Court name
Commercial Court of Uganda
Judgment date
11 November 2015

Muhimbura & Anor v Kitasha Coffee Buyers & Farming Ltd & Ors (Miscellaneous Application-2014/52) [2015] UGCommC 136 (11 November 2015);

Cite this case
[2015] UGCommC 136

THE    REPUBLIC OF UGANDA

IN THE HIGH COURT OF UGANDA AT KAMPALA

(COMMERCIAL DIVISION)

MISC. APPLICATION NO. 052 OF 2014

 (Arising from HCCS No. 502 of 2012)

 

  1. MUHIMBURA STEVEN     }
  2. AZAALWA HASSAN                 }:::::::::::::::::::::::::APPLICANTS

VERSUS

  1. KITASHA COFFEE BUYERS & FARMING LTD}
  2. JUMA KITAKA                                                                        }
  3. SARAH KITAKA                            }::::::::::::::::::::::RESPONDENTS

 

BEFORE: HON. LADY JUSTICE HELLEN OBURA

RULING

This application was brought under Section 98 of the Civil Procedure Act (CPA), Order 38 rule 5 (d) and Order 52 rules 1 & 3 of the Civil Procedure Rules (CPR). The applicant is seeking for orders that the veil of incorporation of Kitasha Coffee Buyers and Farming Ltd, the 1st respondent be lifted and the 2nd and 3rd respondents who are directors of the 1st respondent be ordered jointly and severally to pay the decretal sum of Shs. 163,277,000/=.  The application also seeks for an order that costs of this application be provided for.   

 

The affidavits in support of this application were sworn by the applicants. However, I must point out at this juncture that each of the applicants had filed their own application but when the 2nd applicant’s application came up for hearing, upon this court’s guidance, the 1st applicant withdrew the application he had filed and instead filed a supplementary affidavit in support of this application which was filed by the 2nd applicant.

 

The grounds of this application as stated in the two affidavits are the same save for the search done at the company registry by the 1st applicant as stated in paragraphs 11-14 of his affidavit. In brief, the applicants deposed that the 2nd and 3rd respondents who are husband and wife and are shareholders and directors of the 1st respondent company, jointly and severally conduct business in their individual capacity using the 1st respondent as a mere shield because of its corporate personality. The applicants averred that on diverse occasions they supplied coffee to the respondent but were only paid partly leaving an outstanding balance of Shs. 163,277,000/= which the respondents refused or neglected to pay and upon them suing the 1st respondent, the applicants obtained a judgment and decree in their favour but their effort to execute the same failed because no property that could be attached was found at the 1st respondent’s known business premises which had been abandoned.

 

The 1st applicant averred that upon him conducting a search at the company registry he discovered that the 2nd and 3rd respondents as directors of the 1st respondent had made a resolution dated 29th of April 2013 transferring their shares to a one Kasasa Ronald and Nakibuka Clare and had also appointed them as the new directors of the company. Uncertified photocopies of the resolution and Company Form 8 were attached and marked “D”.

 

He deposed further, that the said appointment of new directors of the 1st respondent company was done when the 2nd and 3rd respondents discovered that they had lost the case and the applicants had filed an application for execution. It was averred that the new directors are the true biological children of the 2nd and 3rd respondents who are hiding behind the 1st respondent to misuse it in order to defraud the public.

 

The 1st applicant further averred that the improper conduct of the 2nd and 3rd respondents of withdrawing from the 1st respondent company and shifting the coffee processing machinery from Plot 63, 3rd Street Industrial Area, the only known place of business for the 1st respondent was or is made with intentions to defraud the applicants who are the judgment creditors and denying them the fruit of their decree and judgment.

 

The respondents were served with this application first through their previous lawyers who declined to receive service on the ground that they no longer had instructions and advised that the respondents be served directly. Efforts to serve the respondents directly failed due to the relocation of their office. They were then served using substituted service by advertising the hearing notice in the Daily Monitor Newspaper of 12th December 2014 and affixing a copy thereof at the Commercial Court notice board. An affidavit of service dated 15th January 2015 stating the above mode of service was filed on 16th January 2015. However, the respondents did not file an affidavit in reply and even failed to appear when the matter came up for hearing so the matter proceeded ex-parte and both applicants agreed to file written submissions which have been considered in this ruling.

 

The gist of the submissions are that the action of the 2nd and 3rd respondents of appointing new directors of the 1st respondent company and them ceasing to be directors as well as relocating the office of the 1st respondent without filing notice of change of address with the registrar of companies was fraudulent as this was intended to avoid a liability following the judgment and decree the applicants had obtained from court against the 1st respondent company.

 

The landmark case of Salmon v Salmon & Co. Ltd [1897] AC 22 on the principle of distinct corporate personality of an incorporated company was cited by counsel for the 1st Applicant. He then submitted based on a passage from Gower’s Principles of Company Law 6th Edition at pg 173 that there are three instances under which the court can pierce the veil of incorporation namely; 1) when the court is construing a statute, a contract or other document; 2) when the court is satisfied that the company is a “mere façade concealing the true facts”; and 3) when it is established that the company is an authorized agent of its members, controllers or humans.

 

He cited the cases of R v Graham (1984) QB.675, Re Williams Bros Ltd (1992) 2 CH.71 and Jones v Lipman [1962]1 W.L.R 832 where the respective courts found that there was fraud as the companies were mere shams and lifted the corporate veils. In Jones v Lipman (supra), the court described the company as, “a creature of Lipman, a device and a sham, a mask which he held before his face in an attempt to avoid recognition by the eyes of equity”.

 

Counsel for the 1st applicant applied the above authorities to the instant case and argued that the affidavit evidence shows proof of misuse of corporate personality when the applicants supplied coffee to the 1st respondent company and it failed to pay the balance. Further, that even when the applicants obtained a decree it could not be executed as the 2nd and 3rd respondents changed location of the company business away from the registered place of business and also withdrew from directorship after appointing new directors and moreover without following the law.

 

This improper conduct of the 2nd and 3rd respondents, counsel argued, show that they used the company as a cloak or as a mask to hide their faces from the creditors of the 1st respondent. He prayed that the 2nd and 3rd respondents be held personally liable for the decretal sum to enable the decree holders realize the fruits of the decree.

 

Counsel for the 2nd applicant on his part, quoted a passage from the 4th Edition of Gower’s Principles of Modern Company Law at pg 126 that the veil of corporate personality can be lifted in certain circumstances such as those in which the corporate entity principle is being used as an instrument of fraud. Furthermore, that Section 20 of the Company Act, 2012 empowers the High Court to lift the corporate veil where a company or its directors are involved in fraud. He cited the case of D.K. Construction Co. Ltd & Jametex Intra Sales Ltd v Barclays Bank Uganda Ltd C.S 644 of 2000 where it was held that:

 

“In order to ascertain whether a company is being used as a mask the court is entitled to look at the reality of the situation, the motive for the transactions and other relevant facts must be considered before coming to the conclusion that the company is a mere facade concealing the true facts.”

 

Counsel for the 2nd applicant submitted that the 2nd respondent who is the managing director of the 1st respondent dealt with the applicants in his individual capacity and often times made direct payments to the applicant for the supply of coffee. He argued that the 2nd and 3rd respondents fully aware that the applicants had obtained a judgment against them on the 12th day of March 2013 purportedly held a meeting on the 15th day of March 2013 wherein they sold their shares to Kasasa Ronald and Nakibuuka Claire who are their children. Further, that although they are the new directors of the company, the 2nd and 3rd respondents continue to run the company and directly benefit from the proceeds and are simply fronting the new directors to avoid liability incurred by them.

 

I have carefully considered the law relating to the lifting of corporate veil vis-à-vis the grounds of this application. I have also looked at the documents attached to the affidavit in support and the ones that were supplied later with the permission of this court as well as considered the arguments of the applicants based on the grounds of this application. I find it necessary to give a brief history of this case so as to determine this application in that context.

 

It is indeed true that the applicants obtained a decree from this court when they filed a summary suit against the 1st respondent (HCCS No. 502 of 2012) for an outstanding balance of UGX 163,277,000/= from the coffee they had supplied to the 1st respondent. The 1st respondent applied for leave to appear and defend the suit vide M/A No. 693 of 2012. The 2nd respondent swore the affidavit in support of that application and acknowledged that the applicants indeed supplied coffee to the 1st respondent but contended that the coffee supplied was not fit for purpose and they were contemplating to return it. It was averred further that there was no breach of contract as there was no written agreement giving a schedule of payment and, in any event, there was no formal demand for the said outstanding balance.

 

The applicants filed affidavit in reply and subsequently written submissions were filed on the basis of which this court made a ruling on 12th March 2013 by which the application for leave to appear and defend the suit was dismissed and judgment entered for the applicants. A decree was extracted and a warrant of attachment and sale of movable property was issued on 18th June 2013. A return of the warrant was filed on 24th July 2013 stating that it was never executed because the only property, that is, the coffee the plaintiffs had shown the court bailiff had already been sold by the time the warrant was issued and the coffee processing machine was a hired one.

 

The bailiff also informed the registrar that he could not apply for a warrant of arrest of the directors because the plaintiff (applicants) supplied coffee to the company and the directors had changed business and shifted their office to an unknown place. The applicants then brought this application for lifting the corporate veil of the 1st respondent company to make the directors personally liable for the judgment debt.

 

As argued by counsel for the applicants, corporate veil can be lifted in instances where the company is merely being used as a shield to defraud public. In the cases cited by counsel for the 1st applicant the corporate veils were lifted for various reasons. In Re Williams Bros Ltd (1932) 2ch.71, a company was insolvent but the directors continued to carry on its business and purchased its goods on credit. It was held that if a company continues to carry out business and to incur debts at a time when there is, to the knowledge of the directors, no reasonable prospects of the creditors ever receiving payments of these debts, it is in general a proper inference that the company is carrying on business with intent to defraud.

 

In the instant case, the applicants supplied coffee to the 1st respondent company with the hope that the same would be fully paid for but only part payment was made leaving an outstanding balance which is now the decretal sum. Instead of the 1st respondent paying for the same, it is alleged that some fraudulent acts like changing directorship of the company and shifting the company place of business without complying with the requirement of filing a notice of change of address by the company have been done to avoid payment of that sum.

 

Evidence of the alleged change of directors is contained in a certified copy of Company Form No. 8 being the Notification of Change of Directors or Secretary or in their Particulars dated 29th April 2013,  a Resolution to sell shares of the 2nd & 3rd respondents to Kasasa Ronald and Nakibuka Clare respectively dated 29th April 2013 both having been filed on 3rd May 2013; Company Form No. 3 being the Return of Allotment of Shares to the said Kasasa Ronald and Nakibuka Clare filed on 27th June 2013, Company Form No. 7 being the Particulars of Directors and Secretaries that was originally filed on 1st June 2007 indicating that the 2nd respondent was the Managing Director and the 3rd respondent was the General Manager of the 1st respondent and the Form of Annual Return of a Company Having a Share Capital made up to the 27th day of April 2011 being the fourteenth day after the date of the Annual General meeting for the year 2012. This return was filed on 18th February 2013 and it indicated that the 2nd and 3rd respondents are the shareholders and directors of the 1st respondent company.

 

I must point out at this juncture that the above certified copies of the company documents were provided later when this court brought to the attention of the applicants that what was originally attached to the affidavit of the 1st applicant were not duly certified by Uganda Registration Services Bureau (URSB). That anomaly was discovered by this court in the process of preparing the ruling and counsel for the 1st applicant undertook to avail certified copies of those documents with a cover letter from URSB within three days from the date of that communication. However, this was not done within the three days as undertaken but the documents were subsequently provided more than one month later and moreover without the official covering letter. Of course, without the official covering letter those documents would be suspect.

 

Be that as it may, I have carefully examined those documents and I find that, first of all they were presented at the URSB by M/S Jingo, Ssempijja & Co. Advocates the same law firm that represented the 1st respondent in M/A No. 693 of 2012 arising from HCCS No. 502 of 2012. Secondly, a lay person’s comparison of the signature of the 2nd respondent as it appears in those company documents and in the affidavit in support of M/A No. 693 of 2012 sworn by him shows a very close similarity between the two implying that he is the same person who also signed the company documents.

 

For the above reasons, I would accept the certified copies of the company documents as originating from the URSB and rely on them in determining this application. I would therefore agree that indeed the 2nd and 3rd respondents have changed the directorship and shareholding of the company by appointing new directors and selling their shares to them. I have particularly noted the timing of the event as drawn to this court’s attention by the applicants. The ruling of this court dismissing the 1st respondent’s application for leave to appear and defend the suit and entering judgment for the applicants was delivered on 12th March 2013 and the decree was issued on 20th March 2013. The applicant’s counsel filed an application for execution of the decree on 19th May 2013 and a warrant of attachment and sale was issued on 18th June 2013.

 

On the other hand, the Company Form No. 8 notifying the registrar of companies of the change of directors and giving their particulars as well as the resolution to sell shares of the 2nd & 3rd respondents were prepared on 29th April 2013 and filed on 3rd May 2013.

 

According to the return of warrant filed by the court bailiff on 17th July 2013, by the time he proceeded to the 1st respondent’s business premises the coffee in the store had already been sold and the 1st respondent’s business offices had relocated to an unknown location. It is also noteworthy that this court had earlier granted an informal application to serve the respondents by substituted service for the same reason that their offices had been relocated and the applicants did not know where they shifted to. For that reason, the applicants have not been able to find the 1st respondent’s new business premises and consequently, the decree has never been executed. The fundamental question that comes to mind is, whether the change of shareholding/directorship of the 1st respondent company and the relocation of its business premises is a mere coincidence or it was intended to defeat the applicants’ claim. I will answer this question shortly after dealing with another matter of concern as I do below.

 

I must point out that counsel for the 1st respondent attempted to adduce evidence from the bar that were never contained in the affidavit in support of this application. To that end, he even tried to smuggle some documents through the back door by attaching them to his submission to prove that the 1st respondent has no property of its own but the 2nd and 3rd respondents would use their properties to secure its loans or debentures. This was a strange procedure unknown to this court and for that matter I ignored those documents.

 

Despite the above observations, it is clear that the 1st respondent is unable to pay the applicants and there are steps taken by the 2nd and 3rd respondents who are persons behind that company to frustrate the applicants from receiving the fruit of their decree. I find those actions of the 2nd and 3rd respondents not innocent given the timing. It could not have been a mere coincidence. That was, in my view, fraudulent trading as was stated in R v Graham (1984) QB.675. In that case it was held that a person is guilty of fraudulent trading if he has no reason to believe that the company will be able to pay its creditors in full by the dates when the respective debts become due or within a short time thereafter.

 

In Salim Jamal & 2 Others v Uganda Oxygen Ltd & 2 Others (1997) II KALR 38 the Supreme Court held that corporate personality cannot be used as a cloak or mask for fraud. Where this is shown to be the case the veil of incorporation may be lifted to ensure that justice is done and the court does not look helplessly in the face of such fraud.

 

The evidence brought before this court as discussed above proves that the 2nd and 3rd respondents are using the 1st respondent company to trade well knowing that it will not fully pay its creditors. In effect they are using it as a mask to defraud the applicants of the proceeds of their coffee which they supplied and were not fully paid for. Therefore this court cannot look helplessly in the face of that fraud and allow the 2nd and 3rd respondents to get away with it.

 

In the circumstances, I would in the interest of justice allow this application by lifting the veil of incorporation of the 1st respondent company and it is accordingly lifted. Since there is proof that the 2nd and 3rd respondents were its shareholders and directors when the debt was incurred and subsequently when the judgment was obtained and the decree issued, they should become liable for that decretal sum.

 

In the result, it is ordered that the 2nd and 3rd respondents shall jointly and severally pay the sum of UGX 163,277,000/= plus interest at 22% and costs of the suit pursuant to the decree in HCCS No. 502 of 2012 given under the hand and seal of this court on the 20th day of March 2013.

 

Costs of this application are awarded to the applicants.

 

I so order.

 

Dated and signed this ….day of November 2015.

 

 

Hellen Obura

JUDGE