THE REPUBLIC OF UGANDA
IN THE HIGH COURT OF UGANDA AT KAMPALA
HCCS No. 33 OF 1996
JACK WAVAMUNNO……………………………………………………………… PLAINTIFF
KAI ANDERSON & OTHERS …………………………………………………..DEFENDANTS
BEFORE: THE HONOURABLE MR. JUSTICE JAMES OGOOLA
Plaintiff contends that Defendants have failed to honour the redemption of his land title and that they also failed to repay the EDF loan — whereupon UNITED ASSURANCE COMPANY sold the suit land in 1996. Plaintiff therefore prays for payment of the market value of his land as well as for general damages, and the costs of this suit.
(a) that Plaintiff was indeed the registered proprietor of the suit land;
(b) that the suit land was sold off by UNITED ASSURANCE COMPANY under the terms of the mortgage.
In addition to the above agreed facts, the parties also agreed the following issues:
(1) whether there was a share transfer contract between Plaintiff and the 1st and 3rd Defendants;
(2) whether the share transfer was subject to the Memorandum of Understanding amongst the shareholders of the 2 Defendant (Exhibit R5);
(3) whether Defendants breached the Share Transfer Agreement, if so whether such breach occasioned loss of Plaintiff’s suit land;
(4) whether 2nd Defendant owed Plaintiff a duty of care under the terms of the Power of Attorney (Exhibit P.3) [to ensure repayment of the EDF loan and redemption of Plaintiffs land]; if so, whether there was a breach of that duty, and whether such breach occasioned loss of Plaintiff’s suit property; and
(5) whether Plaintiff is entitled to the remedies sought.
I will now deal with the agreed issues in the order in which they were presented.
(i) the Agreement was neither signed nor sealed (as required by law) by the two companies: M/S CAPRICORN, and M/S FISHTEC;
(ii) there was no company resolution by M/S CAPRICORN (as required by law); authorising the sale of its shares in FISHTEC;
(iii) there was no company resolution by M/S FISHTEC (as required by law) authorising that company to buy shares from both the Plaintiff and M/S CAPRICORN; and
(iv) there was no company resolution by M/S CAPRICORN authorising Plaintiff to contract on behalf of that company.
In my view, this case stands or falls on the determination of the first agreed issue: namely, whether the Share Transfer Agreement is valid or invalid. Primarily, Defendants’ contention is that the Agreement was neither signed nor sealed by the two companies involved — CAPRICORN and FISHTEC, as required by law.
In addition to all the above defects submitted by the Defendants, it is also quite evident that the purported sale and transfer of shares in this case did not satisfy a veritable number of the Company’s own Articles of Association (Exhibit P.1). Chief among these are the following:
(a) Regulation 5 — which forbids the Company’s funds from being employed to purchase the Company’s shares (contravention of which is punishable by a stiff fine under section 56(2) of the Companies Act);
(b) Regulation 6 — which vests in the Company’s Directors the authority to “allot or otherwise dispose of shares”;
(c) Regulation 18 — which requires share transfers to be “in writing”;
(d) Regulation 19 — which requires the share transferor and transferee to execute the transfer instrument;
(e) Regulation 20 — which forbids any share transfer “unless and until the right of pre-emption” has been exhausted;
(f) Regulation 21 — which requires a shareholder desiring to sell/transfer any shares, to first give an advance notice of his intention to the Company’s Directors; which notice then constitutes the Company’s Board of Directors as his agent for the sale of the shares at a price to be agreed upon between the seller and the Directors.
In the instant case, there is no evidence at all — let alone any indication — to the effect that the requirements of the above Articles of Association were satisfied. In the result, the purported sale and transfer of shares must be held to be invalid.
“I cannot agree that [Section 266 of the Local Government Act, 1933] affects the age-long
requirement of the common law as to the necessity of a seal to bind a corporation. Had Parliament intended to make so drastic an alteration in the law it would surely have so provided in clear terms.
I can find no words entitling me to say that if a corporation does comply with their standing orders the seal is no longer necessary either to bind them or to confer contractual rights upon them.”
The underlying reason for this “age-long” common law rule, is to afford immunity to corporations to the end that” a corporation was not bound unless their contracts were under seal” — see p.433 of Wright’s case (supra).
Having held as I have done on the first issue (that the Share Transfer Agreement was invalid and non-binding), it follows ipso facto that (the second and third agreed issues are also answered in the negative (i.e. the purported share transfer could not be subject to the Memorandum of Understanding amongst the shareholders of the 2nd Defendant; nor could Defendants breach the invalid Share Transfer Agreement).
As regards the second set of agreed issues, however, the position is vastly different. These are issues No. 4 and No. 5, to the effect of whether 2 Defendant owed Plaintiff a duty of care under the Power of Attorney (Exhibit P3) to ensure repayment of the EDF loan and, consequently, redemption of Plaintiffs’ .Kawuku land — and, if so, whether breach of that duty by 2 Defendant
occasioned loss of Plaintiffs property. It is at once evident that this issue is separate and distinct from the first issue (dealing with sale and transfer of shares). The underlying documents to this second set of issues (i.e. the Power of Attorney, the EDF loan agreement, and the Mortgage Deed) are separate and distinct from the documents underlying the first set of issues (i.e. Share Transfer Agreement). Also the intentions of the parties as between each set of issues is separate and distinct — in the first issue, the parties intended to divest their shares in the 2’ Defendant company; while in the second issue, the parties intended to access a loan facility for use in the operations of the 2nd Defendant. In view of all these factors, I am inclined to treat the second set of issues on a very different footing from the one I treated the first set of issues.
It is quite clear in my mind that, thanks to Plaintiffs offer of his Kawuku land as a mortgage, the 2nd Defendant ended up enjoying the benefits of the EDF loan, to the tune of ECUs 100,000. In the course of the scheduling conference of this suit, all the parties to the suit agreed expressly and without any reservations:
(i) that Plaintiff was indeed the registered proprietor of the suit land;
(ii) that the suit land was mortgaged for purposes of the 2nd Defendant’s operations; and
(iii) that UNITED ASSURANCE COMPANY sold off that mortgaged property under the terms of the mortgage.
The terms of the mortgage required, inter alia, repayment of the loan by 2nd Defendant. 2 Defendant obviously breached that requirement. Similarly, the Power of Attorney authorising 2nd Defendant to mortgage Plaintiffs suit land required the 2nd Defendant to repay the EDF loan in accordance with the terms of the mortgage. 2 Defendant’s failure to honour that obligation constituted a breach of its duty under the Power of Attorney to repay the loan and, thereby, to redeem Plaintiff’s mortgaged property. That failure on the part of the 2nd Defendant to repay the loan resulted directly in the sale of the mortgaged property. In my considered view, the responsibility for that loss redounds directly to the 2nd Defendant’s failure. 2nd Defendant must compensate for that loss. However, owing to the unchallenged understanding reached by all the parties (see Memorandum of Agreement: Exhibit P5) under which each shareholder (in the 2nd Defendant company) undertook to pay a pro rata share of the EDF loan (in the event that 2’ Defendant failed to repay that loan), the Plaintiff himself and his company CAPRICORN, must meet 40% and 20%, respectively, of the loss of his suit property.
Accordingly, judgment is hereby entered for the Plaintiff against the 2nd and 3rd Defendants, jointly and severally:
(b) interest on the above decretal amount at the rate of 19% p.a. from the date of filing this suit, to today’s date of judgment; and, thereafter, at the Court rate on the total amount in (a) and (b) above, until payment in full; and
(c) the costs of this suit.
Oscar Kihika, Esq — Counsel for Plaintiff
J.M. Egetu — Court Clerk