AK Detergents v GM Combined (U) Limited (Civil Suit 348 of 1994) [1994] UGHC 42 (11 July 1994)

Full Case Text

#### THE REPUBLIC OF UGANDA

### IN THE HIGH COURT OF UGANDA AT KAMPALA

# CIVIL SUIT NO. 348 OF 1994

A. K. DETERGENTS . . . . . . . . . . . . APPLICANT/DEFENDANT. **VERSUS**

G. M. COMBINED (U) LTD. ................. RESPONDENT/PLAINTDFF. BEFORE:- The Honourable Mr. Justice J. W. N. Tsekooko

## ORDER

A. K. Detergents (U) Ltd. (hereinafter to be called the applicant) has taken out chamber summons under Order 23 Rule 1 of Civil Procedure Rules and Section 404 of the Companies Act, seeking for an order from this court to require G. M. Combined (U) Ltd. (hereinafter called the respondent) "to give security for all the costs to be incurred by the defendant in the suit". The summons is supported by two affidavits of Alykhan Karmali the first of which was affirmed on 7th June, 1994, and the second, titled supplementary affidavit, was affirmed on 14th June, 1994. Alykhan is described as the "Managing Director" of the applicant. In opposition to the application there is an affidavit affirmed by Zalid Mir on 8th June, 1994, describing Zalid as a "Member/Director" of the respondent.

Let me give a brief background. The respondent had been engaged in business in the course of which it obtained loans from Uganda Development Bank (UDB) and the Development Finance Company of Uganda (DFCU). The loans were secured by means of Debentures. By these debentures various assests of the respondent were charged as security. Apparently there was default in the repayment of the loans or instalments thereof. As a result on 13th December, 1993, UDB and DFCU appointed receivers pursuant to the provisions of the debentures. The receivers appointed are Erieza Kaggwa and Flugence Mungereza of the firm of Coopers and Lybrand. The receivers duly took up their . . . . . . . . /2

appointments and thereafter exercised powers conferred upon them by the debentures. In the exercise of those powers the receivers on 21st March, 1994, sold the respondent to the applicant. The sale includes movable and immovable assets. The applicant took possession and has been registered as propri-计一种地名美国 etors of certain buildings.

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Consequently on 18th May, 1994, the respondents instituted suit against the applicants, the effect of which is to nullify the sale and registration of applicants as registered propriat. ors. The present application arises from that suit.

The principal ground as set out in the chamber summons states that:-

"In view of the uncertainty of the plaintiff's continued existance and the doubt of its ability to meet the costs of the suit which it is likely to lose, it is fit that the plaintiff gives such security for costs".

$0.23$ Rule 1 reads:-

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The property of a magnetic

"The court may if it deems fit order a plaintiff in any suit to give security for the payment of all costs incurred by the defendant"

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Further and for the sake of convenience I should quote Section 404 of Companies Act. It reads in its relevant part:

"Where a limited Company is a plaintiff in any suit ..... any Judge having jurisdiction in the matter may if it appears by credible testimony that there is reason to believe that the Company will be unable to pay the costs of the defendant if sussessful in his defence, require sufficient security to be given for those costs and may stay all proceedings until the security is given".

Mr. Mulenga, learned counsel for the applicant referred $\mathcal{F}^{\mathcal{A}} \xrightarrow{\sim} \mathcal{F}^{\mathcal{A}} \xrightarrow{\sim} \mathcal{F}^{\mathcal{A}}$ to the chamber summons and the three affidavits. He submitted, inter alia, that the respondent is heavily indebted so much so $3-100$ that.it has failed to satisfy a court decree in HCCS No. 633 of 1991 passed in 1993. That as a result winding up proceedings in Company Cause No. 26 of 1994, have been instituted against the respondent.

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He submitted that Receivers and Managers were appointed to manage the affaits of the respondent.. The receivers took possession of all the properties of the respondent and sold the same on 21st March, 199^ and put the applicants in possession of the suit properties on 21st March, 199^\*

He further submitted that the respondent is indebted to numerous other Companies which are listed from page 2 in annexture "Q" to the respondent's reply, to the applicant's Written Statement- of Defence. Actually annexture "Q" is a report on the affairs of the respondent covering the period 15th December, 1993 to 22nd Marwh, 199^ made by Messrs Coopers & Lybrand, the receivers. It explains various steps taken by the receivers and managers from the date of their appointment till the 22nd March, 199^ after the receivers had sold off the respondent to the applicant. It includes the statement of affairs of the respondent as it was on 13th December, 1995, and what is was when it was sold off. For purposes of this application the report sets out the Financial Affairs of the respondent,

Mr. Mulenga further submitted that the respondent's indebtedness is shown by its failure to satisfy .a decree passed against it in High Court Civil Suit No. 633 of \*199\*1 in which one Inam UI Haq Paul•successfully sued the respondent and was awarded Shs. 93,89519\$?/=- On this point, the respondent had sought to stay execution of the decree. Initially, the respondent was required to deposit the decreed sum in Court before stay could be granted. Apparently this condition. was varied whereby the respondent was asked to provide security which, as I have gathered from the submissions of both counsel and annexture "A" to Alykhan's supplimentary affidavit, the respondent has been unable to furnish. Mr. Kabenge, learned counsel for the respondent has attempted to play down this failure by the respondent to meet th-e •ondition of furnishing *.... /h*

security. I think that such failure to provide security as ordered by court is against the respondent for our purposes here. The position is made worse in my view because the decree holder, i.e'; Haq,, has in consequence instituted Company Cause No. 26 of 199^ by which he prays for the winding.up of the respondent Cpmpany hoping to have his judgment some how satisfied - I am not persuaded that the institution of Civil Appeal No. 38 of 1993 to the Supreme Court matters in so far as this application is concerned.

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The respondent and its counsel, Mr. Kabenge, don't really deny the existence of the winding up proceedings. Rather, Mr. Kabenge, as one of his arguments against the present application, takes advantage of winding up proceedings and has submitted that since winding up proceedings were instituted on 9th February, 199^ prior to the sale of the respondent's property by the receivers on 21st March, 199^, such sale by the receivers is null and void by virtue of Sections 227, 228 and 229 of the Companies Act. That in that regard the respondent's suit is likely to succeed and' therefore there should be no order for security for costs. He cited the case of Highlands etc Union Vs. A. A. Jamal /T9377 E. A. 641 in support of his view. I better consider this point, at this stage.

Mr. Mulenga in response to this point submitted that the rights of the respondent under S. 227 is an issue to be determined in the main, suit but not in this application. In other circumstances, I could have taken Mr. Kabenge's view and would have had to take S. 227 into account that the section affects the present application. But on the facts of this case I agree with Mr. Mulenga. The receivers and Managers were appointed under the two debentures, Copies of which have been annexed to the respondent's -reply to the Written Statement of Defence as annexture "XW" and "VU". I don't want to go in further details at this stage of the suit than to say that /5

the two receivers exercised powers of sale derived from the two debentures which powers the respondent Comapny can't apparently revoke: See Sawman & others Vs4 David Samud Trust Ltd. /I 978/ 1 All E. R. 616 at page 621, the case cited by Mr. Mulenga. In that case, Goulding J.-, reviewed a number of decided cases.\*n the powers of a receiver appointed by debenture holders, as in the present case, and from the facts set out in that case, the debenture in Sawman's case contained clauses on **appointment** of receivers and the powers of receiver..similar to those contained in the two debentures in the present case. Goudings, J., held with regard to sale, inter alia, that winding up did not affect the receiver's power to hold and dispose of the Company's property comprised in the debenture including the power to use the Company's name for that purpose. These are matters which are really to be decided after the trial but I have to refer to them because of' submissions of Mr. Kabenge which provoked response from Mr. Mulenga. It is obvious from clause 6 of annexture "XW" (Debenture held by the Uganda Development Bank - UDB) and condition 4 of annexture "VU" **^4** (Debentures held by the Development Finance Company of Uganda Ltd. - DFCU) that the respondent had no choice in the appointment of the receivers which appointment was vested in the debenture holders alone subject only to specified conditions. It also appears from perusal of the two debentures that though the receivers are regarded as agents of the respondent, the respondent has no power over the receivers in the exercise of their powers as receivers- such as those of sale which is set forth in condition 5 (3) of annexture "VU" and clause 5 of annexture "XV/".

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The Highland's case upon which Mr. Kabenge relies is distinguishable in khat the disposition there was by a director of the Company (See pages 6^6 to 6^7) during winding

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up. Besides the court is given powers under section 227 to make other orders in case of avoiding dispositions. In otherwords, my understanding of the provisions of S. 227 is that a court need not declare void any disposition of property pending winding up proceedings depending on' the circumstances of each case. The fact that UDB and DFCU are public institutions is such a circumstance. In that case I hold that the defendant/ applicant who purchased property from receivers in exercise have of their powers to sell prima facie y defence in this case where, the receivers sold properties under their powers contained in debentures for the reasons given. As regards S. 288, its wording is very clear. There is no evidence that the receivers were exercising powers of attachment, distress or execution authorised by court. I need not say much on it really as I am satisfied it doesn't apply to this application.

Let me revert to the crux of the application.

I have already indidated soma points made by Mr. Mulenga such as indebtedness of the respondent and appointment of receivers. He referred to Halsbury's Laws of England, 3rd Ed., Vol. 6, pages *^\$1 to* 4^2, and also to section 4o4 of the reproduced . . Companies Act. I have ; y Section 404 of the Companies Act above. Gounsel then submitted that liquidation of a Company is evidence that the Company, i.e, the respondent is in processing of being wound up and therefore may be unable to pay costs. He further contended that as the respondent is under receivership, that is prima facie evidence that it will be unable to pay costs of the defendant/applicant.

He cited the decision of Sherridan C. J., in Mawagola Farmers Vs. Kayanja & others /197V E. A. 108 where Sherridan, C. J, granted an order for further security for costs pending the hearing of an appeal to the East African Court of Appeal. Security for costs in cases on appeal is more easily granted than before trial. In fact that application was under the Court of Appeal Rules (Old Rule 60). ................/7

## 6 Mr. Mulenga further stated that Zalid Mir's affidavit in reply in effect demonstrates that the respondent has no property. Mr. Kabenge states the contrary on this point, but I think it is quite clear from the two debentures that all the respondent's properties and assets were charged and therefore are under receivership.

Mr. Mulenga referred to principles applicable to this type of application. There is no real dispute about these and I may as well deal with them here.

Mr. Mulenga stated that the power to grant order for security for costs is discretionary and I say-that is true: See (1)- Sawman's case. (Supra) (2) Procon (GB) Ltd. Vs.- Provincial Buildings Co. Ltd. and others /198V 2 All E. R. 368, (3) Heinz Heger Vs. Car & General, Equipment Co. Ltd., (HCCS No. 367 of i960),(M. B. No. 38 of 1967)\* That there is a distinction in the extent to which such discretion can be exercised between na'tural person litigants and a Company litigant. This too is correct. See: Same cases of Sawman (Supra) John Bishop (Caterers) Ltd. & Another Vs. National Union Bank Ltd. and others /19737 All E. R. 707, OchemboVs. Sentamu /19777 HCB 193. The Namboro's case, and that of G. Matheradas Vs. N. M. Patel & Another (HCCS 94/64, M. B. 112/64) show that poverty is no bar to litigation by ordinary poor person.

Pearson and Another Vs. Naydler & others /I977? 3 All ER 531 supports the view that Courts avoid barring poor natural person litigants from access to court. In such cases a natural person plaintiff may be required to provide security in exceptional cases, for instances, where the case is frivolous and vexatious or when he resides outside the jurisdiction of the court. The same cases shows that court will readily order for security for costs in cases where a company is a plaintiff and such orders for security are made under the provisions such as S. 4o4 of the Companies Act. ................../8

The cases of John Bishop (Supra) and Pearson (Supra) shows that whether application is made under 0.23 of Civil Procedure Rules or under S. 404 of the Companies Act, the court exercise discretion under either law when making any order for security for costs. Of course Order 23 Rule 1 of the Supreme Court Rules of (England) is not worded like our Order 23 Rule 1. But S. 447 of the England Companies Act, 1948 is similar to ours and as such cases decided under that section are of great assistance to our Courts.

Mr. Mulenga cited more other cases such as Makakha Ochembe Vs. Ssentamu /1977 HCB 193, Kaura Vs. Moraam /19617 EA 462 (This is after trial); Bilcon Vs. Fegmay Ltd. /19667 2 All ER 513 in support of his arguments. Essentially these cases show exercise of discretion.

I have considered some of the arguments of Mr. Kabenge earlier. Mr. Kabenge further says in response to Mr. Mulenga that the respondent still has property and learned counsel relies on Highland case. I have already held that that case doesn't help the respondent. Further by the two debentures in my view / the receivers appear to have so far prima facie exercised

their powers of sale and transfer of suit property. Thus the claim that the sale is void and teherefore respondent's still has property is not tenable: See Sawman's case (Supra) and the case of Household centre Ltd. Vs. Achelis Ltd. /19677 EA 823.

## for respondent

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Learned counsel, contended that the decision of Ssekandi Ag. J., in Namboro's case supports his client. Namboro's case is concerned with a poor natural person litigant but not a company. And the court in Namboro's case was concerned with only Order 23 Rule 1, unlike in the present case, where I have to consider the application under both Order 23 Rule 1 and Section 404 of the Companies Act. As the authorities alluded to earlier show, where a company plaintiff is in financial

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difficulties, courts will, under Section readily order it to provide security for costs. See the illuminating discussion of this type of application in Pearson's case (Supra). Even if I was concerned with Order 23 Rule 1 alone, the persuassive authority in the decision of Procon's case (Supra) which was concerned with Order 23 Rule 1 of the Supreme Court Rules (England) and which rule, even though not identical to our 0.23 Rule 1, is clearly against the respondent in its application and effect.

Mr. Kabenge again submits that the respondent has instituted H^gh Court Civil Suit No. 151 of 199^- In that case his client (respondent) challenges the authority of the receivers and seeks to restrain the receivers from dealing in Company property (among other reliefs). In his affidavit of 8th June, 199^? in opposition to the present application, Mr. Zalid Mir in paragraph 2 states that the plaintiff/respondent has not been placed under receivership which is utterly misleading and false on the facts available. He further alludes, in paragraph thereof, to the said HCCS No. 15\*1 of 199^\* Neither the plaint nor other pleadings in that suit are annexed to the affidavit. I appreciate that court records should not be un duly overburdened with too many documents. But I think in this case it was incumbent upon the respondent to annex the plaint to the affidavit for easy reference.

Be that as it may, Alykhan's affidavits, particularly paragraphs 4 and 6 of affidavit sworn on 7th June, 199^, in support of the present application partly answer Zalid's affidavit - The effect ofppragraphs 4 'and 3 of Alykhan's affidavit of ?th June, 199^ is that the respondent is engaged in a multiplicity of litigations. The consequences are obvious. Collosal costs may very well be awarded against the respondent. And since the ability of the respondent to pay such costs is

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in question now, that lends support to the applicant's contentions. Besides the receivers have now been permitted to be joined as co-defendants in the present main suit. In his affidavit sworn on 20th June, 199^ to support the application, one of. the receivers, Mr. Flugence Mungereza, in paragraphs 6 to 9 of that affidavit, in effect supports the present applicant's contention that the present respondent in this application is in dire financial straits. A perusal of various, documents on the court file really supports this view.

In any case on the facts now available on the case file, I don't think that the existence of High Court Civil Suit No. 151 of 199^ should affect my decision in this case one way or the other. Be it noted that I hnve already indicated that the actions of the receiver so far appear lawful though I should leave final decision to the trial court.

Mr. Kabenge contended that the agreement of sale of the properties omitted to describe the property of the respondent which were sold. In my opinion this argument is not valid. The sale agreement dated 21st March, 199^ refers to the relevant debentures. Those debentures and Legal mortgage dated 27th March, 1990 are clear about which properties were secured and therefore liable for sale.

Some of the arguments by Mr. Kabenge should really be considered during the trial of either present suit or HCCS No. 151/199^• Delving into them at this stage is unfair to both parties. And in view of the observations I have already made I find it unprofitable to discuss the point whether the plaint in this case,.is frivolous or not. The only point to allude to is credible testimoney. Mr. Kabenge says there is none. I think that there is credible testimony in terms of S. ^04.

For the reasons which I have endeavoured to give in this ruling, and having carefully considered the chamber application, /11

Order 23 Rule 1 and Section 404 of Companies Act, the affidavits in support by Alykhan and in opposition by Zalid Mir and the submissions of both learned counsel, I am satisfied that this is a case where the application must succeed. The remaining issue is the quontum, i.e., the amount of security to be provided.

Mr. Mulenga proposed that I should order the respondent to deposit Shs. 60,000,000/=. He gave reasons and authority. He referred to the Advocates (Taxation & Remuneration) Rules 1982. His view in effect is that Shs. $60M/$ = is probable costs for the defendant.

Mr. Kabenge on this point sugrests as an alternative that the receivers should provide the security. In the circumstances of this case where receivers appear to be still looking for more assets from the respondent, this suggestion is not serious at all. I reject it. The case of Dobies & Co. Vs. United India Insurance Co. /1964/ 16 relied on by Mr. Kabenge is inapplicable to this case. In that case the trial had in fact been concluded. So the circumstances showing who should pay the costs were obvious.

At first because of the nature of the claim I entertained the idea of adopting the procedure of Jones, J, in HCCS No. 367 of 1966 (Supra). That is sending the file to the registrar to work out the probable figure with both counsel. But this may lead to unnecessary delay, judging by the way in which arguments were made in this application. Besides Mr. Mulenga has proposed his figure based on value of the suit property and the Advocates (Remuneration and Taxation) Rules, 1982. Mr. Kabenge hasn't made helpful suggestions by way of amount. Let me do my best in the circumstances bearing the said Advocates (Taxation and Remuneration) Rules, in mind.

In Procon's case (Supra) there was a claim for damages of £230M sterling. The Court of Appeal approved £6M and Griddiths, L. J. observed at page 340 "that £6M may seem a very daunting

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figure, but it is in fact only approximately 3% of the sum at stake in this vast litigation". In like manner the litigation here is likely to be vast. The value place on property sold is very big. In the circumstances of the case I will scale down Mr. Mulenga's proposal to Shs. $50M/$ = which I consider to defence costs be the probable sufficient/(security) for the applicant's #osts which the respondent must provide. The respondent is ordered to provide the said sum of Shs. $50,000,000/=$ (Fifty Million Shillings) only within Ninety $(90)$ days from the date of this order. Meantime all proceedings by the respondent/plaintiff in the case are stayed until security is given.

$12$

$\overline{\text{I}}$ think I better also deal with the costs of this application. Costs will be in the cause.

> J. W. N. TSEKOOKO J U D G E $11/7/1994.$

$11/7/1994.$

Mubiru holding brief for Mulenga for applicant. Kabenge for respondent.

Ssensonga court clerk.

Order read in presence of the above. Court:

J. W. N. TSEKOCKO

J U D G E

$11/2/1994.$