Chrispin Daka and Anor v Elliot International Limited and Anor (APPEAL NO. 153 OF 2021) [2022] ZMCA 131 (1 June 2022)

IN THE COURT OF APPEAL OF ZAMBIA APPEAL NO. 153 OF 2021 HOLDEN AT LUSAKA (Civil Jurisdiction) BETWEEN CHRISPIN DAKA CHIKUMBUTSO PHIRI AND ELLIOT INTERNATIONAL LIMITED 1 ST RESPONDENT ANNE VALERIE PATRICIA WILKIE 2ND RESPONDENT CORAM: Chashi, Ngulu.be and Sharp•e -Phiri, JJA On: 5 th Ap•ril and 1 st June 2022 For the Appellants : C. P. Jere (Mrs)) Messrs Kaumbu Mwondela Legal Practitioners For the Respondent : C .. J. Musonda, Messrs Jonah Sitimela & Partners JUDGMENT CHASHI JA, deHvered the Judgm.en t of the Court Cases referred to: 1. Backloads (Zambia} Lim.ited v Freight and Liners (Zambia) Limited 2008/HP'C/0261 2. Avalon Motors Limited {ln Receivership) v Bernard Leigh Gadsden and Motor City Lim.ited - · SCZ Selected Judgment No. 7 of 1998 J2 3. Re Union Accident Insurance Co. Ltd (1972) l WLR 640 4. Mutwale v Professional Services Limited - SCZ Judgment No. 13 of 1984 5. John Mukoma Kasanga & Others v Development Bank of Zambia and Others - CAZ Appeal No. 59 of 2020 6. Fred M'membe and Post Newspaper Limited (in liquidation) v Abel Mboozi and 5 Others - SCZ Appeal No. 7 of 2021 7. Ferguson v Wallbridge (1935) 3 DLR 66 8. Petroships Investment Pte v Wealthplus Pte Ltd (2016) 2 SLR 1022 9. Zccm Investments Holdings Plc v First Quantum Minerals and Others - CAZ Appeal No. 92 of 2020 l 0. Foss v Harbottle ( 1843) 2 Hare, 461 Legislation referred to: 1. The Companies Act No. l 0 of 2017 2. The Corporate Insolvency Act No. 9 of 2017 1.0 INTRODUCTION 1.1 This appeal emanates from the Judgn1ent of Hon. Mr Justice Bonaventure C. Mbewe delivered on 29th December 2020. J3 1.2 In the said Judgment,. the learned J udge ruled that the 2 nd Respondent had a right to bring an action in her own right and in the 1st Respondent Company's name without leave of the court. 1.3 The court also ruled that the 1st Respondent Company had not been properly put into voluntary liquidation and the Appellants had not been properly appointed as liquidators of the 1 st Respondent Company in accordance with Section 88 and 92 of The Corporat e Insolvency Act (CIA) respectively .. 2 .0 THE BACKGROUND 2.1 On 1 st July 2020, the 2 nd Respondent who is a minority shareholder in the 1 s t Respondent Company, was requested to sign a resolution for a member's voluntary winding up . The reason given was that the company was not able to sustain operations due to the Covid-19 pandemic.. The 2 nd Respondent refused to sign as according to her, the reason given for winding up, did not reflect the true and correct position. J4 2.2 What followed is that, the majority shareholders prepared another resolution which excluded the 2nd Respondent and signed it. Subsequently, the 1 st and 2nd Appellants were appointed joint liquidators. 2.3 On 26 th August, 2020, the 2nd Respondent by way of originating summons commenced proceedings in her name and the Company's name against the joint liquidators, challenging the winding up of the company and the appointment of the liquidators. 3.0 DECISION OF THE COURT BELOW 3.1 After considering the affidavit evidence and the arguments, the learned Judge formulated the following issues for determination. (i) Whether the 2 nd Respondent had the right as shareholder and director to commence an action in her own name and in her own right and also in the name of the company in exercise of her residual powers. Ancillary to this was whether the Respondents needed leave of the court to commence court proceedings. JS (ii.} Whether the company bad been properly put into voluntary Hq,uidation. in accordance with CIA (iii) Whether the solvency test under Section 91 CIA had been met. 3.2 As regards the first issue, the learned Judge answered it in the affirmative that the 2 nd Respondent had the right to com.mence the action in her own name and in her own right as she did and also to commence it in the name of the company in exercise of her residual powers. 3. 3 The learned Judge opined that the Respondents did not need to obtain leave of the court to commence the action as the company was not operating and under the control of directors or a receiver, but was under liquidation and the Respondents were challenging or appealing the placing of the company into liquidation and the appointment of liquidators. According to the learned Judge the CIA was therefore the only correct law to look to and the requirement for leave is only found in part vi of the Act which deals with winding u p by the court and not winding up by members .. 3.4 As regards the second issue, after considering Section 88 J6 of The Companies Act (CA), which states that a company may be wound up voluntarily by special resolution of the members or creditors and also upon examining the exhibited resolution which was passed by the company; the learned Judge found that the resolution did not state anywhere that it was a special resolution or that any of the resolutions passed therein including the appointment of liquidators, were being passed as special resolutions. The learned Judge further observed that, the resolution stated that it was signed by all the members of the company in accordance with Section 77 of the Act and that all members must be in favour of the resolution. 3.5 The Judge observed that the members decided not to hold a physical extraordinary general meeting (EGM) but rather pass their resolution by way of circularized or written resolution as provided for under Section 77 CA. According to that Section, the resolution must be described as a special resolution and it must be signed by each member J7 who is entitled to vote on the resolution and it is passed when signed by the last member. 3.6 The Judge in addition observed that the resolution does not state the dates when the members signed, more importantly when the last member signed for the court to determine when it took effect. That the 2 nd Respondent as a minority shareholder was also required to sign the resolution. 3. 7 At the end of the day, the Judge held that the resolution passed was an ordinary resolution and that there was no special resolution as required by the Act. 3.8 As regards the solvency test under Section 91 CIA, the Judge noted that it was optional and no declaration was made. This therefore was not an issue. 3.9 As a consequence of the aforestated, the Judge held that the purported placing of the company into liquidation was null and void and therefore not binding on the company and that all actions taken in furtherance of the action are without effect and illegal. The Registrar of Companies was ordered to cancel the resolution and the attendant notices. JS Further the Judge ordered the Appellants to pay damages for trespass and interference in the company's business; to be assessed by the court. 3. 10 There were other issues which the court deferred to trial a s they could not be determined on affidavit evidence. 4.0 THE APPEAL 4.1 Dissatisfied with the Judgment, the Appellants have appealed against the same advancing seven grounds of appeal couched as foUows: 1. The court erred. in law wh.en it decided that the 2 nd Respondent had a right to bring an action in the Company's name without leave of court without giving proper cognisance of the provisions of sections 331 of the Companies Act, 2017. 2 .. The court misdirected itself in law when it glossed over the provisi.on.s of sections 331 of the Companies Act. 3. The court erred i.n law when it decided that the 1 st. Respondent had not been properly put into J9 Hq,uidation in accordance with section 88 of the Corporate Insolvency Act, 201 7 based on a m.isin.t.erpretati.on oif the provisions of section 77 of the Companies Act. 4 .. The court erred i.n la.w when it decided that the AppeUants had not been properly appointed as liquidators for the 1 •t, Respondent Company in accordan ce with section 92 of the Corporate Insolvency based on a misinterpretatio,n of the provisions of section 77 of the Companies Act. 5 . The court erred in law when it misinterpreted the provisions of section 77 of the Companies Act as to the form and. cont ent of a special resolution. 6. The court erred in law when it condemned the Appellant s to pay dam.ages for trespass and int erference of the 1 st Respondent for what the court referred to as 'illegal' actions by the shareholders and members of the 1 st Respondent. J10 7 . The court erred in law when it glossed over the provisions of section 91(1) of the Corporate Ins olvency Act which optionalises the solvency test requirement. 5.0 ARGUMENTS IN SUPPORT OF APPEAL 5.1 Mrs Jere, Counsel for the Appellant, relied entirely on the filed written heads of arguments filed on 14th July, 2021. Grounds one and two were argued together. The issue being raised is that by bringing an action in the name of the company, the action falls within the territory of a derivative action and therefore Section 331 CA should have been complied with and leave of court sought before bringing the proceedings in the name of and on behalf of the company. 5 .2 It was argued that the authorities relied on by the lower court in arriving at its decision namely; Backloads (Zambia) Limited v Freight and Liners (Zambia) Limited1 , Avalon Motors Limited (In Receivership) v Bernard Leigh Gadsden and Motor City Limited2 and Re Union Accident Insurance Co. Ltd3 are J11 distinguishable from the present case in that, the former cases were dealing with winding up by the court while the latter is at the instance of the shareholders. Further, the said cases were decided at the time when there was no statutory law providing for the procedure and requirements as laid down in section 331 CA. That now the principles in the said cases have been overridden by statute. We were referred to the cases of Mutwale v Professional Services Limited4 and John Kasanga and 2 others v Development Bank of Zambia and 3 othe:rs5 .. 5.3 According to Counsel, Section 331 is the proper law applicable in this case and in the absence of leave, it was improper for the 2 nd Respondent to bring a case in the name of the 1 s t Respondent. 5.4 As regard the court's finding that the 2nd Respondent had the right to commence the action in her own name .and in her own right because she retained residual powers, it was submitted that residual power rests in the board of directors and not an individual director and in the present case, that power rested in both the 2 nd Respondent and J12 one Charles Peter Marie Ghislain and not the 2 nd Respondent alone. 5.5 Grounds three, four and five have been argued together and challenge the learned Judge's holding that there was no special resolution passed for the winding up of the company and the appointment of the liquidators. And that the resolution passed was an ordinary resolution and thus was defective under the CA for not being properly titled as a special resolution or stating that it was being passed as a special resolution. 5.6 Counsel argued that the court misinterpreted the provisions of section 77 CA and that the said provision does not nullify a resolution for not being titled a special resolution neither does it describe what happens in a situation where a special resolution is not described as a special resolution. 5 . 7 Further that section 77 (2) (b) does not requtre the resolution to be dated by the last member to sign it in order for it to take effect nor does it impose an obligation on all shareholders to sign a resolution for it to be valid. It was J13 argued that the resolution passed is valid and complied with Section 77 CA. As such, the 1 st Respondent was properly placed under voluntary liquidation and the Appellants duly appointed as liquidators. 5.8 The sixth ground attacks the condemnation of the Appellants to pay damages for trespass and interference. It was argued that the Appellants should not be penalised for discharging their duties derived from a reasonable belief that the shareholders followed the law in winding up of the Company and appointing the Appellants as liquidators. We were referred to Section 113(1) CIA which provides that acts of a liquidator shall be valid notwithstanding any defect in the appointment or qualification of the liquidator. That the condemnation would have · been just had the Appellants performed functions outside those provided in the CIA. 5.9 Ground seven, is in respect to the solvency test. It was submitted that section 91(1) CIA does not impose a mandatory requirement for a solvency test. That the use J14 of the word 'may' suggests that it is optional. We were urged to allow the appeal and reverse the findings of the lower court. 6.0 ARGUMENTS OPPOSING THE APPEAL 6.1 Mr Musonda, Counsel for the Respondent, equally relied on the filed heads of argument dated 7 th March, 2022. 6.2 In response to grounds one and two, it was submitted that the lower court was on firm ground when it found that the 2 nd Respondent had the right to bring an action in the Company's name without leave of court and that she had given due consideration to section 331 CA before arriving at that decision. 6 .3 It was pointed out that the CIA does not impose an obligation to obtain leave of court to bring an action in the Company's names under a members voluntary liquidation. 6.4 That because the 1st Respondent was in liquidation and under the control of the liquidator, the CIA is therefore, the law to look to with respect to member's rights and how members can seek relief from the courts. We were referred J15 to the case of Fred M'membe, Post Newspaper Limited (In Liquidation) v Abel Mboozi & 5 Others6 • 6.5 That the CIA being a standalone law, it will be wrong in law and principle to make reference to the CA in respect to issues adequ ately covered by the CIA. 6.6 It was further argued that a derivative action is a means by which the minority shareholders sue for the wrongdoing of directors on behalf of the company. That, therefore, section 331 of the CA envisages a situation in which the directors are still in charge of the management of the company's business. However, in the case at hand, it is the liquidators and not the directors who are in control of the company, thereby obviating the need for a derivative action. Counsel cited the cases of Fergusion v Wallbridge 7 and Petroships Investment Pte Ltd v Wealth plus Pte Ltd8 • 6. 7 That in light of the foregoing, extending the requirement of leave of court provided for u nder section 66 and 98(1) CIA and section 331 CA in respect to derivative actions to actions challenging voluntary winding up is wrong 1n J16 principle. Therefore, the court below should not be faulted for holding that the 2 nd Respondent was not required to obtain leave of court before commencing an action in the 1 st Respondent's name. That it is clear that the court gave due regard and consideration to section 331 CA and cannot be said to have glossed over it. 6.8 In response to grounds three, four and five, it was submitted that the lower court was on firm ground when it held that the Respondent had not been properly put into voluntary liquidation in accordance with section 88 CIA. And also when it held that the Appellant s had not been properly appointed as liquidators for t he 1 st Respondent in accordance with section 92 CIA. It was submitted that, in arriving at its decision, the lower court properly interpreted the provisions of section 77 CA as to the form and content of a special resolution. 6.9 In response to ground six, it was submit ted tha t the lower court was on firm ground when it condemned the Appellants to pay damages. The Fred M'embe, Post J17 NewsJp!a.per Limited. (In Liqu ida tion) case6 was called into aid. 6. ]0 It was submitted that the Appellants ought to have exercised professional judgment regarding the process leading to their appointment, which was seriously flawed. That they did not act in the best interest of the company and a:re therefore, liable to make good. 6 .. 11 In response to grou nd seven, it was submitted that, the lower court did not gloss over section 9 1 ( 1) CIA and did in fact acknowledge that the said section makes the requirement for the solvency test optional. That, however, the Appellant s did exhibit a declaration of solvency and it is this declaration which did not meet the requirements of section 91 (2) CIA .. The lower court was, therefore, on firm ground when it fou nd that no declaration of solvency was made in accordance with the ]aw. We were urged to dismiss the appea]. 7 .. 0 ARGUMENTS IN REPLY 7.1 En reply , Counsel merely reiterated their arguments in support. En addition, it submitted that the Respondents' .. J18 aTgument that the 2 nd Respondent exercised her residual powers when she commenced an action in the name of the company is misplaced because the right to bring an action for and on behalf of the company is assumed by the liquidators. We were referred to the Fred M'membe and Post Newspap,er Limited (in liquidation) 6 case and sections 74(3) {a) and 102 CIA. 7. 2 It was further argued that while indeed the CIA is the principle legislation on corporate solvency, this does not however exclude the provisions of the CA, which is the primary statute governing companies. That it is therefore misleading to suggest that the CIA is the only law that can guide the court with regard to member's rights and how members can seek relief from courts. 7. 3 With regard to the Respondent's argument on the difference between a derivative action and liquidation action,, it was argued that the originating summons shows that the 2nd Respondent's daim was that a wrong had been done by the Appellants against the 1 st Respondent. That by virtue of the claims contained in the originating J19 summons,. not only was the court asked to determine issues arising out of a voluntary winding up but for the court to enforce a right falling within the definition of a derivative action.. That in the absence of leave, the court below ought to have removed the 1st Respondent from the proceedings. 8.0 ANALYSIS AND DECISION OF THIS COURT 8.1 We have considered the record of appeal, the parties' respective arguments and the impugned Ruling. 8.2 w·e shall address grounds one and two together as they are entwined. The issue being raised is whether the 2 nd Respondent ought to have obtained leave of court before commencing an action in the name of and on behalf of the 1 st Respondent Company in accordance with section 331 CA. 8.3 The Appellants contend that the action is a derivative action and as such section 33 1 CA comes into play which requires that leave of court must be obtained before commencing an action in the name of or on behalf of the Company. On the other hand, the Respondents argue that J20 the CIA does not require leave of court to be sought where a company is under a members voluntary winding up. 8.4 In the case of Zccm Investments Holdings Pie v First Quantum Minerals and Others9 , we had the opportunity to discuss derivative actions and we held as follows: "It is not in dispute that the claims before the Tribunal and those in the court below were derivative claims. The proper claimant principle was laid down in the case of Foss v Harbottle. The rule being that, if a wrong is done to the company, the proper person to sue the wrongdoer is the company itself The disadvantage of the rule is that it could allow the majority to plunder the company, leaving the minority without a remedy. Exceptions to the rule have therefore been developed as enunciated in the Foss case. A shareholder may now bring a claim by way of a derivative action seeking relief on behalf of a company for a wrong done to a company. A • derivative daim is one where the right of action is J21 deriued from the company and is exercised on behalf of the company. It is therefore an exception to the proper claimant principle." 8.5 In Hght of the above auth ority ,, a derivative action is simply a mechanism in which a shareholder can seek redress agrnnst the company"s directors or officers or third parties for wrongs committed against the company. Until 201 7, in thits jurisdiction, we relied on common law when dealing with derivative actions. And as a rule, one had to show that he feH within the exceptions to the proper daimant principle, which exceptions were mainly that there was an ultra vires or illegal act, or fraud on a minority. 8.6 However, with t he advent of the CA 2017, specifically s ection 331, the law changed with the introduction of the leave stage prior to commencing a derivative action. Section 33 1 provides as follows: (1) Except as provided in this section, a director or an entitled person shall not bring or intervene in J22 any proceedings in the name of, or on behalf of, a company or its subsidiary. (2) Subject to subsection (4), the Court may, on the application of a director or an entitled person, grant leave to- (a) Bring proceedings in the name and on behalf of the company or any subsidiary; or (b) Intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or subsidiary, as the case may be. (3) Despite the generality of subsection (2), the Court shall, in determining whether to grant leave in accordance with that subsection, have regard to the- (a) Likelihood of the proceedings succeeding; (b) Costs of the proceedings in relation to the relief likely to be obtained; {c) Action already taken, if any, by the company or its subsidiary to obtain relief,· or (d) Interests of the company or its subsidiary in the proceedings being commenced, continued, defended, or discontinued, as the case may be. • J23 (4) The Court may grant leave, in accordance with subsection (2), if satisfied that- (a) The company or its subsidiary does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or (b) It is in the interests of the company or subsidiary that the conduct of the proceedings should not be left to the directors or to the determination of the members as a whole. (5) A notice of the application, made in accordance with subsection (2), shall be served on the company or subsidiary. (6) A company or its subsidiary- (a) May appear and be heard; and (b) Shall inform the Court, whether or not it intends to bring, continue, defend, or discontinue the proceedings, as the case may be. 8. 7 It appears therefore, that derivative claims will now proceed in two main stages; the leave stage and the substantive stage. At the leave stage, the court will have regard to the factors listed under section 331 (3) and will ~ J24 have the opportunity to weed out unmeritorious and frivolous claims. 8.8 At the substantive stage, the court will consider statutory provisions and general guide lines set out in case law such as Foss v Harbottle10 on derivative actions. 8. 9 ]n the instant case and upon a perusal of the pleadings on record, we are indined to agree with the Appellants that the action falls within the territory of a derivative action, as the issue being alleged is that of illegality against the company. And so far as the illegality goes, the 2nd Respondent is not prevented from bringing an action to st op the iUegality and to compel the wrongdoers to comply with the law·. However, we do note from the facts on record that, the 2nd Respondent did not seek ]eave to file the derivative action contrary to section 331 CA. Therefore, the derivative action is a nullity and shou ld not have been entertained by the lower court. We, therefore, find merit in grounds one and two. ' Having allowed grounds one and two of the appeal, it is J25 otiose for us to address the remaining grounds. 9 .0 CONCLUSION 9.1 In light of the conclusion we have reached in grounds one and two, the appeal is allowed and the Order by the learned Judge that the 2 nd Respondent h ad a righ t to bring an action in her own right and in the 1 st Respondent Company's name without leave of the court and any other subsequent Order by the court is hereby set aside. We award costs to the Appellan to be paid forthwith. COURT OF APPEAL JUDGE I ~ ~ P. C. M. NGULUBE COURT OF APPEAL JUDGE ~ - ARPE-it2iRI COURT OF APPEAL JUDGE