THE REPUBLIC OF UGANDA

IN THE HIGH COURT OF UGANDA HOLDEN AT KAMPALA

COMMERCIAL COURT DIVISION

MISCELLANEOUS APPLICATION NO. 316 OF 2013

(ARISING FROM CIVIL SUIT NO. 216 OF 2013)

1. LUSWATA PATRICK
2. BBALE STEPHEN
3. NAKATO MARGARET:::::::::::::::::::::::::::::::::::::::                                                                                                                                              APPLICANTS

VERSUS

1. K. L GENERAL SUPPLIES LTD
2. KIMERA VINCENT
3. STANDARD CHARTERED

 BANK UGANDA LTD

4. UGANDA REVENUE AUTHORITY::::::::::::::::::::                                                                                                                                                    RESPONDENTS

BEFORE: HON. LADY JUSTICE HELLEN OBURA

RULING

The applicants brought this application by Chamber Summons under the provisions of Order 41 rules 1, 2 & 9 of the Civil Procedure Rules (CPR) seeking for orders that a temporary injunction issues restraining the third and fourth respondents and/or their agents, servants, assignees, representatives or successors in title from selling the property of the 1^st respondent to recover the loan extended to the 1^st respondent and to recover the tax arrears accumulated by the 1^st respondent under the management of the 2^nd respondent until disposal of the main suit. The applicants also sought an order for costs of the application to be provided for.

The grounds of the application are contained in the affidavit of Patrick Luswata, the first applicant. They are that:- the first respondent was incorporated by Mr. Edward Lugemwa (now deceased) and Mr. Vincent Kimera in the year 2000. On 21/9/2006 Mr. Lugemwa passed on leaving Mr. Kimera as the sole shareholder and director of the first respondent. The applicants applied and obtained letters of administration of the estate of the late Lugemwa’s estate. Further that Mr. Kimera stubbornly refused the applicants and any other beneficiary of the estate of the late Lugemwa into the first respondent and its management. Mr. Kimera continues to run the first respondent wantonly, negligently and without care to the applicants’ prejudice. Further that since the second respondent knowingly continued to carry on the business of the first respondent when its membership fell below its minimum he is personally liable for all the obligations of the first respondent.

Other grounds are that the applicants stand to suffer irreparable damages as shareholders if the sale proceeds, the applicants obtained a Court order under Company Cause No. 18 of 2008 by which the first respondent’s register was to be rectified to add the applicants as shareholders but the second respondent has to date not allowed them in as shareholders, the applicants have filed a suit seeking for an account of the proceeds for the management of the first respondent, and to hold the second respondent responsible for the liabilities of the first respondent and the said suit which has great chances of success is yet to be disposed of. Lastly, that on the balance of convenience and in the interest of justice a temporary injunction should be granted to enable the parties sort out their issues.

Only the third respondent opposed the application on the grounds stated in the affidavit in reply deposed by Mr. Joshua M. Wakhata, the third respondent’s Acting Head of Collections. The gist of his affidavit is that the third respondent exercised its rights under the Mortgage Deed and Act and advertised the securities for sale and so the actions of the second respondent cannot in any way be imputed upon the third respondent.

I note from the affidavit of service of Kambuzi Joseph Kasolo filed on 24^th October 2013 that the second respondent was served with this application by advertisement in the newspaper but he has not answered it. However, it is not clear whether the first and fourth respondents were served with this application.

When this application came up for hearing on 19^th August 2013, Mr. Cranmer Tayebwa represented the applicants while the third respondent was represented by Ms. Alice Nalwoga who was holding brief for Mr. Munanura Kamuteera. Both counsel filed written submissions and this matter was set down for a ruling.

In his submissions, counsel for the applicants highlighted the principles governing temporary injunctions as was stated in the case of Imelda Nalongo vs Tereza Mwewuliza & Another [2003] KALR 274 and followed in the case of Daniel Mukwaya vs The Administrator General [1993] KALR 445.

Counsel for the applicants submitted that the applicants have satisfied the conditions for a grant of a temporary injunction. It was argued that the applicants in the head suit contend that the second respondent should be personally liable for all the obligations of the first respondent, for the activities of the latter carried out after the demise of the late Edward Lugemwa. They further state that Patricia Nabanakulya was held out as an adult whereas not, and no appropriate steps were taken to legalise her shareholding meaning that the first respondent has been carrying on business through the second respondent with less than the minimum required shareholders. It is the applicant’s submission that the second respondent is therefore liable both to account and to settle all the obligations of the first respondent including the payment of the loan from the 3^rd respondent and payment of taxes due to the fourth respondent and so the applicants have a case with a probability of succeeding.

It was also submitted for the applicants that if sale by the third and fourth respondents are allowed to proceed, assets of the first respondent would be wrongly disposed of making the applicants lose on their entitlement from the first respondent as shareholders and beneficiaries of the deceased’s estate. Counsel for the applicants further submitted that no amount of award of damages can atone for the loss arising from losing their inheritance and hence the injunction should be granted so that the issues of liability are properly sorted out first. 

It is the applicants’ contention that the balance of convenience is tilted in their favour since the third respondent will not suffer any damage whatsoever as its loan will continue accumulating interest and the assets will still be available for sale and the same applies to the fourth applicant.

On the other hand, the third respondent’s counsel submitted that the applicants have not shown any serious questions for trial nor does the said suit have a probability of success as against the third respondent because at the time of demise of Edward Lugemwa and at the time of lending monies the law in operation was the Companies Act Cap. 110. It was argued for the third respondent that section 27(1) of Cap. 110 presumes that subscribers to the memorandum have agreed to become members and yet the Act does not bar minors from becoming shareholders in a company. On that note the third respondent argued that the applicants do not raise any serious questions for trial since the Companies Act Cap. 110 does not put an age limit on shareholders as it does for directors. To that effect it was argued that the first respondent operated business legally after the demise of Edward Lugemwa.

Counsel for the third respondent referred to Catherine Elliott & Frances Quinn: Contract Law, 7^th Edition, Pearson Education Limited, 2009 at page 72-73 for the position that minors’ contracts are voidable; they bind the other party but not the minor. The third respondent also cited Charles Wild, Stuart & Josephine Bisacre: Company Law by Smith & Keenan, 14^th Edition at page 238 where it was stated that a minor may be a member of a company unless the articles otherwise provide.

On irreparable damage, counsel for the third respondent submitted that the argument that the applicant will suffer irreparable loss lacks sincerity because the property was acquired in 2011, five years after the demise of Edward Lugemwa. It was argued that the applicants seek to declare the loan illegal because the same was acquired when the company was operating below the required shareholding and director but if the court determines that the loan was illegally obtained, so was the property. It was further argued that the property was provided as security and the intention of the first and third respondents was that the same should be sold in case of any default pursuant to which the third respondent proceeded to advertise in accordance with the Mortgage Act 2009 and Deed.

According to the third respondent the fact that the property is security for a loan provides proof that any loss is capable of being compensated adequately by damages. Counsel for the third respondent relied on the case of Maithya vs Housing Finance Company of Kenya and Another [2003] 1 EA 133  where it was held that securities provided for a loan were valued before lending and the loss of the properties by a sale is clearly contemplated by the parties even before the security is perfected.

Finally, counsel for the third respondent submitted that the balance of convenience lies in refusing to grant the temporary injunction because the first respondent remains indebted to the third respondent and the indebtedness is growing by virtue of interest, while the security is depreciating. It was contended for the third respondent that the cost of this unfavourable situation is being solely borne by the third respondent, which has to account for non-performing loans to the sector regulator, Bank of Uganda and its shareholders.

 In brief submissions in rejoinder, counsel for the applicants conceded that the law does not prevent a minor from being a member of a company and the minor can at a later stage before he or she attains the age of majority denounce the membership of a company but maintained that the second respondent carried on business with a number of members below the minimum.

I have read the pleadings in this matter with the relevant documents attached. I have also given due consideration to the submissions made by both counsel. I also note that both in the application and submissions the applicants do not state the properties of the first respondent whose sale should be restrained. However on 21^st May 2013, the Applicants obtained an Interim Injunction from this court over the property comprised in FRV 907 Folio 23 Plot 13B Mapera road registered in the name of the first respondent. I will also proceed on the presumption that the applicants seek temporary injunction relief over the same property.

In Imeda Nalongo vs Teresa Mwewulize & Another (supra) Musoke Kibuuka J. held that as a matter of law, the granting of a temporary injunction is within the discretion of the court. The discretion must be exercised judicially. It is also trite that the purpose of a temporary injunction is to preserve matters in status quo until questions to be investigated in the suit can be finally disposed of. See Noor Mohamad Jan Hussein Mohamad vs Kassamali Madan [1953] 29 EACA; Kiyimba Kaggwa vs Abdu Nasser Katende [1985] HCB 4.  The conditions for grant of an interlocutory injunction as set out by Spry VP in the leading case of Geilla vs Cassman Brown and Co. Ltd [1973] EA 358 at 360 are as follows;

 (1)    An applicant must show a prima facie case with a probability of success; 

(2)     An interlocutory injunction will not be granted unless the applicant might otherwise suffer irreparable injury which would not be adequately compensated for by damages;

(3)     If the court is in doubt, it will decide the application on a balance of convenience.

With regard to the first condition, for purposes of grant of a temporary injunction the applicant does not have to establish a strong prima facie case with a high probability of success. According to Lord Diplock in the case of American Cynnamide Co. vs Ethicon [1975] 1 All ER 504 at this stage all the plaintiff needs to show by his action is that there are serious questions to be tried and the action is not frivolous or vexatious. In the instant case, the applicants contend that there is a prima facie case since the first respondent was operating without the minimum required shareholders but the third respondent’s counsel argued otherwise.

I have had the benefit of looking at the Memorandum and Articles of Association of the first respondent which are annexture “A” to the affidavit in reply. These are the same documents that the first respondent availed to the third respondent when applying for a loan. They showed that the first respondent had three shareholders. The first respondent obtained a mortgage on 24^th August 2011 by virtue of annexture C1 to the third respondent’s written statement of defence. It is not disputed that one of the shareholders, the late Lugemwa Edward died in 2006.

In paragraph 6 of the written statement of defence, the third respondent/defendant states:

“The contents of paragraph 7 are admitted to the extent that the late Mr. Edward Lugemwa and the 2^nd defendant incorporated a company. The 3^rd defendant shall add that the said two individuals incorporated the company together with a one Patricia Nabanakulya, a shareholder and Director in the 1^st defendant company, who along with them is subscribed to the company’s memorandum and articles of association.”

Indeed a minor may be a member of the company unless the articles otherwise provide. In this case the articles of the first respondent do not bar a minor from being a shareholder. However, as regards a minor being a director of the first respondent, section 186(1) of the Companies Act Cap 110 provides;

“Subject to this section, no person shall be capable of being appointed a director or a company which is the subject to this section if at the time of his or her appointment he or she has not attained the age of twenty one or he or she has attained the age of seventy.”             

Section 186(4) of the Companies Act Cap 110 provides;

“Nothing in subsections (1) to (3) shall prevent the appointment of a director at any age…if his or her appointment is or was made or approved by the company in a general meeting but special notice shall be required of any resolution appointing or approving the appointment of a director for it to give effect for the purposes of this subsection; and the notice thereof given to the company and by the company to its members must state or must have stated the age of the person to whom it relates.”                 

In view of the above provisions, Patricia Nabanakulya being a minor could only be a director of the first respondent if her appointment had been approved by the company in a general meeting for which special notice had been issued. There is no such evidence on court record. According to article 39 of the Article of Association of the first respondent, the number of directors shall not be less than two or more than nine. So if the appointment of Patricia Nabanakulya as director was never approved by the company, it means at the time of obtaining the loan from the third respondent the first respondent could have operated without the minimum number of directors since upon the death of Lugemwa the second respondent remained as the only director. This raises serious issues that merit judicial consideration. As such I find that the applicants have a prima facie case and if the sale is allowed to proceed the prayers in the main suit will be rendered nugatory.

As far as the second condition is concerned, it was the case for the applicants that no damages can atone for the loss arising from losing their inheritance. On the contrary it was argued that the property has a known value which the third respondent, a reputable financial institution, will be able to compensate in damages should the applicants be successful in the main suit and the applicants have not shown that the third respondent will not be able to do so.

The third respondent has exercised its rights under the mortgage deed and advertised the securities for sale as shown by annexture “E” to the affidavit in reply. Clearly the land and developments comprised on Plot 13B Mapeera Road, Nalukolongo, Kampala registered in the first respondent’s name was advertised for sale. Therefore there is an eminent threat of selling the first respondent’s property. Although the property has a market value capable of being compensated, the circumstances surrounding its being mortgaged to the 3^rd respondent particularly the legality of the 1^st respondent’s operations at the time of the transaction need to be investigated first.

This is because the applicants who are legal representatives of the deceased director have not been involved in the management of the first respondent despite the Court order issued on 7^th December, 2012. In the main suit, they are challenging the continued running of the first respondent company by the second respondent as well as the legality of the loan by the first respondent which they contend should be paid by the second respondent personally. They are also seeking a permanent injunction restraining the third respondent from selling the first respondent’s property to recover the loan illegally granted.

In the circumstances, it is my considered opinion that the status quo needs to be preserved as court investigates the affairs of the company to determine whether in view of article 39 of the first respondent’s Article of Association it could lawfully operate with only one director and if not whether the second respondent is personally liable to pay the loan. I am therefore of the view that if this application is not granted and the property is sold the applicants will suffer irreparable loss that may not be adequately atoned for by damages.

In the premises, I am convinced that the balance of convenience favours granting this application and halting sale of the first respondent’s property in recovery of a loan which is still in dispute. The 3^rd respondent will still be at liberty to sell the same and recover its money in the event that it becomes the successful party in the main suit.

In the result, this application is allowed and the orders prayed for granted. Costs shall be in the main cause.

I so order.

Dated this 11^th day of December 2013.

Hellen Obura

JUDGE

Ruling delivered in chambers at 3.00 pm in the presence of Mr. Cranmer Tayebwa for the applicants and Mr. Munanura Kamuteera for the 3^rd respondent.

JUDGE

11/12/13