Court name
Commercial Court of Uganda
Case number
Miscellaneous Application-2013/845
Judgment date
25 November 2013

Stanbic Bank Uganda Ltd v Ducat Lubricants (U) Ltd & 3 Ors (Miscellaneous Application-2013/845) [2013] UGCommC 199 (25 November 2013);

Cite this case
[2013] UGCommC 199
Short summary:
CL, Corporate Veil, Liability of Company Directors, Fraud

THE REPUBLIC OF UGANDA,

IN THE HIGH COURT OF UGANDA AT KAMPALA

(COMMERCIAL DIVISION)

MISCELLANEOUS APPLICATION NO 845 OF 2013

(ARISING OUT OF HCCS NO 438 OF 2012)

STANBIC BANK UGANDA LTD}.............................................................                                                                           APPLICANT

VERSUS

  1. DUCAT LUBRICANTS (U) LTD}
  2. CB RICHARD ELLIS (U) LTD}
  3. ARINAITWE JOSEPH BRYAN}
  4. ARINAITWE PROSSY}..........................................................                                                                                   .RESPONDENTS

BEFORE HON. MR. JUSTICE CHRISTOPHER MADRAMA IZAMA

RULING

The Applicant Messieurs Stanbic Bank Uganda Limited commenced this application under section 98 of the Civil Procedure Act, Order 1 rule 10 (2) and Order 50 rules 1 and 3 of the Civil Procedure Rules for orders that the corporate veil of the first Respondent is lifted and the third and fourth Respondents are added as parties to HCCS No 438 of 2012 in their individual capacity as directors and shareholders of the first Respondent. The Applicant further prays for costs of the application to be provided for.

The grounds of the application are set out in the Notice of Motion and further contained in the affidavit of Deogratius Magala. The first ground is that the first Respondent is a corporate body existing separately from its shareholders and directors. Secondly the fourth Respondent had a business relationship with the Applicant, in which the Applicant advanced to the fourth Respondent a loan of Uganda shillings 200,000,000/=. Thirdly the third and fourth Respondents are directors and shareholders of the first Respondent and controlled the first Respondent at the material time. Fourthly the first, third and fourth Respondents committed acts of fraud in the business relationship with the Applicant. Finally that it is in the interest of justice that the third and fourth Respondents are added as parties to the suit and the suit proceeds against them in person.

In the affidavit in support of the application is deposed to by Mr. Magala Deogratius, employed by the Applicant as Officer Business Solutions and Recoveries, and he deposed to the following facts in support of the application. The Applicant bank granted a loan of Uganda shillings 200,000,000/= to the 1st Respondent according to a facility letter annexure "A" dated 15th of December 2011. The loan was secured by a mortgage over plot 1038 block 249 which was represented to the Applicant by the first, third and fourth Respondents as developed with a Storied House thereon. The second Respondent on the instructions of the first, third and fourth Respondents issued a valuation report confirming that the security was developed as described and had a forced sale value of Uganda shillings 280,000,000/= according to the valuation report annexure "B". The valuation report is issued by the second Respondent and the received stamp shows that it was received by the Applicants Credit Department on 7 December 2011 and is dated 17 October 2011. The first Respondent defaulted on the loan and there is an outstanding amount of Uganda shillings 232,038,059/= according to a bank statement attached to the affidavit in support annexure "C". The third and fourth Respondents are shareholders and directors of the fourth Respondent and had control of the first Respondent at the time the first Respondent executed the loan agreement with the Applicant bank. The deponent has attached is a photocopy of the memorandum and articles of Association, return of allotment, resolution and company form 7 of the first Respondent. Furthermore the third and fourth Respondents also control another company called Ariba Investments Ltd, which has been sued by the Applicant bank in HCCS No 35 of 2013 in similar circumstances as in the Applicant’s suit. HCCS No 438 of 2013 and the plaint in HCCS number 35 of 2013 have been attached to the affidavit as annexure "G". Upon the Applicant having the property used as security surveyed by another company Messieurs East African Consulting Surveyors, the Applicant established through a valuation report that the forced sale value of the security presented for the loan was Uganda shillings 5,000,000/= contrary to representations of the Respondents. The re-survey report is also attached to the affidavit in support of the application. Consequently the deponent asserts that the 3rd and 4th Respondents are in the habit of conducting their business using the corporate mask in a deceitful and fraudulent manner. Consequently the deponent asserts on the basis of advice from his lawyers deposes that there are grounds disclosed for lifting the corporate veil of the first Respondent and adding the 3rd and 4th Respondents as parties to Civil Suit Number 438 of 2012.

The application came for hearing on 23rd of October 2013 when the Applicants Counsel Joseph Luswata represented to the court that the Respondents had not been served. He sought a short adjournment to enable the filing of an affidavit of service. On 25 October 2013 Ronald Kato of Messieurs Sebalu and Lule Advocates deposed an affidavit of service. The affidavit indicates that on 27 September he received the notice of motion from this court for service upon the Respondents. The loan offer letter indicated that the physical address of the Respondents was Gagawala Shauriyako. He however failed to trace the Respondents in the application. The Applicant additionally availed the telephone numbers of the Respondents and upon calling the telephone numbers, none of them could go through. Efforts to trace them and serve the notice of motion on the Respondents proved fruitless.

On 1 November 2013, when the application came for hearing, none of the Respondents appeared. Counsel for the Applicant applied for service through the newspapers and the application was granted. The affidavit of service sworn to by Ronald Kato shows that he took the notices to the New Vision and Monitor offices for advertising. The daily Monitor Newspaper of Friday, November 11, 2013 at page 43 published the hearing notice. Secondly the New Vision of Friday, 11 November 2013 published the hearing notice at page 42 thereof. Photocopies of page 23 of the Daily Monitor on page 42 of the New Vision Newspaper as indicated above were attached. Both notices someone called the Respondents to appear in court on 20 November 2013 at 10 AM.

On 20 November 2013, the Applicant was represented by Counsel Joseph Luswata while no one appeared for the Respondent. Upon application of the Applicant’s Counsel, the application proceeded ex parte under the provisions of Order 9 rule 10 of the Civil Procedure Rules as well as rule 20 thereof.

The Applicant’s Counsel submitted that the essence of the Application is that the Applicant lent Uganda Shillings 200,000,000/= to first Respondent against security represented to Applicant as developed with a storied house valued at Uganda shillings 280,000,000/= according to the valuation report attached to affidavit. The first Respondent defaulted on the loan and the Applicant resurveyed and re-valued the security for the loan and the revaluation report is attached as annexure J to the affidavit in support. The valuation report reveals that the security is not developed and is only worth Uganda shillings 5,000,000/=. Lastly the 3rd and 4th Respondents control another company called Aliba Investments Ltd which also obtained a loan in similar circumstances and the Applicant commenced HCCS No 35 of 2013 against them. Counsels submitted that the affidavit in support sufficiently discloses fraud committed by the Respondents using the corporate veil of the first Respondent. Section 20 of Companies Act 2012 provides that the corporate veil may be lifted on grounds of fraud. Counsel cited two Ugandan Authorities namely Civil Appeal 64 of 1995 Salim Jamal vs. Uganda Oxygen and also MA 156 of 2012 John Lubega Matovu vs. Mukwano Investments Ltd for a discussion of the grounds for lifting the veil. In the premise he prayed that the court grants the Application.

Ruling

I have duly considered the Applicant’s application and the evidence in support thereof have also considered the oral submissions of the Applicants Counsel.

This application proceeded ex parte after substituted service on the Respondents. HCCS No 438 of 2012 is a civil suit filed by Messieurs Stanbic bank Uganda limited against the first two Respondents. Consequently the application is only to add the second and third Respondents who are directors and shareholders of the first Respondent/Defendant.

The application was made under the provisions of Order 1 rule 10 (2) of the Civil Procedure Rules which provides that:

"The court may at any stage of the proceedings either upon or without the application of either party, and on such terms as may appear to the court to be just, order the name of any party improperly joined, whether as Plaintiff or Defendant, be struck out, and that the name of any person who ought to have been joined, whether as Plaintiff or Defendant, or whose presence before the court may be necessary in order to enable the court effectually and completely to adjudicate upon and settle all questions involved in the suit, be added."

It is an application to add Defendants made by a Plaintiff. The general rule is that a Plaintiff can sue whomsoever he, she or it wishes to sue. The general rule which reflects this principle is Order 1 rule 3 of the Civil Procedure Rules which provides that:

“All persons may be joined as Defendants against whom any relief in respect of law arising out of the same act or transaction or series of acts or transactions is alleged to exists, whether jointly, severally or in the alternative, where, if separate suits were brought against those persons, any common questions of law or fact are rise."

In other words the application ought to be allowed merely because the Plaintiff would like to sue the third and fourth Defendants but not because they are necessary parties per se but because the Applicant has a cause of action against the said Respondents. However, the application is framed as an application advancing grounds for lifting the veil so as to proceed against the directors and shareholders of the first Defendant/Respondent. Ordinarily an application to lift the veil can stand on its own and is not necessarily an application to add a Defendant but to make a member of a company liable for actions commenced against the company and proved. Notwithstanding, I will consider the principles for adding a Defendant as well as the grounds for lifting the veil of incorporation so as to proceed against the directors/shareholders.

I have carefully considered the pleadings in the main suit. The first Defendant/Respondent to this application filed a defence on 5 February 2013 in the main suit. The summons to the first Defendant had been advertised in the Daily Monitor Newspaper of Friday, January 18, 2013 at page 46. Secondly I have considered the fact that the Applicant’s application attaches the returns filed with the Registrar of Companies of the first Respondent/Defendant. The memorandum and articles of Association annexure "E" has the third Applicant as the majority shareholder with 89 shares, the fourth Respondent which 10 shares and one other person namely Erimu John Irumba with only one share. The memorandum of Association was executed on 16 September 2011. Apparently the company was registered in September 2011. Secondly annexure "D" to the affidavit in support is company form 7 giving particulars of Directors and Secretaries of the first Respondent Company filed on 3 October 2011. It includes the names of the three shareholders as directors. The third and fourth Respondents are directors in the company. Annexure "F" is a special resolution allotting shares.

Annexure "B" dated 20th of October 2011 is a valuation report addressed to the Applicant which shows that plot 1038 block 249 Bunga Kampala is held by the third Respondent under private Mailo. The valuation report is by the second Respondent Company. In the valuation report is included photos of a storied building. The valuation report shows that the forced sale value of the land, buildings and improvements on plot 1038 block 241 Bunga, Kampala is Uganda shillings 280,000,000/=.

Annexure "A" is a term loan letter from the Applicant offering the 1st Respondent/Defendant a loan facility of Uganda shillings 200,000,000/= to boost working capital. The loan was to be repaid fully within 36 months. The loan agreement was executed on 15 December 2011 by the third Respondent as managing director of the 1st Defendant/Respondent. Finally annexure "J" to the affidavit in support of the application is a valuation report by Messieurs East African Consulting Surveyors dated 6th of June 2012, being a valuation of plot 1038 Block 249 Bunga, Kyadondo County Kampala District. The valuation survey was to establish the fair market value and forced sale value of the property. The date of inspection was 5 June 2012 and instructions were received from the Manager Specialised Recoveries of Messieurs Stanbic Bank (U) Ltd. They established that the registered proprietor of the property is the third Respondent. The plot is vacant and low-lying within a swamp. It is waterlogged in wet weather. Development of the plot may require a permit from the National Environmental Management Authority. After considering all the circumstances the surveyors are of the opinion that the fair market value of the property is in the region of Uganda shillings 10,000,000/= while the forced sale value would be in the region of Uganda shillings 5,000,000/=.

I have considered the following facts as being relevant on whether to add the 3rd and 4th Respondent while discussing the lifting of the veil as well.

  • The third and fourth Respondents as directors of the first Applicant indeed applied in the name of the first Applicant for a loan facility and were granted the loan facility of Uganda shillings 200,000,000/=.
  • The company was incorporated around the same time as the application for the loan facility of the Applicant.
  • It is alleged that the first Respondent/Defendant is the company in which the third and fourth Respondents are directors and shareholders, defaulted in the loan payments.
  • It is further alleged that the valuation report initially obtained was false in material particulars in that there is no development/house on the property used by the first Respondent as security for the loan.
  • It is further alleged from the documentary evidence availed to the court that the forced sale value of the property is not Uganda shillings 280,000,000/= which is the basis upon which the loan facility was granted but Uganda shillings 5,000,000/=.
  • On the face of the averments, the Applicant cannot use the security to recover all its money from the first Respondent.
  • The third Respondent is the registered proprietor of the suit property.
  • The directors are the minds and brains of the company which is a legal fiction or abstraction and does not have a mind of its own.
  • The Applicant alleges that the third and fourth Respondents as directors have employed another company to obtain a loan using similar methodology and the Applicant has filed HCCS No 35 of 2013 against them.
  • At this stage of the proceedings, it is sufficient to show that the Applicant intends to allege fraud against the third and fourth Respondents for the manner in which they obtained the loan.

The second aspect to consider is whether it can be said that the directors of the first Respondent/Defendant to the main suit are alleged to be involved in fraud in terms of section 20 of the Companies Act 2012. In this case it is alleged that the third and fourth Respondents merely used the first Respondent Company as a vehicle to defraud the Applicant. It is not necessary to establish fraud at this stage of the proceedings. It is sufficient to indicate that there is case that the first Respondent has been used by the third and fourth Respondents as a vehicle to obtain a loan with no intention of paying it back. Section 20 of the Companies Act 2012 gives The High Court jurisdiction in cases of tax evasion, fraud or the membership of the company falling below the statutory minimum, to lift the corporate veil. It provides as follows:

"The High Court may, where a company or its directors are involved in acts including tax evasion, fraud or where, save for a single member company, the membership of a company falls below the statutory minimum, lift the corporate veil.

The provision does not indicate at which stage the High Court may lift the corporate veil. However by using the term “involvement in fraud” it is apparent that it should be established to the satisfaction of the court. It cannot be established without the standard of proof required to prove fraud and without a right of hearing. A party is joined for trial of the matters in controversy in ordinary cases. At this stage of the proceedings fraud can only be alleged. It is further apparent that the Applicant intends to proceed against the directors in their own personal capacity. By alleging that they were using the first Respondent Company as a vehicle to perpetrate their own interests, it is not a suit against the company per se but a suit against the individuals in their own personal capacity.

It is a basic common law principle that the mind of a company where guilty intent or responsibility is being considered cannot meaningfully be separated from the minds of the directors where the will of the company is to be discerned. In the case of HL Bolton Co v. TJ Graham and Sons [1956] 3 All ER 624, Lord Denning held at page 630:

“A company may in many ways be likened to a human body. They have a brain and a nerve centre which controls what they do. They also have hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what they do. The state of mind of these managers is the state of mind of the company and is treated by the law as such.... That is made clear in Lord Haldane’s speech in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd ([1915] AC 705 at pp 713, 714). So also in the criminal law, in cases where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the directors or the managers will render the company themselves guilty.”

The difficulty introduced by the application is mixing an application for addition of a Defendant with an application for lifting the veil. A suit can be filed against a director/individual who is a member of the company in their own individual capacity and it would be a matter of evidence to prove that the use of the company name was merely a front or vehicle to perpetrate the alleged fraud by the individual. In other words it is up to the Plaintiff to prove that the company was a mere conduit of the individual. It is a different thing to say that the acts of the 3rd and 4th Respondents are the acts of the company unless the corporate veil is lifted. The corporate veil ought to be lifted where there is proof of involvement of the directors in fraud. It is yet to be resolved by the courts whether the involvement should disclose personal benefit to the director. The question of personal benefit to the directors is considered in the context of considerations of whether to hold the director or the company liable for fraud which has been established.

In the main I do not see a bar to filing of a suit against an individual in his or her own individual capacity for using the vehicle of the company name to perpetrate his or her own individual activities.

It is my humble opinion that in the circumstances of the case, the intention of the Plaintiff as disclosed in the application is to proceed against the persons alleged to have used the first Respondent as a vehicle of fraud. Should the court only lift the corporate veil for purposes of proceedings to establish the allegations of the Plaintiff/Applicant? The lifting of the veil is not proof of any fraud committed by any member of the first Respondent Company. I was referred to several authorities. Those authorities were decided before the promulgation of the Companies Act 2012. The authorities include fraud as one of the grounds for lifting the veil to proceed against a member of a company. As far as the Act is concerned, section 20 clearly provides that involvement in fraud is a ground for lifting the veil. The two authorities I referred to above indicate that directors are the minds and brains and limbs of the company. Once the company is alleged as having been involved in fraudulent acts, the minds behind the act alleged to have been committed are the minds which are involved in the alleged acts. In other words it will show that the allegation of fraud of the company is an allegation of the involvement of its directors. The lifting of the veil assumes that otherwise the acts alleged are the acts of the company. That could be a defence of a director who is sued in his own individual capacity. However what needs to be established is the liability of the individual. In the case of Williams and Another versus Natural Life Health Foods Ltd and Another [1998] 2 All ER 577 the issue was whether the Director was personally liable in tort for acts otherwise attributed to the company. It was not a case as to whether the director could be sued. The House of Lords considered the grounds on which a director could be held personally liable and not whether they can be sued. Lord Styn said at 581 at the bottom to 582:

“It will be recalled that Waite LJ took the view that in the context of directors of companies the general principle must not ‘set at naught’ the protection of limited liability. In Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 at 524 Cooke P (now Lord Cooke of Thorndon) expressed a very similar view. It is clear what they meant. What matters is not that the liability of the shareholders of a company is limited but that a company is a separate entity, distinct from its directors, servants or other agents. The trader who incorporates a company to which he transfers his business creates a legal person on whose behalf he may afterwards act as director. For present purposes, his position is the same as if he had sold his business to another individual and agreed to act on his behalf. Thus the issue in this case is not peculiar to companies. Whether the principal is a company or a natural person, someone acting on his behalf may incur personal liability in tort as well as imposing vicarious or attributed liability upon his principal. But in order to establish personal liability under the principle of Hedley Byrne, which requires the existence of a special relationship between Plaintiff and tortfeasor, it is not sufficient that there should have been a special relationship with the principal. There must have been an assumption of responsibility such as to create a special relationship with the director or employee himself” (Emphasis added)

The grounds for imposing personal liability on a director have to be established by the evidence. In other words the corporate veil can be lifted where fraud has been established against the company. This is not a bar to suing the director in order to prove that there is alleged fraud of the director for which the plaintiff holds them personally liable. The corporate veil ought to be lifted under the provisions of section 20 of the Companies Act 2012 upon establishing that the directors are involved in fraud.

In the context of addition of parties under the provisions of Order 1 rule 10 (2) of the Civil Procedure Rules, the considerations are dictated by the rules.  The Supreme Court of Uganda has held that there is a clear distinction between joining a party who ought to be joined as a Defendant and one whose presence is necessary Kanyeihamba JSC in Departed Asians Property Custodian Board v Jaffer Brothers Ltd [1999] 1 EA 55 between pages 63 – 64 held:

“I agree with the submission of Counsel for the Respondent that a clear distinction is called for between joining a party who ought to have been joined as a Defendant and one whose presence before the court is necessary in order to enable the court effectually and completely adjudicate upon and settle all questions involved in the suit.

Order 1, rule 10(2) reads as follows: ...

This rule is similar to the English Rules of Supreme Court Order 16, rule 11 under which the case of Amon v Raphael Tuck and Sons Ltd [1956] 1 All ER at 273, was considered and decided and in which it was said that a party may be joined in a suit, not because there is a cause of action against it, but because that party’s presence is necessary in order to enable the court effectually and completely adjudicate upon and settle all the questions involved in the cause or matter. (Emphasis added)

In the case of Amon v Raphael Tuck & Sons Ltd [1956] 1 All ER 273 at page 279, Devlin J held that the jurisdiction to join a Defendant turns on the true construction of the words in the rule as to whether that party is a necessary party. He said:

“The question of jurisdiction must depend on the meaning and scope of the rule. One cannot say that the court has no power to join a party against whom the Plaintiff has no cause of action, unless the requirement that he should have one is contained expressly or impliedly in the rule. Nor can one say that some counterclaims, such as that in Montgomery v Foy, Morgan & Co are permissible, and that others, such as that in Bentley Motors (1931) Ltd v Lagonda Ltd, are not, unless the line between them is drawn somewhere in the rule. Accordingly, this case, in my view, really turns on the true construction of the rule, and, in particular, the meaning of the words

“… whose presence before the court may be necessary in order to enable the court effectually and completely to adjudicate upon and settle all the questions involved in the cause or matter …”

The beginning and end of the matter is that the court has jurisdiction to join a person whose presence is necessary for the prescribed purpose and has no jurisdiction under the rule to join a person whose presence is not necessary for that purpose.”

The issue is under order 1 rule 10 (2) is whether the presence of the third and fourth Respondents is necessary whether or not the Applicant has a cause of action against them. Yet the Applicant's case in the application is that the directors of the first Respondent are involved in fraud personally and therefore suggesting that there is a cause of action against the said directors personally.

There is no need for the Plaintiff to demonstrate that it is necessary to sue the directors. If the Plaintiff wants to allege fraud of the directors, he can sue them and prove the case. He can also pray for an order lifting the veil so as to make them personally liable if the company is proved to be liable. That order would be unnecessary if fraud against the individual is proved directly. The veil ought to be lifted upon adducing evidence and establishing fraud. It can be lifted after a suit has been proved against the company. On the other hand the Plaintiff can proceed simultaneously against the company and the directors and prove that the directors are personally liable. The directors can defend themselves and claim that they acted on behalf of the company. In other words the grounds for extending liability to the directors should be proved in the proceedings as there is no bar in law to proceeding directly against a director. In other words it is sufficient to allege that the name of the company was merely used by the individuals for their own ends.

In the premises, the Plaintiff is entitled to sue the third and fourth Defendants in their own individual capacity. Such an application ought to have been made under Order 1 rule 3 of the Civil Procedure Rules. However, the Applicant also proceeded under section 98 of the Civil Procedure Act which provides that nothing in the Act shall be deemed to limit or otherwise affect the inherent power of the court to make such orders as may be necessary for the ends of justice or to prevent abuse of the process of the court. It is therefore my humble conclusion, the application having proceeded ex parte, that no prejudice would be occasioned if the application is allowed to avoid a multiplicity of proceedings. In any case the Plaintiff is entitled to sue whomsoever it pleases provided there is a cause of action against the Respondents. The application to join the third and fourth Respondents as Defendant is allowed with no order as to costs. The Applicant will add the third and fourth Respondents in an amended plaint and extract fresh summons against the third and fourth Respondents respectively within 14 days from the date of this order.

Ruling delivered in open court this 25th day of November 2013

 

Christopher Madrama Izama

Judge

Ruling delivered in the presence of:

No parties present

Charles Okuni: Court Clerk

 

Christopher Madrama Izama

Judge

25th of November 2013