School Outfitters Uganda Limited v Bahange and Others (Civil Suit 750 of 1997) [1998] UGHC 25 (2 July 1998)

Full Case Text

### IN THE HIGH COURT OF UGANDA AT KAMPALA

## CIVIL SUIT NO,750 97

SCHOOL OUTFITTERS (U) LTD PLAINTIFF VERSUS 1. JENNIFER BAHANGE ] [ 2 . RWANYINDO ] [■ DEFENDANT 3 . PAUL BATANIZI ] {

# mw grows

The Plaintiff*,* a limited liability company brought these proceedings against..the Defendants for the following reliefs:-'

- (a) A declaration that the sale agreement is null and void. - (b) An order that the Defendants return the Plaintiff's machinery. - (c) In the alternative. but without prejudice to - (a) that the Defendants the Plaintiffs 20,000,000= ' that is. the real value of the machinery. an order to pay - (b) Costs of the suit - .(c) any other relief which the Honourable Court deems expedient.

## (d) Loss of earnings.

1997,- the Defendants induced Mrs Monica Erapu the Managing Director to' enter into an agreement for the sale of the Plaintiff's1 Industrial Sewing Machines. The said Monica Erapu had no powersto sell the Plaintiff's property without the Plaintiff's authorization signified by the a resolution. By the articles of I fer any business to be lawful a quorum.had to be realised. Since there was no quorum the said. Monica Erapu had no legal stand to sell the Plaintiff's property and the subsequent agreement was null and void. The Plaintiff / also contented that the Defendants failed or neglected to carry out a search in the Company Registry to ascertain whether or not the said Monica Erapu had power to sell the Plaintiff's property. That the Defendants were fixed with constructive notice of the Plaintiff's Memorandum and Articles of Association, the said documents being Public Documents. Finally the Plaintiff's I contended that the Machinery was grossly under valued, the realistic value being shs 20 million. Association of the company, The case for the Plaintiff is that on 11th July,

the that the said Monica Erapu at all times held herself out as Managing Director of the Plaintiff which the Defendants jointly believed and the managing Director is empowered under the Articles of Association to carry out and manage all business of the Plaintiff on behalf of the Directors. The Defendants also The Defendants filed a written statement of defence denying all allegations contained in the Plaint and averred and contended

powers which they did. and averred that upon taking possession of the Industrial sewing machines in question, the Defendants legally acquired ownership *I* on or about the 11.7.97 and the Plaintiff is only entitled to the balance due and owing under the sale. That on about the 24.7.97, the Defendants transferred the said sewing machines to Uniform Manufacturers and Distributors (U) Limited who acquired lawful ownership thereof. On the 30.7.97 the said Monica Erapu demanded in writing for payment of the balance of the purchase price by cheque not later than or to the Plaintiff's lawyers a Greenland Bank cheque No.2116626 dated 14.8.97 drawn in favour of the Plaintiff in the sum of Shs. 1,600,000/= being the balance returned the said cheque unpaid to the Defendants on the 19.9.97. The Defendants contended and averred that they are ready and the purchase price, that is Shs.1,600,000 to the Plaintiff. contended that they were under no obligation to inquire into the and appointment of Monica Erapu as Managing Director beyond ascertaining the general powers of a Managing Director of the Plaintiff, which they did. The Defendants further contended 14.8.97 the Defendant forwarded 15.9.97 and on willing to pay the of the purchase price, but the Plaintiff through its lawyers about the balance of

agreed upon for court's determination:-' the following issues were of the trial, At the commencement

**Whether the Managing Director of the Plaintiff company 1) agreement invalid. had no authority to sell, thereby rendering the**

*\** 4

- **2) If Managing Director's lack of authority to sell. so, whether the Defendants had notice of the** - **3) What are remedies are available to the parties.**

Both sides to the dispute called 1 witness each. The Plaintiff called Mrs. Mary Tiberondwa. She testified that she is one of the Directors of the Plaintiff Company. The other two Directors are Mrs. Monica Erapu and her She does not know the . 1st and 2nd Defendants. She knows the 3rd Defendant,Paul Bagamizi. He was employed by the Plaintiff a Marketing Manager. Mrs. Monica Erapu is the Managing Director and the chairman of the Plaintiff company. The ) Plaintiff company carries on the business of tailoring and retail of school uniforms. They had industrial sewing machines valued at Shs.20 million. . Their Managing Director sold the sewing machines to another company without their knowledge. They asked her to bring the machines back but she did not, agreement of sale (Exhibit P.l). Articles of Association of their company did not have a provision allowing the Managing Director to sell company property. She did not know whether the buyers had knowledge that the Managing Director had no power to sell company property. According to Article 86 of the Articles of Association of the Plaintiff company, the Chairman and the Secretary who is authorised to sign contracts on behalf of the company. They have sign together. not signed by the to Chairman and the Secretary, it was signed by Mr. Erapu alone as instead she The The sale Agreement was son, Denis Erapu. showed the witness an company as Ex. P.2 it is

**2) If lack of authority to sell. Managing Director's** so, **whether the Defendants had notice of the**

**3) available to the parties. What are remedies are**

Both sides to the dispute called 1 witness each. The Plaintiff called Mrs. Mary Tiberondwa. She testified that she is one of the Directors of the Plaintiff Company. The other two Directors are Mrs. Monica Erapu and her She does not know and 2nd • Defendants. She knows the 3rd Defendant,Paul Bagamizi. He was employed by the Plaintiff a Marketing Manager. Mrs. Monica Erapu is the Managing Director and the chairman of the Plaintiff company. The ) Plaintiff company carries on the business of tailoring and retail of school uniforms. They had industrial sewing machines valued . Their Managing Director sold the sewing machines to another company without their knowledge. They asked her to bring the machines back but she did not, agreement of sale (Exhibit P . 1) . Articles of Association of their company did not have a provision allowing the Managing Director to sell company property. She did not know whether the buyers had knowledge that the Managing Director had no power to sell company property. According to Article 86 of the Articles the Plaintiff the Chairman and the Secretary who is to sign together. not signed by tfe Chairman and the Secretary, it was signed by Mr. Erapu alone as instead she **c** The company, authorised to sign contracts on behalf of the company. They have The sale Agreement was showed the witness an son, Denis Erapu. at Shs.20 million. of Association of company as the*.* 1st Ex. P.2 it is

Managing Director. The Board of Directors never authorised the Chairman to sign. They do keep a copy of the Memorandum and Articles of Association at their office where the sale agreement I was signed. She is the Secretary. Article 75 authorises the 4 Managing Director to conduct business on behalf of the company. Mrs. Monica Erapu as Managing Director, was authorised to carry out the day to day business of running the company. Article 75 does not authorise her to sell company property. It is possible under the Articles, Chairman who is not a Managing Director, the two posts are different. Under Article 91 the Directors could vest their power in the Managing Director. In this case, the Directors did not vest their power in the Managing Director to sell the machines. She wants court to nullify the sale agreement and return the machine to the plaintiff. to have a

He and Distributors (U) Ltd. He knows the Plaintiff company and he had a deal with it. On the 11.7.97, the Managing Director offered for sale sewing machines.. He accepted her offer and signed a sale Agreement, (Exh. D.l) . shillings. The agreement provided for payment by instalment. The cash. A cheque for the balance of Shs. 1.6 million was sent to the Plaintiff's lawyers by the Defendant's lawyer; but the Plaintiff's lawyers refused to accept payment. He worked with the Plaintiff company for 4 years as a Marketing Manager. His work involved marketing the items in the shops and other things the Managing Director would direct them to sell. The which The Defendants called one witness, Paul Bagamizi "DWI" first instalment of Shs. 5.3 million was paid to Mrs. Erapu in The sale price was 6.9 million testified that he is working with Uniform Manufacturers

**4** Managing Director, Mrs. Erapu had powers to sell on behalf of the company. She conducted business oij behalf of the company. She could sign cheques. He did not know of any dispute surrounding the sale of the machines. After buying the machines, they sold the machines to another company called Uniform Manufacturers and Distributors (U) Ltd; of which he is the Chairman. He knows that the Plaintiff company was operating in accordance with of Association. He knew that Mrs. Erapu as Managing Director could only do those things which the articles authorised her to do. At the time he bought the machines, he did not check the Memorandum and Articles of Association whether Mrs. Erapu had powers to sell. He was aware that there was a Board of Directors. When he was buying the machines, Denis Erapu and Mary Tiberondwa were not present. He did not ask her to bring all her colleagues because he knew that she had the powers as Chairman and Managing Director to sign contract on behalf of the company. They sent the cheque through their lawyers because they had begun to mistrust Mrs. Erapu after she went to their premises and rudely removed her cutting patterns which they were using and demanded for the balance immediately. She was always selling items, thing. She sold cupboards one time. She would sell any its Memorandum and Articles

On the first whether the Managing Director ofissue, the Plaintiff company had no authority to sell, thereby rendering the agreement invalid, Mr. Byaruhanga, counsel for the Plaintiff whilst admitting that Mrs. Monica Erapu was both Managing Director and Chairman at the time of sale, submitted that the

rosts same parts were different and for each capacity, she had different powers, which are outlined in the Memorandum and Articles $\quad\texttt{of}\quad$ Association Ex. P.2. That the Articles of Association clearly distinguish what is day today business to be managed by the Managing Director and what is not day today business and has to be attended to by the Chairman. That Article 86 is very clear, the Chairman is the Chief Executive of the company; and when it comes to signing documents like deeds mortgages, bonds, contracts or other instruments, it is the Chief Executive to sign, and he has to sign either with the Secretary, or any other proper officer of the company. Counsel submitted further that, to interpret the Articles to mean that the Managing Director can execute a contract, deed or any other instrument such as the one in question alone would be to make the Articles absurd, because clearly, the company intended that for such transactions, there should be two signatories. Counsel argued further that such instruments as the one in question are so important that the company intended to guard against possible He referred to the text book entitled "Company Law in fraud. Uganda" by D. J. Bakibinga at page 71 for the proposition that "since Articles of Association are regarded as a business document, they should be interpreted where possible so as to give them reasonable business efficacy". That since the company could not foresee every possible misdeed of its officers, it there is specific article that expressly prohibits the Managing $n^{\circ}$ Director from selling sewing machines, but it is sufficient that the articles of the Plaintiff company spell out what the Managing Director can do, and what the Chairman can do, and whoever does

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what he cannot do under the articles has no authority to do so. 3

On the second issue whether the Defendants had notice of the Managing Director's lack of authority to sell learned counsel for the Plaintiff submitted that there is ample evidence that such notice did exist. First of all, it is trite law that the company or public *I* documents under S . 388 of the companies Act, and are inspection by the public. Secondly, counsel argued, apart from the fact that the Defendant have only selected those articles that would appear to give the Managing Director power and ignored those that show that she had no power, that is article 86, the *I* Defence is based On ostensible authority, counsel submitted that there was no basis for the Defendants' belief that the Managing Director had ostensible authority because it appears that the witness DW1 Paul Baganizi lied about the previous sales. That the case of Emco PLASTCA Ltd. is distinguishable from the instant case because it is not known whether that company had a provision similar to Article 86 in instant case, and it seems there was no express limitation in that case. It is also clear from the evidence that the Defendants did not take any steps to assure themselves that the person they were dealing with had authority. Counsel S therefore submitted that the Managing Director having had no authority to sell and the Defendants having been on notice of such lack of authority, the sale agreement was valid and passed title to .the Defendants under Section 23 of the Sale of Goods. no Counsel relied on the case of VALLBHDS HIRJI KAPADIA Act. Memorandum and Articles of Association of a written statement of on those articles. open to

*f* VS. THAKERSEY LAXIMIDAS [1964] EA 378 for the proposition that a person who buys from one who has no authority to sell is merely a converter and that the property is reasonable. Counsel finally prayed Court to declare that the sale agreement was invalid, null and void; and that machines. The fact that they have already passed is no hindrance if the Court finds that the sale was invalid-. over on the Defendants be ordered to return the X

Mr. Nkuruzinza learned counsel for the Defendants submitted that the Sale Agreement Mrs. material times the Managing Director of the Plaintiff company. *I* Article 75 of the Plaintiff*'* s Memorandum and Articles of Association (Ex. P2) authorises the Managing Director to manage the business of the company.. These provisions are wide and only excluded those powers that Articles themselves, -required to be exercised by the company in a general meeting. The companies Act does not restrict the power to sell company property to.be exercised by the general meeting; neither do the Articles in Ex. P.2 . Counsel argued that the evidence of DW1 is to the effect that the Managing Director is authorised to carry out the day today business of the company, and that the Articles do not say that the Managing Director cannot not sell company property. If there is any restriction made by the Directors or the general meeting with regard to the type of property the Managing Director cannot sell, then it is a matter within the internal Management of the company. In any case counsel argued, the Plaintiff has not adduced in evidence any company resolution or appointment letter of the Managing are under the companies Act or the was valid. Monica Erapu was at all

Director wherein any restriction on the powers of the Managing company, would be guided by articles 75, 89 and paragraph 3 by the Memorandum and articles of Association which deals with the objects by the company. Paragraph 3(e) of the Memorandum states that the objects of the company are to manufacture, buy, sell, inter alia, commodities, articles and things of every description liable to be acquired in connection with the business of the I company. dispose of any personal property or undertaking of the company for the company thinks fit. It was counsel's submission that the sale of sewing machines was within the ordinary business of the company. DW1, Paul Bafanizi testified that he had worked for the Plaintiff company for four years, during which time the witness had the benefit of observing the1 Managing Director selling company property such as.clothes and old cupboards. Counsel submitted that it was sufficient for PW1 Paul Baganizi, an employee, to simply see how business was being conducted by the Managing Director. There was no obligation on his part to inquire into her powers or the manner in which she was conducting business. It was counsel's submission that the Plaintiff company, time, held out in the public that the Managing Director had authority to sell. It is immaterial authority or not. Ostensible authority is sufficient with regard to third'parties. Counsel also submitted that under Article 86 it was "He itself, over a period of Therefore any third party dealing with the 5 Director set out. Under Paragraph 3(c) the objects include to sell, or could be executed by a proper officer alone; the words are not\* mandatory for the Chairman to sign. Such contracts such consideration as whether she had actual

may sign with the Secretary counsel's submission that the Articles of Association of the Plaintiff company provided for possible where the Managing Director could conduct the business of the company alone. This J is envisaged in Article 91. Whether or not such powers are given to the Managing Director is an internal management matter. He PLASTICA INT. LTD. Vs. FREEBORN [1991] EA 432, where a Managing Director without the authority of the company, agreed upon the terms of service in a contract of service of a Secretary to the company who had been appointed by the Board. When the terms of the contract were breached by the company, the company claimed that the Managing Director had no authority. The Managing Director carried I *(* business of the company and the Articles of the company provided that the business of company would be run by the Managing Director. It was held by both the court below and the Court of Appeal that the Managing Director had ostensible authority and third party dealing with the company assume that there was authority on the part of the person behind &gt; the company. This is regardless of whether or not the articles resolution of the Board gave such powers. It was further held that even though the Secretary was an insider, he was not obliged to inquire whether or not the Articles of Association had been complied with. That the entering into a contract is a matter in which normally a Managing Director; would have power to act. Counsel submitted that the Emco PLASTCA case is on all fours with the instant case, and that facts of the instant case, the Managing Director had of Association or a referred to the case of Emco on the day today on the was entitled to or any other officer." that a It was

Moreover, the absence In the absence of express limitation of the Managing Director's powers, therefore, prayer that Court finds issue number one in favour of the Defendants. ostensible authority to bind the company. of the Managing Director from Court was crucial in establishing it was counsel's the scope of her powers.

On the issue of notice, learned counsel for the Defendants repeated his arguments for issue No. 1 and submitted that the only notice required was the Memorandum and Articles of Association and that there notice of the fact that the Managing Director had no authority to sell in the Memorandum and Articles of Association. The only remedy available to the Plaintiff therefore, is payment of purchase price which the Defendant has at all times been prepared to pay. He prayed Court to dismiss the suit with costs to the Defendants. was no

The first issue is, whether the Managing Director of the Plaintiff company had authority to sell. The answer to this issue is in the affirmative. Article 1 of the Articles of Association of the Plaintiff company incorporates one regulations contained in Table A. in the First Schedule to the companies Act, Cap 85 with modifications. Regulation 80 - 87 deals with the Powers and duties of Directors. Regulation 80 of Table 1 provides as follows:

> "80. The business of the company shall be managed by the directors, who may pay all expenses incurred in the promoting and registering the company, and may exercise

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a no / 0 that regulation has not been made". all such powers of the company as are not, by the Act or by these Regulations, required to be exercised by the company in a general meeting, subject, nevertheless, to any of' these regulations, to the provisions of the Act, and to such regulations being not inconsistent with the aforesaid regulations or provisions, as may be prescribed by the company in a general meeting, but regulation made by the company in a general meeting shall invalidate any prior act of the directors which would have been valid if

The words of Regulation 80 were used in Article 75 of the Plaintiff company except that the word line is substitution with the word Under Article 75 of the Articles of Association, therefore the management of the business of the company is vested in the Managing Director.. It is therefore correct as learned'counsel for the Defendants submitted, that the Articles gave the Managing Director very rude powers\*to manage the company. "Managing Director". "Directors" in the first

According to the testimony of both PW1 Mrs. Mary Tiberondwa, and DW1, Paul Bagamizi, Mrs. Monica Erapu is the Chairman and • Managing Director of the Plaintiff Company. It is not however clear how she was appointed, but Article 89 provides that the Directors may from time to time appoint one or more of their body the office of the managing Director, for such period and on• to such terms as they think fit. Article 91 empowers the Directors to entrust' and confer upon the Managing Director any of the powers exercised by them upon such terms and conditions, and with

such restrictions as they may think fit. No letter of appointment or Board resolution was tendered in court to indicate whether there were any restrictions imposed on the powers of the Managing Director, so it can be taken that the Directors vested all their power to manage the company under Table A Regulation 80 into the Managing Director modification of the said Regulation and incorporation of 75, without any restrictions. the same under Article

Article 86 empowered the Directors to elect a Chairman who is the principal executive officer of the company, and subject to the control of the Board of Directors, the Chairman7 s duty in general, company. Apart from chairing Board Meetings, he may sign, with the Secretary or any other officer of the company authorised by the Board, certificates of shares, deeds, mortgages,w bonds, contracts executed. Learned counsel for the Plaintiff contended that Mrs. Erapu had no powers authorization signified by a Resolution duly passed by the therefore, the subsequent agreement was null and void. With due respect to the learned counsel, this argument cannot stand in light of the testimony of. PW1 Mrs. Tiberondwa and DW1, Paul Both witnesses Mrs. Erapu is the DW1 the 4 years company and that there was no quorum to legalise the transaction, or other instruments authorised by the Board to be Baganizi. Managing Director and Chairman of the Plaintiff company. Paul Baganizi had the had the opportunity of observing her during he worked with the Plaintiff company as Marketing is to supervise and control all the business of the to sell the Plaintiff's property without testified that

Manager. managing the business of the company almost single handedly. One time she even The was managing the affairs of the company and had therefore authority to sell company property. on of the Managing Director to bid the Plaintiff company. The question as to whether the Articles of Association director to enter into a contract binding the company was not third party should have inquired, as long as he acted on the representation that the Chairman or director contract. It is immaterial whether Mrs. Erapu had authority to enter into the contract, The plaintiff company cannot repudiate the actions of the Chairman/Managing Director done within the scope of the ostensible authority. Thus a third party dealing with the company was entitled to assume that there was authority She could sell anything, sold the cupboards of the a matter into which a or a resolution of the Board empowered that Chairman or any other She was company. She could sign cheques. Plaintiff company therefore held out Mrs. Erapu as the person who had authority to enter into the the part

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The management and conduct • Company throughout the material period was in the hands of Mrs. Erapu. The Board of Directors, by their conduct helped to create this impression or belief in the minds of other persons who dealt with the company. The Defendants reasonably believed that Mrs had authority to enter into the contract as the matter of is Director and Chairman of the Plaintiff company. See EMCO x Erapu managing the business of the company and signing of the contract within the Articles of Association and she is the Managing of the business of the Plaintiff

within the scope of the ostensible authority of the Managing Director and let the Respondent obliged to enquire whether the Articles of Association had been complied with. The answer to the first issue also takes care of the second issue, that is whether the Defendants had notice of the lack of authority to sell. The Plaintiff company held out the the person who had authority not only to business of the but company to sell company property. contract was binding on the company as being made Managing Director as PLASTICA LTD VS FREBERNE [1971] EA 432 per Lutta J. A. where it was held that the even though an inside was not manage the

issue of remedies available to the parties, I have already held that the Managing Director had authority to sell the sewing machines in question; and that she had authority to sign a binding contract on behalf of the company therefore the sale agreement is valid. The prayer under paragraph 16 (a) is therefore denied. The prayer under paragraph 16 (b) is also denied since there is evidence that the said machines have already been transferred to a third party. On the

order that being shs. 20 million, no evidence was adduced in support of this figure, so I am unable to award it. In my view, the only way to establish the actual value of the machines is to have the machines valued. I accordingly make the following orders As regards the alternative prayer in paragraph 16(d) , that is an the Defendants pay the real value of the machines

- 1. hereof. a valuer within 7 days The Registrar is to appoint - 2. Pl and report to the Registrar within 7 days after his appointment. The valuer is to value the machines in Exp. - 3. If the actual value of the machines is higher than 6.9 million shillings, then the Defendant shall pay the actual value less 5,300,000/= already paid, within 30 days from the date of the report. - 4. Interest on (3) above will accrue after 30 days fromthe date of the report, at court rate, till payment in full. - 5. The parties are to share the cost of valuation on a 50 50 basis. - 6. Each party shall bear its own costs.

I so order.

S. M. Arach-Amoko Ag. Judge 2/07/98

expedient.