[2024] UGCommC 212

## 5 **THE REPUBLIC OF UGANDA**

## **IN THE HIGH COURT OF UGANDA**

# **(COMMERCIAL DIVISION)**

## **CIVIL SUIT NO. 0212 OF 2019**

**1. VICTORIA CONSTRUCTION LTD**

10 **2. KIGONGO WILLIAM ::::::::::::::::::::::::::::: PLAINTIFFS**

### **VERSUS**

- **1. YIGA ALLAN** - **2. KASUMBA SAMUEL** - **3. NSEKANABO ALEX**

#### 15 **4. EQUITY BANK (U) LTD ::::::::::::::::::::::::::::::::::::::::::::::::: DEFENDANTS**

## **Before: Hon. Lady Justice Harriet Grace Magala**

## **Ruling on Preliminary point of law**

## **Brief facts**

The 2nd Plaintiff incorporated the 1st Plaintiff ('The Company') on 4th October 2010 together with the 3rd 20 Defendant and a one Kayongo Evarist as the initial shareholders of the 1st Plaintiff. The 2nd Plaintiff was a co-director and secretary of the 1st Plaintiff.

Subsequently, in or about 2018, several changes were made in the 1st Plaintiff and the 2nd Plaintiff was removed both as a shareholder and a director in the company and replaced with the 2nd Defendant and the 1st 25 Defendant.

Thereafter, the 1st Plaintiff secured a loan facility of Ugx. 200,000,000/- (Uganda Shillings Two Hundred Million only) from the 4th Defendant and defaulted with repaying the same. The loan facility was secured by motor vehicles registration number UAW 181Z, UBD 753A and UAN 685Z and personal

30 guarantees.

The Plaintiffs now bring this suit against the Defendants to nullify the appointment of the 1st, 2nd, and 3rd Defendants as Directors and Secretary respectively for being procured fraudulently, an injunction against the defendants and their agents from deriving title of property in the security

5 motor vehicles for the mortgages being fraudulently procured, general damages and costs of the suit.

# **Hearing and Representation**

The matter came up for further hearing of the Plaintiffs' case on 11th of June 2024 and Mr. Kaweesi Kakooza of Jingo, Ssempijja & Co. Advocates appeared

10 for the Plaintiffs while Mr. Goloba Mohamed and Mulumba Rashid appeared for the 4th Defendant.

Midway through the cross-examination of the 2nd Plaintiff, counsel for the 4th Defendant raised a preliminary objection that the suit was incompetent against the fourth Defendant for having been instituted by the 1st Plaintiff without

15 authorization of the company. He then made oral submissions which this court has considered in this Ruling.

The Plaintiff's counsel stated that he had been ambushed and asked for two days within which to make reply through written submissions, but he has not honored the directions to date. The Court shall thus proceed to deliver its

20 decision.

#### **4 th Defendant's Submissions**

Counsel for the 4th Defendant argued that according to Article 41 of the 1st Plaintiff's old memorandum and articles of association, the managing directors of the company are to manage the company and give instructions to file any 25 suit on behalf of the company.

That under Article 49, of the Articles of Association of the Company, the managing director with the board of directors have authority manage day to day running of company and this is reechoed in the amended memorandum of association and articles of association of the company.

30 That the person who authorized counsel to file this suit on behalf of the company had no authority.

The 2nd plaintiff ought to have applied to rectify the register to be added as a shareholder or director of the company.

The prayers are made on behalf of the company. The suit challenges the 35 actions that were done by the company.

The company cannot sue the 4th defendant without instructions from company. Counsel relied on the cases of *M/s Tatu Naiga & Co. Emprorium versus Verjee*

5 *Brother Ltd SCCA No. 8 of 2000, United Assurance Co. Ltd Versus Attorney General SCCA No. 1986 and Kabale Housing Estate Tenants Association Ltd Versus Kabale Municipal Local Government Council SCCA No. 15 of 2013.*

## **Determination**

It is not in dispute that when the 2nd Plaintiff instructed counsel to institute this suit for and on behalf of the 1st 10 Plaintiff, he had been removed from being a shareholder, director and secretary in the company. This was admitted by the 2nd Plaintiff during cross examination at the hearing of this matter, before this preliminary objection was raised by counsel for the fourth Defendant.

Additionally, it is not disputed that the authority to instruct the institution of the 15 suit or management of the company's affairs is possessed by the board of directors or the managing director of the company, according to the company's articles of association.

In *United Assurance Co. Ltd Versus Attorney General (supra)*, which has been relied on in several cases, *Hon. Chief Justice Samuel Wako Wambuzi (Rtd)*

20 observed that where proceedings are brought in the name of a company, there must be authority for bringing the action. Whether the authority is by the board of directors or the company at the general meeting must depend on the constitution of the company.

In *Kabale Housing Estate Tenants Association Ltd Versus Kabale Municipal Local Government Council (supra*), also referred to by counsel for the 4th 25 Defendant, **Hon. Kitumba B. JSC(Rtd.)**, observed that:

*"Where a wrong has been done to a company and an action is brought to restrain its continuance, or to recover the company's property or damages or compensation due to it, the company is the true plaintiff. See: Gray Vs* 30 *Lewis [1873] 8 Ch App 1035. The appropriate agency to start an action on behalf of the company is in the board of directors, to whom the power is delegated to manage the affairs of the company…"*

This is what is called the *'proper plaintiff rule'.* This rule applies under company and corporate law, in that, where a wrong has been done to the company, then 35 the proper claimant in such action is the company itself. It is only the company to sue. This Rule was developed from the English case of *Foss Versus Harbottle (1843) 2 Hare 461 ER 189.* In other words, according to this rule, it is only the 1 st Plaintiff to sue the Defendants. However, to institute this suit, there must be approval or authority to do so by the 1st Plaintiff, as seen from the cases above.

5 However, jurisprudence has developed exceptions to the *'Foss V Harbottle Rule'* and allowed derivative actions i.e. actions by the minority shareholders/directors in the name of the company or themselves.

In the case of *Edwards and another Versus Halliwell and others (1950) 2 ALL ER at 1063***, Jenkins LJ at page 1066**, observed that the rule is not an inflexible rule, 10 and it will be relaxed where necessary in the interests of justice.

The honorable judge noted that there are exceptions to the *rule in Foss Versus Harbottle* these include:

- a) Where the act complained of is wholly *ultra vires* the company, the rule has no application because there is no question of the transaction being 15 confirmed by any majority. - b) Where what has been done amounts to what is generally called in these cases fraud on the minority and minority shareholders' action on behalf of themselves and all others.

**Asquith LJ** added that the principle of *Foss V Harbottle* does not apply either by 20 way of barring remedy or supporting the objection that the action is wrongly constituted because the union is not a plaintiff if, the remedy is sought by an individual, complaining of a particular breach of his rights and inflicting particular damage to him or his individual rights.

In the case of *Allied Bank International Ltd Versus Sdru Kara and Anither HCCS* 25 *No. 191 of 2002***, Hon. Justice James Ogoola** relying on *Salim Jamal versus Uganda Oxgyen Ltd SCCA No. 64 of 1995***,** noted that:

*"The rationale for these exceptions is articulated by Gower's Principles of Modern Company Law (2 Edn.) at p.528, thus:*

*"If there were no such exceptions, the minority would be completely in the* 30 *hands of the majority. Even the limitations imposed by the substantive law would be stultified, for as long as the company remained a going concern no action could effectively be brought to enforce them."*

In other words, if the minority were denied of the right to sue, their grievance could never reach the court because the wrongdoers themselves, being in 35 control, would not allow the company to sue.

The exception to the Foss vs Harbottle rule does not apply to the 2nd Plaintiff. He is neither a shareholder (minority or otherwise) nor a Director. I therefore find

that the 2nd Plaintiff had no authority to institute this suit on behalf of the 1st 5 Plaintiff. The suit is hereby struck out with costs to the 4th Defendant.

I so order.

**Dated and signed at Kampala this 31st day of July 2024.**

10 **Harriet Grace MAGALA**

**Judge**

**Delivered online (ECCMIS) this 31st day of July 2024.**