Any creditor has the right to challenge any act performed by a debtor where such acts are meant to defraud his claims. Our Civil Code allows the possibility to attack these fraudulent acts.

If the fraudulent acts were carried out under an onerous title (for instance against payment) the creditor must bring proof of fraud on the part of both contracting parties. However, if the acts were performed under a gratuitous title, it is sufficient for the creditor to prove fraud on the part of the debtor alone.

This matter centred round the case in the names of Merkanti Bank Limited et. versus Raiffeisen Bank International AG et. decided by the Court of Appeal (Superior Jurisdiction) on March 29, 2023.

The defendant bank (Raiffeisen) had extended a substantial loan to a group of companies Scully Royalty Ltd formerly known as MFC Group. The loan was secured by the parent company of the group, which later changed its name to LTC Pharma (Int) Ltd (a foreign company incorporated under the laws of the Marshall Islands). In fact, LTC had entered into an agreement with Raiffeisen Bank securing the said loan as a guarantor.

It happened that there was a need to restructure the companies within the group, and Scully Royalty Ltd (formerly known as MFC group) informed Raiffeisn about its intentions. Additionally, LTC was sold and no longer formed part of MFC group.

Scully Royalty Ltd. (another foreign company incorporated in the Cayman Islands) acquired forty-nine million, nine hundred and ninety-nine thousand, nine hundred and ninety nine (49,999,999) shares in Merkanti Holding p.l.c. (a company incorporated under Maltese Laws) from LTC Pharma (Int) Ltd.

According to Raiffeisen Bank, this restructuring, change in ownership and transfers had violated the loan conditions, leading it to request repayment of the loan in full. The defendant bank Raiffeisen claimed that the money was not repaid, prompting it to initiate legal proceedings.

Raiffeisen filed a case against Scully Royalty Ltd and others in 2019 in the Cayman Islands, where Raiffeisen claimed to be a creditor of a debt guaranteed by LTC and through this case, Raiffeisen had sought to impugn the transfer (through the actio pauliana) of shares in Merkanti Holding p.l.c. from LTC to Scully.

As a result of these proceedings, Scully Royalty together with Merkanti filed proceedings in Malta seeking a declaration from the Maltese courts that the transfer of shares, which Raiffeisen has contested in the Cayman Islands, was lawful. Additionally, Scully Royalty and Merkanti requested a declaration from the Maltese courts that none of the claimants have engaged in illegal, bad faith, or fraudulent actions. This action is known as the negative actio pauliana, the inverse of the actio pauliana.

Jurisdiction

Before entering the merits of the case, the Maltese courts had to decide if Malta had jurisidiction to hear the merits of the case.

It was clear that the basis for the current action stemmed from LTC (Int.) Pharma's failure to fulfil its obligations under the guarantee, which resulted from the Merkanti transfer and other transfers.

The defendant Bank Raiffeisen argued that if the guarantee did not exist, there would be no grounds for proceedings in the Cayman Islands and even less so for the proceedings in Malta. Moreover, Raiffeisen suggested that the legal actions of Scully and Merkanti resembled a negative "actio pauliana”, which was in contrast to "actio pauliana," which allows the creditor to challenge acts carried out fraudulently by the debtor that harm the creditor.

In this case, Scully Royalty, was seeking is a declaration that the Merkanti Transfer was not intended to defraud creditors and therefore could not be contested (the opposite of "actio pauliana").

Scully Royalty Ltd defended the legitimacy of the share transfer, arguing that the agreement with LTC Pharma (Int) Ltd was exclusively related to the shares in a limited liability company incorporated under the laws of Malta. They contended that the transaction had no substantive or real connection with the Cayman Islands.

Initially, the First Hall Civil Court in Malta accepted the plea of lack of jurisdiction. However, the Maltese Court of Appeal had a different view. It held that the main contract in question was not the guarantee given by LTC to Raiffeisen but rather the transfer of shares in Merchants Holding p.l.c. between LTC and Scully.

The Court of Appeal held that given that the transfer involved shares in a company registered in Malta, the place of fulfilment of the obligation was in Malta, thus falling under the jurisdiction of the Maltese courts. Consequently, the Court of Appeal, upheld the appeal, annulling the judgment of the First Hall Civil Court, and rejecting the plea of lack of jurisdiction.

As a result, the case was sent back to the First Hall Civil Court so that it hears and decides on the merits of the proceedings. The outcome of this legal battle will undoubtedly have far-reaching implications for both Scully and LTC Pharma should the First Hall Civil Court decide that the transfer of shares in Merkanti was made in bad faith to defraud Raiffeisen Bank.

It remains to be seen how the court will rule on this contentious matter.

Dr Clive Gerada is a senior associate at Azzopardi, Borg and Associates Advocates.