STEPHEN MAHENDEKA MGANGA VS BEST WAY CAPITAL MGT LTD MISC

IN THE HIGH COURT OF THE UNITED REPUBLIC OF TANZANIA (COMMERCIAL DIVISION) AT ARUSHA MISCELLANEOUS APPLICATION NO. 2779 OF 2024 (Originating from Commercial Case No. 03 Of 2022) BETWEEN STEPHEN MAHENDEKA MGANGA.................................APPLICANT VERSUS BEST WAY CAPITAL MANAGEMENT LIMITED........RESPONDENT RULING Date of last Order: 16th May, 2024 Date of Ruling: 20th May, 2024 GONZI, J. The brief facts of this case can be gathered from the affidavit in support of this application sworn by the applicant, Stephen Mahendeka Mganga. The Applicant was the Decree Holder in Commercial Case No.03 of 2022 whose judgment was delivered on 26th May, 2022. The Court pronounced Default Judgement following non-appearance of the defendant in that case. This can be substantiated by the Default Judgment which forms "Annexure Ml" to the Affidavit in support of the Application. Through the i decree issued on 26th May 2022 attached as "Annexure M2" to the affidavit, the the court awarded the applicant a total sum of TZS.138,350,000/=. This sum was made up of TZS 100,000,000/= as the trading capital invested by the applicant in the respondent Company;. TZS 33,550,000/= as return benefits on the investment of the TZS 100,000,000/= which was invested from December,2021 to May 2022; and TZS 5,000,000/= as damages for inconveniences suffered by the Applicant. The applicant stated in his affidavit that he has made several efforts to demand payment of the decretal sum from the Respondent but that the respondent has refused or neglected to pay him at all. In the circumstances the applicant decided to institute the present application to lift the corporate veil of the Respondent Company in order to make its Directors liable to satisfy the decree personally and enable the applicant get his rights under the decree. That was all from the affidavit of the applicant in support of this application. In the chamber summons the applicant filed this application against the respondent under Order XXI Rules 9,10 (2) (j) (iii), 28, 35(1), (2), 36 and Section 95 of the Civil Procedure Code Cap 33 R.E 2019 praying for the following orders: - (i) That this honourable court be pleased to lift the veil of incorporation of the respondent /judgement debtor. 2 (ii) Costs to be provided for. (iii) Any other relief(s) as the court may deems fit and just to grant. Upon futile attempts to serve the Respondent, on 6th March 2024 the court ordered the applicant to serve the respondent via substituted service by way of publication through Newspaper. The Applicant managed to serve the respondent by way of substituted service through Mwananchi Newspaper dated 1/04/2024. The hearing proceeded exparte the Respondent. The application was argued orally on 16/05/2024 whereby the applicant was represented by Miss. Upendo Msuya, learned counsel whereas the respondent was absent and the application was proceeding exparte against the Respondent. Ms. Upendo Msuya, learned advocate, adopted the affidavit sworn by Mr. Stephen Mahendeka Mganga who is the applicant and prayed for it to form part of her submissions. She submitted that the applicant is applying for the court to lift the corporate veil of the Respondent company (Judgement Debtor) as well as costs of the application and any other relief the court deems fit to grant. Ms. Msuya submitted that the applicant is applying to lift the corporate veil of the respondent company so as to arrest its directors in an attempt 3 to compel them to personally satisfy the default judgement in Commercial Case No.03 of 2022 which was passed against the company on 26/05/2022. The learned advocate for the Applicant submitted that the applicant has made efforts to execute the decree but all have failed as the respondent company has closed its offices and some of its directors have migrated to Dubai the UAE. She argued that in previous efforts, the Applicant attempted to execute the decree by way of garnishee order, to attach a bank account of the respondent company and managed to secure a garnishee order nisi on 25/02/2023. However, it was subsequently proved in court that the bank account attached which was under the name of "M- Pesa Trust Fund" was not of the Respondent and that the Respondent was not a beneficiary thereof and had no interest although the Applicant had used the same account to deposit the TZS 100,000,000/=. The learned counsel submitted further that the other efforts done by the applicant include tracing the properties of the respondent company in order to attach them but no property of the respondent has been found. She submitted that the Applicant has now discovered that the respondent is running Bit Coin business in Dubai. She submitted further that upon search at the office of the Registrar of Companies at BRELA, the applicant 4 has discovered that there are some directors and shareholders of the Respondent company who are in Tanzania. Ms. Msuya concluded that the applicant believes that if the veil of incorporation is lifted, the applicant will get access to the managing director of the Respondent Company in Dubai and or the other directors who are in Tanzania. The learned counsel pleaded that lifting the corporate veil and making the directors and shareholders of the company personally liable is the only way that remains available to the applicant to get back his decretal money that he invested in the Respondent Company. After hearing the submissions made by the learned counsel for the applicant as well as reading and analyzing the affidavit in support of the application, the pertinent issue for determination is whether the applicant has managed to establish the special conditions warranting lifting of the corporate veil of a company as per the evidence presented in the affidavit in support of this application? I revisited the law applicable to lifting the veil of incorporation of a company in Tanzania. In Salute Finance Limited versus Rex Energy Limited and 2 others, (Misc. Commercial Application No. 193 of 2023, High Court Commercial Division at Dar es Salaam) this Court pointed out that: 5 The most common grounds for judicial lifting or piercing the veil are fraud, where the company is a sham or facade, instrumentality rule, alter ego doctrine, concealment and evasion. The Court of Appeal of Tanzania in the case of Millicom Tanzania NV versus James Allan Russels Bell and Others, Civil Reference No.3 of 2017 [2018] TZCA 355 held that: "We are aware that, piercing the veil entails looking behind the person in control of the company not to take shelter behind legal personality where fraudulent and dishonest use is made of the legal entity." The question is whether the applicant has established any of the grounds commonly relied upon to lift the corporate veil of the company? In the affidavit as well as in the submissions by the learned counsel for the applicant, none of those grounds was disclosed or argued. For example, the test for fraud in civil cases was restated by the Court of Appeal of Tanzania sitting at Dar es Salaam in Ebony and Co. Limited versus Watumishi Housing Company Limited, (Civil Appeal No.29/2021) where it was held that: We are also fortified on this by the fact that despite the allegations of fraud fronted by the appellant, there is nowhere the particulars of such 6 fraud have been provided nor any evidence led to prove it. It should be noted that fraud imputes a criminal offence whose proof ought to be above the requirements in civil cases that is on balance of probabilities. In the case at hand there is not even a mention of fraud in the affidavit, leave alone particulars thereof being provided. In the decision of this Court in Sheikh Hashim Mbonde versus Tip top Connection Company Limited and another, Misc. Civil Application No. 467 of 2022 decided by the High Court (Hon. Chuma, J.) the court pointed out the conditions for lifting the corporate veil that: "The first one is the company is a mere instrumentality or alter ego of the shareholder or director in question such that there is such unity of interest and ownership that one is inseparable from the other. The second condition is that the facts must be such that adherence to fiction separate entity would have, under no circumstances, sanction a fraud." I have passionately read the affidavit in support of this application sworn by Mr. Stephen Mahendeka Mganga r/sai//sthe oral submissions made by the learned counsel for the applicant. It is obvious that the applicant's affidavit in support of the application is scanty and bankrupt of any 7 relevant facts to substantiate any of the established grounds for lifting the corporate veil of a company. Many details came through the oral submissions of the applicant's counsel from the bar. Most of what the learned counsel submitted from the bar is not even stated in the affidavit of the applicant. I find such submissions are mere statements from the bar which do not amount to evidence. This principle has been followed in various cases including Fatuma Idha Salum Vs. Khamis Said (2004) TLR 423; Makori J.B Wassaa and Joshua Mwaikambo & Another (1997) TLR 88; Tina & Co. Limited and 2 Other Vs. Eurafrican Bank (T) Ltd Now known as BOA Bank (T) Ltd, Civil Application No. 86 of 2015 (CAT-unreported). The rule is that arguments and submissions by an advocate in court cannot be a substitute for evidence. A similar stance was taken by the Court of Appeal of Uganda in the case of Trasafrica Assurance Co. Ltd Vs. Cimbria (E.A) Ltd (2002) E.A cited with approval by the Court of Appeal of Tanzania in the case of Tina & Co. Limited and 2 Other (supra) where the court held that as it is well known a statement of fact by counsel for the parties is not evidence and therefore, the court cannot act on it. Traversing my way along the same footsteps of the above cited decisions, I desist to act on mere statements by the learned counsel from the bar. The sympathetic but unsubstantiated tale by the Applicant's counsel 8 cannot form basis for court's decision. The court needs cogent facts and evidence to rely on as the basis for its decision. For example, the Applicant's counsel from the bar alleged that the respondent company has closed its offices, that the Managing Director has migrated to Dubai and that there are some shareholders and directors of the company who are still resident in Tanzania. These are factual allegations which the applicant should have proved by evidence in the affidavit. A list of company's directors and shareholders could have been obtained from the office of Registrar of Companies. Closure of company business and offices would also require some paperwork from the relevant offices. None of them was brought forth in the affidavit. I hasten to say that even if the Applicant had brought evidence of closure of the respondent company's office, or of migrating from one country to another by a director or shareholder, that evidence perse would not have justified lifting the corporate veil. That would not have amounted to a wrong-doing at all and thus it could not have justified lifting the corporate veil unless one or more of the grounds for liting the veil could have been substantiated by cogent evidence. The most common grounds for judicial lifting or piercing the veil are fraud, where the company is a sham or facade, instrumentality rule, alter ego doctrine, concealment and evasion. By a director or shareholder of a company traveling or even migrating to another country, it does not 9 necessarily mean that the company is thereby evading its liability to pay its debts unless cogent evidence is brought to substantiate that intention and until that action can trigger off one or more of the established grounds for lifting the veil. A person is not bonded to stay in one country simply because his company is indebted. When a person does business with a company he does not thereby do business with the individual persons who own or run that company. A company is a separate person distinct from its shareholders and directors. The debt incurred by the company attaches to the company and not to its shareholders or directors personally, unless the veil is lifted for that purpose, upon proof of the existence of the legally established grounds for lifting the corporate veil. Looking at the affidavit in support of this application, the applicant ventured more on explaining how he obtained the decree in Default Judgement in Commercial Case No.3 of 2022 and that the respondent has so far refused to honour the said decree in that case. The applicant was supposed to provide cogent evidence in the affidavit which could enable the court to draw the necessary inferences on existence of the grounds for lifting the corporate veil. Evidence establishing those grounds was necessary for the court to draw the necessary inferrences. In the book "Analysis of Evidence" by Terrence Anderson and others, published in 10 2005 by Cambridge University Press, the learned authors state at page 80 that: 'Everyone draws inferences from evidence. The dog barks, you infer that someone is approaching the house; a loud horn sounds behind me, I infer that the driver behind me is impatient or angry; there are dark clouds over head, foot prints in the sand, lipstick on the shirt, fingerprints on the steering wheels of a stolen car. All tell tales. Inferential reasoning is a basic human skill." In the case at hand, the court needed cogent evidence on which it could draw the necessary inferences and conclusions on existence of fraud, the company being a sham or facade, the company being used as a mere instrumentality or alter ego, concealment or evasion. In the case at hand such evidence is conspicuously missing. The applicant's learned counsel told this court in her statement from the bar that the applicant has made efforts to enforce the decree including applying for a garnishee Order Nisi dated 25/04/2023 by attaching a bank account of the respondent company but the effort ended in vain after it was discovered that the respondent company was not a beneficiary in that account which was in the name of M-Pesa Trust. I do not see any wrong­ doing there on the part of the Respondent company or its shareholders or directors as to make them personally liable for the debts of the ii company. The fact that the court lifted the garnishee order nisi over the bank account of a stranger to the decree, proves that the alleged effort by the Applicant was erroneous. It doesn't show any cunningness by the Respondent company or its shareholders. The fact that the applicant has made so many futile efforts to trace the assets of the respondent company but in vain, is not one of the grounds for lifting the corporate veil in the absence of a wrongdoing by the directors or shareholders of the company. Lack of assets by the Respondent Company was relied upon in this case, that since the Respondent company has no assets registered in its name, then the shareholders and directors of the Respondent company should personally bear the duty to satisfy the decree passed against the Respondent company. This is unjustified in the law relating to lifting the corporate veil of a company. The words of Hon. Chuma, J., which words I fully subscribe to, in the Sheikh Hashim Mbonde's case (supra) are still ringing in my mind that: The mere fact that the applicant cannot trace the properties of the company cannot constitute exceptional circumstances. There must be tangible evidence to prove that the respondent director was involved in concealing the properties of the company and that he was acting as an alter 12 ego or agent of the company and hence inseparable from it. Actually, the Applicant has himself to blame for the situation he has found himself in with regard to his investment in the respondent company. The Applicant could have made himself a secured creditor by entering into a debenture agreement with the company at the time of entering into the contractual relationship by which he invested his Tshs.lOO,OOOzOOO/= in it. The Applicant could have demanded a personal guarantee by the Company's directors before entering into the investment agreement with the respondent company. The Applicant could have made use of the annual returns and accounts filed with the Registrar of Companies, to know the financial position of the respondent company, before risking his investment. In other words, the alleged efforts done by the Applicant after obtaining a decree against the respondent company, prudently, ought to have been made prior to entering into the agreement with the company and investing his Tshs. 100,000,000/= in it. That the Applicant opted to enter into the contract with the company as unsecured creditor, which means that he assumed the risk which is facing him now. Much as the court is desirous to see that its decrees are executed and decree holders get paid their decretal sums, the court cannot go to the extent of violating all the established legal principles just to ensure that the decree is satisfied 13 by whoever the Decree holder may wish to impose upon the obligation to satisfy the decree. When the shareholders chose a limited liability company as the mode of doing their business, they consciously and deliberately sheltered themselves personally from the risks of their business. One of such risk is the liability incurred by their business towards other persons in the course of doing business like the judgment and decree in this case. Lifting the corporate veil of their company and making them personally liable for the debts of their company for no wrongdoing on the part of the shareholders or directors, would be a purposeless cruelty and a legal deception to them. It would make the corporate veil accorded by the Companies Act an illusion. An individual should know beforehand how he stands as against the law so that he can organize his affairs accordingly. If the law becomes un-predictable, then it will fail in one of its key purpose namely social control. Shareholders and directors of a company decide to trade under the limited liability company on the understanding that any risks attributed to the business will not be personally incurred by them so long as there is no wrong-doing on their part that would lead to the lifting of the corporate veil. When a company operates as a limited liability company, it doesn't mean that such a company cannot incur liabilities or debts. It only means that where such liabilities and debts are incurred, absent any wrong doing on the part of 14 the shareholders and directors, the liabilities and debts attach only to the company as a fictious legal person and that the liability of the members of the company is limited to the extent of their un-paid up shares only. When a company is formed, the word "Limited” forms part of the company’s name. The use of the word "Limited" in the companies' names was originally required as a warning to those doing business with the company that the liability of those involved with the company did not have an unlimited extent. The incorporation of the subscribers into a limited liability company normally takes place firstly in the form of the Memorandum of Association of a company. This is the agreement of the subscribers interse accepting to be constituted into a limited liability company pursuant to the mutual agreement and covenants entered with each other as reflected in their memorandum of association which is essentially an agreement or contract binding the subscribers towards each other and towards the company on the other hand. Section 18(1) of the Companies Act, Cap 212 provides that the memorandum and articles shall, when registered, bind the company and the members to the same extent as if they respectively had been signed and sealed by each member. The memorandum of association contains covenants on the part of each member to observe all the provisions of the memorandum and of the articles. It is the registration 15 of the memorandum and articles of association by the Registrar of Companies which marks the birth of a company as an independent legal entity distinct from its subscribers. This is reflected under section 15(1) and (2) of the Companies Act Cap 212, which the Applicant also has cited as one of her enabling provisions in support of the application at hand. The section provides: S. 15.-(1) On the registration of the memorandum of a company the Registrar shall certify under his hand that the company is incorporated and, in the case of a limited company, that the company is limited, and, in the case of a public company, that the company is a public company. (2) From the date of incorporation mentioned in the certificate of incorporation, the subscribers to the memorandum, together with such other persons as may from time to time become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as provided for in this Act, (underlining suppled). 16 When the company is formed (i.e. incorporated) a new legal person is thereby created. That legal entity has all of the attributes of an individual - a human, except that the company attains maturity on its birth. There is no period of minority - no interval of incapacity. Just like a natural person, the company can own property; buy, sell and own land and any other asset such as shares; just like an individual it can sue and be sued; when legal threats are made, they are made against the company. When legal claims are made, they are made by the company. The company can borrow money: i.e incur debts. If the company is wound up, at that point the shareholder who has not paid for his shares must pay the total amount due for the unpaid up shares. That is the amount and extent that the shareholder is liable to pay if it all goes wrong for the company. The concept of separate legal personality is not eroded, even if the shareholders and directors of the company are the same persons. The concept of limited liability is the concept that gives rise to - or is - the corporate veil. Creditors of the company are not able to recover debts from the personal assets of the shareholders, directors, or employees. They must recover them from the assets of the company, and the company alone. I repeat, in order for the court to lift the corporate veil and make shareholders and or directors personally liable for the debts of their 17 company, enough evidence must be presented to activate the known grounds for lifting the corporate veil. It must be remembered that lifting the veil is the exception and not the rule. The Applicant ought to prove why the general rule should be abrogated and how does he fit under the established exceptions under which a corporate veil can be lifted. Whereas section 15(1) and (2) of the Companies Act, Cap 212 accords the subscribers of the company the status and privilege of corporate veil, the applicant in the case at hand is seeking to move the court to disregard such corporate veil, lift it and make the undisclosed directors and shareholders of the respondent company personally liable for the satisfaction of the decree which was expressly passed against the Respondent company alone. The question is whether it is justifiable to allow that application for the reasons disclosed by the applicant in his affidavit in support of this case? In my settled decision, this application fails for lack of evidence to substantiate the existence of the special circumstances for lifting the corporate veil in law. Looking at the application carefully, there is another glaring defect that at any rate would have defeated the application at hand even if the applicant had managed to substantiate the requirements of lifting corporate veil. The application at hand is made against one respondent only namely the Respondent company which is the actual judgment debtor. The alleged 18 Directors and shareholders against whom the order is sought, to make them personally liable to satisfy the decree passed against the company, have not be impleaded in this application. The pertinent questions are: who are the directors of the respondent company against whom the order is sought? Who are the shareholders of the company against whom the order is sought? Who is the alleged Managing Director of the Respondent Company who has allegedly migrated to Dubai and thus the applicant wants to trace and make him liable to satisfy the decree passed against the company? How can an effective court order be passed against strangers to the case? How can an adverse order be made against persons (un-pleaded directors and shareholders) without affording them the right to be heard? It seems the applicant in this case wishes to secure a blank cheque of an order to lift the corporate veil of the respondent company, without specifying the names and details of the persons it is sought to attach on, so that he can himself fill in the blanks as and when need arises by slapping the decree upon persons whom the applicant himself considers fit! That would be a very dangerous move and gross abuse of the judicial process. I am not prepared to venture into that avenue. If the applicant has cogent reasons to substantiate an application for lifting the veil in order to execute his decree, he should follow the dictates of the law by impleading the correct persons and substantiating his allegations 19 by cogent evidence of their misconducts thwarting execution of the decree, so as to justify the imposition of personal liability on them. Without cogent evidence, the court will not have the basis or reasons for its decision. The court should always be a neutral forum for administration of justice according to the law and evidence available without sympathy or prejudices. All said and done, the application at hand fails and I hereby dismiss it. I make no order as to costs since the matter proceeded exparte. Ruling is delivered in court this 20th May 2024 in the presence of Ms. Upendo Msuya, learned advocate for the applicant and in the absence of the Respondent against who the matter proceeded exparte and who was notified through publication on a Newspaper. 20