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Review of the Events at the Time of the National Bank of Malta Crisis 1973-1974 Compiled by Dr. E Micallef LL.D

RUN ON THE NATIONAL BANK OF MALTA - THURSDAY 6 DECEMBER 1973 CENTRAL BANK OF MALTA FAILS IN IT'S DUTY TO ACT A LENDER OF LAST RESORT TRANSFER OF SHARES WITHOUT COMPENSATION PRIME MINISTER THREATENS SHAREHOLDERS WITH THE REMOVAL OF THE LIMITED LIABILITY THE NATIONAL BANK OF MALTA WAS DELIBERATELY PREVENTED FROM BORROWING MONEY FROM FOREIGN BANKS DIRECTORS OF THE NATIONAL BANK OF MALTA SUCCUMB TO THE THREAT OF THE REMOVAL OF THE LIMITED LIABILITY (10 DECEMBER 1973) PRIME MINISTER ANNOUNCES SETTING UP OF NEW BANK LINO SPITERI TAKES CHARGE OF THE ASSETS OF THE NATIONAL BANK OF MALTA 10% OF THE SHARES HELD BY THE SECOND HALL OF THE CIVIL COURT TRANSFERRED BY JUDGE XUEREB FOR NO VALUE PARLIAMENT LEGISLATES TO SET UP COUNCIL OF ADMINISTRATION THE BANK HAD GOOD FINANCIAL BASE AND RUN WAS UNJUSTIFIED NATIONALIST PARTY REQUESTS ENQUIRY THAT WAS DENIED THE ACCOUNTS AS PERCEIVED BY THE COUNCIL OF ADMINISTRATION FAIL TO BE PRESENTED AT THE SHAREHOLDERS MEETING ALL ASSETS AND LIABILITIES OF THE NATIONAL BANK OF MALTA TRANSFERRED TO BANK OF VALLETTA (MARCH 22 1974) NATIONAL BANK OF MALTA AUDITED ACCOUNTS ARE PRESENTED AND SHOW A LOSS AFTER THE PROVISION OF BAD AND DOUBTFUL DEBTS WERE INFLATED BY 300% (MARCH 27 1974)

THURSDAY 6th December, 1973. The first tremor that signaled trouble for the National Bank of Malta Ltd.(NBM), was registered on Thursday, 6th December, 1973 when some branches reported withdrawals that were heavier than normal. That same day, the General Manager, Mr. Henry Micallef was called for a meeting at the Central Bank(1) where he met the Assistant Governor, Mr. Lino Spiteri. The latter asked him what had happened and Mr. Micallef informed him of the withdrawals but assured him that there was nothing serious and that extra funds had been made available to the branches to make good for any further withdrawals He further re-assured him that the Bank had enough liquidity to meet a heavy demand and that it had experienced several other runs before and had managed through them safely(2). People usually deposited the money a few days after they had withdrawn it.

FRIDAY 7th December, 1973. The following day, Friday the 7th, the withdrawals continued and the Central Bank called the chairman of the NBM for a meeting with the Prime Minister, Mr. Dominic Mintoff (3). The NBM delegation reiterated what they had told Mr. Lino Spiteri and they asked him to allow them to handle the situation.

Up to that day, there had been many rumours about what had caused the run on the Bank but the real reason was yet unknown to the directors. In fact, Mr. Mintoff himself confirmed this in Parliament when he said that '1Ma stajniex ahna nsibu raguni seria iI-ghaliex hemm dan ir-run"(4) and that the Central Bank had informed him that the Bank was actually doing better than the previous year. Later it was found that a many depositors had been induced to withdraw their money urgently because the rumour was that the Bank was in great trouble. Was the rumour spread with maIicious intent? Since the Bank was better off than in the past, there was no serious motive to justify the panic. The question still remains as to who started the whispering and why. This it seems, has never been established. Another factor that could have helped to undermine the Bank was the fact that Government had previously been airing the intention of taking over the banking system. The Prime Minister himself bad made specific statements of objectives to this effect and there had also been two specific ministerial public statements.

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The Central Bank's Role The Central Bank wanted to issue a statement to set minds at rest about the run on the Bank but the Prime Minister had hindered it, claiming that the statement was too weak and that it would not stop anything(S). One must stress upon the fact that usually the Central Bank would, in the circumstances, issue a cautious statement as to the stability of a bank and thereby protect the latter's reputation and cool the run. The Central Bank has an emergency function to stand as a Rock of Gibraltar in time of panic, to be ready to use the full monetary powers of the Government to stem collapse of the banking system." (Samuelson Economics) Therefore "a single bank need no longer fear that its reputation, like that of a good woman is compromised simply by being brought into question." But alas, the Bank's reputation found no similar support and this despite the fact that the P.M. himself had declared that the NBM's financial stability was sound. "An essential function of a Central Bank is that when circumstances require it, it should act as lender of last resort. No commercial bank, however efficiently run and soundly managed, could withstand an abnormal demand for cash. In a banking crisis it becomes the duty of the Central Bank to allay any tendency towards panic on the part of the public by assisting the banking system to withstand the strain of excessive demands made upon it for cash." (A Textbook of Economics by J.L. Hanson -Macdonald and Evans). But the Central Bank, when thus requested by the NBM, had offered to lend only against realizable assets. The P.M. had stated in Parliament(6) that the Central Bank had refrained from providing the necessary advances because there had not been enough time for the NBM to produce the requisite securities.
Notes to the above (1) Antoine Tagliaferro (Assistant Manager) accompanied him. (2) a. when there was the Bical crisis. b. when there were rumours that bearer accounts were going to be controlled c. when there was the issue with the British Government. (3) Present were Mr. Louis Vella (Chairman.), Dr Robert Staines (Secretary of the Board of Directors), Mr. Antoine Tagliaferro (Accountant and Assistant Manager) and Henry Micallef (General Manager). (4) Statement made in Parliament on Monday 10th. Cf. Debates Vol.143, pg. 77? (5) Court evidence of Dr Philip Attard Montalto.

MONDAY 10th December, 1973.

On Monday 10th, the situation worsened because the withdrawals continued and were even heavier than those of the previous two days. In fact Lm900,000 were withdrawn that day. In the circumstances, a board meeting of the National Bank was called to discuss the situation and the Directors were informed of what was happening. The General Manager and the Chairman of the Bank assured the Directors that the Bank had 30% liquid assets and was therefore within the requirements of the law; the minimum allowed being 25%.

Monday's first meeting with the Prime Minister.

In the afternoon, at 3.00p.m., the Prime Minister sent for the NBM officials at Castille. Present were: for NBofM Ltd., Mr. Louis Vella, the Chairman, Mr. Henry Micallef, the General Manager and Mr. Antoine Tagliaferro, Assistant Manager(7) and accompanying the Prime Minister were Dr Joseph Abela, then Minister of Finance, Mr. Earland, the Governor of the Central Bank; Mr. Lino Spiteri, Mr. Henry Degabriele and Dr Edgar Mizzi, the Attorney General. This meeting was a very heated one and the Prime Minister was adamant on having the shares of the Bank transferred. He wanted the Bank by 5.30p.m. He threatened them that he would otherwise close it and declare a "Bank Holiday" as he was empowered to do by the Banking Act. Mr. Earland was quoted as having exclaimed "it is inconceivable!" at Mr. Mintoff proposition. Such an action would, of course, cause more damage because it would confirm the depositors' fears that the Bank was in danger of bankruptcy.

The Prime Minister admitted that this was not a case like the one of Bical but he said that these were the people's money and that he, as Prime Minister, was responsible for them. It is obvious from Mr. Micallef's evidence in court that the P.M. out rightly rejected any suggestions from the part of his advisers who were present at the meeting, leading to any aid to the Bank to see it through the crisis He also refused to listen to Mr. Micallefs proposal that the Bank should borrow from Midland Bank and National Westminister Bank.

Notes to the above :(6) Cf. Debate of Tuesday 11th, Vol. 143, pg. 884. (7) According to the evidence of Mr. Henry Micallef there were also Major Austin Cassar Torreggiani and Baron Patrick Scicluna.

Seeing no way out of the situation, Major Austin Cassar Torreggiani asked for the price at which the shares were to be transferred and the flat reply was: "Naturally without compensation." All protests fell on deaf ears. Mr. Mintoff then instructed Dr Edgar Mizzi to draft an Instrument for the transfer of shares which read as follows:

"We the undersigned, hereby authorize the Board of Directors of the National Bank of Malta Ltd. to transfer to the Government of Malta all the assets pf the Bank in consideration of the assumption by the Government of Malta of all the Bank's liabilities and undertake to do all that may be necessary in order that such transfer be effected."

At this stage, the Prime Minister wanted the control of the Bank and he refused any idea of compensation to its owners because he reasoned that, in consideration for the assets, government would be taking on the responsibility for the Bank's liabilities.

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Threats

Mr. Mintoff secured his demand by two very serious threats that turned out to be highly efficacious to extort the compliance he was asking for The Directors had no choice. He threatened that if they persisted, it would be at the risk of the shareholders because he would extend the limited liability of the shareholders beyond the Bank's capital to their personal assets. "If tomorrow morning you come and tell me that the Bank has gone bankrupt God help you. The shareholders will be held personally responsible. Remind them that it is in Malta that they have to live."(8) He couldn't stop people from coming to their houses to remove their personal belongings'.'(9) to make good for their deposits.

His second threat was that he would withdraw the four million pounds parastatal funds which were deposited in the Bank so that "all Malta would know that the Bank had gone bankrupt."(10) Mr. Mintoff added that he'd go on television and tell the people, "Jien se ndabbar rasi; tieghi se nehodhom" and that he would fill 'Strada Reale' with the vans of the parastatal companies to make a show of it and alarm all and sundry thereby aggravating the run. It is interesting to ponder upon the fact that the five parastatal companies had previously been depositing money with the National Bank while they were borrowing money from Barclays, thereby always increasing their deposits with the National Bank.

The NBM representatives returned to the Bank and reported the outcome of the meeting to the Directors and to some major shareholders who were present. Immediately, a feverish telephone campaign was started in an attempt to convince the Bank shareholders to give up their shares and to go and sign the deed of authorization for the Directors to transfer them to the Government. The directors made it quite clear to them that if they did not transfer, the Government could take their personal effects from their homes - the individual shareholder's home. "jekk ma jitrasferhux. . ..il-Gvern jaghmel il-Ligi u l-ghada insibu lillarixxal u jaghmlilna elevazjoni tal-hwejjeg taghna kollha."(11) M

Notes to the above:(8) (9) See evidence of Dr Philip Attard Montalto where he says that it was the Chairman who reported these words to the Board of Directors. See Court evidence of Mr. Peter Cassar Torreggiani.

(10) See Court evidence of Dr Philip Attard Montalto. (11) Cf. Court evidence of Mr. Justice Anthony Montanaro Gauci.

Panic reigned supreme. How was it possible that shares of a Lm100 each which had a market value of Lm350, be transferred for no consideration? On the other hand, the removal of the limited liability would have stripped them of their personal belongings and their hardship would have been worse. Indeed, the terms of "highway robbery" and "hijack" which were used to describe the situation were most appropriate: You either give up your money or you die.

On that Monday afternoon, the situation was very critical. Time was running out and tension running high. All doors were closed. The directors had no alternatives and they had to decide between two very painful evils. They either had to allow the Government to take control of the Bank or else face sure bankruptcy because all sources of support were blocked by the Government. The only possibility was to institute liquidation proceedings but they were hesitant because this would have caused great hardship to the depositors who would be denied their right to withdraw their money for a long time; to the three hundred bank employees who would have lost their job and to the thousands of workers who were employed by the many enterprises which would have closed or collapsed if the Bank were to be declared bankrupt. Above all, they feared that the shareholders' investments would have been totally lost.

Most of the Directors and shareholders present signed the transfer that had been drafted by the Attorney General. However many others refrained and the Directors had by no means managed to obtain the signature of the shareholders having 65% of the shares - this being the requisite majority for the passing of an extraordinary resolution according to the Articles of Association of the National Bank of Malta Limited.

For the second time that day, a delegation from the National Bank (12) went to the Palace to meet the Attorney General, Dr.Edgar Mizzi with the intention of requesting the opportunity to consult foreign banks which could lend them bridging finance. But this request was again turned down. They suggested that they should speak to Mr. Louis Galea of Barclays Bank but Dr Mizzi's answer was in the negative. He informed them that Mr. Galea at the time was with Mr. Mintoff and that he had already taken the pill : "Dak diga' bellghaha l-pillola."(13) Some Directors had interpreted this to mean that the P.M. was going to take over Barclays as well. Whatever it implied, any chance of support from Barclays was ruled out.

Dr Mizzi faithfully reminded them of the threat that in the morning the Prime Minister was going to withdraw the 4 million pounds in parastatal funds. That same evening they had to obtain the signature of at least 51% of the shareholders.

In order to appreciate the gravity of the situation, it is important to take into consideration the factors that were weighing hard against the Bank. First and foremost, the Bank's liquidity was running disturbingly low. Up till that day, Lm1,200,000 had been withdrawn and it was certain that further withdrawals would cripple the Bank. Therefore it needed financial support and fast - liquid cash was vital for its survival. Despite this need, Government did not allow the Directors to seek the help of foreign or local banks. The Central Bank did not, or could not help either.
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Notes to the above:-

(12) (13)

Present were Dr Philip Attard Montalto, Profs Cremona, Mr. Louis Vella, Major Austin Cassar Torreggiani, Mr. Henry Micallef, Baron Patrick Scicluna, Dr Robert Staines and Mr. Antoine Tagliaferro. Court evidence of Dr Philip Attard Montalto.

. In such circumstances, it is usually the Government that lends support. It is worthwhile to quote Samuelson on the matter. He sustains that: "Banks are safe today because everyone realizes that it is a vital function of government to stand behind them should a depression or panicky run on the banking system ever recur. No Banking system with fractional reserves - i.e. none that keeps less than 100% of its deposits in cash - can ever turn all its deposits into cash on a moment's notice. So every fractional reserve system would be a "fair-weather system" if Government did not stand ready to back it up. If the panic ever came again, Congress, the President and the Federal Reserve Board would all act, even using their constitutional powers over money to print the money needed to meet a national emergency."(14) Unfortunately, the Maltese Government's idea of saving the Bank was by taking over its assets and liabilities and not by aiding it with ready cash. The other two crucial factors - the threats and the short time - were the instruments, which were used to tighten the ropes to squeeze out the requisite consent.

Second Meeting with the Prime Minister.

The National Bank of Malta delegation, demoralized and empty-handed returned to the board meeting only to be called again to the Palace to meet the Prime Minister(15) who was accompanied by several Ministers(16). This meeting was the worst one yet with Mr. Mintoff making himself understood very loudly: "Tonight, I will address Parliament and I shall tell them that you came over to me to give me the Bank". Protests were silenced and buried. He said, "ixshareholders xappu bizzejjed, issa daqshekk" and again, "jien se nghid lill-Poplu illi gejtu toffruli 1-bank u tajtuhuli b'xejn".(17)

In fact, the next day, that was how the newspapers reported it.

Dr Attard Montalto challenged him to nationalize the Bank and compensate the shareholders on the Audited Accounts. But of course, Mr. Mintoff new better. The Prime Minister informed them that Government and Barclays Bank had agreed to form a new bank having a capital of three million pounds, with Government holding 60% (Lm1,800,000) and Barclays 40% (Lm1,200,000). This new Company would then take over the National Bank, when the shareholders agree to transfer the Bank. Thus the NBofM Directors were faced with a "fait accompli". Finally, the Prime Minister instructed Major Cassar Torreggiani to collect the share certificates for him.

That same evening of the longest day, Mr. Mintoff made a statement in Parliament. His version of the matter was as follows:About a fortnight before, Government had heard of the rum ours that were damaging the National Bank and it had drawn the Bank's attention. about its consequences. The parastatal bodies wanted to withdraw their money but the Government had advised them to the contrary. During that afternoon's meeting with the NBofM delegation, he had promised to discourage any withdrawals by parastatal bodies. They suggested to him that Government should take over the Bank for no compensation and he replied that if the offer was made by the Board and by the shareholders, Government would be prepared to consider it seriously and see what can be done(18).

Notes to the above:-

(14) (15) (16) (17) (18)

Ibid. pg. 279. This time they were Dr Philip Attard Montalto, Mr. Louis Vella, Mr. Henry Micallef and Major Austin Cassar Torreggiani. Dr Anton Buttigieg, Mr. Lorry Sant Mr. Wistin Abela, Dr Joseph Abela, Mr. Camilleri (secretary), Dr Edgar Mlzzi and Mr. Louis Galea of Barclays.. Cf. Court evidence of Dr Philip Attard Montalto. Taken from Parliamentary Debates. Sitting No. 248 of Monday 10/11/73 Vol. 143, pg. 770-780.

On this Point, it must be appreciated that, as it is reported in the Times of 13/11/73 (Editorial pg. 10), the reasons why the Bank's Directors took such a hard step had not been divulged to the public and they remained unknown until the evidence of the first witnesses was given in Court six years later.

Mr. Mintoff announced the setting up of a new company between Government and Barclays Bank which would be taking over the National Bank. This takeover, he explained, should restore the trust of the public in this Bank and thereby the run would stop. Up till that hour there were 50% of the NBM shareholders who had accepted the transfer and he was reassured that within one or two days he would have the required two thirds majority. As for the following day, he said that the Directors had agreed to go by the operational guides issued by the Central Bank and Barclays.

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TUESDAY 11th December, 1973.

The effect of his statement was catastrophic. The following morning of Tuesday the 11th instead of abating withdrawal grew heavier. By the end of the day Lm1.3 million had been withdrawn bringing the total to over Lm2.5 million. Late that afternoon, the Prime Minister appeared on Television. In his interview(19) he stated that Government and Barclays wanted to save the situation that had been created by false rumours that the Bank was in financial difficulties. He compared the run to a stampede of cows on the rampage towards the precipice. Somebody had to have the courage to stop them. He said that there were also rumours that Government was taking advantage by taking over the Bank. This, he declared, was not true. He appealed for calm and announced that on the advice of the Central Bank the NBofM was to suspend its activities as from the morrow to see what could be done in the interest of the depositors. Government and Barclays would then get together to solve the problem quickly.

In Parliament that evening(20) the PM. explained, in justification, that in the circumstances, he had no other choice but to close the Bank to avoid further damage. He was well aware of the fact that closing it would cause damage to the Bank's name in Malta and abroad. But between the two evils, they had to choose the lesser one, Mr. Mintoff accused those who, with malice, had interpreted the Government's efforts wrongly, thinking that Government wanted to nationalize the Bank. If it were so, Government would have the courage to say it. "We do not nationalize what is dead" he said. He wanted to effect a rescue operation. Government was lucky that Barclays had seen eye to eye with it because they have an interest in that the banking system should not collapse. He emphasized that this was not a question of party politics and that nobody could say that this is a Bank of the Labour Party.

The Leader of the Opposition, Dr George Borg Olivier then claimed that the version he had heard from the Bank's Directors was partly in conflict with the P.M.s version and he requested the P.M. to confirm that Government had offered financial aid through the Central Bank, since from his information, no such aid was offered as was the usual practice.

Orizzont of 12/12/73, pgs; 1&5. (20) Cf. Parliamentary Debates, Sitting No. 249 Adjournment pg. 871 et seq.

Mr. Mintoff's answer was that the Central Bank was not a charitable institution in that the ailing Bank had to offer securities for the cash. It was the Government who would help, not the Bank because the latter was bound by law to demand securities for advances. The Bank's securities in England were not good enough and any other securities had to be realizable. Government had helped; firstly by refraining from withdrawing the Lm 4 million belonging to the parastatal bodies and secondly by providing Lm 3 million together with Barclays. The NBofM representatives, he said, knew what Government was doing for them and said, "Isma', ahna gentlemen, naf illi f'dan 1-istampede il-kapital taghna ser idub. Biex nghinukom, were going to forego il-fatt illi hemm share capital taghna u hemm rizervi." He continued, "Did they expect Government to give them all the budget so that they would remain shareholders in the Bank? After all," he reasoned, "they gave nothing to the people when they earned money from them. I cannot say that the Bank belongs to the people because it actually belongs to the shareholders. We have done this in the people's interest." Mr. Mintoff then submitted that Government was not in a position to guarantee pound for pound.

WEDNESDAY 12th December, 1973.

In the very early hours (2a.m.-3.30 a.m.) of Wednesday 12th, the Police informed each individual Director that the Bank was going to be taken over by virtue of Section 18 of the Banking Act(21) that the Bank's license was suspended arid that Mr. Lino Spiteri had been appointed to take charge of the assets of the NBofM. They were told that the licence would never be restored unless Government received at least two thirds of the shares. The Noble Guido Sant Fournier, being the custodian of the Bank's keys, was threatened with arrest if he did lot consign them.

The Bank's officials were called to another meeting with the Prime Minister where they were presented with another version of the declaration in which the shareholders were to transfer to the Government and also to "any person or company designated by the Government of Malta, the business of the said Banks including all assets and liabilities of such Banks." The declaration, this time, specified that, "the transfer was to be effected without payment of any compensation or other consideration whatsoever." It further provided that: 1) the Board of Directors be authorized to do all that may be necessary to effect and complete the transfer, and 2) 2) that the shareholders should either vote in favour of any resolution to that effect or else confirm or ratify the said transfer at a General Meeting should this be necessary.

The threat of the removal of the limited liability was again strongly reiterated - that evening, the P.M. was going to legislate either to set up a Council of Administration or to remove the limited liability, and he declared that he would do this despite his knowing that it was unconstitutional.

Notes to the above:-

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(21) This section gives the responsible minister the power to appoint a person to take charge of the assets of the Bank or any portion of them for the purpose of safeguarding the interests of the depositors, creditors and shareholders of the Bank.

Court's authorization for the transfer of the shares of the Scicluna and Sant Fournier.

That same day, the Directors concerned filed an application in the Second Hall of the Civil Court to obtain the requisite authorization to attend at an extraordinary general meeting of shareholders of the National Bank and to vote according to the directions that the Court deemed fit to decree with regards to the declaration. The Court had to decide about the transfer of the shares of the late Marquis John Scicluna and of his son and the shares of the late Count Alfred Antonio Sant Fournier, their total being 1,109 shares. The testamentary administrator of Scicluna's estate was Mr. Alfred Delia and he was therefore responsible for its 918 shares, 200 of which belonged to the Noble Marquis Joseph Scicluna; the latter's curators being Mr. Alfred Delia and Baron Patrick Scicluna. Dr Philip Attard Montalto and Mr. Adrian Busietta were the co-curators of the Noble Count A.A. Sant Fournier and were therefore responsible for the 191 ordinary voting shares registered in the name of the Count and his four children.(22)

The judge heard several witnesses(23) and he also took the opinion of Dr Edgar Mizzi on the telephone, who later informed them that the Prime Minister wanted a decision quickly. All four witnesses testified as to the nil value of the shares under the prevailing circumstances; at that moment it had been impossible for any shareholder to try to sell his share and to receive any price for such shares. It was claimed that any valuation of the shares in the future would depend on some action which might be taken to reactivate the Bank. Dr Mizzi was then called to give evidence in Court and he assured the Judge that at that stage the shares had no value because the license was suspended and anyway Government was taking over the Bank. Above all, it would be in the interest of those shareholders who, themselves had deposits with the Bank that Government should save the Bank.(24) Finally the Judge spoke to the Prime Minister and gave his decision. He authorized the mentioned curators to attend the extraordinary general meeting and sign the deed of transfer without compensation because on that day the shares in question had no value and the probability of their regaining value was non existent. It is important to note that Mr. Alfred Delia, despite the Court's authorization, did not sign the transfer of the late Marquis John Scicluna and neither did he counter-sign that of the son, Marquis Joseph Scicluna. Another point to be remembered is that the extraordinary general meeting was never called. The signatures were gathered individually.

Prime Minister presents Bill in Parliament

In Parliament that evening(25), Mr. Mintoff informed the House that Government had an urgent piece of legislation to cater for the NBofM situation which he wanted to pass through all its stages in that same session. A Council of Administration would be set up to continue the business; this being imperative to save the industry of the Island. He said that Government was taking on a great responsibility in taking over the Bank; no other Government would shoulder it. He made it incumbent on the Opposition to cooperate in solving this national crisis, and in fact they did. They were allowed ten minutes to study the law, - that is, 69 seconds for each page.

Notes to the above:-

(22) (23) (24) (25)

Marie, wife of Dr Philip Attard Montalto; Eileen, wife of Mr. Adrian Busietta and the brothers Alfred and Anthony Sant Fournier and their descendants.

Dr Philip Attard Montalto, Dr Robert Staines and Baron Patrick Scicluna and Mr. Louis Galea. N.B. Both the Scicluna's and the Sant Fournier's had deposits with their Bank Cf. Parliamentary Debates, Vol. 144 pg. 914 et seq.

The Prime Minister explained that the law was being enacted in anticipation of the consent of the shareholders having two thirds majority of the shares. Up till then 5,900 shares had been transferred out of the 9,800 and in all, 6,543 shares were required. Furthermore, there were 1,109 shares about which the Second Hall of the Civil Court was still deliberating; hopefully giving its decision before the law was enacted.(26) He said that provided the shareholders keep their word, Government would be ready to support the depositors despite the fact that the situation had worsened; however, without the signatures, the Bank could not be taken over. " If the shareholders did not give their consent," he warned, "the consequences would be much graver than those which followed the collapse of other Banks on the Island in the past." Again he emphasized that Government could not guarantee pound for pound to the depositors. Three million pounds would definitely be provided but Government could never make an unlimited commitment with the people's money. After all, he said, it was they (the Directors) who made this suggestion to us and told us to convey it to you.(27)

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Further on in his speech(28), he claimed that had they followed the normal process, a Controller would have been appointed but, the situation being what it was, the Bank would have had to be liquidated. Had the Bank opened that day it would have gone bankrupt. So Government was finding another way which the law did not contemplate, in order to save the Bank. Mr. Mintoff remarked that those who had shares could say "bye-bye" to them; those shareholders who also had deposits would at least, save their deposits if liquidation was avoided and there was therefore no altruism or madness on their part. However those who had shares only, were kindly saying that once they lost their own, they should not cause damage to others. Therefore, he reasoned, if one does not want to take the normal procedures there had to be a new Bank. This Bank would pay no compensation whatsoever and there would therefore be no question of liquidation. Government will not be making any gain from the Bank, its sole interest being the Lm4 million deposits and the welfare of the industries. Again, he reminded the House that "Jiena nista' nghid li mhux ahna ghamilniha din il-bicca xoghol, gharnluha huma stess, il-Board of Directors."

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House that "Jiena nista' nghid li mhux ahna ghamilniha din il-bicca xoghol, gharnluha huma stess, il-Board of Directors."

Then Dr Mario Felice championed and praised the shareholders for their sense of sacrifice and loyalty; many of them had renounced to their life's savings and their shares were all they had to live on. The Government, he said, was going to take a great advantage from their sacrifice 'which enabled the Government to take the lead into his hands more quickly and easily.

Mr. Mintoff denied that Government had not taken any risks; as the biggest depositor, it was Government that was making the biggest sacrifice, he claimed. The risk was there because Government was still not sure whether he would recover all of them and It would take quite some time before the true state of the Bank was established. It was a conscious risk in the interest of the nation. Had it not been for Government's intervention, the shareholders would lose everything. They had made no great sacrifice because the alternative would have meant liquidation of the Bank and then surely they would get nothing. Thus the Bill was passed.

Notes:-

(27) (28)

Cf. Parliamentary Debates, Vol 144 pg 953. Cf. Parliamentary Debates, Vol. 144 pg 962.

The National and Tagliaferro Banks (Temporary Provision) Act No. XLV, 1973.

It is important at this stage, to expound briefly, the contents of the Act in order to appreciate its effects and implications. The National and Tagliaferro Banks (Temporary Provision) Act had an over-riding effect notwithstanding any other law, commercial or otherwise and over the Memorandum and Articles of the Banks and it had prevalence over them in case of conflict.(29) Therefore, the Banks were to be regulated exclusively by the Act and any other laws were thereby ineffective. The Council of Administration was established and given administrative powers over the Bank and its business, subject to the directions of the Minister. It was vested with all the powers and functions exercisable by the Board of Directors or any Director and therefore the powers of the Board, the shareholders and of the Bank in general meeting were kept in abeyance.(30) Furthermore, the Council was freed from the obligation of convening general meetings of the Banks or meetings of their Board of Directors. (31)

The Prime Minister reserved the power to exempt the Council or any member thereof from complying with any provisions of the law in Malta in relation to commercial partnerships. This would be done if in the opinion of the Prime Minister it would not be possible or appropriate in the circumstances to comply thereto.(32) One must realize that this provision was very wide and the powers it conferred were of the most arbitrary nature. The Commercial Partnerships Ordinance was rendered ineffective through this blanket provision and therefore the limited liability safeguard which is contemplated by the Ordinance, could be lifted at any time. "Deher car li l-Gvern agixxa b'mod li zamm f'idejh il-possibilita' ii t-theddida jattwaha u dan minhabba li waqt is-seduta tal-Parlament innumru ta' firem rikjest kien ghadu ma ngabarx.1'(33)

THURSDAY 13th December. After a one-day closure, the Bank s re-opened on Tuesday the 13th, under the administration of the Council of Administration and limited bank ing serv ices were prov ided to industries and hotels. Its Chairman was Mr. Maurice Abela(34) while Mr. Denis Degiorgio(35) and Mr. Antoine Tagliaferro(36) were members. In the newspapers of the following day, it was reported that the shareholders owning the requisite two thirds majority of shares had agreed to transfer the Bank to the Gov ernment without compensation. In actual fact, this had not tak en place as yet.

FRIDAY 22nd December. Nine days later, in Parliament, the Opposition through Dr G.M. Camilleri suggested that since the Prime Minister had stated that the Central Bank had given assurance that the financial state of the Bank had been better than the previous years and that therefore the rumours were totally unfounded, Government should see to it that a Commission be set up to establish 1. Who started the unjustified rumours which caused the run on the Bank, 2. Whether there was really the danger, with the liquid funds available to these Banks and other funds which others wanted to place at their disposal, that the NBM could go bankrupt or that the confidence of the depositors could not be re-established, and 3. to investigate the way in which some of the shareholders renounced to their shareholdings."

Notes:-

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(29) Section 2 (2)&(3). (30) Section 4 (2). (31) Section 9. (32) Section 6.

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(33) Court evidence of Mr. Peter Cassar Torreggiani (13/2/80). (34) At the time he was secretary of the Ministry of Commonwealth and Foreign Affairs. (35) He was Branch Manager of Barclays Bank International. (36) He was an Accountant and Assistant Manager of the National Bank.

But Mr. Mintoff answered that an inquiry would only be held when there was proof of mismanagement. A month' later he ruled out such an inquiry, saying that it would be superfluous to find out who started the run.(37)

It must be submitted however, that the Opposition's proposal for a Commission still holds ground. The three point form the crux of the whole problem because, 1. the rumours were truly unjustified and malicious and therefore 'such evident malice, rather than being simply condemned, should be exposed"(38); 2. the Directors were not allowed to have recourse to other Banks so as to enable the Bank to absorb the effects of the run. The confidence of the depositors would have been restored as it had been before in other runs, but this possibility was not given a single chance to materialize; 3. it is being held that due to the threats of removal of limited liability the consent to the shareholders was invalidly obtained (vide pending court case).

JANUARY 1974. In his New Year's broadcast on television, Mr. Mintoff assured the public that the Bank would re-open as soon as the shareholders signed over their shares to Government.

Informal Meeting of Shareholders

On January 3rd, the Directors of National Bank and Tagliaferro Bank called the shareholders for an urgent "informal" meeting to discuss the Government's request for the transfer of a two thirds majority of the shares' to the Government without compensation. They received a memorandum from the directors' in which the events and the circumstances that had led up to the crisis were briefly outlined. They were informed that Government was requesting that the shareholders who had signed the undertaking of December 12th should now assign their shares to it. This was necessary because the undertaking of the 12th had made no reference to the transfer of the shares but had referred only to the authorization to the Board of Directors to transfer the business, assets and liabilities of the Bank for no compensation and to its ratification by the company in general meeting. The memorandum continued that, " it was pointed out that the shareholders who had undertaken to vote for such a Resolution was in reality going to surrender all his interests without consideration and therefore he should not find any objection against the transfer of the shares" and finally that "it was a decision which must be taken individually by each shareholder."

During the meeting, in which many questions were put to the Directors, the shareholders were informed that the request made to the Council of Administration for the Balance Sheet and Accounts, had not been complied to yet and therefore the financial situation of the Bank could not be ascertained.

( Notes:-)

(37)
(38)

See Parliamentary Debate as reported by The Times, Jan 31st, 1974, pg. 16. Roamer's Column, Sunday Times 10/12/73.

In a declaration issued by the shareholders a month later (4/2/74) it was stated that "nobody has clarified the situation sufficiently to enable us to judge whether there was, or is, any necessity of a surrender of shares for guaranteeing the full return of the depositors' money."

The Directors made it clear that the position at that moment was that those who had already signed had an obligation to sign again the transfer of their shares, but those shareholders who had not signed were free to make their own decision. They had two alternatives; either not to surrender the shares and face serious consequences in that depositors would lose their money, employees lose their job and the economy of the Island risk complete havoc, or to accept Government's proposal to transfer the shares and keep the Bank going as promised by the Prime Minister, thereby avoiding the mentioned consequences.(39) It is important to remember at this stage that the shareholders had still been under fear of reprisal at the time.(40)
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The National and Tagliaferro Bank~ (Temporary Provision) (Amendment) Act 1914. On January 30th, 1974, an amending Act was passed to make further temporary provisions relating to the NBofM. It specifically empowered the Council of Administration to transfer, when so directed, the business of the Banks, including all assets and liabilities to such persons and this for the purpose of safeguarding the interests of the depositors (41) This transfer was to comprise all property and all rights. The direction to transfer could be given either by an extraordinary resolution taken at a general meeting or by a resolution in writing signed by shareholders holding an aggregate number of shares required to carry an extraordinary resolution.(42) The Act provided for any possible technical difficulty that could arise with regards to the transfer and for the simplification of the legal procedures that are normally involved in such transfers.(43) It further widely empowered the Minister of Finance to decide on how to deal with old deposits. This was being done, as Mr. Mintoff explained, in the interest of depositors so as to avoid a new stampede.

During the debate, the Prime Minister announced that Barclays Bank had chosen to opt out of the agreement to avoid their having a monopoly in the banking field and Government was therefore pursuing negotiations with other banks. He informed the House that the name of the Bank would be changed to Bank of Valletta and that a certain Mr. Wright would be participating in the new Bank. The Banco di Roma and the Bank of Libya would also participate if the conditions were favourable.

Transfer of Business, Assets and Liabilities to Bank of Valletta.

On March 21st, 1974 the Shareholders' Association sent a letter to the Council of Administration warning its members that what they were doing was incorrect and calling upon them not to participate in a transfer of business of the NBofM for no consideration on the basis of the share transfer forms so far signed and on the basis of the wholesale and unwarranted writing down of assets. The Association proposed a reasonable alternative technical method of resolving the crisis based on transferring half the reserves. But the Council and the Government failed to show any interest.

(39) Cf. report by the Times of Malta of Jan 4th, 1974. (40) Cf. Memorandum of shareholders, issued subsequent to ('this meeting. (41) Section (42) Section 4 (1) (2)

(43) Section 1121 ~2)(b)&(c).

The actual transfer of the NBofM's business, assets and liabilities was effected by the Council of Administration to the Bank of Valletta, on March 22nd, 1974 (44) - that is, over three months after the Bank had been taken over. The transfer was exempted from stamp duty and from the statement for the purposes of the Death and Donation Duty Act, 1973. Accordingly a Legal Notice (45) was presented in Parliament whereby the powers and duties of the Council of Administration as to the business, assets and liabilities of the National Bank of Malta ceased to have effect without prejudice to anything done or omitted to be done.

Therefore, first the National Bank of Malta Ltd and then the Council of Administration were deprived of any power over the Bank's business, assets and liabilities. The important point however is that they both retained their legal entity, thereby remaining in existence but with no possibility of resuming their functions. They have both been left in suspended animation.

On the day of the transfer, in a television broadcast, Mr. Mintoff announced the opening of the Bank of Valletta and spoke about how it was going to operate. He said that the signatures of shareholders who had already given their consent to the transfer of their shares were being gathered. He said that it had become clear that there would be serious delay for capital that that been promised from outside sources to be forthcoming arid on the advice of the Council of Administration, Government had opted for an all-Maltese Bank with sixty per cent of the shares would be in Government's name and a 40% shareholding belonging to the Malta Development Corporation with the duty to sell them to the Maltese public. He stated that once the people were risking their money, through the Government, the Development Corporation and therefore the public would buy their shares in the new Bank at a price which was 25 per cent higher than the price for Government and as an incentive no stamp duty would be payable on the transfer of shares from the Corporation to the public.

In his statement, the Prime Minister informed the public that the National Bank's liabilities exceeded its assets by a quarter of a million pounds considering the shareholders' capital and its reserves. This went to prove, he said, that it was not true that the Labour Government wanted to rob the Bank and again, that "the Government would not have intervened if the Directors of the NBM had not asked the Government to do so" and naturally if there had not been at stake the depositors' money and the employment of thousands of workers." He expressed the hope that there would be an end to frivolous talk and that no one would waste energy and money in lawsuits.(46) Then he gave details as to the measures that the new Bank would be imposing with regards to deposits with a possibility of withdrawing up to 30% of their deposits.
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On March 24th, the Bank of Valletta was opened with its assets totaling Lm37.8 million. Government had provided Lm3.3 million with another Lm3.3 million on call - to be used if the necessity arose. These assets were to guarantee the depositors' money and other liabilities.

(Notes:)

(44) (45)

L.N. 27 of 1974 National and Tagliaferro Bank (Cessation of Certain Provision) Order. The transfer was to take effect on the 24th of March. (4) Cf. The Times of Malta, Saturday 23rd March, 1974. pg.1 & 10.

An important and legitimate point that has been raised by many shareholders, of the Bank is that the period of time which the National Bank was under the control of the Council of Administration until unrestricted banking business was resumed, was indeed a long one when one considers the rough and hurried manner in which the shareholders were treated; forced to give up their Bank overnight for no compensation whatsoever without their Directors being allowed to borrow money themselves from foreign Banks. The depositors' money remained frozen all through the three months anyway and had the Bank been allowed to retain its identity and its property, perhaps under the guidance of a Controller and with the faculty of restricting the withdrawal of fixed deposits, it may well have been able to survive the crisis and regain its financial stability. To this effect, it is apposite to quote from the letter which the Shareholders Association had sent to the Council of Administration "The apparent lack of success of the Prime Minister in his successive negotiations with other third parties brings into relief the questionable basis of the human values being promoted and the fact that justice cannot be seen to have been done by the Prime Minister's chosen method of relationships with the shareholders."

National Bank of Malta's Audited Accounts.

Three days after the opening of the Bank of Valletta, Government laid on the Table of the House of Representatives the accounts of the National Bank of Malta for the financial year ending December 31st, 1973, as audited by Deloitte and Co. The profit and loss account showed a loss of Lm3,184,000 which, the auditors attributed to the large additional charges which the Council of Administration had considered necessary to provide further for bad and doubtful debts. The liabilities exceeded the assets by Lm253,000. The provision for known bad and doubtful debts of the National Bank amounted to Lm5,030,000 and of the Group, Lm 5,982,000. It was explained that, when compared with similar provision at the end of 1972 of LM2,378,000, there results an increase of Lm3,614,000. This provision had to be arrived at by making specific provisions on the basis of individual advances which were considered to be partly or wholly unrecoverable, as well as reserving on these advances. The Council of Administration had also made a general provision to cover possible losses, having regard to the need of maintaining the Group's liquid assets and to the fall in property prices from the abnormal level of 1969. The provision for the latter had been calculated 1) through the application of an index of property price changes between 1969 and 1973, which was based on the values of properties as determined by the Council according to the information it had available, and 2) after taking into account collateral securities and specific provisions against these advances. This property index showed a devaluation of property of some 45% between 1969 and 1973 on contract sale figures and as the shareholders had claimed "it had totally ignored the fact that during the same period, the cost of construction had risen by some 70%."

Further efforts for compensation Since the crisis, the National Bank of Malta shareholders continued their efforts, through correspondence and personal contact, to open discussions with the Government in order to find a form and method of fair compensation. In June 1974, Dr Riccardo Farrugia on behalf of the Shareholders Association, sent a letter to the Prime Minister with a proposal to explore the possibility of trying to reach a satisfactory agreement to all concerned but he never received an answer. In May 1975, the Shareholders Association sent a letter to Mr. Danny Cremona, Chairman of the Bank of Valletta, requesting his support to the claim which Dr Farrugia had made in June 1974 but again this was not forthcoming. Under the circumstances it was felt that legal action had to be commenced. In January, a legal protest was filed by a large number of shareholders where they claimed that the payments that were being made to the Bank of Valletta in. relation to debts for which provision had been made, were going to be considered as profits of the Bank of Valletta9 when in actual fact, they represented a part of the assets which they owned indirectly as shareholders of the NBofM. They insisted that details about the provisions. the property index and supporting schedules should be given to the Directors without any further delay, claiming this to amount to the oppression of the minority shareholders of the Bank. Furthermore, they claimed that the estimate of the immovable property of the Bank had been given at their book value less depreciation thereby not reflecting their true worth.

N.B.M. Investments Limited.

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In June 1976, the Shareholders Association formed a company with the sole purpose of instituting collective court action, The shareholders were invited to exchange one of their shares or their litigious rights for equivalent shares in the new company.

A case was subsequently instituted on March 1977 by the Directors of the NBofM Investments Ltd against the Prime Minister, the Governor of the Central Bank, the Minister of Finance and the Members of the Council of Administration, challenging the validity of the transfer of shares of four shareholders of the National Bank for no compensation... The grounds for the nullity of the transfers were four : a) they were not duly stamped according to law, b) they were not effected by a public deed, c) they had no causa and d) they were affected by a vitiation of consent because of error and extortion by violence. This court case has been pending before the Commercial Court for the last ten years. Several witnesses have given evidence upon the facts and the case is awaiting the new Prime Minister to assume the acts before the case goes before the Judicial Assistant for the compilation of further evidence.

Dr Riccardo Farrugia, who holds a senior appointment in the banking sector is today using his good offices in order to have this important matter reviewed.
The National Bank of Malta's trial in 1973 was brisk and the sentence of death summary. The time of its review is long overdue. May the winds of justice bring to light the truth which sets all free.

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