Equity Bank Uganda Limited v HD Resources Limited & 2 Others (Miscellaneous Application 1833 of 2022) [2023] UGCommC 252 (6 September 2023)

Full Case Text

# THE REPUBLIC OF UGANDA

## IN THE HIGH COURT OF UGANDA AT KAMPALA

### (COMMERCIAL COURT DIVISION)

## MISC. APPLICATION NO. 1833 OF 2022

(Arising out of EMA No. 0224/2022 arising from Civil Suit No. 915 of 2020)

EQUITY BANK UGANDA LIMITED ::::::::::::::::::::::::::::::::::::

#### **VERSUS**

#### 1. HD RESOURCES LIMITED

#### 2. OWARWO HENRY MUGUMYA

3. BARIGYE LIONEL::::::::::::::::::::::::::::::::::::

# **BEFORE: HON. LADY JUSTICE ANNA B. MUGENYI RULING**

This application was brought by Notice of Motion under section 20 of the Companies Act 2012, section 98 Civil Procedure Act, Order 38 rule 5(d), Order 52 rules 1 & 2 Civil Procedure Rules seeking orders that:

- a. The corporate veil of the 1st Respondent/Defendant be lifted - b. The 2nd and 3rd Respondents be made personally liable for the liability of the $1^{st}$ Respondent - c. That the costs of this application be provided for

The grounds of the application are set out in the Notice of Motion and the affidavit in support of the application deponed by Isiko Charles, a legal officer of the Applicant/Judgement creditor. Briefly, in November 2020, the Applicant filed civil

suit 915 of 2020 against the 1't Respondent for the recovery of money to a tune of Ugx 135,170,000 /: (One hundred thirty-five million one hundred and seventy thousand Uganda shillings) being money had and received by the l.tRespondent. Efforts to trace the whereabouts/new residential address ofthe l't Respondent proved futile thus the Applicant filed an application for substituted service that was granted but the I't Respondent never filed a defense to the suit.

The applicants prayed for a Default Judgement against the I't Respondent and the same was granted vide civil suit 915 of 2020 for Ugx 135,170,000/: (one hundred thirty-five million, one hundred and seventy thousand Uganda shillings only), interest at 28%o per annum and costs. A decree was extracted by the Applicant on the 27h March2023 and the Applicant's lawyers applied for execution of the decree vide EMA-0224-2022 and attempted to effect service on the Respondents in vain as they could not be traced.

When the matter came up for hearing of the execution proceedings, the court permitted the Applicantto execute against the property of the l.tRespondent. The Applicant failed to trace any properry or known assets ofthe I't Respondent and they had since changed fiom their known address at Ntinda in Kampala and the new address was not known to the Applicant. The Applicant then filed the present application seeking for orders as stated above.

#### REPRESENTATION

The Applicant was represented by IWs Kakona & Kwotek Advocates and the Respondent or their representative were not present and neither were they represented in Court by counsel.

counsel for the Applicant informed the court that the Respondents were served through substituted service and an affidavit of service was filed through ECCMIS

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on the 8th ofAugust 2023. counsel for the Applicant prayed to proceed exparte as against the Respondents and the court, upon being satisfied that effective service had been done, granted the Applicant's prayers and the matter proceeded exparte.

counsel for the Applicant proceeded by way oforal which have been considered in the determination of this matter.

## RULING

I have carefully read the pleadings and listened to the submissions of counsel for the Applicant and the main Issues before this Court for determination are:

- I. whether the corporate veil of the 1't Respondent should be lifted by court and execution proceed against the 2nd and 3'd Respondents - 2. Whether the Corporate veil can be lifted at execution

# Issue I

# whether the corporate veil of the I't Respondent should be lifted by court and execution proceed against the 2nd and 3.d Respondents

The principle of corporate personality was discussed in the famous case of salomonv- A Salomon and co Ltd U897|AC 22 which contends in general terms that a company is a legal entiry that is separate and distinct from its members, shareholders or directors. Therefore, this implies that once a company is legaily incorporated, it must be treated like any other independent person with its rights and liabilities appropriate to itself.

Though the principle of corporate personality clearly stipulates that a company is distinct from its members/shareholders or directors, there are exceptional circumstances under which the corporate veil can be lifted/pierced as stipulated in case law discussed below.

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The case of Delhi Development Authority- v -skipper construction Co. (p) Ltd 1199614 SCC 623: AIR 1996 sc 2005 bears emphasis, that the corporate veil should only be disregarded in cases where it is being used for a deliberately dishonest purpose or fraud. lv'hen the corporate character is employed for the purpose of committing illegality or defrauding others, the court can ignore the corporate character and look at the reality behind the veil, so as to enable it to pass appropriate orders to do justice between the parties concerned.

The courts of law in Uganda have also weighed in and lifted the corporate veil in circumstances that warrant that cause of action. These circumstances were aptly discussed in the case of Salim Jamal & 2 others vs. Uganda Oxygen Ltd & 2 others [1997] l1 KALR 38, where Justice Oder(JSC) as he was then held that;

" ... To my mind, there is no doubt that ever since the famous case of SS!qUp!\_y, Salomon & Co. (1897) A. C. 22. Courts have rigidly applied the principle of corporate personality. But exceptions to the principle have also been made where it is too /lagrantly opposed to justice or convenience or in the interest of Revenue collection. In such exceptional cases, the law either goes behind the corporate personality to the individual members or ignores the separate personality of each company in favor of the economic entity constituted by holding and subsidiary companies ... "

The Supreme court in the above case cited with approval the case of Gitford Motor company-v-Horne [933] Ch 935 where the defendant incorporated a new company in order to avoid liability of breach of covenants he owed his employer, and it was held by Lawrence L. J agreeing with Lord H that:

"l am of the opinion that the evidence amply justified the learned judge in drawing the inference that the company was a mere cloak or shamfor the purpose of enabling

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the defendant to commit a breach of his covenant against solicitation. In these circumstances, I agree with the finding of the learned judge that the defendant company was a mere channel used by the defendant Horne for the purpose of enabling him, for his own benefit, to obtain the advantage of customers of the plaintiffcompany and that therefore the defendant company ought to be restrained as well as the defendant Horne. "

The Supreme court concluded that where fraud or improper conduct can be shown then it may be possible to disregard the corporate personality thus the court in Salim Jamal & 2 others vs. Uganda Oxygen Ltd & 2 others(supra) essentially found /lagrant injustice, fraud or improper conduct to justify the lifiing ofthe corporate veil.

The lifting of the corporate veil has since been embodied into Uganda's statutory law under section 20 of the Companies Act as stipulated below:

## "Lifting the corporate veil

The High Court may, where a company or its directors are involved in acts including tax evasion, fraud or where, have for a single member company, the membership of a companyfalls below the statutory minimum, lift the corporate veil. "

In the instant case, the lifting ofthe corporate veil was not an issue in the substantive suit vide civil suit 915 of 2020 and only arose during the time of execution of the judgment decree. The application for the lifting ofthe corporate veil was brought by the Applicants by way of a Notice of motion supported by an affidavit.

In these, the only averments that may allude to the presence of fraud can be found in paragraphs e and f of the Notice of Motion and paragraphs 9,10,1 1, and l4 of the affidavit in support of the motion.

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In the submissions of the Applicant's counsel, he stated that the application is for the lifting of the corporate veil under section 20 of the companies Act and alluded to the fact that the Act provides for fraud as one of the requirements for lifting the corporate veil.

It is trite law that allegations of fraud are more serious in nature and are required to be specifically pleaded and strictly proved before a court oflaw by a person alleging it. Fraud must be strictly proved and the burden ofproofis heavier than on a balance of probabilities generally applied in civil matters. (See Kampala Bottlers Ltd-v-Damanico (U) Ltd, Civil Appeal No. 22 of 1992).

Section 103 of the Evidence Act (Cap 6) stipulates that the burden of proof as to any particular fact lies on that person who wishes the court to believe in its existence. The evidence as to the existence of fraud in this application can be referenced in the averments as to service being effected through substituted service to the respondents, lack of any known assets of the I't Respondent in Uganda after conducting an extensive search, efforts to trace the location and address of the l.t Respondent tumed futile as they are no longer present in their known address registered with Uganda Registration Services Bureau (URSB) and the directors/shareholders hiding under the veil to defeat the ends ofjustice and frustrate the court order.

Although the Applicants have made these allegations/ averments as to fraud, upon the Court's assessment of the same, the evidence on fraud does not sufficiently establish a case for the lifting of the corporate veil. The allegations on their own without elaboration on what is dishonest, intentional perversion of truth or concealment is not sufficient to establish fraud to the required standard ofproof.

I, therefore, find no proof that the Respondents were involved in acts of liaud warranting the lifting of the corporate veil.

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However, in the submissions of the Applicant's Counsel, he cited the Court of Appeal decision in the case of Beatrice Odongo & Noah Ochota -v-Tamp Engineering consultants Limited, Civil Appeal No.8/2020 where the court stated that:

"... Section 20 of the Companies Act,20l2 does not limit the legal premisefor lifting the corporate veil in Uganda to fraud. On the contrary, the statutory provisions make provisions for acts that include but are not necessarily limited to tax evasion, fraud or membership below the statutory minimum. A literal interpretation of the provision would be that the acts of fraud or tax evasion are only some of the acts that would warrant the lifting of the corporate veil. Thus the decision in salim Jamal & 2 others vs. Uganda Orygen Ltd & 2 others(supra) is instructive on other acts that may legally justify the lifting of the corporate veil. In addition tofraud the court found Jlagrant injustice and improper conduct to justifi the lifting of the veil ... "

The Court of Appeal stated in the above case to which I agree that although these additional acts in the case of Salim Jamal(supra) were not specifically mentioned in the Notice of Motion, the fact that the application was lodged under Section 20 of the Companies Act that makes provision for them would mandate this Court to address them suo moto.

In the case of Guning v Naguru Tripati Ltd & 5 Ors Misc Application No. 232 of2017, the Court held that:

"... The concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. The corporate veil can indisputably be pterced when the corporate personality is found to be opposed to justice, convenience and the interest of those doing business with the

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entity... The veil of incorporation can be lifted at execution stage in appropriate CASCS

In this case, the Applicant extended money to the l't Respondent and the Respondent did not pay it back as per the agreement leading to the Applicant filing a suit against the Respondents. The Respondents did not file any defense thus a defaultjudgment was entered in the favor of the Applicants. The Respondents have never appealed against the decision/judgment of the court. Efforts to trace the properties or residential address of the 1't Respondent have proved futile and the Applicant,s search at the URSB clearly indicated that they have a physical presence in Uganda at Ntinda, Kampala. However, a physical search showed that they were not in the said address as indicated in the annual retums

It is my considered opinion that when a company that is duly registered as physically present in Uganda disappears into thin air after taking credit from an institution and they cannot be traced through its physical address or any of its assets cannot be traced./is known for purposes of attachment to fulfil a court decree, it ought to be restrained from taking undue advantage of their business partners. Not lifting the corporate veil, in this case, will make a blatant mockery ofjustice as the judgment creditor/Applicant will not be able to execute the decree of the Court and recover the outstanding amount claimed in civil suit 915 of 2020.

Applying the case of Guning vs. Naguru Tripati Ltd & 5 Ors (supra) to the present case, the corporate veil can indisputably be pierced when the corporate personality is found to be opposed to justice, convenience and the interest oflhose doing business with the entity.

The facts of this case clearly show that the actions of the Respondents in not appearing in the hearing ofthe suits/applications, having no known assets or physical

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address, and failing to honor the court decree reflect their opposition to justice and the interest of those doing business with them.

I, therefore, find that the colporate veil ofthe 1't Respondent should be lifted and execution should proceed against the 2nd and 3d Respondents.

#### Issue 2

# Whether the corporate veil can be lifted at execution stage

In the case of corporate Insurance company Limited vs. savemax Insurance Brokers Ltd 120021 I EA 41, Ringera J held that the veil of incorporation can be lifted against the directors at the execution stage in appropriate cases.

In the case of W. E. Kiwalabye v Uganda Commercial Bank and Another (1994) IV KALR 8 Justice Kato held that:

" . . .lts our opinion that the applications of this nature, where court is tasked to lift the veil at the execution stage, the court needs to satisfy itself that the following conditions are proved;

,) That applicant is thejudgement Creditor.

b) That she/he hasfailed to realize thefruits ofexecution

c) That it is the only option available for the creditor to realize the fruits of the judgment.

In the present case, the Applicant, in their Notice of motion and its supporting affidavit and submissions, clearly stated that they have failed to realize the fruits of their decree as the registered office ofthe Respondent has been changed and efforts to trace it have proved futile. The Applicant also clearly stated in their affidavit that after a thorough search, there are no known assets ofthe Respondents to attach for

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purposes ofexecuting the decree. clearly, the Applicant has demonstrated that there is no other way for the Applicant/Judgement creditor to realize the fruits of their judgement.

In the circumstances, therefore. I find that the instant case is a proper one for the corporate veil to be lifted at the point of execution to allow the creditors to realize the fruits of their judgement

All in all, and in conclusion, the present Application is allowed and the orders sought therein are granted as prayed.

Costs of the Application are awarded to the Applicant.

HON. LADY JUSTICE ANNA B. MUGENYI

DATEDz6/9/2023