Former More Supermarkets boss Ryan Schembri committed fraud when he appeared on a €3.5 million constitution of debt contract while knowing that he was no longer the legal representative of the supermarket chain, a civil court has declared.
The court ordered the rescission of the public deed drawn up by a notary on June 20, 2014 and also ordered that a copy of the judgment be handed to the Commissioner for Revenue, the Financial Intelligence Analysis Unit, the Police Commissioner and the President of the Notarial Council.
The decision stemmed from two civil lawsuits filed by More Supermarkets Ltd and More Holdings Ltd against Edmond Mugliett and Alexander Farrugia, together with Ryan Schembri, Adrian Agius and Cassar and Schembri (Marketing) Ltd.
The cases were filed in November 2014, five months after the public deed wherein Schembri and Agius acknowledged a debt of €2 million and another debt of €1.5 million representing two loans made by Mugliett and Farrugia respectively to Cassar and Schembri (Marketing) Ltd, a joint venture between Schembri and his former business partner Etienne Cassar.
More Supermarkets Ltd were drawn into that debt agreement alongside Cassar and Schembri (Marketing) Ltd together with Schembri and Agius in their personal capacity.
However, it later transpired that Schembri had stepped down as director of all More supermarkets except for the Hamrun branch, since May 2014 and was therefore no longer their authorised legal representative.
As for the Hamrun branch, just nine days before the constitution of debt contract, the company had barred any financial or other undertaking by the Board of Directors unless specifically approved by the company’s gGeneral meeting.
The supermarket companies thus turned upon their former boss, Agius, Mugliett and Farrugia claiming that the monies were never loaned and that the constitution of debts was entirely fabricated.
Mugliett and Farrugia countered that the applicants themselves were fraudulent because they were simply trying to avoid repaying the loans.
Agius argued that he had acted in good faith, that he was only representing More Supermarkets (Hamrun) and that this lawsuit was triggered by disagreements between Mugliett and Darren Casha, who had taken over the supermarket chain from Schembri.
In a lengthy and detailed judgment the First Hall, Civil Court, presided by Mr Justice Ian Spiteri Bailey, upheld Agius’s plea that he was only involved in the Hamrun branch and was thus non-suited in respect of the other supermarkets.
The court made some preliminary considerations.
Cassar and Schembri (Marketing) Ltd was almost totally absent from these proceedings in spite of having been duly served notice of the case.
Share transfer was 'a smokescreen'
The share transfer agreement between Schembri and Casha came at a time when Schembri was targeted by money laundering investigations in Croatia and therefore that transfer was “a smokescreen” for Schembri’s supermarket companies to escape those investigations.
Farrugia testified that he had handed €1 million to Schembri in Libya and the funds were later transferred to Malta under the pretext of a contract of work in Libya.
“But the court can in no way approve such suspicious transactions,” said the judge, thus flagging the matter to the FIAU.
As for Notary Claire Camilleri who drew up the constitution of debt, the court observed that a public notary was a “public official who has to inspire trust in any party appearing before him as well as in the State itself.”
The contract contained a declaration about payment effected on signing of the deed. Yet it turned out that that declaration was false.
Both Mugliett and Farrugia testified that certain assets of Cassar and Schembri were transferred to the supermarket companies with the express intention of claiming a €300,000 VAT refund.
For this reason the court flagged the matter to the Tax Commissioner and the Police Commissioner to investigate and take action if necessary.
Schembri resigned directorship before contract was signed
Turning to the contract that was being challenged, Mr Justice Spiteri Bailey observed that although Schembri had resigned his directorship when he appeared on the constitution of debt, the change had not yet been reflected in the register of companies.
The relative Forms K were filed four days after that contract was signed.
However, citing law professor Andrew Muscat, the court held that “nowhere does the law state or imply that the change amongst directors is not effective until the change had been registered.”
The court said it could not tolerate a situation where a third party, extraneous to the internal affairs of a company, suffered prejudice because any changes were not yet made public.
Both the notary and Mugliett had carried out all possible checks, even by consulting the register of companies. Thus the court could not annul the contract simply because the debtors were wrongly represented.
Having said that, the court said it had no doubt that Schembri knew very well that he was no longer authorised to represent the supermarket companies when signing that debt agreement.
“Yet he appeared on the contract feigning that nothing had changed.”
The only thing all parties had in common was their trust in Schembri who doubtlessly defrauded all those present in the room that day, went on the court.
Mugliett and Farrugia would not have signed the deed were it otherwise.
As for Agius, he seems to have been the “greatest victim of Schembri’s fraud” because he even forfeited his home. His testimony showed that he only agreed to sign because he trusted Schembri and believed that the sums were truly due.
However, as director of the Hamrun branch, Agius could have run the necessary checks before signing, but that was something he failed to do.
Agius was not to be held responsible in damages, if any.
Evidence showed that €2 million were transferred from All Seas Management Ltd and Blue Finance Ltd to Cassar and Schembri Ltd.
Mugliett claimed to be the ultimate beneficial owner of those two companies, yet appeared in his personal capacity on the constitution of debt.
The court concluded that that contract was based on a false premise and was therefore null at law.
As for damages, the applicants presented a list of court proceedings filed by creditors of the supermarket chain. They argued that were it not for the garnishees stemming from that debt agreement, they would have taken negotiations with creditors to a successful end and the supermarkets would not have shut down.
But the court expressed serious doubts about that and moreover, the applicants brought no evidence to support this claim.
More Supermarkets never filed properly audited accounts and when they did, data showed that the business had registered €1.7 million in losses over a full year in operation.
The court thus rejected all claims for damages.
The court however declared that Schembri had committed fraud when appearing on that constitution of debt which was to be rescinded.
A notary was appointed to draw up the deed of rescission within four months and to cancel the general hypothec and bill of exchange ancillary thereto.