Food Lovers Market Lusaka Ltd and Ors v National Pension Scheme Authority (APPEAL NO. 019/2017) [2017] ZMCA 476 (13 October 2017)

IN THE COURT OF APPEAL FOR ZAMBIA APPEAL NO. 019/2017 HOLDEN AT LUSAKA (Civil Jurisdiction) BETWEEN: FOOD LOVERS MARKET LUSAKA LIMITED 1 , CHITA CHIBESAKUNDA TIBERIUS AGUSTUS VILJOEN L..1 NGOSHE MWANANSHIKU ttvti REGSI IGNUS VAN ROOYEN CUBRIAN SERVICES LIMITED AND 1 " APPELLANT 2ND APPELLANT 3RD APPELLANT 4T1 APPELLANT 5TH APPELLANT 6''11 APPELLANT NATIONAL PENSION SCHEME AUT1 IORITY RESPONDENT Coram: Chisanga JP, Mulongoti and Sichinga, JJA On 4th May, 2017 and 13th October, 2017 For the 1, 2, 3rd, 401, 511, & 611 Appellants: Mr. A. Mbambara of Messrs Mbarnbara Legal Practitioners For the Respondent: (cid:9) Mr. K. Musaila of Messrs Chonta Musaila & Pindanifldvocates JUDGMENT Chisanga, JP, delivered the judgmcnt of the court. Cases referred to: 1. Salomon and Salomon Company Limited (189 7) A. C. 22 2. Development Bank of Zambia and Another vs Sunvest Limited and Another (1995-1997) ZR 187 3. Macaura vs Northern Assurance Company Limited (1925) A 619 4. Associated Chemicals Limited vs Hill and Delamain Zambia Limited and Ellis Company (as a law firm) 1998 SJ 7 5. Barter vs Barter (1950)2 ALL EL 458 (cid:9) 6. Sithole vs The State Lotteries Board (19 75) ZR 106 7. Re William C. Leitch Bross Limited (1932) 2 Ch 71 S. R vs Grantham (1984) Q B 675 9. BP Zambia Plc vs Interland Motors Limited (2001) ZR 37, 10. 11. 12. 13. 14. Bank voor Handel en Scheepvaart N. V. vs Statford (1953)1. Q. B 248 at 278 Inland Revenue Commrs. Vs Sanson, Gllford Motor Co., Ltd vs Home (1933) CH 935 Nordernfelt vs Maxim Nordenfelt Guns and Ammunitions Company Ltd (1894) A. C. 535. Ethiopian Airline Limited and Sunbird Safaris Limited & others SCZ NO. 26 OF 2007 vs Sharma's Investment Holding Ltd and Vijay Babular Sharma SCZ No. 26 of 2007 Other works referred to: 1. Order XIV/5/2 of the High Court Rules CAP 27 of the Laws of Zambia 2. Section 383 of the Companies Act, Chapter 388, Volume 21, of the Laws of Zambia The appellants in this appeal are 21(1 to 6th respondents in the Court below, to an action commenced by Originating Notice of Motion by the respondent who is applicant in the Court below. The claim against the 1st respondent, Food Lovers Market Lusaka Limited, is for the sum of ZMW 5,363.945.54, being rental arrears due from the 1st respondent to the applicant as at 30th November, 2015, in respect of premises known as shop No. 48 Levy Business Park. In addition to that claim the applicant seeks an order that the 1st respondent's directors and or shareholders, namely the 21, 3rd, 4th, 5th and 6t11 respondents J2 are liable without limitation of liability, for the said debt of ZMW 5,363,945.54 that is due from the 1st respondent to the applicant. The applicant equally claims any other relief the Court may deem fit. The Originating Notice of Motion is supported by an affidavit sworn by one Mwape Mbewe Lambe, legal counsel in the employ of the applicant. Of relevance to this appeal is the assertion that the 1' respondent, who was tenant of its premises, had persistently defaulted in paying its rent and other charges and there was outstanding from the 1st respondent, the sum of ZMW 5,363,945.54, as at 30th November, 2015. As against the 2nd to 6th respondents, it is asserted that these individuals carried on the 1St respondent's business or incurred debts when, to their knowledge as directors and or shareholders, there was no reasonable prospect of the 1st respondent being able to pay the debts as evidenced by the 1st respondent's letter dated 21st October, 2015. The said letter is exhibited as 'MM L3' to the affidavit in support, and was written by the 2nd respondent to the applicant. Upon being served with the Originating process, the 2nd, 3rd and 5th respondents entered conditional appearance and took out summons for misjoinder of themselves pursuant to Order XIV/5/2 of the High Court Rules CAP 27 of the Laws of Zambia. The supporting affidavits were sworn by the 2d and 5th respondents to the action. The 5th respondent's assertions were that he was not privy to the lease agreement, and the 1st respondent and the 5th respondents are separate and distinct legal personalities at law. Further, that it was improper J3 for the applicant to join him to a matter to which he was not privy, notwithstanding that he was director in the 1St respondent company. He could not be held personally liable for debts incurred by the 1st respondent in the course of its operations. The 211 respondent also stated that he was not privy to the lease agreement as the 1st respondent was a separate and distinct legal personality from him. In his view, the letter authored by him three years after entry into the lease agreement could not be evidence that the respondents had knowledge that the 1st respondent had no reasonable prospect of being able to meet its obligations. He asserted that the letter alluded to was merely informing the applicant that they were making arrangements to refinance the business, and, that was not evidence of the knowledge of the 1st respondent's inability to discharge its obligations nor was it a personal guarantee. The application for misjoinder was opposed by affidavit sworn by one David Chewe, Director of Investments in the applicant. He stated that the ground on which the respondents had been joined to the proceedings was that they had carried on the business of the 18t respondent when there was no reasonable prospect of the 1st respondent being able to pay its debts, by inter alia, continuing to incur rent for the property in issue. The learned Judge in the Court below considered the application, and refused it.. Her reasoning was that the Companies Act had altered the position in Salomon J4 and Salomon Company Limited' in that by Section 383, a director or member of a company can be held personally liable by a Court for the company's debts notwithstanding the company's status as a separate legal person upon being satisfied that the person was knowingly a party to the carrying on of any business of the company for a fraudulent purpose. The learned Judge expressed the view that it was in the respondents' interests to remain part of the action and defend themselves, and that no prejudice would be inflicted on them as they would be heard on the merits. She was of the further view that if the respondents remained joined to the action, multiplicity of actions would be eliminated, as enjoined by the Supreme Court in Development Bank of Zambia and Another vs Sunvest Limited and Another2. She however refused to compel the respondents to produce financial statements to enable the Court determine whether or not the respondents are guilty of fraudulent trading, as that would amount to making a determination on the merits of the case at that preliminary stage. The learned Judge was of the view that the application envisioned by Section 383 was not one for joinder but for an order that a person would be personally responsible without limitation of liability for the debts or other liabilities of the company. The applicant had in effect made such application as creditor through relief number 3 in the Originating Notice of Motion. She noted that the Court could only make such an order, if satisfied, on the evidence before it that the person was knowingly a party to the carrying on of any business of the company J5 for a fraudulent purpose. The learned Judge dismissed the application as a result. The 211d to 6°' appellants were dissatisfied with the decision of the learned Judge, and have appealed to this Court on the following grounds: 1. The learned Puisne Judge fell into gross error when she held that the provisions of the Companies Act Chapter 388, Volume 21, of the Laws of Zambia had altered the position in Salomon vs Salomon. 2. The learned Puisne Judge erred in law and fact when she visited the provisions of Section 383 of the Companies Act, Chapter 388, Volume 21, of the Laws of Zambia, which had no relevance to this action unless there was a requisite application of the Liquidator or any creditor or member of the company. 3. The learned Puisne Judge erred in Law and fact when she found as a fact that by joining the 2nd, 3rd, 41h, 5th and 6th respondents to this action the need for multiplicity of actions by the respondent had been eliminated. The arguments on ground one, as advanced in the appellant's heads of argument are that a limited company is a legal person, separate from its members, and that generally, the law will not go behind the separate personality of the company to its members. Reliance in that connection is placed on the celebrated case of Salomon and Salomon Company Limited where this principle was stated. It is argued, premised on Macaura vs Northern Assurance Company Limited3, and Associated Chemicals Limited vs Hill and Delamain Zambia Limited ,K) and Ellis & Company4 that thu separate personality of a corporation or company is a person distinct from its members or shareholders. It is contended that without this principle, Company Law would virtually collapse as limited liability would no longer be an incentive for investors to restrict the risks associated with their passive investment. Consequently, the corporate-capitalist machine would grind to a halt. According to learned counsel, the ruling of the court below is an affront to principles of company law, and tantamount to lifting the corporate veil, when there is reluctance by the courts to do so, save on the stated exception, where there is an abuse of the corporate firm. It is argued that the respondent's action against the appellant is premature and incompetent as a result. This is bucause the court was not moved for it to go behind. Therefore, the court has no jurisdiction with regard to the appellants. On ground two, the appellants contend that Section 383 of the Companies Act provides an instance where the veil may be lifted by statute, and does not in any way alter the Salomon principle. In learned counsel's view, the section has a trigger mechanism, in that it is invoked by an application by either the liquidator or any creditor or member of the company, to show that a person knowingly took part in any business of the company for a fraudulent purpose. It is upon satisfaction that this was so, that a court may proceed to pierce the veil. In the present case, no such application was made in the court below, and as such, the proceedings against the appellants personally are ill founded. J7 It is maintained that the case as pleaded cannot result in proceedings against the 26, 3rd , 4111, 5111 and 6th appellants personally especially that the respondent did not make an application as envisaged by Section 383 of the Companies Act to adduce evidence to show fraudulent trading. Reference is made to Barter vs Barter5 and Sithole vs The State Lotteries Board6 in that connection. It is contended that no fraudulent trading was pleaded by the respondent nor was evidence adduced in that respect. As a result, the court could not invoke the provision of Section 383 of the Companies Act. According to counsel the Learned Judge made findings of fact in the absence of an application in Section 383 of the Companies Act or evidence of fraudulent trading. Therefore, the respondent's purported process against the 2nd, 3rd, 4th, 5th and 6th appellants is misconceived and void ab irtitio. The arguments on ground 3 are that the question of multiplicity of actions does not arise, as an application for removal of the corporate veil would not give rise to multiplicity of actions. We are urged to allow the appeal. The respondent's opposing arguments on grounds 1 and 2 of the appeal are that Salomon vs Salomon is inapplicable to this case, because of Section 383 of the Companies Act. It is learned counsel's view that the Act is cognisant that the principle of separate legal entity may be abused and that the benefit of the doctrine should not be enjoyed by abusers, like the appellants in this matter. J8 Thus, Section 383 makes it clear that these appellants may be held liable for the (1st appellant) debts. Learned counsel refers to Re William C. Leitch Bros Limited (1932) 2Ch 717, and argues that as held in that case, it may be inferred that there is an intent to defraud creditors if a company carries on business and incurs debt when, to the knowledge of the directors, there is 110 reasonable prospect of the company being able to pay them. It is not necessary to show that there was no prospect of the creditors ever being paid. It is enough that there is no reason for thinking that they will be paid as the debts fall due or shortly thereafter. R vs Grantham8 is- s referred to in that regard. referred Learned counsel goes on to argue that the contents of exhibit marked 'MML3' in the affidavit in support of originating notice of motion, and the fact that rent remained outstanding to date are sufficient to show that the 1st appellant and its shareholders/ directors have been guilty of fraudulent trading in terms of Section 383 of the Companies Act. Therefore, the 2nd, 3rd, 4th, 5th and 6th appellants have accordingly been properly joined to the proceedings, and ought to be held personally responsible for the 1st appellant's debt. It is further contended that the respondent is a creditor who in terms of Section 383 of the Companies Act is entitled to seek ptyment of the debt from the appellants, who were properly joined to the action. By so doing the respondent has complied with Section 383 of the Companies Act, which requires a creditor to apply for the order sought in originating notice of J9 motion in the course of a winding up or proceedings such as these. Thus by issuing court process, the respondent has applied for the order contemplated by Section 383 of the Act. Turning to ground 3, learned counsel refers to Section 13 of the High Court Act, and BP Zambia Plc vs Interland Motors Limited9, where the Supreme Court held that a party in dispute with another over a subject should not be allowed to deploy his grievances piece meal in scattered litigation and keep on hauling the same opponent over the same matter before various courts. We are urged to dismiss the appeal. We have considered the grounds of appeal and the arguments of the parties. It has long been settled that a limited company has a separate legal personality, distinct from its shareholders. Salomon and Salomon Company Limited is the landmark decision in which this principle was espoused. Lord Macnaghten articulated it as follows, at page 51: "the Company is at law a different person altogether from the subscribers (cid:9) and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits. The company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers, as members liable, in any shape or form, except to the extent and in the manner provided by the Act." It is equally established that the corporate veil can be lifted. In Bank Voor Handel en Scheepvaart N. V. vs Slatford1° Devlin J remarked, J10 "The legislature can forge a sledgehammer capable of cracking the corporate shell." Section 383 of the Companies Act CAP 388 of the Laws of Zambia is one such instance, where the legislature has made certain officers vulnerable to liability in prescribed instances. We will advert to the section later in the judgement. It should also be noted that the courts have in exceptional instances cracked the corporate shell. One such instance is where the company is acting as agent for its shareholder. In Inland Revenue Commrs vs Sanson11, Lord Sterndale remarked, "There may be, as has been said by Lord Cozens - Hardy, M. R, a position such that although there is a legal entity within the principles of Salomon vs Salomon & Co, that legal entity may be acting as the agent of an individual and may really be doing his business and not its own at all." The court will look behind the corporate veil whenever the company is a "mere cloak or sham." Gilford Motor Co., Ltd vs Home12 is an illustration. In that case, H was a former employee of 0 limited, and was subject to a covenant against soliciting G Ltd's customers. He formed a company, J. M. Home and Co. Ltd and carried on a similar business to that of 0 Ltd, and dealt with its customers. 0 Ltd applied for an injunction to restrain the breach of covenant. The Court of Appeal enjoined both I I and his company. The court was satisfied that the company was formed as a device, a stratagem, in order to mask the effective carrying on of a business of M. E. B. Home. The ill purpose was try to enable him, under what is a cloak or a sham, to engage in business which on consideration of the agreement that had been sent to him just about seven days before the company was incorporated, was a business in respect of which he had a fear that the plaintiff might intervene and object. The court may look to the economic reality when considering questions of public policy. For instance, the court considered whether a covenant in restraint of trade was to be construed as a master and servant covenant or a vendor and purchaser covenant and in SO doing, looked to the economic reality. See Nordenfelt vs Maxim Nordenfelt Guns and Ammunitions Co. Ltd 13. Yet another instance in which the corporate veil will be lifted is one where there are several companies in a group. The courts may consider the companies as one. It can be seen that the corporate shell will in exceptional instances be cracked open, where grave injustice will be inflicted on a party affected if the corporate curtain remains undisturbed. We now turn to the grounds of appeal on which the order of the learned judge is agitated. It is said the learned judge stated that the Companies Act had altered the position in Salomon and Salomon Company Limited. In so stating, the learned trial judge was agreeing with the arguments of learned counsel for the respondent to the effect that Section 383 of the Companies Act had altered the position in Salomon and Salomoii. The learned judge said she concurred with J12 that submission, to the extent that under the said section a director or member of the company can be held personally liable by a Court for the company's debts notwithstanding the company's status as a separate legal person upon being satisfied that the person was knowingly a party to the carrying on of any business of the company for a fraudulent purpose. We have considered the said statement, and cannot fault it all. The learned judge recognised that a limited company is a separate legal person, but she went on to state that a director or member of a company may be held liable for carrying on the company business for a fraudulent purpose. This statement accurately conveys the position of the law. The learned judge was in effect stating that section 383 of the Act is a sledge hammer capable of cracking the corporate shell. As stated above, there are instances when the corporate veil may be lifted, and section 383 is one such instance. It is misplaced to argue that the learned judge lifted the corporate veil as she did no such thing. The matter is yet to be heard and determined. Thus the corporate veil can only be lifted if fraudulent trading is proved. We therefore find no merit in ground 1. We move to consider ground 2. That ground attacks resort to section 383 when no application has been made to that effect. Section 383 of the Companies Act reads: "In the course of the winding up of a company or any proceedings against a company, the court may, on the application of the liquidator or any creditor or member of the company, if it is satisfied that a person was knowingly a party to .313 the carrying on of any business of the company for a fraudulent purpose, make an order that the person shall he personally responsible without any limitation of liability, for the debts or othtr liabilities of the company or for such of those debts or other liabilities as the court directs". We have cogitated on the import of Section 383, which appears to have been largely derived from Section 332 of the Companies Act 1948 of England. The difference between the provision in Lhe Companies Act of England, and Section 383 of our Companies Act is that under our Companies Act the order that a person be personally liable for company debts incurred as a result of fraudulent trading to which he was a party may be made even when the company is not being wound up. The Companies Act of 1948 has been amended in England but the provision on liability for fraudulent trading is largely the same. The application for such an order is made by summons, accompanied by particulars of claim. Evidence may be given, and witnesses called at the hearing. In this jurisdiction, the Supreme Court had occasion to pronounce itself on a similar application in Ethiopian Airline Limited and Sunbird Safaris Limited vs Sharma's Investment Holding Ltd and Vijay Babular Sharma' 4. The facts were that the appellant had petitioned for the winding up of the 1St respondent and sought an order that the 2I and 3rd respondents be held liable personally for the debt of the I respondent. The amended petition was accompanied by a verifying affidavit and there was an affidavit in opposition to the winding-up petition sworn by the 3rd respondent. There were a number of facts that were pleaded in the petition which the 3rd respondent did not challenge. The Supreme Court held that the averments that had not been J14 challenged were deemed to have been accepted by the 31 respondent, and he was on that premise held personally liable for the debts of the 1st respondent. It will be observed that in that maUcr, the application to impose liability on the 3rd respondent as managing director of the 1st respondent was not made separately, but at the time the action was commenced. In the present case, the respondent added the appellants to the originating process and made averments in the supporting affidavit. That manner of procedure cannot be impugned, as it was endorsed by the Supreme Court. In any event, the intendment of section 383 is that an application be made to the court. We do not see why a party armed with information that fraudulent trading has been perpetrated by officers of a company should not, when suing the company, add the concerned officers to the same action and seek the order envisaged by section 383. As correctly stated by the learned judge, Section 383 is not concerned with joinder of a party, but rather, the seeking of the stated relief against an officer who has been party to fraudulent trading. We thus find the second ground unmeritorious. Multiplicity of actions is the commencement of several actions over the same subject matter culminating in litigation. This piece meal approach has been roundly condemned by the courts and is to be guarded against. Section 383 stipulates that the application for in order that those complicit to fraudulent trading be held liable for a company's debts must be made in the proceedings before the court. As earlier stated, and as guided by the Supreme Court in the J15 a cited case, it is proper to pray for an order in the originating process itself. We however see nothing to prevent a party from making the application later in the proceedings upon subsequent discovery of facts suggesting fraudulent trading after the action has already been commenced against the company. Although the learned judge had in mind the curtailing of multiplicity of actions, she nonetheless reached the correct decision, as the order in question could be sought in the proceedings before the court. Ground three equally falls to the ground. The appeal is thus dismissed with costs to the respondent. F. M CHISANGA JUDGE PRESIDENT J. Z. MULONC rTI COURT OF APPEAL JUDGE D. L. Y. SI' HINGA COURT OF AP • EAL JUDGE i 16