[2024] UGHC 775

# THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA AT ARUA **MISCELLANEOUS APPLICATION NO. 0028/2023** (ARISING FROM CIVIL SUIT NO. 0018 OF 2014)

$\mathsf{S}$

# NILECOM LIMITED::::::::::::::::::::::::::::::::::::

#### **VERSUS**

#### 1. KODJO ENTERPRISES LIMITED 15 2. RICHARD EDEMACU 3. SCHOLASTICA EDEMACU::::::::::::::::::::::::::::::::::::

#### BEFORE HON. JUSTICE COLLINS ACELLAM

#### **RULING**

#### **Brief Introduction**

This is an application brought by way of Notice of Motion under Section 20 of the Companies Act, Section 33 of the Judicature Act Cap 13, Section 98 of the Civil 25 Procedure Act Cap 71 as amended and Order 52 rules 1 and 3 of the Civil Procedure Rules SI 71-1 for orders that;

> 1. The corporate veil of incorporation of the $I$ ^st Respondent company be lifted to enable the Applicant commence execution proceedings against the $2^{nd}$ and $3^rd$ Respondents as shareholders of the 1^st Respondent for the enforcement of the decree in High Court Civil Suit No. 0018 of 2014.

## 2. The costs of this application be provided for.

# 35

#### Background

It is contended that on 15^th September 2014, the Applicant filed Civil Suit No. 0018 of 2014 against the 1^st Respondent for recovery of Ugx 135,682,485/= (Uganda Shillings One Hundred Thirty-Five Million six hundred eighty-two thousand four hundred eightyfive shillings only), interest thereon and costs of the suit. On the 15^th of March 2018, 40 judgement was entered for the Plaintiff against the Defendant for ugx $117,682,485/$ = as the principal sum owed, ugx $101,762,010/$ as general damages, interest on the two at 8% per annum from the date of judgement until payment in full and costs of the suit and of the counterclaim. On 9^th July 2018, the Applicant filed TA No. 0051 of 2018 for 45 taxation of the Plaintiff's Bill of Costs and it was taxed and allowed on 21^st January 2019 at ugx 38,227,000/= by the D/Registrar of this Court. The Applicant then filed MA No.

0057 of 2019 for execution of all the orders of the decree in Civil Suit No. 0018 of 2014, mode of execution was by way of arrest and detention. On 28^th November 2019, the D/Registrar of this Court issued a Warrant of Arrest for the 2^nd Respondent and signed

a Warrant of Committal of Judgement Debtor to Prison. On 3^rd December 2019, the 2^nd 50 Respondent filed MA No. 0095 of 2019, an application to be released from civil prison and the warrant of arrest issued against him to be cancelled, which was allowed and

**ABA**

granted on 4^th December 2019. The Applicant now brings this application seeking Court $\mathsf{S}$ to lift the corporate veil of incorporation of the 1^st Respondent company to enable the Applicant to enforce the decree in High Court Civil Suit No. 0018 of 2014.

# Grounds of the Application

The grounds on which this application is based on, are stated in the affidavit of Mr. 10 David Mutabanura, the Managing Director of the Applicant. The affidavit of Mr. David Mutabanura deponed on 23^rd February 2023 states that the 1^st Respondent company is nothing more than a sham established by the 2^nd and 3^rd Respondents to hide behind it so as to avoid recognition. The 2^nd and 3^rd Respondents acted fraudulently as a different

- company held the franchise for Moyo district which they purported to sale to the 15 Applicant. The 2^nd and 3^rd Respondents further acted fraudulently by failing to produce the consent of MTN for the transaction and providing proof of the net monthly earnings from the franchise and to hand over the shop in Arua. The 1^st Respondent company is nothing but a sham and a brief case company without any assets and is used by the 2^nd - and 3^rd Respondents to dupe the Applicant to part with its physical scratch cards and 20 electronic airtime for no consideration at all. The 2^nd and 3^rd Respondent being the mind and shareholders of the company ought to be made personally liable for such fraud. The $2^nd$ and $3^rd$ Respondents hold assets in their names that they have kept away from the company to evade liability.

The Applicant contends that this is a proper case where it is appropriate to lift the corporate veil of the 1^st Respondent company and allow the Applicant to take out execution proceedings against the $2^nd$ and $3^nd$ Respondents for recovery of the sums due in the decree.

#### 30

# Grounds in Opposition

In opposition, the 2^nd and 3^rd Respondents in their affidavits deponed on 4^th April 2023, they contend that there was no fraud or fraudulent misrepresentation in the purchase agreement on the part of the company or the Directors that's why the parties successfully 35 carried on with business after the signing from January 2012 till around November 2014. The only disputed amount between the parties was ugx 135,682,485/= which eventually became the subject matter in Civil Suit No. 0018 of 2014 in Arua High Court. That the 2^nd and 3^rd Respondents did not in any way incorporate the 1^st Respondent company as a cover, sham, cloak and mask to hide from liability and responsibility. Ever since the 40 company was incorporated in July 2000, it was involved in reputable business of selling MTN products and has never been involved in any illegal or unlawful or inappropriate or fraudulent business. The 1^st Respondent company duly paid all her taxes and there is no fine or demand put by Uganda Revenue Authority for tax evasion or failure to pay taxes. There was no cause of action pleaded and proved by the Applicant against the 1^st Respondent company for fraud and the allegations of fraud now made against the 2^nd 45

- and 3^rd Respondents are just an afterthought by the Applicant after failing to execute the Court judgement and decree in HCCS No. 0018 of 2014 against the 1^st Respondent company who is currently facing serious financial challenges. The Applicant only sued the 1^st Respondent as the only Defendant in Arua High Court Civil Suit No. 0018 of - 2018 and judgement was entered only against the 1st Respondent Company thus the 50 decree should be enforced against it only which is not wound up or dissolved to date. That the properties the 2^nd and 3^rd Respondents have acquired are not out of the 1^st

$\mathcal{N}^{\mathcal{O}}$

$\mathsf{S}$ Respondent company business and assets but from the proceeds as a secondary school teacher and a farmer. The Respondents conclude that this application be dismissed with costs.

# Grounds in Rejoinder

- In rejoinder, the Applicant refutes the assertions by the Respondents, the content therein 10 is false and amounts to a belated attempt to mislead the Court. The 2^nd and 3^rd Respondents are husband and wife who registered property in the 2^nd Respondent's names and used it as security for credit facilities to make assets unreachable to by its creditors. The 2^nd and 3^rd Respondents' conduct of carrying on business in the name of - the 1^st Respondent and failing to pay the 1^st Respondent's creditors constitutes an 15 improper conduct entitling the Court to lift the corporate veil and enable the Applicant to execute the decree against them and realize the fruits of litigation. The execution of the decree of this Court in HCCS No. 18/2014 is not complete, the 1^st Respondent despite over 20 years of existence has no known asset in its name and the 2^nd and 3^rd - Respondents are using the 1^st Respondent's corporate veil to defeat the execution process 20 and render the decree nugatory.

# Representation

During the hearing, the Applicant was represented by M/S Simon Tendo Kabenge (Stek) Advocates whereas the Respondents were represented by M/S Alaka & Co. Advocates.

Before I proceed to the merits of the application, I want to note that I have perused through the application and all the supporting documents or affidavit and affidavit in reply, Both Counsel for the Applicant and Respondent filed their submissions which

I have duly put into consideration to come up with this Ruling. There were rejoinders 30 made on record. I shall now proceed to enlist the issue in contention.

<u>Issues</u>

Whether the 1^st Respondent' corporate veil ought to be lifted in the circumstances? 35 Whether the 2^nd and 3^rd Respondents are liable to pay the decretal sum?

The Applicant handled issues 1 and 2 together and the Respondents followed suit, so I shall determine the issues jointly too.

# Determination

# Submission of Applicant

- Counsel contends that before filing this application, the Applicant conducted a thorough 45 search of the existence of the 1^st Respondent company and established irrefutable facts that since its incorporation in the year 2000, the last Annual return was filed on 18^th January 2018 and no returns have been filed for the last five years, its registered office is not its names and the company held bank accounts in KCB Bank, DFCU Bank, Orient - Bank, Bank of Africa and Stanbic Bank where the 2^nd and 3^rd Respondents who are 50 Directories and signatories to the accounts own 100% of its shares. The 1^st Respondent despite over twenty-two years of existence has no known asset in its name and the 2^nd and


- 3^rd Respondents have taken it to themselves picking money from the company and buying $\mathsf{S}$ property which they have instead registered in their own names. The Applicant discovered that the $2^nd$ and $3^rd$ Respondents were guilty of fraud and that a different company, Ejab and Family Investments Company Limited actually held the franchise for Moyo District which the Respondents had expressed ownership of during the negotiations and agreement of selling to them the MTN franchise. The Directors (2^nd 10 - and 3^rd Respondents) only used the name of the company as a mere front to perpetuate the fraud. Further, the 2^nd and 3^rd Respondents failed to produce the consent of MTN for the franchise purchase transaction and proof of the monthly net earnings from the franchise and to hand over the shop in Arua. Counsel concludes that being the mind of - the 2^nd and 3^rd Respondents as shareholders and directors of the 1^st Respondent company, 15 they ought to be made personally liable for such fraud and cannot hide behind the corporate veil to only be used for dishonest purpose. Counsel prays that this application be allowed, with costs to the Applicant.

#### Submission of Respondent 20

Counsel for the Respondent submits that the current application is a duplication of issues, misplaced, misconceived, premature, frivolous and vexatious thus should be dismissed with costs or stayed or consolidated by the Applicant. The Applicant has before this same Honourable Court a pending Arua High Court Miscellaneous Application No. 005 of 2020 arising out of the same Civil Suit No. 0081 of 2014 between the same parties claiming the same orders. The Applicant also miserably failed to prove any fraud that is

- attributed to the 1^st, 2^nd and 3^rd Respondents. The 2^nd and 3^rd Respondents in their affidavits in reply and annextures attached denied any fraud and using the company for - illegal or improper purpose. The 2^nd and 3^rd Respondents aver that they didn't 30 incorporate the 1^st Respondent company with or were not using it for carrying on business as a cloak or a mask or a sham a device or stratagem for hiding from responsibility or liability, execution proceedings against the 1^st Respondent were commenced but it has financial challenges to pay the decretal sum. That a company - 35 which is fraudulent and incorporated as a cloak, mask, sham, and a devise to hide or cover of the directors from liability cannot have such long peaceful and smooth business dealings and transactions with reputable companies. The 2^nd and 3^rd Respondents aver that the 1^st Respondent owns no assets, and they haven't in any way dealt with its assets and resources for their personal use but acquired family properties through being a secondary teacher and commercial farmers. Counsel concludes with a prayer that this 40 - application is dismissed with costs to the Respondents or is stayed until the other application is finally disposed of.

# **Consideration of Court**

Section 20 of the Companies Act, 2012

20. Lifting the Corporate Veil.

The High Court may, where a company or its directors are involved in acts including 50 tax evasion, fraud or where, save for a single-member company, the membership of a company falls below the statutory minimum, lift the corporate veil.

$-400$

"The personal liability of shareholders and directors arises only when the corporate veil is pierced where the applicant pleads and proves that the company did not operate as legal entity separate and apart from the officers, directors and shareholders such that the company was actually the alter ego of the shareholders, officers and directors and not a separate legal entity; where the corporation is just a shell designed to shield liability, a mere instrumentality of the shareholders. ... The corporate veil can be removed only if there is impropriety. Even then, impropriety itself is not enough. It should be associated with the use of the corporate structure to avoid or conceal liability (see Merchandise Transport Ltd v. British Transport Commission [1962] 2 OB 173, at 206–207; Trustor v. Smallbone (No 2) [2001] WLR 1177; DHN Food Distributors Ltd v. Tower Hamlets London Borough Council [1976] 1 WLR 852 and Antonio Gramsci Shipping Corp and others v. Stepanovs [2011] 1 Lloyd's Rep 647)." (Hon. Justice Stephen Mubiru in ABSA Bank (U) Limited vs Enjoy Uganda Limited & 2 Others HCMA No. 1243 of 2023).

In the instant case, the Applicant alleges that the Respondents engaged in fraud during business operations and the 2^nd and 3^rd Respondents are the brains behind the 1^st Respondent's sham existence. The 1^st Respondent has no assets, and all its businesses and assets are held by the $2^nd$ and $3^rd$ Respondents after its existence of over twenty-two $25$ years. The 2^nd and 3^rd Respondents are misusing the corporate personality of the 1^st Respondent as a mask for fraud to hide and avoid recognition and defeat the Applicant's right to enforce the decree of the court issued in CS No. 18/2014. It is on record through evidence of the Applicant that the 1^st Respondent company last filed company returns on 18^th January 2018 and the 2^nd and 3^rd Respondents are the Directors, Company 30 secretary and only Shareholders of the 1^st Respondent. In the various Bank accounts held by the 1^st Respondent, the 2^nd and 3^rd Respondents are the Directors and signatories who own 100% of the shares. According to the copies of Particulars of Directors and Secretary, Board Resolutions and Annual returns attached, the 2^nd and 3^rd Respondents are the only shareholders and are directly involved in the running of the operations of the 35 company.

The 2^nd and 3^rd Respondents have fully been aware of this outstanding obligation to settle the sums owed under the decree in CS No. 18 of 2014, taxation proceedings and execution proceedings were undertaken with both the parties' full knowledge and the 40 sums have been due for over five years now without any payment or commitment to pay by either of the Respondents. The 2^nd and 3^rd Respondents as Directors of the 1^st Respondent do not at any point of this application acknowledge the debt owed and how or if it will be paid, all they say is that the 1^st Respondent company is experiencing financial challenges. The claim that the Applicant has another pending application with 45 prayers for similar orders cannot be used as a distraction to weigh down the fact that the Applicants have a legal decree to enforce, and the Respondents are frustrating it thus rendering the decree a nugatory, since its issuance in March 2018.

50 A Warrant of Arrest was issued in 2019 by the Deputy Registrar of this Honourable Court for arrest of the 2^nd Respondent to enforce the execution of the decree in CS No. 18/2018. An Application was filed by the 2^nd Respondent to have him released from

$A$ Ands.

$20$

$\mathsf{S}$ prison because of ill $\big/$ on medical grounds and this application was granted. Since then, the Respondents have not made any payment towards fulfillment of the sums owed in the decree, or communicated with the Applicant regarding how this payment will be effected. The Applicant states that no property has been identified that is registered in the names of the $1^{st}$ Respondent company, not even its office in Arua and the bank accounts associated to it have been emptied by the $2^{nd}$ and $3^{rd}$ Respondents. I opine that 10 this amounts to fraud on the part of the Respondents.

Evidence has been adduced by the Applicant that 1^st Respondent is a sham, created and used by the 2^nd and 3^rd Respondents to perpetuate fraud. A company that has existed for over twenty years that has no assets registered in its names, bank accounts that are covered with bank loans or empty and it has been operating while conducting business arrangements with reputable companies like MTN in West Nile region, no explanation has been offered as to how the company started experiencing financial challenges or what is being done to recover its status and be able to clear debts owed. The Respondents are

- clearly using the corporate status of the 1^st Respondent as a shield to escape liability and $20$ / or execution of a valid Court order. At the time the 2^nd and 3^rd Respondents undertook to conduct business with the Applicant, the two directors knew, or ought to have known. that there was need to continue making payments towards purchase of stock for normal running of the business and throughout the transition period of handing over business - $25$ to the Applicant but took no step was taken with a view to minimize the loss while continuing to trade, even after the reconciliation meetings were made and a court order for the sums owed was issued. The 2^nd and 3^rd Respondents are now hiding behind the 1^st respondent's corporate veil to fraudulently frustrate the Applicant from recovering or executing against them a valid court order. For these reasons, this application is allowed.

The effect of "lifting" or "piercing" the corporate veil is that the shareholders and directors, rather than the company, are regarded as the relevant actors on whom liability of the obligations of the company are placed.

Consequently, leave is granted for issuance of a notice against the 2^nd and 3^rd respondents, 35 to show cause why execution of the decree should not proceed against them jointly and severally.

The costs of this application are awarded to the Applicant.

Delivered by email this 28^th day of August, 2024

**Collins Acellam** Judge

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