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“Deadlock” Among Various Grounds Of Sufficient Gravity That Warrant Dissolution Of A Company – Shareholders

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Article 214 (2) (b) (iii) of the Companies Act, Chapter 386 of
the laws of Malta empowers the Maltese Courts ordering the
dissolution of a company where the Court “is of the
opinion that there are grounds of sufficient gravity to warrant the
dissolution and consequent winding up of the company
“.
The law falls short of providing a concrete, exhaustive list of
instances which constitute ‘grounds of sufficient gravity’,
however, drawing inspiration from English Insolvency law and
English jurists, our courts have delivered a wealth of case law
clarifying the practical parameters of this provision.

The Maltese Courts have generally held that the provision is
closely related to its English counterpart, which refers to
just and equitable‘ grounds. Notions developed
under English law have in practice served as guidance for
determining what constitute grave and sufficient reasons under
Art.214 (2) (b) (iii). On their part, English jurists have devised
a list of instances which constitute ‘just and equitable’
grounds of dissolution, including situations of so-called
‘deadlock’.

Professor Andrew Muscat, defines ‘deadlock’ as
those circumstances in a company where it ‘becomes
impossible to manage its affairs because the voting power at board
and general meetings is divided between two opposing groups’
1 .
Situations of deadlock can be made less
difficult to handle with some foresight at planning stage, such as
providing for a chairman’s casting vote, or other conflict
management provisions in the constitutional documents of the
company. Where such mechanisms are not put in place or are
otherwise unsuccessful, the court may find that there exist grounds
of sufficient gravity to warrant the dissolution and consequent
winding up of the company. In Ivan Calleja et vs
M.I.M.S Supplies Limited
2, the strained
relationship that existed between the two shareholders had
persisted for a number of years, and had led the company to
completely cease operations. In the eyes of the court, the
breakdown in mutual confidence and trust‘ between the
shareholders lead the company to ‘a point of no
return
‘. Hence, it had no other option but to order its
dissolution pursuant to Art.214 (2) (b) (iii) Companies Act.

In another judgment delivered by the First Hall Civil Court on
the 1st November 2012, in the names Av.
Henri Mizzi
noe vs Robert
Damkjaer
, the court made reference to a UK
landmark judgment dating back to 1916 where the UK Court of Appeal
held that :

Refusal to meet on matters of business, continued
quarrelling, and such a state of animosity as precludes all
reasonable hope of reconciliation and friendly cooperation have
been held sufficient to justify a dissolution…. All that is
necessary, is to satisfy the Court that it is impossible for the
partners to place that confidence in each other which each has a
right to expect…”. 3

In view of the above, where the court is satisfied that there
exists a constant state of conflict or opposing positions between
the shareholders, lack of compromise and breakdown in mutual
confidence, where the Company can no longer objectively continue
trading, the Courts can be persuaded that there are grave and
sufficient reasons which are sufficient to warrant the dissolution
and consequent winding up of the company.

As illustrated in Ballut Blocks Services Limtied vs
Unibuild Company Limited (FHCC) 2017

4 , the wide terms in
which the provision is couched grants the court a wide discretion
to analyse the facts presented before it and to decide whether
there subsist sufficient grounds to dissolve a company beyond
simply situations of deadlock. Other grounds which may possibly
constitute grounds of sufficient gravity include the abandonment of
the main objects set out by the company in its Memorandum and
Articles of Association, or the loss of a company’s central
management as a result of criminal action which as a consequence
results in the loss of its statutory required licenses for
operations 5 . Other grounds which have been suggested
to constitute grounds of sufficient gravity include situations of
unfair prejudice, oppression and discrimination among shareholders.
Such circumstances can give rise to personal liability of
particular directors pursuant to Article 402 of the Companies Act,
but commentators have argued that insofar as the court finds its
sufficient may also warrant the dissolution of the company pursuant
to Art. 214 (2) (b) (iii).

In conclusion, while “deadlock” is a typical situation
that triggers the remedy of Article 214(2)(b)(iii), the grounds for
such remedy remain open-ended, thus allowing the Court to adapt the
remedy to changing circumstances in the travails of 21st
Century corporations.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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