Freshint Ltd and Ors v Kawambwa Tea Company Ltd (SCZ Appeal 130 of 2005) [2008] ZMSC 152 (8 May 2008)

IN THE SUPREME COURT OF ZAMBIA SCZ APPEAL NO.130 OF 2005 Jl HOLDEN AT LUSAKA (CRIMINAL JURISDICTION) BETWEEN: FRESHINT LIMITED HEMANT JALLAN THOMPSON LLOYD AND EWART LTD AND 1ST APPELLANT 2nd APPELLANT 3rd APPELLANT KAWAMBWA TEA COMPANY[1996] LTD RESPONDENT CORAM : Lewanika,DCJ, Chibesakunda and Mushabati, JJS. On 28th July, 2007 and 8* May, 2008 For the Appellant: Mr A. Dudhia of Musa Dudhia and Company For the Respondent: Mr N. Nchito of MNB JUDGMENT Mushabati, JS., delivered the judgment of the Court. Cases referred to: J. Magnum Vs Quadri and another[1981] Z. R. 141 2. Avolon Motors Vs Gadsden and another[1998] Z. R.41 3. BP Zambia Plc Vs Interiand Motors Ltd[2001] Z. R.37 4. Royal British Bank Vs Turquand [1855] 5 E and B. 248 5. Zambia Bata Shoe Company Vs Vin-Mas Ltd [1994] Z. R. 136 J2 Legislation referred to: Companies Act, Cap. 388 - 5.215(1) and (3) When we heard this appeal the late Deputy Chief Justice Hon. Mr Justice D. M. Lewanika was a member of the panel but he passed on before this judgment was ready. The judgment is therefore by the majority of the panel that heard the appeal. This is an appeal against the High Court judgment dismissing the appellant's claim for US$100,000 and interest at the rate of 10% plus costs. In this judgment we shall continue to refer to the appellants as the plaintiffs and the respondent as the defendant respectively as these were designations they held in the court below. The evidence in support the plaintiffs case was that P. W.2 Hemant Kumar Jalan, the 2nd plaintiff, who was Director of both Freshint Limited, the first plaintiff and Kawambwa Tea Company (1996), Limited negotiated for a loan of US$100,000 from Thompson Lloyd and Ewart Limited, the third plaintiff on behalf of the defendant Company. The loan was dully advanced to the defendant Company. The condition under which the loan was granted was that the defendant Company was to export its Tea through the third plaintiff. The loan was to be recovered from the proceeds of the exported Tea. The guarantor of this loan was the 2nd plaintiff. The defendant Company was however, put under receivership. Messrs J3 G. Sokoto and N. H. C Chiromo were appointed joint Receivers/Managers by HSBC which was owed some money by the defendant Company. The receivership was as a result of the floating charge dated 26th June, 2000 created between the defendant Company of one land and HSBC of the other hand. The loan of US$100,000 was not repaid by the defendant company. The Receiver/Managers acknowledged the said loan but refused to repay it back to Thompson Lloyd and Ewart (TLE). The loan was however, paid off by Freshint Limited (FIL) as per memorandum of understanding between the 2nd plaintiff and the 3rd plaintiff. The documents relating to this loan were signed by the 2nd plaintiff on behalf of the defendant. P. W.l Edward Kenneth Clive Foster confirmed the payment of this said loan by TLE to the 3rd plaintiff. The 2nd plaintiff made a personal guarantee for the full payment of the loan on 22nd November, 2000. The defendant called one witness, D. W.l Nallan Chakravarty Narasimhan, its Financial Director. D. W.l, stated that the defendant was a stranger to the documents purporting to be a memorandum of understanding between the 2nd plaintiff and the 3rd plaintiff. At the time the said document was executed by the parties, the defendant company was already under receicership of George Sokota and Nobert Chiromo. On examining the documents, held by the defendant company, D. W.l observed that the US$100,000 loan, obtained through the loan J4 agreement dated 28th November 2000, was not in fact applied to purchase machinery or as working capital for the defendant company. The defendant company was forced to carry out some investigations against the 2nd plaintiff and other Co-Directors for breach of their fiduciary duties to maintain its assets’ value or to advance its commercial interests. The records further revealed that the defendant company had paid a total sum of US$265,558 from its Tea Export sales to third parties from which the defendant company derived no benefits. These are the brief stories by both the plaintiffs and the defendant. At the conclusion of the trial the learned trial judge dismissed the claims against the defendant, hence this appeal before this court. The plaintiffs filed four main grounds of appeal. These are as follows; “1 . The court below erred in law and in fact when it failed to fake into account the law relating to the Doctrine of Subrogation. Under this doctrine of law the Appellants were entitled to recover from the Respondent monies paid by the 1st and 2nd Appellants to the 3rd Appellant for and on behalf of the Respondent, which monies the Respondent admitted were due and payable by the Respondent to the 3rd Appellant and to date have still not been paid. 2. The court below erred in fact and in law when it failed to find that if would be an Unjust Enrichment prohibited by law and equity for the Respondent to retain the loan proceeds of J5 US$100,000 plus interest without repayment, which the loan proceeds the Respondent admitted it had received and not repaid. 3. The learned Judge erred in fact and law when he failed to fake info account that the 3rd Appellant was claiming in the action in the Court below for the repayment to it (on behalf of the 1st and 2nd Appellant) of the loan monies that if had advanced to the Respondent, which loan monies the Respondent admitted having received and not repaid. 4. The Learned Judge in the Court below misdirected himself in fact and in law and wrongly Non-Suited the Appellants by his findings thaf:- (a) The loan agreement needed to be under seal; and (b) The 2nd Appellant did not have authority to enter info agreements on behalf of the Company; and (c) There was no resolution authority the 2nd Appellant to enter into the loan agreement; and (d) There was not resolution authorizing the 2nd Appellant to execute the Memorandum of Understanding; and (e) The 2nd Plaintiff acted without authority of the Company; and (f) The 2nd Plaintiff was liable in his personal capacity” J6 These grounds of appeal were buttressed by both written and oral submissions. The gist of their written heads of argument, which in our view tended to over-lap each other, was that the plaintiffs were entitled to recover from the defendant the sum of US$100,000 which was obtained by the 2nd plaintiff on its behalf, from the third plaintiff, on the principle of subrogation. They argued that a person, who pays a debt to a creditor on behalf of a principal debtor, is entitled to subrogation of the rights of the creditor as against the debtor. In their arguments they relied on quotations from Halsbury's Law of England which we reproduce hereunder: The first quotation is from Volume 16, 4th Edition at paragraph 1438 which states that: “Where one person has a claim against another, in certain circumstances a third person is allowed to have the benefit of the claim and the remedy for enforcing it, even though it has not been assigned to him, and he is then said to be subrogated to the rights of the first person. This is not only in cases of suretyship but also in those in which, without any contract of suretyship, there is a primary and secondary liability of two persons for one and the same debt, the debt being, as between the two, that one of the persons only, and not equally of both, so that the other, if he should be compelled to pay it, would be entitled to reimbursement from the person by whom, as between the two, it ought to have been paid”. J7 The next one is under paragraph 1440 of the same Volume. It reads: "When a surety has paid a debt to a creditor he is entitled in equity to be subrogated to all the rights possessed by the creditor, and is entitled to have transferred to him any securities which the creditor has taken from the debtor, so as to help him recoup himself”. The same authors state in paragraph 193 of their Volume 20 that: “As soon as the surety has paid the creditor what is due to the creditor under the guarantee, he is entitled,., to be subrogated to all the rights possessed by the creditor in respect of the debt”. Finally in paragraph 203 of the same book above they state: "..the right to indemnity is an incident of the suretyship, and the principal debtor will be liable without the necessity of any further request for all sums subsequently paid by the surety under the guarantee as money paid to the use of the principal debtor”. They went on with the argument by saying the 1st and 2nd plaintiffs, having paid off the loan advanced by the 3rd plaintiff to the defendant company, are entitled to assert the 3rd plaintiff’s rights over the defendant company i.e to demand the amount advanced by the 3rd plaintiff from the defendant company as though it was the 3rd plaintiff which was claiming for the said money. They further argued that the defendant did not dispute that the loan was made to it by the 3rd plaintiff and repaid by the 2nd plaintiff. Failure by the defendant to pay back this money to the plaintiffs J8 amounted to “unjustly enriching itself”. The 3rd plaintiff was entitled to recover the loan amount from the defendant as per clause E of the memorandum of understanding that he (2nd plaintiff) signed on behalf of the defendant company. Finally Mr Dudhia argued that the trial court erred in fact and law when it held that the loan agreement ought to have been under seal and that the 2nd plaintiff’s had no authority to enter into the said agreement, on behalf of the company, and that made him personally liable for the said debt, more so there was no resolution by the defendant company authorizing the 2nd plaintiff to enter in the said agreement giving rise to this claim. Mr Dudhia argued that these findings were not supported by evidence on record. He went on to say the loan agreement did not need to be under seal as it was a simple contract. On lack of authority by the 2nd plaintiff to enter into the said loan agreement Mr Dudhia argued that there was no such evidence on record to prove this fact. In fact he argued that the loan agreement's validity was acknowledged by the Receiver even if the 2nd plaintiff was not authorized to enter into the loan agreement under review. However, since the defendant got the money which did not belong to it, it would be improper if it did not pay back the said amount with interest. In his brief oral submission Mr Dudhia merely argued that the principle of subrogation was applicable in this case because the receiver of the company admitted the debt. If there was any breach of fiduciary duty by the directors, then the defendant ought J9 to have sued its directors. There was no law which allowed the defendant company to disavow a loan agreement entered into on its behalf with a third party. The agreement was entered into on its behalf and so it must pay back the debt. The defendant also filed written heads of argument which were augmented with oral submissions. The gist of the defendant’s written submissions was as follows. On the first ground it was argued that the agreement that gave rise to this action was entered into by the 3rd plaintiff and the defendant through the 2nd plaintiff who was then its director. Though the loan of US$100,000 was disbursed it did not benefit the defendant company. The loan was intended to enable the defendant company to import some machinery from India. At the time the US$100,000 was obtained the second plaintiff and other directors were aware of the defendant's loan obligations to HSBC Bank which led to the defendant company being placed under Receivership. On 17th August, 2001 the three plaintiffs executed a Memorandum of Understanding in which the 1st Plaintiff agreed to pay the 3rd plaintiff the loaned sum of US$100,000 on behalf of the 2nd plaintiff and the money was later duly paid. The action was commenced so that the defendant could reimburse or indemnify the 2nd plaintiff for having paid off its loan. The defendant’s counsel argued that subrogation, though correctly stated, could as well be pleaded by the defendant against the J10 plaintiffs. This was possible because the agreement between the 2nd plaintiff, and the 3rd plaintiff was coupled with breaches of duties by the Directors, namely the 2nd plaintiff and his other director accomplices. Directors, who are agents or through whom a company acts enjoy a fiduciary relationship with such company. They are therefore, expected to act in good faith to avoid placing themselves in a position that compromised their official duties. The director/directors of a company are under a duty to exercise care, skill and diligence in dealing with company affairs. If such duty has been breached the company has an option of either suing the director/directors or repudiating the transaction. In the instant case the 2nd plaintiff obtained the loan on behalf of the company but applied the proceeds for the purpose that gave no financial benefit to the company. He did not use the loan for the purpose it was obtained. He argued further that the 2nd plaintiff already knew of the company's insolvent position at the time he negotiated for the loan under review. He knew that the defendant company owed HSBC Equator Bank some money, which it was unable to pay back. The 2nd plaintiff had, therefore, a perceived conflict of interest in his dealings in this matter in that he and two other directors from Binani Group of Companies had the conduct of the affairs of the defendant company. The Binani Group of Companies derived some financial benefit from the loans obtained in the name of the defendant company. Jll The 2nd plaintiff was fraudulent, reckless and negligent in the manner he conducted himself. The court below was justified when it refused to consider the 2nd Appellant's plea of subrogation. The defendant was entitled to disavow the whole transaction and that the loss, in fact fell where it was due. On the second ground Mr Nchito merely submitted that the court below was on firm ground when it found that allowing the claim would have been unjust enrichment of the plaintiff, which was prohibited in law and equity. On the third ground he argued that the court below was justified when it rejected the 3rd plaintiff's claim, which claim was in fact on behalf of the 1st and 2nd plaintiffs. The money obtained under the loan agreement was never deposited into the defendant's account. The money was directed, by the 2nd plaintiff, to service a dubious loan. It was therefore, strange for the 2nd plaintiff to claim that the defendant company was unjustly enriched, when, to his knowledge, he knew that it never got any benefit from the said loan. Finally it was argued that the 2nd plaintiff had no authority to enter into agreement on behalf of the defendant and that there was in fact no company resolution authorizing him to enter into the loan agreement now under review or consideration. The 2nd plaintiff J12 acted without authority when he executed the Memorandum of Understanding which culminated into the loan he purportedly obtained on behalf of the defendant. He was therefore, liable to the repay the loan in his personal capacity as he acted without the authority of the defendant company. Mr Nchito made a very brief oral submission buttressing his written arguments. He said the learned trial Judge properly considered the issue of fiduciary duties in his judgment. The defendant company could not sue the 2nd plaintiff because he (2nd plaintiff) had already paid back the money he owed the 3rd plaintiff. The purpose for which the loan was applied was indicated in the letter on pages 96 and 97 of the record of appeal. The money was intended to enable the defendant company to import new tea machinery from India but this was not done. The above are the arguments by both learned counsel. We are greatly indebted to both learned counsel for their spirited arguments advanced in this case. We have considered them in light of the evidence on record and the judgment appealed against. J13 We have no doubt that the loan, giving rise to these proceedings, was obtained by the 2nd plaintiff purportedly on behalf of the defendant. The loan having been made the defendant company failed to pay it back to the third plaintiff. The loan was then paid back by 1st and 2nd plaintiff as per Memorandum of Understanding that the 2nd plaintiff entered into with the 3rd plaintiff. Though the 3rd plaintiff was a party to these proceedings it did so on behalf of the 1st and 2nd plaintiffs who were seeking for reimbursement from the defendant company because they had purportedly paid back the loan, it owed, on its behalf. The issues before us are: 1. Did the 2nd plaintiff have authority to enter into the loan agreement with the 3rd plaintiff under which a sum of US$100,000 was released to the defendant company? 2. Did the defendant company have any financial benefit from this loan? 3. Is the defendant bound by the 2nd plaintiff's acts refusing this loan? In arguing the issue we have raised in one above Mr Dudhia said in his written heads of argument, The learned Judge in the court below seemed to be of the opinion that the respondent company did not authorize the 2nd plaintiff to enter into the loan agreement and as such it was not bound to repay the money. No evidence was J14 adduced to show that the 2nd appellant had no authority to enter into the loan agreement. It is trite law that he who alleges must prove and as such it was up to the respondent to prove this allegation made in its defence. We find this argument a bit strange. Whereas it is argued that no evidence was adduced to prove that the 2nd plaintiff had no authority to enter into the said loan agreement it was said in another breath that he who alleges must prove. First and foremost it was the plaintiffs in this case who ought to have proved their case against the defendant by showing that in fact the 2nd plaintiff acted with the authority of the defendant company. It is them who alleged that they were owed some money from the transaction entered into by the 2nd plaintiff, purportedly on behalf of the defendant company. It was incumbent upon the plaintiffs to prove that the 2nd plaintiff had the necessary authority from the defendant company to enter into agreement on its on behalf. Mr Dudhia further argued as follows; We maintain that the fact that the respondent company admits that it got the money shows that even if the 2nd appellant was not authorized to enter into the loan agreement (which is denied), the respondent has effectively ratified his actions by keeping the money. This admission was, according to the learned Counsel for the plaintiffs, made by the defendant J15 company’s Receiver. If this argument is correct why did the plaintiffs sue the defendant company in its own name when it was under Receivership? A company under Receivership can only sue or be sued through the Receiver/Manager. It was clearly stated in High Court case of Magnum Vs Quadri and an others that “A Company under receivership has no locus standi independent of its receiver. As long as a company continues to be subjected to receivership, it is the receiver alone who can sue or defend in the name of the company’. This was confirmed by this Court in the case of Avo/on Motors Vs Gadsden and Another® when we said ‘...it would be improper for a current receiver being sued in his own name by the company as this would amount to suing himself”. This shows that a company under receivership has to act in the name of its receiver. We are live to the fact that a company is a legal entity, without physical existence which can only act through human beings, as was the case here. The case of BP Zambia Plc Vs Interiand Motors Ltd® refers. This is what we said : As a metaphysical entity or fiction of law which only has legal, but no physical existence, a company (though being a separate and distinct legal person members or shareholders), can only act through the humans charged with its management and conduct of its affairs. J16 Our own Companies Act Cap. 388 of the Laws of Zambia provides under Section 215(1) and (3) os follows; 1. Subject to this Act, the business of a company shall be managed by the directors, who may pay all expenses incurred in promoting and forming he company, and may exercise all such powers of the company as are not, by this Act or the articles, required to be exercised by the company by resolution. 2. Without limiting the generality of subsection(1), the directors may exercise the powers of the company to borrow money, to charge any property or business of the company or all or any of its uncalled capital and to issue debentures or give any other security for a debt, liability or obligation of the company or of any other person. However, the human being that acts on behalf of a company must have authority of the said company to do so. Only contracts entered into on behalf of a company by authorized agents will bind such company. Such agents are formally authorized through a resolution of a company. This is the basis of the famous Turquand’s case®- Our own decision in the case of Zambia Bata Shoe Company Vs Vin-Mas Limited® supports this principle. We said in this case: In practice most people dealing with companies rely on the rule in Turquand’s case and do not bother to inspect the articles. Applying the fiction of constructive notice both the vendor and the purchaser were aware of the need for a special J17 resolution and the binding contract for sale was entered into on that basis. The company’s authorized agents bound the company to comply with the contract and such liability cannot be avoided. In this instant case now before us we are not satisfied that the 2nd plaintiff acted with the authority given to him by the defendant company. He acted without authority hence his failure to produce evidence to that effect. It was not for the defendant company to prove that it had, in fact, not given him such power. Since this was a pleaded issue in its defence it was for the plaintiffs to have been on guard to prove that the 2nd plaintiff had in fact acted within the authority given to him. The defendant company adduced sufficient evidence through its witness who said the loan was not used for the purpose it was obtained. As he acted without authority from the company the loan agreement he entered into, purportedly on behalf of the defendant, was therefore ‘ultra vires’ and so it was not binding on the defendant. The trial Judge was therefore on firm ground when he so found. The plea of subrogation did not apply here and so it fails. The second issue of consideration is whether the defendant company benefited financially from the said loan. The loan was, according to the letter at pages 96 and 97, though objected to by the plaintiffs’ counsel, for the purpose of enabling the defendant company to secure some new machinery from India. The machinery J18 was never obtained. The plaintiffs have not shown any tangible benefit which the defendant company derived from the loan. The fact that the loan agreement was entered into by 2nd plaintiff, a director, purportedly on behalf of the defendant company, was not enough proof that the defendant company was bound by the agreement. It ought to have been proved that the defendant company benefited from such agreement though it was entered into without authority. In this case the agreement was entered into without authority and no benefit accrued to the company from the said contract. Why should the company be bound by such contract if we may ask? He who comes to equity must do so with clean hands, of which the 2nd plaintiff did not have. His acts were in complete breach of his fiduciary relationship with the defendant company. All in all we find no benefit that the defendant company enjoyed from the dubiously obtained loan by the 2nd plaintiff. We find no unfair or unjust enrichment which the defendant company enjoyed when it refused to repay back the loan under review. It is in fact the 1st and 2nd plaintiffs who were trying to obtained unjust enrichment from the defendant company. We do not therefore, agree with Mr Dudhia on this argument. Finally is the defendant company bound by the 2nd plaintiff's acts regarding this loan agreement? If it can be proved that the 2nd plaintiff had authority to enter into that agreement then the J19 defendant company shall be bound by it even if it did not benefit from the said loan. It would also be bound by the said contract if it (the defendant company) derived some benefit from the loan even if the 2nd plaintiff acted without authority. The trial court found that the defendant company was not bound because the 2nd plaintiff acted without authority. This was a finding of fact which this court cannot lightly over turn. D. W.l Nallan Chakravarty Narasimhan, the Financial Director of the defendant company from June, 2002, when the defendant company was bought by Kumul Holdings Limited, stated that the US$100,000 was not applied for the purchase of machinery or as working capital. It was instead applied to liquidate the obligations of Sable Combined UK Limited and Sable Combined Zambia Limited to HSBC Equator Bank Limited. We are therefore, unable to see any benefit the defendant company enjoyed from the said loan. This is the more reason why we said the plea of subrogation for which argument the authorities cited from the learned authors of the Halsbury Laws of England Volumes 16 and 20 all of 4th Edition, were cited but cannot be sustained in this case. The reasons why we say it cannot be sustained are as follows: Firstly, the second plaintiff acted without authority from the defendant company to act on its behalf even if the loan was obtained in its name. Secondly the loon facility did no benefit the defendant company in any way. In the final analysis the 2nd plaintiff’s acts in this case were “ultra vires.” We therefore, find no legal or justifiable ground upon which we can reverse the lower Court's judgment in this matter. On the contrary we find that it was well supported by the evidence on record and so we find no merit in the entire appeal. The appeal is dismissed with costs. In default of agreement the costs shall be taxed. D. M. Lewanika DEPUTY CHIEF JUSTICE LP. Chibesakunda SUPREME COURT JUDGE C. S Mushabati SUPREME COURT JUDGE