Successful Challenge to Administrative Penalties Imposed by the Registry of Companies

In its judgement delivered on 14^th June 2023 in the names of Marco Aquilina & Euro Concrete Blocks Limited vs. Ir-Registratur tal-Kumpaniji, the Civil Court (Commerce Section), presided over by Mr. Justice Ian Spiteri Bailey,  decided in favour of the plaintiffs, who successfully challenged the payment and settlement of various alleged administrative penalties imposed by the Registrar of Companies.  The Registrar of Companies has recently filed an appeal to the judgement delivered by the Civil Court (Commerce Section).

The pertinent facts of the case are as follows.

Background

By means of a judicial letter dated 20^th January 2022, the plaintiffs were notified by the Registrar of Companies to pay the sum of EUR 16,553.75 due as penalties which were allegedly incurred by the plaintiffs due to various shortcomings on the company’s behalf, including i) failure of officers of the company to comply with provisions in terms of Article 120(4), ii) failure of directors to deliver annual accounts, or delivering defective annual accounts to the Registrar in terms of Article 183(10) and iii) failure of the officers of a private company to file annual return in terms of Article 184(3). Plaintiffs filed an application to contest the penalties being imposed for various reasons.

Their objections, on which the Court based its decision, included 3 main defences, which in essence comprised of i) prescription, ii) Aquilina not being the ‘legittimu kontradittur’, and iii) lack of clarity on how the penalties were imposed by the Registrar.

The Law

The Court held that Article 401(3) – (16) of the Companies Act (Chapter 386 of the Laws of Malta) (the ‘Act’) sets out the applicable procedure pursuant to which any person may institute proceedings objecting to penalties imposed by the Registrar of Companies. Such proceedings shall, in terms of Article 401(5), be instituted by means of an application against the Registrar. The application shall, under pain of nullity, state clearly and concisely the nature of the complaint, the facts out of which the complaint arises, the reasons why such complaint should be upheld, and the claim that the penalty is not due at law or is due at law only in a smaller amount. The Court shall not annul or reduce a penalty as aforesaid unless such penalty cannot at law be imposed in the circumstances of the case or cannot at law be fixed in the amount fixed by the Registrar.

The Court then noted that in terms of the application, the applicant shall attach all such documents in support of his claim as it may be in his power to produce, and shall indicate therein the names of all witnesses he intends to produce stating, in respect of each, the proof which he intends to make. The Court shall then, without delay, set down the application for hearing at an early date, which date shall in no case be later than 30 days from the date of filing of the application.

The application, and the notice of the date fixed for the hearing, shall then be served on the Registrar without delay, and the said Registrar shall file his reply thereto within 14 days after the date of the service of the application. In its reply, the Registrar must clearly state whether he agrees to the facts set out in the application, the reasons why he objects to the claim, the names of the witnesses in support of his reasons and shall attach thereto all documents in support thereof.

The Court specified that on the date fixed for the hearing of the application, it shall consider only matters of fact and of law as are ascertainable from the application, reply or documents filed, by either of the parties, or from the evidence indicated by either of the parties in the application or reply, as the case may be, or from the oral pleading of either of the parties. The Court shall then hear the application to a conclusion within 5 working days from the date fixed for the original hearing of the application, and no adjournment shall be granted except either with the consent of both parties, or for an exceptional reason to be recorded by the Court, and such adjourned date shall not be later than that justified by any such reason. Notwithstanding the provisions of Article 256(2) of the Code of Organisation and Civil Procedure (‘COCP’), the executive title referred to in Article 401(4) shall not be enforceable before the lapse of 30 days from the service of the judicial act therein referred to. The decision of the Court upon an application filed by the plaintiff may either confirm the imposition of the penalty/ies fixed by the Registrar or reduce any such penalty. Any such decision shall, upon becoming res judicata, be deemed to be a judgment of the Court ordering the payment by the applicant of the penalty as confirmed or reduced.

Last but not least, an appeal from a decision of the Court upon an application in terms of Article 401(5) shall be made by means of an application to the Court of Appeal to be filed within 6 working days from the date of the decision. The person against whom the appeal is entered shall within six (6) working days from the service upon him of the application file a reply to the appeal.

The Court’s Considerations

The Court observed that whilst the plaintiffs had filed an application which satisfied the requisites of Article 401(6), the defendant did not file its reply thereto within 14 days after the date of service of the application as required in terms of Article 401(10) of the Companies Act. Consequently, as decreed on 22^nd March 2022, the reply of the defendant was declared inadmissible. In the said circumstances, the evidence brought forward by the plaintiffs were deemed as being uncontested.

It follows that the only proof in support of the requested amounts due by way of penalty was the list of penalties annexed to the judicial letter, whereby the Registrar of Companies had indicated the total amount due by way of penalty and specified the nature of the infringement. The Court made reference to Article 401(3) of the Companies Act and held that two requisites need to be satisfied whenever the Registrar gives notice in writing to any person that such person has become liable to a penalty under the Companies Act:

• There must be specified the nature of the infringement; and
• There must be indicated the amount as due by way of penalty in respect of such infringement.

The Court observed that the legislator was very clear in the wording used in the said provision – there is a presumption that the person to whom notice is given shall, without prejudice to the provisions of Article 401 (4) – (17), be deemed to have incurred a penalty under the Act and that the said penalty would be due for breach of law as specified under the Act. It follows that the amount indicated as due by way of penalty, including any penalty due for each day during which the default continues, shall be deemed to be the penalty due under the Act in respect of the infringement/s specified in the notice. The Act then provides a remedy to the notified person/s when any such person desires to institute proceedings objecting the penalty by suspending the execution and payment of the amount requested by the Registrar by 30 days within which such person/s may file an application, in the prescribed form against the pain of nullity, to object to the said penalty.

The Court confirmed that the application was validly made in the prescribed from stipulated under Article 401 and proceeded to consider the above-mentioned defences put forward by the plaintiffs:

a) Prescription

The Court made reference to Article 427 of the  Act, which states that where any provision of the Act provides for the imposition of a penalty, the amount of such penalty shall be determined by reference to the Eleventh Schedule of the Act, which specifies the maximum penalty that may be imposed by the Registrar under any of the provisions of the Act.

In terms of Article 427(3) of the Act, an action by the Registrar for the recovery of penalties under the Act shall be prescribed by the lapse of 5 years from the day on which the default occurs. Additionally, the law states that the penalty shall become due on the day on which the default occurs and the daily default penalty shall be due for every day during which the default continues and shall accrue from the day following that on which the default occurs.

The Court held that it was evidently clear that by means of this judicial letter, the Registrar was claiming payment of amounts due by way of penalties for alleged contraventions of the law or defaults by the plaintiff company that fall outside the 5 year prescriptive period.  Consequently, the Court concluded that such penalty amounts are to be considered as prescribed, and thus, not payable by the plaintiffs to the Registrar.

b) Legittimu Kuntradittur

The plaintiff’s second defence revolved around the fact that Marco Aquilina should not be considered as the ‘legittimu kundradittur’ since he was appointed as director and thus became an official of the plaintiff company with effect from 11^th May 2011. He thus submitted that he should not be held responsible for alleged defaults which occurred prior to his effective date of appointment and thus for any penalties imposed by the registrar in connection with the said period. Without prejudice to the other defences, the Court made reference to the previous judgement of ‘Arkitett Mariello Spiteri vs. Ir-Registratur tal-Kumpanniji u b’digriet tal-14 ta’ Jannar 2009 gew kjamati fil-kawza Mario Camlleri u Randolp Camilleri’  as decided on 15^th January 2015, wherein the Court had held that any penalties imposed in terms of Article 183 and Article 184 of the Act are of a strict application. Additionally, the Court held that a company shall be jointly and severally liable with its officers for the payment of any administrative penalties imposed under the Act.

c) Lack of clarity in the manner in which the penalties were imposed

The Court held that while the Act speaks of ‘offences’ and ‘penalties’, these proceedings are not to be construed as being criminal proceedings. The said proceedings are in terms of the Act and are similar to those proceedings found under the COCP, for example debt recovery proceedings in terms of Article 166A of the COCP. In fact, the Act here refers to the said penalties as “administrative penalties”.

That being said, the Court held that it must be satisfied that the person receiving the penalty notice is provided with enough detail to fully understand why (and the legal basis on which) such penalties are being imposed. The Court found that without prejudice to the defence of prescription raised by the plaintiffs, with regard to the various amounts of penalties set out in the penalty notice:

• there was no indication by Registrar of when the alleged default occurred;
• the Registrar failed to provide a clear explanation of the imposed penalty amount;
• there was no explanation provided by the Registry whether the penalty which was imposed was the maximum penalty or whether the penalty stipulated therein also included a daily penalty;
• the Registry had incorrectly applied a penalty amount for a particular year on two occasions; and
• where the Registry had exercised its discretion to not impose the maximum penalty at law, the recipient had the right to understand how the Registry had exercised its discretion in determining the final penalty amount.

In addition to the above, the Court also noted that Aquilina had, to no avail, also made several attempts to contact the Registry to obtain an explanation regarding the penalty amounts which were due. The Court stressed that that the Registry cannot ignore attempts made by the plaintiff for explanations when it not only has the power to impose penalties for alleged defaults in terms of the Act, but also has the power to exercise discretion in imposing a maximum or lower amount for the penalties stipulated in the penalty notice.

The Court’s conclusions

On the basis of the foregoing, and in light of the applicable provisions of the Act cited above, the Court acceded to the plaintiffs’ request and defences and declared that the Registrar’s alleged amounts due by way of penalties in the judicial letter dated 20^th January 2022 were not due in terms of law.