Court of Appeal Overturns Arbiter’s Decision in Favour of Appellant

In a judgment delivered on 18th September 2024, the Maltese Court of Appeal, presided by Hon. Judge Lawrence Mintoff, ruled in favour of the appellant, overturning a prior decision by the Arbiter for Financial Services (the "Arbiter"). This decision underscores the importance of procedural fairness in legal proceedings before the Arbiter and clarifies the limits of liability for trustees, especially during transitions between trusteeships.

Case Overview

The case involved the complainant’s investment in a retirement benefit scheme. The complainant alleged that the trustee and retirement scheme administrator (the “trustee”) —later the appellant—had failed to properly manage his pension fund, which resulted in substantial losses from high-risk and illiquid investments. The investments were initially made under the management of a predecessor trustee.

After hearing the case, the Arbiter found the appellant partially liable for the losses, ordering it to compensate the complainant for 40% of the losses related to the investments. The Arbiter reasoned that the appellant, as the new trustee, had a duty to rectify past errors made by the previous trustee. Disagreeing with this conclusion, the appellant filed an appeal.

Reasoning of the Court of Appeal: Procedural Fairness and Trustee Liability

The Court of Appeal’s ruling focused on two critical issues: the procedural fairness of the proceedings before the Arbiter and the distinction between the responsibilities of predecessor and successor trustees.

First, the Court emphasized that procedural fairness and the principles of natural justice, particularly audi alteram partem, must be upheld in legal proceedings, including proceedings before the Arbiter. The complainant had initially framed the complaint against the trustee responsible for making the investments, but during the proceedings, began to shift liability toward the appellant, who assumed the trusteeship later. However, the complaint was not amended to reflect the appellant’s specific responsibilities after the transition, depriving the appellant of a fair opportunity to defend itself based on its actions during its tenure.

The Court found that without a clear distinction between the actions of the previous and current trustees, the appellant was unfairly held accountable for decisions made before it took control of the scheme. This failure to provide the appellant with an opportunity to respond to properly formulated allegations and to produce its own evidence in rebuttal constituted a breach of procedural fairness.

Secondly, the Court Of Appeal addressed the issue of trustee liability. It determined that the appellant could not be held liable for decisions made by the previous trustee. The investments in question had been made before the appellant assumed the role of trustee, and there was no legal or factual basis for holding the appellant responsible for those actions.

The Court made it clear that liability for a successor trustee cannot be imposed retroactively unless there is clear evidence of negligence or failure to take appropriate corrective actions after assuming control. In this case, the complainant did not demonstrate any misconduct or negligence by the appellant during its period as trustee.

Outcome and Key Lessons

The Court of Appeal overturned the Arbiter’s decision, ruling that the appellant was not liable for investments made by the previous trustee. The complainant was ordered to bear the costs of both the initial proceedings and the appeal.

The decision highlights the paramountcy of principles of natural justice, such as audi alteram partem, ensuring that all parties have a fair opportunity to produce evidence and to respond to specific allegations against them.

The ruling also clarifies that a successor trustee cannot be held responsible for the actions of a predecessor unless negligence or failure to act after the transition is demonstrated. This legal distinction is crucial for cases involving the transfer of trustee responsibilities and provides some guidance for assessing trustee liability.

Muscat Mizzi Advocates successfully represented the appellant in this case.