Basabe & 2 Others v Dependable Outcomes Limited (Miscellaneous Application 570 of 2024) [2024] UGCommC 357 (3 October 2024)

## THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA AT KAMPALA [COMMERCIAL DIVISION] **MISCELLANEOUS APPLICATION NO 0570 OF 2024** [ARISING FROM CIVIL SUIT NO. 865 OF 2021]

# 1. BASABE BARNABAS 2. LWERE PATRICK

# 3. MBONIGABA CLEVER::::::::::::::::::::::::::::::::::: <table> DEPENDABLE OUTCOMES LTD::::::::::::::::::::::::::::::::::::

# BEFORE: HON. LADY JUSTICE ANNA B. MUGENYI

### **RULING**

The applicant brought this application by way of notice of motion under section 98 of the Civil Procedure Act (CPA), section 33 of the Judicature Act, Order 7 rules 11(a), (d), (e), Order 6 rules 28, 29 & 30, Order 26 rule 1 and Order 52 rules 1, 2 & 3 of the Civil Procedure Rules(CPR) for orders that:

- 1. The Respondent's pleading in civil suit no. 865 of 2021 be struck out as against - a) The plaint does not raise and or disclose any reasonable cause of action against the Applicants to sustain the reliefs sought, - b) The Plaint in civil suit no.865 of 2021 as against the Applicants is frivolous - 2. In the alternative and without prejudice to the above, the Respondent be ordered to furnish in court sufficient security for costs for the Applicants in - 3. Costs be provided for.

This application was supported by the affidavit of Mr. Basabe Barnabas, the 1<sup>st</sup> applicant and opposed by the affidavit of Mr. Fred Kyankya Guyina, the chairperson board of directors of the respondent company.

The facts giving rise to this application are that in 2016, Bakab Construction Ltd, the company in which the applicants are directors, executed a contract with Kisoro District for the rehabilitation of a community access road. On or around the 14<sup>th</sup> April 2016, the company entered into an agreement with the respondent for hiring identified equipment for a contractual sum of Ugx 323,000,000/=.

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Subsequently, the respondent filed civil suit no. 865 of 2021 against Bakab Construction Ltd, Equity Bank, and the three applicants in this case who are directors of Bakab Construction Ltd. The respondent sought declarations against the applicants jointly and severally as directors or otherwise for knowingly, acting fraudulently by operating a bank account and withdrawing money without the plaintiff's representative's signature or signing mandate for the account, defeating the purpose of the resolution signed on 3<sup>rd</sup> May 2016 in relation to operation of a joint account with the Plaintiff's chairperson which required the Plaintiff's attestation

## **REPRESENTATION**

The applicants were represented by M/s Ligopedia Advocates whereas the respondent was represented by M/s Avrax Advocates.

### **RULING**

I have carefully read the pleadings of the parties and listened to the submissions of counsel and the Issues raised for determination are:

- 1. Whether the pleading in civil suit no. 865 of 2021 read together with all its annexures, raises or discloses any reasonable cause of action against - 2. Whether civil suit no. 865 of 2021 is frivolous and vexatious. In the alternative without prejudice; - 3. Whether the respondents should furnish the applicants with security for

### Issue 1

Whether the pleading in civil suit no. 865 of 2021 read together with all its annexures, raises or discloses any reasonable cause of action against the applicants.

Counsel for the applicants submitted that the alleged breach of contract in the main suit arises from a contract between Bakab Construction Limited and Dependable Outcomes Ltd and the 1<sup>st</sup>, 2<sup>nd</sup>, and 3<sup>rd</sup> applicants only being directors of the company cannot be faulted for the breach of contract which is between the company and the third party. Counsel submitted that if any cause of action should arise, it should be against Bakab Construction Limited as a company and not against its directors since a company is separate and independent from its directors and its members.

Counsel for the respondent submitted that in the instant case, it is hard to separate the actions of the managers and those of the company as a corporate body minus leading evidence in the main suit alluding to the facts of the fraud. Counsel submitted that fraud cannot be proved at this level unless the Court has investigated the fraud and evidence is led to ascertain such fraudulent transactions and to find whether the managers or directors acted in their personal capacity or otherwise.

Counsel for the respondent further submitted that by virtue of pleading fraud against the applicants which fraud was specifically pleaded in paragraphs 5 and 6 of the plaint, the applicants here are answerable through their evidence to distinguish whether they were acting as directors or in their personal capacity resulting into the breach of the contract between Bakab Construction Limited and Dependable Outcomes Ltd. Counsel averred that the applicants are all the directors, the mind and thoughts of the company who refused to respect contractual obligations of payment of the contractual sum which led to the institution of civil suit no. 865 of 2021, and are now hiding behind the corporate veil in this application not to be answerable for their action.

The law governing the need for a plaint to disclose a cause of action is provided for under Order 6 Rule 30(1) of the CPR which states that:

"The court may, upon application, order any pleading to be struck out on the ground that it discloses no reasonable cause of action or answer and, in any such case, or in case of the suit or defense being shown by the pleadings to be frivolous or vexatious, may order the suit to be stayed or dismissed or judgment to be entered accordingly, as may be just."

Under Order 7 rule 11(a) of the CPR, a plaint shall be rejected by the Court if it does not disclose a cause of action. Therefore, a plaint that does not disclose a cause of action cannot stand and should be struck out by the Court.

The Courts have described what constitutes a cause of action in a plaint or the ingredients of a cause of action in the case of Auto Garage v Motokov [1971] EA

"If a plaint shows that the plaintiff enjoyed a right, that the right has been violated and the defendant is liable then a cause of action has been disclosed and any omission or defect may be put right by amendment if, on the other hand, any of those essentials is missing, no cause of action has been shown and no amendment is permissible."

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Further in the case of Major General David Tinyefunza v AG Constitutional Appeal No.1 of 1997 Wambuzi CJ held that:

"The question of whether a plaint discloses a cause of action is considered upon a perusal of the plaint only".

The Court of Appeal in the case of Kapeka Coffee Works Ltd v NPART CACA No 3 of 2000 held that in determining whether a plaint discloses a cause of action, the Court must look only at the plaint and its annexures if any, and nowhere else.

In the instant case, the contract in question which forms the basis of the main suit was entered between the respondent and Bakab Construction Limited which is a limited liability company. The applicants in question are directors of the company that signed the contract and resolutions on behalf of the company.

It is trite law that a company is a separate legal entity distinct from its members with the capacity to sue and be sued in its own individual capacity (Salomon v Salomon & Co. Ltd UKHL 1 [1897] AC 2).

The only exceptions under which the directors of a company can be sued in their individual/personal capacity are when the corporate veil is lifted under section 20 of the Companies Act. The respondent in this case did not seek for a declaration of lifting the corporate veil in the main suit to hold the applicants personally liable.

In the case of ABSA Bank (U) Ltd v Enjoy Ug Ltd & Others HCMA No 1243 of 2023; Honorable Justice Mubiru Stephen stated that:

"The personal liability of shareholders and directors arises only when the corporate veil is pierced where the applicant pleads and proves that the company did not operate as legal entity separate and apart from the officers, directors and shareholders such that the company was actually the alter ego of the shareholders, officers and directors and not a separate legal entity; where the corporation is just a shell designed to shield liability, a mere instrumentality of the shareholders."

To hold the applicants, in this case, liable for purported fraudulent actions, the respondent would have to apply to this Court to lift the corporate veil under section 20 of the Companies Act.

In the circumstances, this Court finds that the right party to be sued is the company which is Bakab Construction Limited and not its directors who acted on its behalf.

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I therefore find that the plaint in civil suit no. 865 of 2021 does not disclose a cause of action against the applicants and the suit against the applicants is accordingly

# Issue 2 Whether civil suit no. 865 of 2021 is frivolous and vexatious

Counsel for the applicant submitted that they wish to rely on the case of *Genagric* Plantation Limited v Kabugo Yunus and 5 others HCMA No. 250 of 2019, read together with the case of R v Ajit Singh 1957 EALR on pages 822 and 825 which defines frivolous and vexatious to mean something that paltry, crumply not worth of serious attention having no reasonable ground or purpose. Counsel further submitted that for the reasons they have stated in the first issue, the applicants were merely directors, and were executing their mandate as directors to the company and as such cannot be liable for any breach where the company is involved. The cause of action against them then becomes frivolous and vexatious.

Counsel for the respondent submitted that for a matter to be frivolous or vexatious, it must be brought in bad faith intending to waste the time of another, which is not the case in the main suit (civil suit no. 865 of 2021) where they are aggrieved following a contract they entered into with Bakab Construction Limited, consumed its services which services were negotiated by the applicants, and the applicants ensured performance and compliance of the contractual obligation by signing PEX3 in the main suit.

In the case of Kivanga Estate Ltd v National Bank of Kenya Ltd Civil Appeal No.217 of 2015, the Court observed that:

"An action is frivolous when it is without substance or groundless or fanciful and is vexatious when it lacks bona fides and is hopeless or offensive and tends to cause the opposite party unnecessary anxiety, trouble or expense".

I have considered the whole plaint in civil suit no. 865 of 2021 which seeks several declarations from this Court including; $i.$

A declaration that the 1<sup>st</sup> defendant breached a contract between the plaintiff and 1<sup>st</sup> defendant by not paying the outstanding contractual balance of Ugx $211,250,000/=$

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- Recovery of Ugx 211,250,000/= (Uganda Shillings Two Hundred and Eleven ii. Million Two Hundred Fifty Thousand only), as the outstanding balance on the - A declaration that the $2^{nd}$ , $3^{rd}$ , and $4^{th}$ defendants jointly and or severally as iii. directors or otherwise, knowingly, acted fraudulently by operating a bank account in withdrawal of money/ without the Plaintiff's representative's signature or signing mandate for the account, defeating the purpose of the resolution signed on 3<sup>rd</sup> May 2016 in relation to the operation of a joint account with the Plaintiff's chairperson which required the Plaintiff's attestation and or authorizations. - A declaration that the 5<sup>th</sup> Defendant knowingly acted negligently and allowed iv. operations of the 1<sup>st</sup> Defendant's bank account by withdrawing money, without the plaintiff's authorization or signature contrary to the signing

Upon a review of the plaint in civil suit no. 865 of 2021, the respondent's claim can be seen to have a legal basis, it is not fanciful, or offensive and cannot be said to be intended to cause the opposite party unnecessary anxiety or trouble.

I therefore find that much as there is no cause of action against the applicants, civil suit no. 865 of 2021 does disclose issues that require judicial consideration against Bakab Construction Limited in which the applicants are the directors and is therefore

### Issue 3

# Whether the respondents should furnish the applicants with security for costs.

Counsel for the applicants relied on the provisions of *Order 25 rule 1* and on the case of Karukende v Kibirenge and two others Miscellaneous Application No. 261 of 2018 where the Court held that in an application for security for costs, the following principles must be considered by Court while exercising its discretion to make such orders; whether the applicant is being put to undue expenses by defending a frivolous and vexatious suit, that he has a good defense to the suit, that only after these facts have been considered would facts like inability to pay can come into account which leaves majorly two grounds, where the applicant is being put to undue expense by defending a frivolous and vexatious suit and that the defendant has a good defense to the suit.

Counsel for the applicants further submitted that the applicants are indeed being put to undue expense, by defending this suit which should have been commenced only

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against Bakab Construction Limited, and that the defendant has a very good defense

Counsel for the respondent submitted that there is no evidence that the respondent will be unable to pay the costs if the civil suit is concluded otherwise. Secondly, there is no demonstration in the applicant's affidavit in support of the application that they have been subjected to unwarranted expenses in managing the main suit.

Order 26 Rule 1 of the CPR provides for the security of costs thus:

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

As already determined in Issue 1 above, there is no cause of action against the applicants, and the suit against them was dismissed.

In the circumstances, this Court cannot award security of costs to the applicants who are no longer a party to the main suit. I therefore find that this is not a suitable case for an award of security for costs.

In conclusion, therefore, the respondent's pleading in civil suit no. 865 of 2021 is struck out as against the applicants as it does not disclose any reasonable cause of

The costs of this application are awarded to the applicants.

HON. LADY JUSTICE ANNA B. MUGENYI DATED........ $3.1(0.224)$