Ebrahim v Tait (C.A. 2/1935.) [1935] EACA 51 (1 January 1935)

## COURT OF APPEAL FOR EASTERN AFRICA.

## Before SIR JOSEPH SHERIDAN, P., LAW, C. J. (Zanzibar), and WEBB, J. (Kenya).

## KASSAM EBRAHIM, Appellant (Original Respondent)

W. K. TAIT as Official Liquidator of Kassam Ebrahim & Co., Ltd., Kampala, Respondent (Original Applicant).

## C. A. $2/1935$ .

- Company—Winding-up—Application by Official Liquidator for Public Examination of Promoter or Officer-Allegation of Fraud-Companies Ordinance (Uganda) (Cap. 105), section 196. - $Held$ (15-2-35).—Where the Official Liquidator applies under section 196 of the Companies Ordinance Cap. 105) for the public examination of a promoter or officer of a company which is being wound up the affidavit grounding the application must disclose a prima facie case of fraud against the person incriminated: it is not enough that there is a suggestion or finding that fraud must have been committed in the promotion or formation of the company or in relation to the company since its formation. Decision of High Court of Uganda reversed.

Appeal from the High Court of Uganda. The facts appear sufficiently from the judgments.

Baerlein for the Appellant.—A general allegation of fraud on whomsoever practised is insufficient. Even if the formation of the Company constituted a fraud on the creditors of the former partnership the Liquidator is not concerned with them, and in fact there is nothing to show that their rights were affected.

Kaplan (Keatinge with him) for the Official Liquidator. An order under section 196 is not appealable (cf. Indian Companies Act, 1882, section 162). It is sufficient if the affidavit makes out a prima facie suggestion of fraud.

The following cases were referred to: In re Trust and Investment Corporation of South Africa (1892 3 Ch. 332); In re Laxon (1893 1 Ch. 210); re Birkdale Steam Laundry Co. (1893 2 Q. B. 386); re General Phosphate Co. (1895 1 Ch. 3); Ex parte Barnes (1896 A. C. 146).

SIR JOSEPH SHERIDAN, P.—This is an appeal from a Judgment of the High Court of Uganda.

The question turns on the construction to be put on section 196 of the Companies Ordinance. Section 196 provides, in so far as it is material: "When an Order has been made for winding up a Company by the Court and the Official Liquidator has

applied to the Court stating that in his opinion a fraud has been committed by any person in the promotion or formation of the company or by any director or other officer of the company in relation to the company since its formation, the Court may, after consideration of the application, direct that any person who has taken part in the promotion or formation of the company, or has been a director, manager or other officer of the company, shall attend before the Court on a day appointed by the Court for that purpose and be publicly examined as to the promotion or formation or the conduct of the business of the company or as to his conduct and dealings as director, manager or other officer thereof".

In the matter of Kassam Ebrahim & Company, Ltd., (In Liquidation), the Official Liquidator applied to the Court that a Summons be issued to Kassam Ebrahim, the appellant in this case, and Mohamedally Damji Virani, calling upon them to:-

- (a) Show cause why the respective sums of Sh. $6,860/40$ and Sh. $4.585/29$ should not be paid to him as Official Liquidator of the company. - (b) Be publicly examined as to the promotion and/or formation of the company and/or the conduct of the business of the company and/or their respective conduct and dealings as directors thereof. - (c) Show cause why the formation of the company should $(c)$ not be held to be fraudulent and why they should not be held personally responsible for the debts thereof. - (d) Such other purpose as the Court may thereafter determine.

This prayer is based on and is contained in an Affidavit of the 25th October, 1933, in which it is averred (inter alia):-

(1) Investigation into the books and affairs of the company discloses the following facts: -

- (a) The company was incorporated on the 1st day of April. 1931, for the purpose of taking over (inter alia) a business formerly carried on in partnership by Kassam Ebrahim and Mohamedally Damji Virani; - (b) At the flotation of the company shares were taken up by the said former partners in the firm as the purchase price of the business. Such shares were taken up by each partner as to 23,500 shares and Sh. 25,000 in cash.

(2) Prior to formation of the company the books were kept in Gujarati and from a report made to me thereon by Mr. Alexander Stewart Folkes I believe that at the time of formation of the company the partnership business was insolvent.

(3) Subsequent to formation of the said company, in or towards payment of the above purchase price payable in cash, the said Kassanı Ebrahim had drawn from the company the net sum of Sh. 6,860/40 and the said Mohamedally Damji Virani has drawn the sum of Sh. $4.585/29$ .

(4) Apart from any amounts which may be recoverable from the said Kassam Ebrahim and Mohamedally Damji Virani I estimate that the gross recoverable assets of the company will only amount to 33.23 per cent of the liabilities of the company.

(5) In my opinion as the result of the said enquiries the financial position of the company was such that at the date of its formation the partnership business was insolvent and its incorporation into a company was fraudulent on the then existing creditors of the company. (It would seem that for this last word "company" there should be read "partnership".)

Now the construction to be put upon section 196 would appear to be that the jurisdiction of the Court to issue a summons ordering attendance for the purpose of public examination depends not merely on an expression of opinion by the Official Liquidator that a fraud has been committed, but rather on the setting out in his affidavit of such facts as suggest fraud. In the case of $Ex$ parte Barnes (896 A. C. 152) Lord Halsbury, in interpreting a similar section of the English Act says: "My Lords, I confess, 1 entertain not the smallest doubt that the meaning of this legislation is that in order to give the Court jurisdiction to make such an order there must be a finding of fraud, and a finding of fraud against an individual who is thereby made subject to being summoned before the Court and is compelled to answer, whether the answer incriminates him or not, but, being exculpated, receives his costs. I confess I am unable, looking at the whole of the legislation on the subject, to entertain the least doubt that that was what the legislature intended; and I am a little surprised I confess, that there should have been any doubt that fraud must be found; by which I do not mean that the word "fraud" must be used, but that such facts must be found by the Official Receiver as suggest fraud against the person incriminated, and that there must be an individual person incriminated. It is not enough that there is a general finding that fraud must have existed somewhere, which would mean nothing; but there must be an individual person pointed to and in respect of whom all these different provisions for his protection as well as for his being made an example of become perfectly reasonable. In the event of there being no fraud found, or in the event of there being no individual pointed out as being suggested to be guilty of fraud, I entertain no doubt that the Court has no jurisdiction to make any such order for a public examination". And Lord Watson in the same case at p. 153 says: "I am also of opinion that the power committed to the Court by that sub-section has

no application to any of the persons therein mentioned who is not inculpated in this sense that a prima facie case of fraud on his part is disclosed by the further report".

Applying the test laid down in that case to the affidavit of the Official Liquidator in this case, I have come to the conclusion that there was insufficient material before the learned Judge to warrant his issuing a Summons for the attendance and public examination of the appellant. This is sufficient to dispose of the appeal; but had I come to the conclusion that a Summons for attendance and public examination was properly issued, I would have held that section 196 is not an authority for granting the prayers $(a)$ and $(c)$ . The matters dealt with in both $(a)$ and $(c)$ appear to me to fall under section 235 of the Ordinance, and before the appellant could be called upon to account in those matters a Misfeasance Summons would require to issue.

In my opinion the appeal should be allowed with costs in this Court and the Court below. The costs to be out of the assets of the company.

LAW, C. J.—On behalf of the respondent a Preliminary Objection was taken that no appeal lay from the Order sought to be appealed. It is observed that the Application, which founded these proceedings, was made under sections 195 and 196 of the Companies Ordinance (Cap. 105). So far as section 195 is concerned, we have been referred to the case of $R$ . Wall v. J. E. Howard (1896 I. L. R. 18 All., p. 215), where it was held that no appeal lay from an Order under what appears to be the corresponding Indian law. In his Order, the learned Judge expressed the opinion that the Application was mainly concerned with section 196, and with this I would agree. It is not contended that an Order under that section is not appealable. But whether the Order can be said to have been made under section 195 or 196, or both, it seems that Orders under both sections are appealable to this Court under the Uganda Law in view of the language of section 66 of the Civil Procedure Ordinance, 1930. The Preliminary Objection was not very seriously pressed. I consider the Order in question is properly appealable.

With regard to the points raised in the Memorandum of Appeal I would say that I have read the judgment of the learned President of the Court with which I respectfully agree.

WEBB, J.—The company was incorporated on the 1st April, 1931, for the purpose of taking over (inter alia) a business formerly carried on in partnership by Kassam Ebrahim and Mohamedali Damji Virani. Subsequently an order was made for the winding-up of the company by the Court. On the 26th October, 1933, a summons was taken out by the Official Liquidator asking that Kassam Ebrahim and Mohamedali Damji Virani should: $(a)$ show cause why two sums of money (said to have been received by them from the company should not be paid over to the Official Liquidator; (b) be publicly examined as to the promotion and/or formation of the company and/or the conduct of the business of the company and/or their respective conduct and dealing as directors thereof; (c) Show cause why the formation of the company should not be held to be fraudulent and why they should not be held personally liable for the debts thereof.

On the 6th November, 1934, an Order was made in the terms of the prayer in the summons against Kassam Ebrahim. From that Order the present Appeal is taken.

The application by the Official Liquidator was made under section 196 of the Companies Ordinance (Cap. 105), the relevant portion of which is as follows:-

Sub-section $1:-$

"When an Order has been made for winding up a company by the Court, and the Official Liquidator has applied to the Court stating that in his opinion a fraud has been committed by any person in the promotion or formation of the company or by any director or other officer of the company in relation to the company since its formation, the Court may . . . direct that any person who has taken part in the promotion or formation of the company, or has been a director, manager, or other officer of the company, shall attend before the Court . . . and be publicly examined as to the promotion or formation or the conduct of the business of the company, or as to his conduct and dealings as director, manager or other officer thereof".

$\overline{5}$

This section is substantially identical with section 216 (1) of the Companies Act, 1929.

The affidavit of the Official Liquidator grounding the summons sets out that the partners in the firm of Kassam Ebrahim and Mohamedali Damji Virani received as the purchase price of the business 23,500 shares in the company and Sh. 25,000 cash, and that subsequent to the formation of the company Kassam Ebrahim had drawn from the company the sum of Sh. $6,860/40$ towards payment of the purchase price payable in cash, and the Official Liquidator estimates that the gross recoverable assets of the company will only amount to 33.23 of its liabilities. Paras. 3 and 6 of the affidavit are as follows: -"3. Prior to the formation of the company the books were kept in Gujerati and from a report made to me thereon, I believe that at the time of the formation of the company the partnership business was insolvent. 6. In my opinion as the result of the said inquiries the financial position of the company was such that at the date of its formation the partnership business was insolvent and its incorporation into a company was fraudulent on the then existing creditors of the *company* (I remark, in parenthesis, that the word "company" here must be a mistake for "partnership".)

On behalf of the appellant it is urged that this affidavit does not disclose any facts from which it can be inferred that a fraud was committed "in the promotion or formation of the company", and that the learned Judge was wrong in holding that "Any allegation of fraud, on whosoever practised, which the Official Liquidator is prepared to support, is sufficient ground for an application to the Court".

A number of cases have been cited in which the Courts have considered what are the essential statements that should be contained in the report of the Official Receiver in order to give the Court jurisdiction to make an order under the analogous provisions of section 8 of the Companies (Winding-up) Act, 1890: Re Trust and Investment Corporation of South Africa, (1892 3) Ch. 332); Re Laxon and Co. (1893 1 Ch. 210); Re Birkdale Steam Laundry Co. (1893 2 Q. B. 386); Re General Phosphate Co. (1895) 1 Ch. 3) and Ex parts Barnes (1896 A. C. 146). It seems sufficient if I refer to the judgment of Lord Halsbury, C., in the lastnamed case; he says (at p. 152): "My Lord, I confess I entertain not the smallest doubt that the meaning of this legislation is that, in-order to give the Court jurisdiction to make such an order, there must be a finding of fraud, and a finding of fraud against an individual who is thereby made subject to being summoned before the Court, and is compelled to answer. . . I do not mean that the particular word 'fraud' must be used, but that such facts must be found by the Official Receiver as suggest fraud against the person incriminated: and that there must be an individual person incriminated: it is not enough that there is a general finding hat fraud must have existed somewhere, which would mean nothing $\ldots$ " That case was considered in Re Civil, Naval and Military Outfitters, Ltd. (1899 1 Ch. 215) in which Lindley, M. R. said (at p. 231): "if you find the Official Receiver reporting that specified persons have, in his opinion, been guilty of fraud in connection with the formation of the company, and you look back into the report and see, not whether the charge against those persons is proved (that is not the function of the report), but whether there is such a basis for that opinion as in the view of the Judge warrants him calling upon those persons to undergo a public examination that, I think, is all that the report need do. This, as it seems to me, is the fair and true result of the language of the Act and the decision in $Ex.$ p. Barnes'.

Reading the affidavit of the Official Liquidator (which takes the place of the report mentioned in the Act of 1890) in the light of these decisions, I am of opinion that it fails to disclose such facts as show clearly that, in his opinion, a fraud has been committed, or to do more than give rise at most to a suspicion The fact that Kassam Ebrahim received a sum of of fraud. Sh. 6,860/40 from the company as part of the purchase price of his interest in the partnership business does not seem, of itself. to be a suspicious circumstance (it does not appear, for example, when this sum was received, nor what was the capital of the company, nor when the winding-up order was made—all of which might be material factors) and no facts are stated from which it is possible to conclude how the formation of the company constituted a fraud on the existing creditors of the partnership. if that is what was meant by para. 6 of the affidavit.

Turning to paras. $(a)$ and $(c)$ of the prayer in the summons it is apparent that the relief asked for by them does not come within the terms of section 196. These two paragraphs appear to refer to the power of the Court to assess damages against delinguent directors under section 235 of the Ordinance, corresponding to section 276 of the Companies Act, 1929, under which proceedings may be taken by what is called a "misfeasance summons". Such proceedings are obviously of a very different character from merely ordering a person to attend for public examination under section 196, and one is not surprised to find that, by the English practice, such a summons must state distinctly the grounds upon which it is said that the respondent ought to be ordered to pay the money claimed (see Stiebel's Company Law, 3rd Ed., p. 964). The onus would be upon the Official Liquidator to prove misfeasance by the respondent, not upon the latter to show cause why he should not pay. The affidavit of the Official Liquidator, in my opinion, disclosed no grounds (though such grounds may exist) upon which the present appellant ought to be ordered to repay the sum mentioned or why he should be held personally responsible for the debts of the company.

In my judgment the appeal should be allowed and the order of the 6th November, 1934, quashed, and the appellant should have his costs here and below out of the assets of the company.