as a director makes him unfit to be involved in the
management of the company
 Aim is to disqualify a person with previous record of mismanaging companies which eventually
become insolvent
 Maximum disqualification order is 15 years with a minimum of 1 year – it is up to the court to
decide
o This term must reflect the gravity of the underlying misconduct
o This is there to protect the public rather than punish the director of misconduct
o These are additional remedies for wrongful trading
 A notice of disqualification order should be delivered by the registrar of courts to the registrar
of companies for registration

Irregular appointments
 Any irregularity raised after the completion of the publication of his appointment shall be relied
upon by the company unless company can prove that such parties were aware of the
irregularity at the relevant time
o In actuality, appointment of directors comes into effect immediately and does not
depend on any publication
 Two rules:
1. A third party who deals with a company represented by persons who appear to be its
directors is usually entitled to assume that since they could have been appointed directors,
they have been
2. The rules do not extend to a case where no appointment at all is made, or director has
ceased to be a director

Vacation of office
 Expiration of the period of office
o Director may be appointed for a fixed period of time or for life
o Director may hold office at will and be removed at any time by the members or even by
the other directors
o May hold office until the end of the annual general meeting following his appointment
o Director automatically ceases to hold office upon expiration of his duration
 Disqualification
o Automatically vacate office without the need to resign

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  Resignation
o Free to resign from his point at any time
o Unconditional unless it is made subject to acceptance
o Usually done by the tendering of a notice in writing which is delivered to the chairman
or company secretary
o This may be done during a board or general meeting
o Claims of compensation may arise in the case of a breach of contract of service
o Company may sue director for any compensation
 Death
o A personal appointment and can never be inherited
 Removal
o Company may remove any director before the expiration of his period of office by a
resolution taken at a general meeting and passed by members having the right to attend
and having more than 50% of the nominal value of the voting rights
o Any director removed is to receive notice and voice his opinion at the intended meeting
o There does not need to be a justifiable reason for the removal of director
o Power of removal is vested in the hands of shareholders and is there to strike balance
between the directors’ powers of management and the shareholders’ powers of control
o If directors exercise their power of management in the best interest of the company as a
whole, they will not suffer interference from the shareholders who will let them running
the company
o If shareholders are dissatisfied with the conduct of the company’s affairs, they can
exercise the ultimate power of control by removal of directors
o A director who has a fixed contract of service with the company has the right to claim
half his salary for the unexpired period of service and can claim damages or
compensation for termination of his office as director
o If director is remove by the general meeting and position is not filled at the meeting,
position may be filled as a casual vacancy
 Person will hold office until the next general meeting and will be eligible for re-
election
 Will not be taken into account in determining the directors who are to retire by
rotation at that meeting
o In the case of a company with issued share capital divided into different classes of
shares, general meeting may remove any director appointed by the holders
 Casual vacancy may be filled by the holders of that particular class of shares who
made the original appointment and not by the general meeting ot by the board
of directors
In the event of any change amongst the directors, company must send to the Registrar the Form K to
register the change. Form must specify the date of change together with all the details of the new
director. This form is to be sent within 14 days from the date of change

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Duties that directors owe to their companies
 General principle of company law that directors are classified as mandatories and fiduciaries of
the company
 Legal position of directors is regulated by the Companies Act and any other legislation
regulating companies
 When there is no provision, the provisions of the civil code relating to mandate regulate
directors
 Director as a fiduciary:
o Owes duty to protect the interests of another person
o Holds, exercises control or powers of disposition over property for the benefit of other
persons
o Receives information from another person subject to a duty of confidentiality and
person knows that such information is to be restricted
 Directors cannot be regarded merely as mandatories or fiduciaries
 Duties of directors are primarily and largely owed to the company and not to the shareholders
 No provision addressing whether directors have a general duty towards creditors of their
company – not likely that court will hold directors personally liable in a case of breach of duty
for damaged suffered by the creditor
 Categorized into two:
1. duties of a general nature arising out of the juridical natural of the office
a. act bona fide – honestly, in good faith and in the best interest of the company to
promote its well-being, to exercise due care, diligence and skill and not to misuse
their powers
b. promote the well-being of the company and responsible for the general
governance of the company
c. proper administration and management and general supervision of its affairs
d. maintain the minute book which recalls the proceedings of board meetings and
shareholders meetings
e. at the end of the financial year, the director reports to the shareholders on the
company’s performance during the past financial year
f. director’s report and financial statements are signed off by the director and
submitted to the company’s general meeting for approval
g. personal interests do not conflict with the interest of the company
i. law does not prohibit transactions between 2 companies where the director
has conflicting interest if there is the disclosure of this conflict of interest
ii. if a director is interested in a contract with a company, he is to declare the
nature of his interest to the other directors at the first meeting held after he
became interested
iii. if a director fails to declare his interest, he is liable for a fine of EUR 2,329.37
(LM 1,000)

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 iv. Articles may also provide that a director shall not vote at a meeting of any
contract he is interested in or if he does, vote is not counted
2. specific duties mostly of an administrative nature

NO PROFIT RULE – Directors are prohibited from:

 making secret or personal profits from their position without the consent of the company
o prohibiting an insider from using inside price sensitive information to his advantage
 making personal gain from confidential company information
 using any property, information or opportunity of the company for their own benefit
o except with the consent of the company in general meeting or as permitted in the
articles or memorandum
Doctrine of corporate opportunities – to protect the company from self-dealing of those persons who
should act in the best interests of the company
Benefits from third parties – prohibition against taking bribes which linked with the general principle
of avoidance of conflicts of duty and interest; this could be money, reward or advantage.
Director may not without getting approval of the company in general meeting beforehand:
 in competition with the company carry on business on his own account or on account of others
 be a partner with unlimited liability in another partnership or a director of a competitor
company
Failure of this gives the company the right to take action for damages and interest against the director
or demand payment of any profits made due to such failure. Company may also apply any other
remedy it may have against the director for breach of duty.
Prohibits company from making a loan to its directors or directors of its parent company or to enter
into any guarantee or provide any security in connection to a loan for its directors or directors of its
parent company. Exclusions:
 with approval of the company in general meeting with the reason of giving funds to meet
expenditure incurred by the director for the purpose of the company or to enable him property
to perform his duties as an officer of the company
 if ordinary business of the company is any of the above, given that company is doing so in the
ordinary course of business
Company is also prohibited from making any payment to any director for compensation for loss of
office or his retirement from office unless this is disclosed to members of the company and proposal is
approved by the company in general meeting
Unfettered discretion – directors cannot validly contract with one another or a third party as to how
they will vote at future board meetings or even if there is no improper motive or purpose or no
personal advantage to be gained by the directors

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  a nominee director should ignore the interest of his appointer and consider what is the best
interest of the company as a whole
Duties qua mandatary – directors are subject to the duties imposed by the civil law on mandatories.
They are applicable if they are not inconsistent with the Companies Act or are inapplicable to the sui
generis position of directors
Duties qua fiduciary – directors as fiduciaries of the company are subject to a number of fiduciary
obligations as set out in the Civil code – a breach will also result in the return of any property together
with all the benefits derived to the person to whom the duty is owed
Statutory Duties
1. Keeping of statutory registers and minute books
o A register for members and debentures
o Required to keep minutes of the board and general meetings through minute books
o It is imposed on all officers of the company, but it is the company secretary that takes
the responsibility for these
2. Filing of returns and documents
o It is imposed on all officers of the company, but it is the company secretary that takes
the responsibility for these
o Returns and documents to be prepared are:
 Issue of shares for a consideration other than in cash
 Transfer to company of non-case assets in first two year
 Amendments to the memorandum or articles of association
 Increase in issued share capital
 Offering of shares on a pre-emptive basis
 Return of allotments
 Acquisition by company of its own shares
 Redemption of preference shares
 Delivery notice of transfer or transmission of shares
 Pledging of securities
 Removal of director
 Vacancy or removal in representation of the company
 Appointment and removal of auditor
 Draft terms of merger and division
 Notice of dissolution
 Single member company
 Director’s report
 Compromise or arrangement
3. The board and general meetings
o Empower the board of directors to convene general meetings

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 o One has to keep in mind matters relating to notice and the responsibility in relation to
proxies
4. Record-keeping and financial statements
o Companies are obliged to keep proper accounting records in respect to:
 All sums of money received and expended by the company
 The respect in which the receipt and expenditure take place
 Assets and liabilities of the company
 If company deals with goods:
 statements of stocks held by the company at the end of each accounting
period
 all statements of stocktaking
 statements of all goods sold and purchased
o Proper accounting records means that these are enough to show and explain the
company’s transactions and
 Disclose with reasonable accuracy at any time the financial position of the firm
 Enable directors to ensure that any balance sheet and profit and loss account
prepared complies with the requirements
o Directors are responsible to ensure that the following are drawn up and published in
accordance with the requirements of the Act even if consolidated
 Annual financial statements
 Corporate governance statement
 Directors’ report
 Required to prepare a report for each accounting period to review the
progress of the company’s business
 Directors responsible are liable to a penalty if this report is not drafted
according to the requirements
 Contents of report according to Article 177:
o Names of directors
o Principle activities of the company and its subsidiaries
o Any significant change in those activities
o A fair review of the development of the business of the company
and its subsidiaries
o The position at the end of the period
o Description of principal risks and uncertainties faced
 Directors to file with the registrar of companies a copy of the annual
accounts together with the auditors and directors report within 42 days
from the end of the period. Some exemptions for small companies:
o If the balance sheet does not exceed the limits of 2/3 of the below
criteria, such companies are exempted to deliver the directors’
report to the Registrar

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  Balance sheet total – EUR 4 million
 Turnover – EUR 8 million
 Average number of employees – 50
o If the balance sheet does not exceed the limits of 2/3 of the above
criteria for a private company having the status of an exempt
company, company is exempted to deliver directors’ report and
profit and loss account
o Private companies which on their balance sheet do not exceed the
limits of 2/3 of the following criteria are exempted from also
delivering the auditors’ report
 Balance sheet total – EUR 46,600
 Turnover – EUR 93,000
 Average number of employees – 2
5. Liquidation of the company
 Breach of duty ore responsibility by the director may prove most onerous arise when a
company continues to trade when it is in a state of insolvency
 Vital for a director to ensure company is in a state of solvency at all times and take
appropriate action without delay if not
 Declaration of solvency
o When it is proposed to dissolve and wind up a company voluntarily, directors may
make a declaration that they made a full enquiry into the affairs of the firm and
formed the opinion that company will be able to pay its debts in full within such
period not exceeding 12 months from the date of dissolution
o If a director makes the above statement without having reasonable grounds that
company will be able to pay its debt in full in the period specified is guilty of an
offence and is liable on conviction to a fine of not more than EUR 46,587 (LM
20,000) or imprisonment not exceeding 3 years or both
 Members’ voluntary winding up
o If a liquidator is not appointed by the general meeting, it is the duty of the directors
to apply to the court for the appointment and penalties will apply in case of default
 Creditors’ voluntary winding up
o Directors are bound to call meeting of creditors and give notice
o Directors must prepare a full statement of the company’s affairs with a full list of the
creditors and estimated amount of their claims
o Appoint one of the directors to preside at the said meeting
o Directors are bound to cause a notice of the said meeting to be advertised once in at
least one local daily newspaper
o If liquidator is not appointed by the general meeting or creditors, it is duty of the
directors to apply to the court for appointment and penalties will apply in case of
default

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 6. Miscellaneous duties
 Authentication of documents of the company
 Issuing and signing of shares certificated
 Provide the requested information to auditors
 Cooperate in cases of company investigations
 Usually such administrative duties are imposed on directors or company secretary but if act
imposes duty on the company it is required to be done by the officers of the company

HOW LAW ATTEMPTED TO CONTROL DIRECTORS

 Law tries to strike a balance between containing the risk of abuse and allowing directors space
to be efficient and innovate in their management of the company
 Law requires directors to prepare and present to the shareholders a set of financial statements
which need to be audited by auditors appointed by the shareholders
 Shareholders are free to critical review the performance of the board at the annual general
meeting
 Shareholders have the power to remove and replace directors and also sometimes intervene
directly in the management of the company by passing resolution
 Potential remedies of fraudulent and wrongful trading and disqualification orders are also
effective in controlling risk of abusive behaviors by directors
 In case of listed and public interest companies, rules on goof corporate governance are
primarily aimed at securing the highest level of professionalism and integrity in the way that
directors conduct business
 Set of duties which company law imposes on director in relation to the exercise of their powers
with potentially severe penalties when in breach

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6.2 Other Company Officers
 Officers of the company – director, manager or company secretary
A company secretary
 Every company must have a company secretary
 First company secretary is appointed by the promoters of the company
 All subsequent secretaries are appointed by the board of directors
 Directors of company have the power to remove and appoint within 14 days of removal or of
when post become vacant
 Any person that deems to have requisite knowledge and experience may be appointed to hold
such post
 A company cannot have its sole director as the company secretary
 May not be appointed if is:
o Interdicted, incapacitated or undischarged bankrupt
o Convicted of crime affecting public trust, theft or fraud
o A minor
o Disqualified by the courts for breach of provisions of the companies act
o Auditor of the company
 Is responsible for keeping:
o Minute book of general meetings and board of directors
o Register of members and debenture
o Other registers and records that may be required to be kept by the board of directors
 Must ensure proper notice are given of all meeting and that all returns, and other documents
are prepared and delivered to the registrar in accordance with the requirements of the
companies act
 Can be held to be just as responsible as other officers of the company but a company may
purchase insurance cover for its officers against liabilities
Company auditors
 Every company must have auditors even though it is not included as an officer of the company
under the Companies Act
 An auditor is defined as a person who is an individual and holds a warrant to act as auditor
issued under the Accountancy Profession Act
 Directors may appoint first auditors prior to the first general meeting of the company and shall
hold office until the conclusion of that meeting
 If directors do not do so, appointment may be made by the company at a general meeting
 If both directors and company do nor appoint auditors, any director or member of the company
may apply to the Court to appoint a person to fill the vacancy

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  If no notice is given within 2 weeks of the general meeting, notice must be given to the registrar
notifying that his power to apply to the court to appoint the company’s auditors has become
exercisable – if notice is not given, every office of the company who is in default is liable to a
penalty for each day that default continues
 Notice specifying terms of the proposed resolution is to be given to the person proposed to be
appointed or to any resigning auditor in the case of filling in a casual vacancy of the auditor in a
general meeting
 Disqualification of individual auditors who in last 3 years have been:
o Officer or employee of the company
o Partner, employer or employee of an officer of the company
o Partner or employee of an employee of the company
o Related by consanguinity or affinity in direct line or up to the third degree in the
collateral line to an officer of the company
 If partner is totally excluded from the audit concerned, disqualification would not apply for
cousins of the auditor or his spouse
 Remuneration of auditors is fixed by directors – it relates to fees, expenses and benefits
 Auditors of the company have right to access at all times the company’s books and to ask for
information and explanation related to the performance of their duties
 If officers of the company make a false or misleading representation to an auditor of the
company, they are liable to a fine or imprisonment not exceeding 6 months or both
 Subsidiary company registered in Malta is to give auditors of the parent company all
explanations and information necessary for the performance of their duties
 A parent company having a subsidiary not registered in Malta is to take all reasonable steps to
obtain from the subsidiary all the information n and explanation required by the auditors of the
parent company for the performance of their duties
 Company may at any time remove its auditors by resolution taken at a general meeting; has to
be approved by members holding more than 50% of the nominal value of the shares
represented and are entitled to vote at the meeting
o Notice of resolution must be delivered to the registrar fore registration within 14 days of
the date of the resolution
o Auditor has right to request compensation for damages for termination of appointment
o Auditor will retain his right to attend any general meetings at which his term of office
would have expired or at which it is proposed to fill the vacancy caused by his removal
o Auditor being removed or not being re-appointed is entitled to receive notice of the text
and reasons for the proposed resolution of the general meeting whereby it is intended
to be removed
o Auditor may make representation in writing to the company within the reasonable
length and request their notification to members of the company or be head orally
during the meeting

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  On receipt, company may include the fact that such representation has been
receive in the notice
 Auditor may resign from office by depositing a notice in writing at the company’s registered
office
o Company must submit notice to the registrar within 14 days
o Auditor is to include with his notice of resignation, a statement outlining circumstance
which he considers should be brought to the attention of the members or creditors of
the company
 Auditor may deposit a signed requisition for directors of the company to hold an
extraordinary meeting for the purpose of receiving and considering the
explanations of the circumstance connected to the resignation
 Auditor may request that statement of circumstances to be circulated to
members or creditors before the meeting. The company can choose:
 To circulate a copy of statement to every person entitled to receive a
copy of the accounts
 Apply to the court for an order to not circulate the statement – court will
notify auditor and both parties will be heard before decision is reached
where court will decide whether to circulate copies or not
 Directors are obliged to hold meeting within 20 days for a date not later than 28
days
 When an auditor ceases to hold office as auditor, he is to deposit at the company’s registered
office, a statement of circumstances which auditor believed should be brought to the attention
of the members or creditors of the company. If he considers that there are no circumstances, a
statement to that effect should be made
o Company is to send a copy to every person entitles to receive copies of accounts or
apply to the court for an order for grounds of sufficient gravity to warrant that
statement should not be circulated within 14 days
 Duty of auditors is to:
o examine and verify the original accounting records of the company
o discover any inaccuracies or omissions
o examine the company’s annual balance sheet and profit and loss to ensure they agree
with the company’s original accounting records
o report to the members of the company on the original accounting records and its annual
accounts
 The duties are to safeguard the members of the company against inaccurate, misleading or
incomplete annual accounts being presented to them by directors
 Responsibilities of auditors:
o Carry out all investigations necessary to enable them to prepare the Auditor’s report
o Auditor’s report must state whether in the auditors’ opinion,

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  the annual accounts have been properly prepared in accordance with the
Companies Act
 the annual accounts give a true and fair view of the state of the affairs of the
company as at the end of the accounting period
 whether directors’ report has been prepared in accordance with the applicable
legal requirements
 whether in the light of the knowledge and understanding of the undertaking and
its environment obtained in the course of the audit, they identified material
misstatements in the directors’ report and give indication of the nature of such
misstatements
 In the performance of this duties, auditors must act honestly and exercise the care and skill of
the diligent and prudent member of his profession
 Auditor must monitor the work personally and not simply rely on his assistants’ reports
 According to civil law, the degree of diligence to be exercised in the performance of an
obligation is that of a bonus paterfamilias
 Liabilities of the auditors:
o Exempted from any liability or responsibility to which he may otherwise be exposed at
law or which is intended to indemnify him against any such liability or responsibility
o In the absence of such provisions, general principles of civil law particularly those of
contract and tort are applied
 Auditor is liable toward the company and existing members in performance of
his duties as auditor of the company
 Auditors would be liable where he acted negligently in damages for breach of
contractual and statutory duties – no liability in damages will arise for a mistake
unless the mistake is not ‘grossolan’
 Auditors are liable in damages for any dishonest or fraudulent acts of omissions
on their part

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6.3 Majority Rule
 Essence of the principle of majority rule is that the power of the company resides in the hands
of those who own more than half the shares with voting rights
 It is an essential feature of a limited liability company without which no limited liability
company could prosper or continue to live
 Minority shareholders must either accept the decisions of the majority or seek to reverse them
through the normal democratic processes or sell out and invest elsewhere
 Control by majority over minority shareholders can be exercised directly though the general
meeting or indirectly through board of directors
 Law lays down safeguards to ensure the use of the majority rules is not used in a manner which
is unfairly prejudicial to other company’s member resulting in abuse of power
Protection of minority rights
 Any member of a company who complains that affairs of the company are being conducted in a
manner which is unfairly discriminatory or prejudicial to other members may make an
application to the court for an order
 If court finds that complaint is well-founded, the court may:
o Regulate the conduct of the company’s affairs in the future
o Restrict or forbid company to carry out any proposed act
o Require company to do the act which applicant complained that it has omitted to do
o Provide for the purchase of any members of the company by other members of the
company or company itself
o Directing company to institute, defend, continue or discontinue court proceedings or
authorizing a member of the company to do so in the name and on behalf of firm
o Providing payment of compensation for person who suffered from loss or damage
o Order dissolution of company and provide for its consequential winding up – company is
deemed to be dissolved on the date when order is made
 3 types of remedies for shareholders:
o Personal action – when personal right of an individual shareholder has been infringed
o Representative action – same personal right of a number of shareholders has been
infringed like a collective action
o Derivative action – by a member of a company regarding a wrong being done to the
company; if wrong is done to the company, the company alone can decide to sue and
decision shall be made by the majority
 Minority shareholders can bring action themselves to protect company if the
wrong-doers are in control of the company – will only be granted to them if act
caused harm to the company and thus granted minority shareholders.

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  In cases of breaches of duty of directors, it is not enough to for the
minority to show that the majority could not lawfully ratify what has
been done
 Court must be satisfied that the plaintiff is a proper person to bring the case and
that person’s conduct is not tainted and that there has not been any
unacceptable delay in brining action
 The proceeds go to the company and not to the shareholders
 Shareholder can in some circumstances have the right to institute an action
against the company instead of the company itself to safeguard the best interest
of the company even if the action I usually reserved for the company
The proper plaintiff has acquired a force of its own quite independent of the majority’s power to
ractify
3. Any act prohibited by the memorandum or illegal is incapable of being ratified by any majority
but not every breach of article constitutes a breach of minority rights which are clauses that
regulate internal procedure
4. Fraud on minority is interpreted very widely and includes abuse or misuse of power,
appropriation of company property and negligence thus this would relax the rule that majority
must approve litigation
5. Having personal right since enforcement through the company is unnecessary
6. Special minorities – will have no application when the rules of the company law require some
higher majority or where matter is inappropriate to refer it to an ordinary majority
JUST AND EQUITABLE – recognition of the fact that a limited company is more than a mere legal entity
with a personality in law of its own; there is recognition that behind it there are individuals with rights,
expectations and obligations which are not necessarily submerged in the company structure. The
superimposition of equitable consideration requires:
1. An association formed or continued on the basis of a personal relationship involving mutual
confidence
2. An agreement or understanding that all or some shareholders shall participate in the conduct of
business
3. Restriction upon the transfer of the members’ interest in the company so that if confidence is
lost or a member is removed from management, he cannot take out his stake and go elsewhere
Unfair prejudice remedy
Article 402 is intended to protect the shareholders of a commercial partnership particularly the
minority shareholders; it is enough for a shareholder to show that he is suffering, or he could suffer
because of the direction of the company – it is enough proof to be based on probability
 Court can order anything it deems fit and proper according to what is provided in article 402 if
it finds that the claim of shareholder is well founded and is just and equitable

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  This article is not inspired by legal concepts but by equitable and just principles which
recognize interests and legitimate expectation of the shareholders which go beyond what is
stated in the memorandum or in the law
 It is not necessary that there was bad faith or intent to cause harm
 Not only the behavior of the person against whom the claim is made but also of the
complainant himself – this is important to determine if conduct is unfair and prejudicial which
will affect the court order
Examples of unfair prejudice:
 Removal and exclusions from board of directors
 Improper allotment of shares
 Self-dealing by the directors
Removal where there are no allegations of any wrongful conduct but a result of irretrievable
breakdown in relations does not amount to unfairly prejudicial conduct – court held that when there is
such breakdown and one party must leave, articles provide a method for disposing his shares and one
has to abide with such articles. One cannot seek to improve his position by using unfair prejudice
unless he can show bad faith, impropriety, arbitrary or artificial valuation
 Misappropriation of corporate assts constitutes as a breach of fiduciary duties and
consequently as being unfairly prejudicial
 Non-payment or payment of low dividends could be unfairly prejudicial
 It may be stated that conduct is deemed to be unfairly discriminatory when distinctions are
made between the members of a company which otherwise should be treated equally to the
extent that such inequality cause unfairness
 Oppression has been interpreted to include conduct which is unfair or seriously impaired rights
of the complaint causing his expectations to not be fulfilled and it would be unjust for such hard
to not me remedied

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6.4 Company Meetings and Resolutions
 A company acts through the general meeting and the board of directors
 Directors are vested with all the powers of the company except those which are specifically
entrusted by the Companies Act or by the memorandum or articles of the company thus are
vested with very wide powers
 General meeting retains two powers that give ultimate control of the company:
o The power to alter the memorandum and articles of association
o The power to remove directors
General Meetings Class Meetings
Pass resolutions that are binding to all the To pass resolutions that are binding only on the
members and on the company itself members of the class concerned
All members of the company can attend, speak Members of the class concerned can attend,
and vote speak and vote
 Class member may appoint proxy to
attend, speak vote on his behalf given
that proxy is not member of firm
No specific provision that states whether May be held to:
provisions of the Companies Act on General  Approve alterations of any rights of a
Meetings apply also to class meetings particular class under the memorandum
or articles
May be convened, held and conducted as  Approve of reduction in share capital
directed by the Civil Court – court has power to:  Approve of increase in issued share
 Call a meeting of a company capital
 Conduct meeting  Appoint directors
This may be done either on:  Approve compromises or arrangements
 Its motion which affect that particular class
 Demand of parties  Approve amalgamation of the company
 Absence  Approve division of company
 Application of any director or member

Articles may require that resolutions be unanimously approved or to be approved by a higher

percentage of votes than would otherwise be required. If a resolution is signed by all the shareholders
for the time entitled to receive notice and attend and vote at general meetings, it shall be considered
as valid and effective as if the same has been passed at a general meeting duly convened and held
Ordinary General Meeting
 Every company must hold an annual general meeting every year
 Not more than 15 months should elapse between one general meeting and another
- First general meeting is to be held within 18 months from date of registration of
company

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 - Any member may file application requesting court to order the meeting to be called,
held or conducted if directors fail to convene an annual general meeting
 All business transacted at the annual general meeting shall be deemed special with exception
of:
- Declaring a dividend
- Consideration of the annual accounts
- Reports of the directors and auditors
- Election of directors in the place of those retiring
- Appointment and fixing of remuneration of auditors
 For listed companies, the ordinary business at the annual general meeting is:
- Receiving or adopting Annual accounts
- Declaring a dividend
- Reappointing of directors and appointing directors to replace those retiring
- Reappointing auditors and remuneration
 Company secretary is to ensure that 14 days before the annual general meeting, a copy of
accounts is sent to every member of the company, every holder of company’s debentures and
all other persons entitled
 It is a vital mechanism where useful discussion and democratic control can be exercised
Extraordinary General Meeting
 General meetings other than annual general meetings are extraordinary general meetings
 Directors may convene at any time when the need arises and are convened in the same manner
as annual ordinary general meetings
- In order for a director to do so, he must hold at the date of the deposit of the requisition
not less than 1/10 if the paid-up share capital of the company
- Requisition should state objects of the meeting and is to be signed and deposited at the
registered office of the firm
- Directors have 22 days from the date of the deposit of requisition to convene a meeting
– if not, requisitions may convene meeting themselves in the same manner as meetings
held by directors, but it cannot be held after expiration of 3 months from date of
deposit of requisition
 Companies Act does not list out the items to be dealt with at an extraordinary general meeting
and any business that does not fall within an annual general meeting, may be put at the
extraordinary meeting
 Two situations that would need to be referred for consideration at the extraordinary general
meeting:
- Resigning auditor puts notice of resignation for the purpose of receiving the said
resignation and hear the explanation of the circumstance auditor may place before
meeting (21 days)

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 - Where decision arises during the course of a company recovery procedure – members of
company are satisfied that affairs of company have been improved and is in a position to
repay its debts, they may submit application to the court confirming so and request the
court to issue an order for termination of such procedure – must call this meeting if
directors become aware that company is unable to pay its debts or likely to become (30
days for not later than 40 days)
 May require such meeting where shareholders may be needed to vote on matters that require
a change in the company’s operating and financial policies such as:
- Changes in the memorandum and articles
- Conversion, amalgamation or division of the company
- Dissolution of the company
- Filing of a winding up application of the company
- Filing of a company recovery application
- Review of the company’s position following the calling of a general meeting by the
board where company is unable to pay its debts
 In a private company, a resolution is deemed to be extraordinary if:
- Taken at a general meeting with a notice specifying the intention to propose the text of
resolution as extraordinary and principal purpose is duly given
- Passed by a number of members having the right to attend and vote at any meeting
holding not less than 51% in nominal value of the shares or a higher % if articles or
memorandum state
 In a public company, a resolution is deemed to be extraordinary if:
- Taken at a general meeting with a notice specifying the intention to propose the text of
resolution as extraordinary and principal purpose is duly given
- Passed by a number of members having the right to attend and vote at any meeting
holding not less than 75% in nominal value of shares represented and entitled to vote or
at least 51% in nominal value of shared entitled to vote at the meeting
 If only one of the above majorities is obtained, another meeting has to be convened within 30
days to take a fresh vote
 Decisions to alter the memorandum or articles require an extraordinary meeting except for:
- Decision where a company acquires its own shares
- Where class rights are varies
- To change currency in share capital
- To voluntarily wind up compan7
- To nominate and remove a liquidator
- To convert a commercial partnership
- Decisions relating to the amalgamation and division of companies

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Notice of meetings
 Should be given to every member even if member is not entitled to attend meeting and vote
 Should be given to auditors and directors
 Auditors are entitled to receive all communications relating to any general meeting and attend
which concerns them as auditors
 Notice is to be given either personally or by sending it by power to the person or registered
address – to the address suppled to the company if no registered address in Malta
 Company may vary in the manner of service
 Should specify:
o Place
o Day
o Hour
o Whether ordinary or extraordinary
 Annual meeting – no need to specify the business to be discussed since members
are aware of agenda through articles of association
 Extraordinary meeting – refer and specify the special business to be discussed
Proxies
 Defined as a reference to:
o Mandatary appointed by a member to vote on his behalf at a general meeting
o Actual document by which such mandatary is appointed
 Every member who is entitled to attend and vote at any meeting has right to appoint another
person as his proxy to attend and vote instead of him
 Proxy appointed has same rights as member
 Notice convening a meeting must inform members of their right to appoint proxies – if not,
every office of company is liable to a penalty
 There is no need for proxy appointment to be lodged earlier than 48 hours of commencement
of meeting
Quorum
 Two members personally present form a quorum and a meeting cannot proceed without this
 Proxies do not count as quorum unless articles provide otherwise
 Members without any voting rights are not counted for the purposes of determining quorum
 If meeting is convened by requisition of members, it shall be dissolved if quorum is not present
within half an hour from the time of meeting
o It shall be adjourned to the same day in the next week or time and place as directors
determine in all the other cases
o If quorum is not present within half an hour of the adjourned meeting, members
present shall be a quorum

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Moving of resolutions
 Ordinary resolutions – does not need to be stated verbatim in the notice may be moved by
any member at the meeting if resolution is cited in the notice; may be moved in different terms
as long as it corresponds to the general nature of the first resolution
 Extraordinary resolutions – need to be set out verbatim and no changes can be made
 Once a member moves a resolution, any member or proxy may speak on it and vote on it
Written resolutions (Round Robin Resolution)
 One which is signed by all the members for the time being entitled to receive notice and attend
and vote at general meetings
 Annual general meetings may be held like this
 Any resolution can be passed like this except for decision to remove a director or auditor before
the end of their term of office
o This is to not deprive auditors of directors of their right to receive notice, attend
meetings and be heard at meetings where matters which concerns them are being
discussed
 A meeting is not required to pass a written resolution and no prior notice is necessary, but it
can only be passed through an unanimous agreement of all the members
 The date of a written resolution is the date on which the last member signs
Special resolutions
 Passed at a general meeting of which a notice specifying the intention to propose a special
resolution is given
 It requires same majority as with an extraordinary resolution
 Required for important matters such as alteration to the memorandum or articles
o If the case, copy of amended document must also be filed at the registry of companies
 A meeting for a special resolution may be held at a shorter notice with agreement of all
members entitled to attend and vote at meeting
Elective resolutions
 Requires the unanimous agreement of all shareholders who are entitled to attend and vote
 Used for specific purposes which related to the removal or reduction of administrative or
formal requirements such as the need to hold an Annual General Meeting
 May be used for the following purposes:
o Amend duration of the authority of directors to allot securities
o Dispense with the holding of annual general meetings
o Dispense with laying of accounts and reports before the members in general meeting
o Allow majority required to authorize short notice meeting and notice of resolution to be
reduced from 95% to a lower figure but not less than 90%
o Dispense with the annual appointment of auditors

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Class Resolution
 Company proposed to pass a resolution that affects one class of share only
 It will need to obtain the consent of a majority of the holders of the class of share
 Can be obtained in writing or by passing an extraordinary resolution at a separate class meeting
Voting
 Voting on proposed resolution is taken by means of a show of hands where each member has
one vote regardless of the number of shares held
 Articles of association may provide that a poll may be demanded, and chairman may proceed
with poll without taking a vote by show of hands or before or after
 Any member may demand poll
 Articles may put restrictions on the right to demand a poll on certain issues
 A poll must be held on any resolution if demanded by:
o Not less than 5 members
o Member representing at least 1/10 of the total number of votes
o Member who holds shares on which there has been paid at least 1/10 of the capital paid
on all the shares which carry the right to vote
 In case of equality of votes, articles may provide that chairman would be entitled to a second or
casting vote – the declaration of chairman as to the result of the vote is deemed to be final
 If a particular resolution requires a particular majority in value, resolution is not deemed to be
carried on a show of hands if the required majority of members are not present at the meeting
Chairman
 Articles of association usually provide that chairman of board of directors should preside as
chairman at every general meeting
 If chairman of board is not present or unable on the day of meeting, directors present at the
meeting are to elect one of their number to be chairman of the meeting
 In the absence of such provision, members present may elect any member present to act as
chairman
 Primary role of chairman is to:
o Preserve order at the meeting
o Call on members to speak
o Conduct vote at the conclusion of the discussion on each of the proposed resolution
 Chairman’s decision is to be final and conclusive unless chairman is found guilty of fraud or
some other misconduct

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Minutes
 Minutes of all the proceedings of all meetings are to be taken
 First on agenda is usually the approval of the minutes of the previous meeting
o Once approved, company secretary is to ensure that minutes are signed by the
chairman of the meeting
o Once signed, they are proof of proceedings of the meeting
 Members have right to inspect such minutes at the company’s registered office without a
charge

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7 – Legal Implications relating to companies in difficulty or
crisis

7.1 Insolvency
 When a company is insolvent, all of its creditors attempt to satisfy their individual claims
against the company at once which may result in the dwindling of all the company’s assets
 Insolvency law aims to prevent this by putting all creditors on a level playing field in which:
o All creditors’ rights and remedies are suspended
o A mechanism is established for the orderly collection and realization of assets
o These assets are distributed among creditors in accordance with the statutory scheme
of distribution
 When company becomes insolvent, its officer should be divested of their management powers
and an investigation of the company’s management should be carried out
o Proceedings may be initiated if evidence suggests that directors are culpable, civil and
criminal
 Winding up is done to protect the public in particular the creditors of the company from future
improper trading
Company is solvent at the end of winding up – surplus of assets to distribute among its shareholders
Company is insolvent at the end of winding up – not enough assets to cover the company’s debts
Two methods of winding up:
Compulsory / court winding up Voluntary winding up
Court plays an active and dominant role Court’s role is passive
None of the organs of the firm are involved Certain organs of the firm have a say
Once winding up order is issued, company is No analogous protection for the company
shielded from the institution of any further
actions against it
More advantages to persons managing the
company since it is less costly and more
expeditious

Members’ voluntary winding up – company has extraordinary resolution resolved for company to be
dissolved and wound up voluntarily – can only take place if the company’s directors file a declaration of
solvency of the company

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Advantages:
 Little to no court intervention
 Creditors do not have much control since the declaration of solvency acts as a guarantee that
their claims will be satisfied
Directors are obliged to switch to creditors’ winding up if on the expiration of the 12 months from date
of dissolution, it transpires that there are not enough assets to pay off creditors
Creditors’ voluntary winding up – court shall determine at its discretion whether company shall be
would up by court or voluntarily in the case of dissolution
Court shall allow a period of not more than 30 days before ordering dissolution of the company in
which firm may remedy the default and if proof is submitted than court shall not order the company’s
dissolution
Principal figures:
 Shareholders initiating process by extraordinary resolution in the general meeting
 Liquidator who takes control of firm once the winding up process is initiated
 Court who may order creditors’ voluntary winding up
Shareholders’ general meeting takes place – directors shall cause a meeting of the company for not
later than the 14th day after the meeting at which the resolution for dissolution and voluntary winding
up is passed – notice of said meeting of creditors shall be sent by post to creditors at least 7 days
before the meeting
 In these 14 days, directors are ousted from office once liquidator is appointed
 If liquidator is not appointed, directors should act with utmost circumspection and should not
make any transactions post general meeting unless urgent cases
A company shall be dissolved and wound up in the following cases:
 Company has extraordinary resolution resolved that company be dissolved and wound up by
court
 At the discretion of the court to decide if company should be dissolved and wound up if:
o Business of company is suspended for an uninterrupted period of 24 months
o Company is unable to pay its debts
 Tests used to determine this are cash flow and balance sheet tests
 Cash flow test – satisfied when a debt due by firm has remained
unsatisfied after 24 weeks from the enforcement of and executive titled
against the firm
 Balance sheet test – satisfied if proved that company is unable to pay its
debts taking into account contingent and prospective liabilities of the
firm
 No discretion of the court to decide if company should be dissolved and wound up if:

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 o Number of members is reduced below 2 and remains so for more than 6 months
o Number of directors is reduced below the minimum prescribed and remains for more
than 6 months
o Court is of the opinion that there are grounds of sufficient gravity to warrant the
dissolution and winding up of the company
 Example: objects of company are illegal or there is fraud, mismanagement or
lack of probity in the running of the company’s affairs
o When period fixed for duration of company by the memorandum or articles expires
o On the occurrence that memorandum or articles provide that company is to be wound
up and general meeting had not before such expiry passed a resolution to be wound up
voluntary
 May also apply to set up for the purpose of catering for and carrying out a tender
The request to the court for winding up is made by means of an application which may be made by:
 Decision of the general meeting
 By its board of directors
 Any debenture holder
 Creditors
 Contributories
Liquidator
 Takes control of the company with the aim of liquidating the assets of company and distributing
them according to law
 He has the sole aim of liquidating the firm properly and distributing the assets
 If company is being wound up by court
o Liquidator shall take into his custody all the property and rights which he has reasonable
cause to believe the company to be entitled
o Liquidator shall have power from the court or liquidation committee to
 Bring forward or defend any action or other legal proceeding in the name and on
behalf of the company
 Carry on business of company as may be necessary for the beneficial winding up
– no new business may be taken on but can do ancillary acts for example, order
new supplied to finish off a particular line of production
 Pay creditors according to their ranking at law
 Make any compromise with creditors
 Make calls on contributories and to affect any arrangement in relation to debts,
liabilities and claims of the company
 Represent company in all matters and do all such things as may be necessary for
winding up of the company and distributing its assets
 Sell movable and immovable property by public auction or private agreement

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  Do all acts and execute all deeds, receipts and other documents in the name and
on behalf of the company
 Raise on the security of the assets of the company any money requisite
 Appoint a mandatory to act for him in his capacity as liquidator for particular
purposes
 Liquidator has a fiduciary relationship
 Once the winding up process is concluded, liquidator must lay before general meeting the
below documents:
o An account of the winding up including receipts and payments
o Final audited accounts
o A proposal for the scheme of distribution of surplus assets
 There are 3-month term in which shareholders may object to any one of these documents – If
there are no objections, company is struck off the register
 A person shall not be qualified to act as liquidator unless he is:
o An advocate
o A certified public accountant
o auditor
o Registered with the registrar as fit and proper to exercise the function of liquidator
 A person may not act as liquidator if he held the below during the 4 years prior to the date of
dissolution:
o He has held office of director or company secretary
o Had held any other appointment with or in connection with that company
 Liquidator is prohibited from transferring or disposing of any assets of a company in favour of:
o Liquidator himself, his partners or employees, spouse or any person related to him up to
the third degree
o A commercial partnership of which he is a partner of
o A company which he is a director or of which he holds more than half in nominal value
of its issued share capital or entitled to more than half its voting power
Administration
 Insolvent company may continue to carry on business without going into liquidation as a last
attempt to save company from going into liquidation
 It will be operated by the administrator on behalf of the creditors as going concern
 Administrator will attempt to revive the company’s business by recapitalizing the business or
selling it as a whole or as smaller elements

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 7.2 Corporate Recovery (Corporate Rescue)
 A company which has run into financial difficulties could seek a safe harbor within which to
restructure the business without the constant threat of creditor action
 Intended to provide an opportunity for a company to address its problems free from the
pressure of creditors’ claims and actions
 If a company become aware that its unable to pay its debt company is to explore options of
dissolution and winding up or the company recovery procedure
 A company recovery procedure is initiated by means of a company recovery application made
to the court requesting it to place the company under such procedure and appoint a special
controller to take over, manage and administer the business of the company for a period
specified by the court
 Requirements for an application to made to the court:
o Company must be at present unable to pay its debts or will in the future be likely to
become unable to pay its debts
o Company has not been dissolved voluntarily and court has not issued a winding up order
in its regard
 The application may be brought by:
o The company following an extraordinary resolution
o Board of directors following a decision
o Creditors of the company representing more than ½ the value of the company’s
creditors
 Contents of the application:
o Shall give full facts, circumstances and reasons which left to the company’s inability to
pay its debts
o A statement by the applicants as to how the financial and economic situation of the
company can be improved in the interests of its creditors, employees and company
itself
 If application is made by the company, the following documents shall be annexed to it:
o Statement of company’s assets and liabilities made up to a date not earlier than two
months before date of application
o List containing names and addresses of creditors together with indication of the amount
due to each creditor and security of respective creditors
 If application is made by the creditors, it shall be accompanied by appropriate supporting
documentation and statements
 Upon submission of an application and unless it is dismissed or during the period during which
the company recovery procedure is in force:
o Any pending or new winding up application be stayed
o No resolution for the dissolution and winding up of the company may be passed or
given effect to

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 o Execution of claims of a monetary nature against company and any interest accrued is
to stay
o During tenure of lease – no landlord to whom rent is payable may terminate lease of
the premises held by the company if firm fails to comply with term or conditions of its
tenancy of such premises unless imposed by court
o During hire-purchase agreement – cannot enforce any security over property of the
company unless imposed by court
o No precautionary or executive act or warrant mentioned in the code of organization and
civil procedure shall be made against company or property of company unless imposed
by court
o No judicial proceedings shall be commenced or continued against company or its
property unless imposed by court
 Termination of company recovery order must be approved by court and may be initiated by:
o Special controller after consulting with joint creditors and members committee
 No useful purpose for company to continue with such procedure
 Shall make an application to the court with his detailed and
comprehensive reasons for termination
 Once application is received, court orders company to be wound up –
such order has to be forwarded by the Registrar of Courts to the Registrar
for registration
 Affairs of company have improved and is in a position to pay its debts
 Shall make an application to the court with his detailed and
comprehensive reasons for termination
 Court shall make provisions and conditions as it may consider necessary
o Directors of the company or members in an extraordinary meeting
 Submit application to court with appropriate supporting documentation and
information confirming that they are satisfied and request the court to issue
termination of the procedure
 Court shall make provisions and conditions as it may consider necessary
Role of Courts
 Court can dismiss application or issue a company recovery order
 Court should only issue order if:
o It is satisfied that company is or is likely to become unable to pay its debts
o It would result in the survival of the firm as a viable going concern in part or in whole
o It would result in a compromise or arrangement between the company and any of its
creditors or members
 Court should take into account:
o Best interest of creditors, shareholders and company itself and possibility of
safeguarding employment

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 o Cost incurred in fees and charges by adopting the company recover procedures
 Decision should be made within note more than 20 working days by filing of the application

Special Controller
 Appointment
o Court shall appoint an individual to carry out administration and management of the
property and business of company
o Court shall fix a reasonable remuneration taking into account the firm’s financial
position, business and assets
o Determine period (not more than 10 working days) within which firm has to deposit a
sum of money in court or offer any other guarantee which is sufficient to cover
remuneration and charges by appointing a special controller
 Eligibility
o An individual who the court establish that:
 Has proven competence and experience in the management of business
enterprises
 Is qualified and willing to accept the appointment
 Has no conflict of interest in relation to his appointment
o As long as special controller holds office, his full name, residential or business address is
to be clearly indicated in all the business letters, order forms, invoice and any other
documents of the firm
 Powers and duties
o Company shall continue to carry on its normal activities under the management of the
special controller
o Special controller shall upon his appointment:
 Take into his custody all the property of the firm to which he is responsible to
manage and supervise its activities, business and property
 Shall examine the assets, affairs and business performance of the company
 Shall verify that there is a reasonable expectation of the company’s recovery and
continuation as a viable going concern
 Shall submit an initial report to the court not later than 2 months from his
appointment
o Any power held by its directors or officers shall be suspended upon appointment of
special controller and is assumed and exercised by the special controller unless special
controller consents for such power to be held generally or in particular cases
o No meetings shall be held except if imposed by court
o Special controller has the power to:
 Remove any director and appoint any individual to serve as manager after
informing court by means of notice

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  Engage persons for the provision of professional and administrative services and
commit company to the payment of their respective fees and charges
 Call any meeting of the members or creditors of the company
o Special controller shall not without prior authorization of the court:
 Engage company into any commitment of more than 6 months duration
 Termination of employees
 Sell or dispose property of company to himself, his spouse or relatives
o His appointment can be extended if special controller request it and good cause is
shown but court has to hear the views of directors beforehand
Meeting of creditors and members
 Within one month of his appointment, special controller shall convene meetings of creditors
and members for the purpose of:
o Laying before them their information and review the company’s affairs together with
preliminary proposals on future prospects and management of the company
o Appointing a joint creditor (not more than 3) and members (not more than 3)
committee to render such advice and assistance as special controller may require in the
management of the affairs, business and property of the firm
 Not less than 14 days’ notice shall be given of the holding of such meeting and special controller
shall send a copy of the notice of the meeting to any directors or officers of the company
Fraudulent and wrongful trading
 Usually brought by the liquidator but may be brought by the special controller during the
company recover procedure
 If it appears to the special controller that there is fraudulent or wrongful trading, he does not
need to see through the end of his appointment but may file action for this immediately
 Fraudulent trading
o Court on application of special controller may declare that any knowingly parties be
personally responsible without any limitation and is liable of an offence and liable to a
fine of note more than EUR 232,937.34 or imprisonments for term not exceeding 5
years or both
 Wrongful trading
o When a director knew or ought to have known that company is unable to pay its debts
or is likely to become unable to pay its debts
o Court on application of special controller may declare that person is liable to make
payment towards the company’s assets as the court thinks fit
o Court shall not grant this if it is satisfied that person took every step to minimize
potential loss to the company’s creditors
Special controller’s final report

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  Shall submit a written final report to the court after the end of the period of his appointment
containing his detailed and comprehensive opinions and reasons as to whether or not the
company has reasonable prospect to continuing as a viable going concern and will be in a
position to pay its debts regularly in the future
o If yes – it shall additionally have attached to it a precise and detailed recovery plan
containing all the proposals required to enable company to continue as a viable going
concern including proposals in relation to financial resources, retention of employees
and future management of the firm. it shall have explained the proposed manner of
paying creditors and whether a voluntary compromise has been reached with all the
creditors or whether it is proposed that court sanction a compromise
 Court may reject or accept the proposed recovery plan as is or with amendments – if accepted,
the recovery plan shall be effective and binding on all interested parties for all purposes of the
law

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8 – Corporate Fraudulent and Criminal Behaviour

8.1 The Prevention of Market Abuse Act

 Purpose of this act is to safeguard the integrity of Maltese and Community financial markets
and to enhance investor confidence in those markets
 The act shall apply to financial instruments admitted to trading on a regulated market in Malta
or in any member state or EEA state or for which a request for admission to trading on such
market has been made
 Market abuse is defined as:
o Insider dealing
 A person uses or seeks to use inside information known and acquired by virtue
of his position to trade to his advantage or advantage of others
 Act prohibits anyone with inside information from:
 Disclosing it to any other person unless this is done as part of the normal
court of his employment or duties regardless of if the person knows or
not that such person will make use of such information for dealing
 Recommending another person to acquire or dispose financial
instruments based on that information
 Counselling a person to deal on a regulated market in those financial
instruments
 Inside information is categorized into 3:
1. Financial instruments that are not commodity derivatives – precise
information which has not been made public that would likely to have a
significant effect on the prices of financial instruments if it were to be
made public. Example: information about a takeover offer for a company
2. Derivatives on commodities – precise information which has not been
made public relating to derivatives and users of the market where
derivatives are traded
3. Persons charged with execution of orders concerning financial
instruments – precise information which has not been made public that
would have a significant effect on the prices of those financial instruments
or price of related derivative financial instruments if made public
 Information is precise if it indicates a set of circumstance which exist or is
expected to exist and if it is specific enough to enable a conclusion to be drawn
on the possible effect of the circumstances or event

o Practice of market manipulation

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  Person seeks to distort the price of financial instruments or effect transactions in
a manner which gives or is likely to give false or misleading signals about
financial instruments
 4 ways of market manipulation:
1. False or misleading transactions – where transactions give false or
misleading signals for the demand or supply or price of financial instrument
2. Price positioning – where transactions by persons acting together result in
the price of a financial instrument to be at abnormal or artificial level
3. Fictitious devices – where transactions employ fictitious devices or any
other form of deception
4. False or misleading information – where dissemination of information via
the media or other means gives misleading signals, news or rumors about
financial instruments by person who knew that such information was false
or misleading
 For 1 and 2, if someone can establish that there are legitimate reason for their
behavior and it is a market accepted practice, then the behavior is not regarded
as market abuse
 This is a matter of national discretion thus are the responsibility of the MFSA
 Instances of market manipulation:
- Persons collaborating to secure a dominant position over a supply or
demand for a financial instrument which has the effect of fixing purchase or
sale prices or other unfair trading conditions
- Buying or selling of financial instrument at close of market to mislead
investors who act on the basis of closing prices
- Taking advantage of access to media by voicing an opinion about a financial
instrument you have previously taken position on or its issuer and profiting
from impact of the opinions voiced on the price of that instrument without
disclosing the conflict of interest
 Punishment of Market Abuse
 Natural persons
- fine of not less than EUR 5,000 and not exceeding EUR 5,000,000
- up to 3x profit made or loss avoided whichever is greater
- imprisonment for a term not exceeding 6 years
- both
 Legal persons
- fine of not less than EUR 5,000 and not exceeding EUR 15,000,000
- up to 3x profit made or loss avoided whichever is greater
- exclusion from entitlement to public benefits or aid
- temporary or permanent disqualification from practice of commercial
activities
- judicial winding up

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 - temporary or permanent closure of establishment which have been used
for committing the offence
 A person may not be sanctioned more than once for the same action
 Act shall not apply to:
- Buy-back programs
 Trading in own shares
 Buy-back program must comply with articles 4, 5 and 6 of the Regulation
 Article 4 – procedural conditions and disclosure requirement
with which an issuer must comply with when effecting a buy-
back program
 Article 5 – requirements which apply when issuer executes the
trades under such program
 Article 6 – restrictions to the trading by the issuer in its own
shares
 Sole purpose must be to:
 reduce the capital of an issuer (in value or number of shares)
 meet obligations arising from debt financial instruments
exchangeable into equity instruments
 meet obligations arising from employee share option programs
- Stabilization of financial instruments
 Any purchase or offer to purchase relevant securities
 Any transaction in associated instruments by investment firms or credit
institutions undertaken in significant distribution of such securities for
supporting the market for a predetermined period of time
 Must comply with articles 8, 9 and 10 of the Regulation
 Article 8 – set of time limits within which stabilization may be
carried out
 Articles 9 – disclosure and reporting requirements relative to
stabilization
 Article 10 – dictates applicable price conditions for the effecting
of the stabilization exercise

Duties and disclosure obligations

 MFSA imposes a number of requirements on certain relevant persons to detect and control
market abuse:
o Issuers of financial instruments admitted to a regulated market are required to:
 Disclose inside information to the general public by public announcement in the
form of notice

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  Must be made promptly and synchronized on the interest site of the
issuer and published in newspapers distributed widely in Malta and in
any other states applicable and cannot be combined in a misleading
manner with the marketing of the issuer’s activities
 May be delayed by issuers to protect their legitimate interest provided
that confidentiality of information is ensured during the delay and delay
won’t mislead public
 List of insiders who have access to inside information – list must be regularly
updated and must be provided to the MFSA
o Persons in managerial responsibilities within an issuer of financial instruments
registered in Malta whose financial instruments have been admitted to trading on a
regulated market and persons closely related to them
 Must notify MFSA of the existence of transactions conducted on their own
account relating to shares of the said issuer or to derivatives of other financial
instruments linked to them
 Such person is a member of the administrative, management or supervisory
bodies of the issuer or senior executive having regular access to inside
information which have the power to make managerial decisions affecting the
future development and business prospects of the issuer
 Examples:
 Board of directors
 Executive committee
 Management committee
 Audit committee
 Remuneration committee
 No notification is required until total amount of transactions has reached EUR
5,590 (LM 2,400) at the end of the calendar year
o Persons professionally arranging transactions in financial instruments
 Are required to notify the MFSA in the manner specified on any suspicious
transactions which might constitute market abuse
 Recognized investment exchanges (RIEs) are required to give MFSA notice of any
evidence suggesting that a person may, has or is likely to commit an offence
 These have a duty of confidentiality and are required to not inform any other
persons except for the MFSA
Possible signals of insider dealing or market manipulation
 Unusual concentration of transactions in a particular security
 Unusual repetition of transactions among a small number of clients over a period of time
 Unusual concentration of transaction with only one client or different securities of one client or
with a limited number of clients

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Possible signals of insider dealing
 Client opens account and immediately gives order to conduct a significant transaction
 Unexpectedly large and unusual orders in a particular security
 Client’s requested transaction is significantly out of character with the client’s previous
behavior
 Client requests immediate execution of order regardless of price
 Significant trading by major shareholders or insiders before announcement of important
corporate events
 Unusual trading in shares of company before announcement of price sensitive information
relating to the company
 Employees own account transactions timed just before clients’ transactions
Possible signals of false or misleading transactions or price positioning (Market Manipulation)
 Extent to which orders to trade given represent a significant proportion of the daily volume or
transactions in the relevant financial instrument in particular when these lead to a significant
change in the price
 Extent to which order to trade given by persons with a significant buying or selling position in a
financial instrument led to significant changes in the price of the financial instrument
 Whether transactions lead to no change in beneficial ownership of the financial instrument
 Extent to which orders given include position reversals in a short period and represent a
significant proportion of the daily volume
 Extent to which orders given are concentrated within a short time span in the trading session
and lead to a price change which is subsequently reversed
 Extent to which order to grade given change the representation of the best bid or offer prices in
a financial instrument or the representation of the order book available to market participants
 Extent to which orders to trade given are undertaken at a specific time when reference prices,
settlement prices and valuations are calculated and lead to price changes
 Whether order to trade is preceded or followed by dissemination of false or misleading
information by the same persons or persons linked to them

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 8.2 The Prevention of Money Laundering Act
Duties of producers of recommendations (Money Laundering)
 These requirements have purpose of ensuring that recommendations with respect to financial
instruments are:
o Fairly presented
o Disclosed any possible conflict of interest
 A recommendation is defined as being information recommending or suggesting an investment
strategy concerning financial instruments or their issuers including any opinion of present or
future value or price of such instruments intended for distribution channels or for the public
 Rules:
o Disclosure requirements with respect to the identity of the producers of
recommendations
o Standards and obligations with respect to the fair presentation of recommendations and
disclosure of any conflicts
o Standards for dissemination of recommendations by third parties
 Any person who does not satisfy the duties above is subject to a fine by the MFSA not
exceeding EUR 93,174 (LM 40,000)
Nature and Legal control over Money Laundering
 MFSA issued Guidance notes that outline the requirements of the Prevention of Money
Laundering Regulations and provide a practical interpretation of the Regulations
 These notes assist persons licensed to carry credit and financial, investments and life assurance
business to develop policies and maintain procedures appropriate to their business in order to
avoid people using such businesses for money laundering and funding of terrorism
 Activities which constitute as money laundering:
o Conversion or transfer of property knowing that property is derived from criminal
activity for the purpose of concealing the origin of the properly or assisting persons
involved
o Concealment of the true nature, source, location, disposition, movement, rights or
ownership of property derived from criminal activity
o Acquisition, possession and use of property deriving from criminal activity
o Retention without reasonable excuse of property knowing it was derived from criminal
activity
o Acting as an accomplice in respect of any of the above activities
 Criminal activity is any activity that amounts to:
o Any production, manufacture, preparation, distribution, transport, offer, sale,
importation, exportation or purchase of any narcotic drug or psychotropic substance
o Any criminal offence
 Knowledge is the determining factor for the offence of money laundering to occur

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  Money laundering is a criminal offence punishable by a fine not exceeding EUR 1 million or
imprisonment for a period not exceeding 5 years
 Some countries consider the proceeds of all criminal activities to be dirty money while other
countries consider that only proceeds derived from certain serious crimes constitute as dirty
money – in Malta, any offence is considered as such as from 2005
Investigation order
 Upon receipt of a suspicious transaction report from the Financial Intelligence Analysis Unit
(FIAU), the Attorney General requests the criminal court to issue an investigation order if he
consider that there is reasonable cause to proceed with the investigations
o Court will only issue an investigation order upon being satisfied that there are grounds
of suspicion
o Investigation order is served to people who are likely to have information of value to the
investigation such as banks, MFSA, registrar of courts
o If any person named in the investigation order fails or refuses to comply is guilty of an
offence and is punishable on conviction by a fine not exceeding EUR 11,646 (LM 5,000)
or 1 year imprisonment
Attachment order
 Attorney General may also apply to the criminal court for the issuance of an attachment order
 It is similar to a garnishee order as it attaches the hands of persons mentioned in the order who
are obliged to declare in writing to the AG the nature and source of all money and other
movable property
 When this is issued, suspect is prohibited from transferring or disposing of the property
Prevention of Money Laundering and Funding of Terrorism Regulations
 Subject persons are obliged to take appropriate steps to identify and assess the risks of money
laundering and terrorist financing whilst taking into account risk factors
1. Subject persons are legal or natural persons carrying out relevant financial business
 Auditors
 External accountants
 Tax advisors
 Real estate agents
 Notaries and other independent legal professions in relation to assisting in the
planning or execution of transactions for their clients
2. Steps are to be proportionate to the nature and size of the subject person
3. Risk factors include those relating to their customers, countries or geographic areas,
products services etc.
 Risk assessments shall be documented, kept up-to-date and made available to the relevant
competent authorities which may decide that such risk assessments are not required where the
specific risks inherent in the sector are clear and understood

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  Know-your-customer has been enhanced since these regulations revolve around the due
diligence procedure which must be carried out by subject persons. The aim is to:
1. Ensure that subject person knows the customer
2. Subject person can provide its part of the audit trail if customer comes under
investigation in the future
3. Enable suspicious customers and transactions to be recognized and reported to
authorities
 The regulation cover:
1. Identification procedures – evidence of identity is satisfactory is applicant is the person
who he claims to be
2. Record keeping – credit and financial institutions are required to retain records
concerning customer identification and details of transactions for use as evidence
3. Recognition and reporting of suspicious transactions – a suspicious transaction is one
which is inconsistent with the customer’s normal business; failure to report a suspicious
transaction is punishable by a fine not exceeding EUR 50,000 or imprisonment not
exceeding 2 years
4. Education and training of all employees
5. Internal controls and communications of policies
Financial Intelligence Analysis Unit
 May determine that legal and natural persons who engage in financial activity on a limited basis
and where there is little risk of money laundering or funding of terrorism occurring, do not fall
within the scope of relevant financial business
 FIAU basis its reasoning on the turnover of the financial activity which must not be more than
EUR 15,000, the type of transaction and whether the financial activity is directly related to the
main activity
Customer Due Diligence
 Need to be carried out for the purpose of preventing money laundering and the funding of
terrorism
 No subject person may form a business relationship or carry out an occasional transaction
unless necessary due diligence took place
 Customer due diligence shall compromise of:
o Identification on documents obtained from a reliable source
o Identification of beneficial owners by subject persons for trusts, corporate structures
and other entities
o Obtaining information on the purpose and intended nature of the business relationship
such that subject person is able to establish business and risk profile of customer
o Conducting ongoing monitoring of the business relationship
 Customer due diligence shall apply to all new customers

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  Subject persons have to ensure that they have effective customer acceptance policies and
verify the identity of the applicants for business
o These may rely on third party information but remains responsible for compliance with
the requirements of this regulation
o Information and documents kept by subject persons may be used for investigations by
the FIAU or any other competent authority and shall be available on request
o Such documents have to be kept for a period of 5 years from the date in which the
financial business was completed
o Records containing details of transactions carried and examination of such transactions
shall be kept for a period of 5 years from date of dealings
o Subject persons have obligation to examine with special attention and to the extent
possible the background and purpose of large transactions and patterns which will likely
be related to money laundering or funding of terrorism
o If subject person has suspicion or reasonable doubts, he must disclose that information
supported by relevant documentation to the FIAU by not later than 5 working days
 If an applicant for business makes a false declaration, person is guilty of an offence and liable
on a fine not exceeding 50,000 or imprisonment for a term not exceeding 2 years
o If an applicant for business is acting on behalf of a principal, person must ensure that he
is duly authorized by the principal to act as such
 Simplified customer due diligence – when a person is already authorized or licensed in another
member state to conduct such business; subject person still has to gather sufficient information
to ensure applicant for business qualifies accordingly
 Enhanced customer due diligence – on a risk sensitive basis if a situation by its nature can
present a higher risk of money laundering and funding of terrorism
 No due diligence – in case of certain insurance policies and certain pensions
Offence of Tipping off
 Any bona fide disclosure made to any supervisory authority is not treated as a breach of the
duty of professional secrecy
 A subject person and supervisory authority shall not disclose to a third party or person being
investigated that an investigation is taking place – this will carry a fine not exceeding EUR
50,000 and imprisonment not exceeding 2 years
Role of the Money Laundering Reporting Officer (MLRO)
 Required to determine whether information contained in an internal suspicious transaction
report give rise to knowledge or suspicion that a customer is engaged in money laundering
 Not expected to investigate the transaction other than internally or to determine whether
funds are the proceeds of criminal activity
 He must consider all other relevant information available within the institution concerning the
person
 He has reasonable access to any information held by it which may assist him

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  Obligation of reporting a suspicious transaction is on the subject person
 Responsibility to ensure that appropriate reporting procedures are complied with lies on the
credit and financial institution
 Use of information disclosed by the subject person can only be used for investigations
connected with money laundering activities
The setting up of the Financial Intelligence Analysis Unit (FIAU)
 FIAU is a government agency having distinct legal personality and reports directly to Parliament
 FIAU is responsible for the collection, processing, analysis and dissemination of information
with a view to combating money laundering and funding of terrorist financing
 Acts as an intermediary between the credit and financial institutions and other relevant
financial business bound by the regulations and the police authorities
 Law grants wide powers to the unit in order to perform its duty to combat money laundering
and terrorist financing
 May carry out on-site examinations on the subject persons by FIAU or MFSA
 Functions of FIAU:
o Receiving reports of transactions suspected to involve money laundering or funding of
terrorism
o Sending analytical reports to the commissioner of police for further investigation
o Monitoring compliance by subject persons to law, regulations and guidance notes
o Instructing subject persons
o Gathering information on the financial and commercial activities in the country
o Promoting training and provide training for personnel of subject persons
o Advising and assisting persons to put into place and develop effective measures
o Exchanging information with any foreign body
The cycle of money laundering
 Money laundering is a single process but can be divided into 3 stages:
1. The placement stage
 Initial entry of the dirty money into the financial system
 It relieves the criminal of holding and guarding large amounts of bulky cash
 It places the money into the legitimate financial system
 Money launderers are most vulnerable to be caught at this stage since it may
raise suspicions
 Common methods:
 Loan repayment – repaying loans with illegal proceeds
 Gambling – purchase of gambling chips and placing bets
 Currency smuggling – physical movement of illegal money over the
border
 Currency exchanges – purchasing foreign money with illegal funds

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  Blending funds – using a legitimate cash focused business to co-mingle
dirty funds
2. The layering stage
 Also referred to as structuring
 Most complex and often entails the international movement of funds
 Primary purpose is to separate the illicit money from its source which is done by
the sophisticated layering of financial transactions
 Money launderers may begin by moving funds electronically from one country to
another which are then divided into investments placed in advances financial
options or overseas market; constantly moving them to elude detection and
exploiting loopholes
3. The integration stage
 Money is returned to the criminal from what seem to be legitimate sources
 The dirty money has been place initially as cash and layered through a number of
financial transactions thus processed are now fully integrated into the financial
system and can be used for any purpose
 Major objective at this stage is to reunite the money back with the criminal in a
manner that does not draw attention and appears to result from a legitimate
source
 This technique involves the use of many individuals who exchange illicit funds for highly liquid
items; these instruments are then given to the launderer to begin the layering stage
Nature and legal control over bribery
 Bribery is the act of giving or receiving a financial advantage for an improper performance of a
position of trust that is expected to be performed in good faith
 Does not have to involve cash or and actual payment and can take many forms
 Bribery by Public Officers
o Any public officer who in connection with his employment requests, receives or accept
any reward or promise in money or other valuable consideration he is not entitled to
 Object of bribe is to induce officer to do what he is in duty to do – imprisonment
of a term 6 months to 3 years
 Object of bribe is to induce officer from doing what he is in duty to do –
imprisonment of a term 9 months to 5 years
 Officer accepts bribe and fails to do what he is in duty to do – imprisonment of a
term 1 year to 8 years
o Seizure of property belonging to persons charged or accused of the criminal proceedings
shall not apply in regard to bribery cases committed by a Minister, Parliamentary
Secretary, member of the house of representatives, major or local councilor
o Failure of duty consisting in passing sentence on defendant – imprisonment of 18
months to 10 years; a higher punishment than 10 years may be applied
o Failure of duty consists in releasing of a person charged

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  If failure of imprisonment for a term of 2 years – imprisonment of 3 to 9 years
 If failure of imprisonment not higher than 2 years but not in the class of
contraventions – imprisonment of 18 months to 5 years
 Failure of contraventions – imprisonment of 9 months to 2 years
o Member of house of representatives who requests, receives or accepts a bribe with
object influencing him of his conduct – imprisonment of 1 year to 8 years
o Perpetual general or special interdiction shall be added to punishments when
maximum exceeds 2 years imprisonment
o Temporary general or special interdiction shall be added when maximum does not
exceed 2 years imprisonment
o Person who bribes is deemed to be an accomplice
o Where public officer does not commit crime, person who attempts to bribe shall be
liable to imprisonment of 6 months to 3 years
 Contraventions – punishment shall not exceed 18 months
o Where house of representatives does not commit crime, person who attempts to bribe
shall be liable of imprisonment of 6 months to 4 years
 Embracery and corruption of other persons – the above also apply to the following:
o Any person who is entrusted with the administration of a corporate body having a
distinct legal personality
o Juror shall include a lay person which has the responsibility of deciding on the guilt of
accused person in the framework of a trail
o Any employee when working in capacity on behalf of a natural or legal person operating
in a private sector who knowingly conducts himself in any manner provided above in
breach of his duties
 Bribery to foreign public officials
o The above bribery provisions also apply when an offence was committed outside Malta
by a Maltese citizen or a permanent resident in Malta or has its headquarters in Malta
o Any public officer of any foreign state including any member of a domestic public
assembly of any foreign state which exercises legislative or administrative powers
o Any officer or employee of any international or supranational organization
o Any member of a parliamentary assembly of any international or supranational
organization
o Any holder of judicial office or any official of any international court
o Any member or officer of a local council
o Such provisions also apply to any person called upon to act as arbitrator
 Trading in influence
o Any person who promises, gives or offers any undue advantage to any person who is
able to exert an improper influence over the decision-making of any person to exercise
such influence – imprisonment of 3 years to 6 years

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 o Receive or accept any offer or promise of any undue advantage with the object
exercising any improper influence
o Such offences are complete whether or not the alleged ability to exert an improper
influence existed and whether or not the influence leads to the intended result
 Accounting offences
o Any person with the intent to commit or conceal any offence or creates and uses any
accounting document containing false or incomplete information or unlawfully omits to
make a record of payment – liable to imprisonment of 3 months to 18 months
 Jurisdiction of the Maltese courts over offences where:
o Only part of action giving execution to the offence took place in Malta
o Offender is a Maltese national or permanent resident in Malta
o Offence involves public officer, house of representative or local council of Malta
o Offence involves any of those persons of any international or supranational organization
 Corporate liability
o Where person found guilty is a director, manager, secretary, the principal officer, have a
power of representation or authority to take decisions of a body corporate and the
offence was committed for the benefit of that body corporate, the said person is
deemed to be vested with the legal representation of the same body corporate and
liable for a fine of EUR 1,164.69 – EUR 1,164,686.70
o Where a person who found guilty was at the time an employee of the body corporate,
was done for the benefit of the body corporate and was rendered because of the lack of
supervision or control by director etc is liable for a fine of EUR 10,000 – EUR 2,000,000
Foreign anti-bribery law
 Maltese companies and agents must be aware of potential cross-border liability under certain
jurisdictions where corrupt practices include less obvious forms
Criminal activity in the operation, management and winding up of the companies
 Fraud in anticipation of dissolution
o Any person who was an officer of the firm who was dissolved shall be guilty of an
offence within 12 months after date of dissolution if he has:
 Concealed company’s property or any debt due
 Fraudulently removed company’s property
 Concealed, destroyed or falsified any documents relating to firm’s property and
affairs
 Made false entry or altered documents relating to firm’s property and affairs
 Pledged or deposited of any property which has been obtained by credit and not
yet paid unless done in the ordinary business of firm
 Obtained property on behalf of company on credit by false representation
 Obtained consent of creditors by false representation

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 o A person charged can prove that he had no intent to defraud or conceal the affairs of
the company or to defeat law
 Fraud by officers of companies being wound up
o A person is guilty of an offence when company is being wound up if he:
 Made a gift or transfer of any executive title against the property of the firm
 Concealed or fraudulently removed property of the company within two months
before order for payment of money against firm
o A person is not guilty if he proves that he had no intent to defraud the company’s
creditors
 Other offences by officers of companies being wound up
o A person is guilty of an offence when company is being wound up if he:
 Does not to the best of his knowledge fully reveal to liquidator all the property
of the company including how, to whom, for what consideration and when
company disposed of any part of such property
 Does not deliver to the liquidator property of the company in his custody which
is required to be delivered up by law
 Does not deliver to the liquidator all accounts, accounting records and
documents in his custody which is required to be delivered up by law
 Makes material omission in any statement relating to the affairs of the firm
 Fails to inform liquidator within one month that a false debt has been proven by
an person in winding up
 Prevents production of any documents relating to the property or affairs of
company after dissolution of company
 Attempts to account for property of the company by fictitious losses or expenses
within 12 months of the dissolution
 Remedy against delinquent directors
o Apply in the winding up of a company either by court or voluntarily if person:
 Is or has been officer of the company
 Acted as liquidator of company
 Has taken part in the promotion, formation or management of the company
 Has misapplied or retained any money or property of the company
 Is guilty of any improper performance or breach of duty
o Court may compel him:
 To repay, restore or account for the money or property with interest at what
rate court thinks fit
 To contribute sum to the company’s assets by way of compensation
o No requirement for company to be insolvent – it is intended to protect both creditors on
insolvency and shareholders in a solvent situation
o Remedy to apply is not only for the liquidator since it can also be done by creditors and
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 o Duty of directors to act in the best interests of the company requires consideration of
the interests of the creditors and shareholders
o Direct duty towards shareholders in case of solvency and towards creditors in case of
insolvency
o Directors is compelled to contribute not the company’s debts in principle, but the
director’s debts owed to the company
 Fraud by officers of companies subsequently dissolved
o Any person who is an officer of a company which is subsequently dissolved is guilty of an
offence if he has:
 By false pretenses induced any person to give credit to the company
 With intent to defraud creditors of the company made any gift or transfer at the
enforcement of any executive title against the company
 With intent to defraud creditors of the company, concealed or removed property
of the company or within 2 months before the date of any unsatisfied judgement
or order for payment of money obtained against company
o A person is not liable if an offence occurred more than 5 years before the date of
dissolution
 Liability when proper accounting records are kept by insolvent company
o If when the company is dissolved it is shown that proper accounting records were not
kept by the company in 2 years before the dissolution or in the period of the dissolution,
whichever is shorter, every officer who is in default unless shown that he acted
diligently, shall be guilty of an offence
FRAUDULENT TRADING
 Person liability on certain persons whenever the firm has been involved in fraudulent trading
 If this provision on fraudulent trading is implemented, there will be the lifting of corporate veil
of the company and there will be imposition of unlimited liability of the persons involved
 Liability can be imposed upon directors, shareholders and also any person who has been
involved in fraudulent trading
 Both creditors and creditors who have not been defrauded will be able to benefit from the
application of this article and thus be entitled to compensation
 Amount of liability which can be imposed by the court is not limited to the amount involved in
fraud but court may impose a higher liability than the amount involved in fraud
 Limitations:
o Can only come into effect in the course of winding up – cannot come into effect if fraud
in a company which is still a going concern and not in a state of dissolution
o Imposes liability for fraud and there is a very heavy burden of proof which has to be
satisfied for fraud
o Imposes not just a civil liability but also criminal liability subject to fine and
imprisonment

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  Sunshine defense may be brought by the directors of a company against whom an action for
fraudulent trading is filed – if directors of the company genuinely believed at the time when the
trading activities were carried out that the financial difficulties experienced were only
temporary; then directors should not be held personally liable
 If court finds out that there has been fraudulent trading, it may declare such defendant to be
personally responsible without any limitation of liable for all debts and any other liabilities of
the company as court seems fit
o Liable for a fine of EUR 232,937.34 or imprisonment of a term not exceeding 5 years

WRONGFUL TRADING
 A separate provision of wrongful trading was introduced instead of lowering the level of proof
required for fraudulent trading
 A form of compensation for the mismanagement of the firm than the very high standard of
proof required in criminal offences which is not required here
 Four matters have to be kept in mind:
o Such provision can only be applied if company is in the course of winding up
o In a contribution order under such provision, the court will order director to make
contribution to the assets of the company for eventual distribution amongst creditors
o Can only apply to impose liability either on the directors or any person held liable
o For a court to make a contribution order, liquidator must satisfy the below
requirements:
1. Before commencement of the winding up process, person involved was director or
shadow director
2. Such directors knew or should have known that there was no reasonable prospect
for the firm to avoid going into insolvent liquidation
o Court will not make such order if it is satisfied that director took every reasonable step
possible to minimize the potential loss to the creditors of the company
 Examples that could lead to liability for wrongful trading if company is insolvent:
o Company is approaching insolvent liquidation and directors do nothing to collect
whatever amounts are due to company
o Directors fail to preserve the assets of the company
o Liquidation is approaching and directors pay excessive remuneration to themselves or
top management of the company
o Company enters into transactions at an undervalue

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Package kit for survival – actions that can minimize as far as possible the risk that they would be found
guilty of wrongful trading and thus limit the liability of the directors
 Directors of company should not cease trading when they realize that company is heading into
financial difficulties since this does not mean that you have minimized creditor’s loss
 Directors have to meet to determine if business if viable or not
o Not viable – company is to be put into liquidation
o Viable – draw up proper business plan
 Ensure that frequent and regular board meetings are held
 Keep proper and adequate records of the company to avoid responsibility for wrongful trading
 Regular and updated budgets being put to the board of directors
 Financial statements to be presented at least on a monthly basis or at least on quarterly basis
 Get professional advice from outside if they think that such advice might be useful
 Make sure to inform all the creditors of the company and keep them informed on the current
financial situation of the company
 Consider applying the company recovery procedure if financial situation worsens
 Ensure that whatever decisions they take regarding remedial action is to be properly recorded
in the minutes which shows a degree of prudence being exercised by the directors
 If director has been in a minority for a considerable period of time, such director should
consider resigning from the board of directors; it is the last resort since resignation will not
prevent director from behind held responsible for wrongful trading

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