Jamal and Others v Uganda Oxygen Ltd and Others (Civil Appeal 64 of 1995) [1997] UGSC 4 (14 April 1997)

Key Facts

Issues

• The court needed to determine if the circumstances of the case warranted judicial intervention, considering that Shamji as director could challenge co-directors for excluding him from the board and affairs of the company.
• The court needed to determine if the first, second, and third defendants fraudulently caused loss to UOL through various means including opening unauthorized bank accounts, transferring funds, and selling company goods at undervalue.
• The court needed to determine if Shamji (respondent 3) was illegally excluded from the board of directors and whether the purported actions by defendants to remove him between 23rd and 25th May 1994 were valid acts.
• The court had to determine whether the defendants' acts and omissions exceeded the powers granted under the memorandum and Articles of Association of UOL, including unauthorized account openings and fund transfers.
• The final issue was whether the acts complained of by the plaintiff were done in good faith and bona fide, though the trial judge found it unnecessary to consider this after answering the preceding issues.
• The court needed to determine the specific monetary amount of loss caused to UOL by the defendants' fraudulent actions, with the audit report showing losses of shs. 230,929,355/=.
• If the first issue was answered negatively, the court had to determine whether the actions taken by the two men while purporting to be directors of UOL were null and void and legally illegal.
• The court had to determine whether Shamji held the majority shareholding in Oxyco Holding Ltd (OHL), the second plaintiff, and what percentage of shares he controlled in relation to the company structure.
• The court had to determine whether the defendants jointly and severally were liable to account for the misappropriated funds of shs. 230,929,305/= from UOL and any other misappropriated funds.
• The court needed to determine whether Salim Jamal and Shabir Abji were properly appointed as directors of Uganda Oxygen Ltd (UOL). The trial judge found they were not directors by unanimous agreement between Shamji and Alnoor, who were the only shareholders.

Holdings

Remedies

• The Supreme Court ordered that the plaint be amended to indicate Shamji as the only plaintiff, suing as a shareholder and representative of other shareholders of UOL. The plaint should be amended to join UOL as the 4th defendant. The fraud issue should not form part of the amended plaint. The amended plaint should be restricted to the issue of quantum of liability by the three appellants in favour of UOL, and must be filed and served on all four defendants within 21 days.
• The trial judge's orders were set aside and substituted with new orders. The defendants were restrained from purporting to be directors of UOL at least until proper and valid appointment was made. The resolutions passed by defendants No.1 and No.2 were declared void.
• Shamji was entitled to bring a derivative action against the appellants as a shareholder through UOL, since the corporate veil was lifted due to fraud committed by Salim. This allowed Shamji to sue in his own name (but in truth on behalf of UOL) against the wrongdoing appellants.

Legal Principles

• The court examined whether the acts of the defendants were done in good faith. The trial judge found that the defendants' actions were fraudulent and not bona fide. The court considered whether the acts complained of were ultra vires and whether the defendants acted in good faith in their purported capacity as directors.
• The court discussed fiduciary duties of directors and shareholders. The trial judge found that Salim Jamal, as a wrongdoer, had fiduciary obligations to the company. The court referenced authorities on fiduciary positions where directors misuse money they control in their fiduciary capacity for their own benefit.
• The court held that where a holding company and its subsidiary are essentially one economic or commercial unit, and the corporate personality is being used as a cloak for fraud or improper conduct, the corporate veil may be lifted. The principle transcends revenue law and applies where fraud or improper conduct can be shown. Shamji was entitled to bring a derivative action because the wrongdoers controlled UOL and could not bring an action to remedy the wrongs they were doing.
• The court addressed the burden of proof regarding allegations of fraud. The trial judge found that the 1st appellant was fraudulently incorporated by backdating the certificate of incorporation. The court held that once fraud is alleged, it is open to the court to extend its inquiry to matters precedent and incidental to registration.

Precedent Name

• Foss v. Harbottle (1843)
• Salomon v. Salomon & Co. (1897) A.C. 22
• Fam International Limited v. Mohamed Halid El. Fatih (1993)
• National Enterprises Corporation v. Nile Bank Ltd (1994)
• Pioneer Laundry and Dry Cleaners Ltd v. Minister of National Revenue (1939)
• Gilford Motor Company Limited v Horne (1933)
• Moir v. Wallersteiner (1975)

Cited Statute

• Civil Procedure Rules Order 1 Rule 10
• Constitution (Consequential Provisions) Statute, 1996
• Companies Act, Cap 85
• Civil Procedure Act, Cap 65
• Constitution of Uganda 1995
• Rules of the Supreme Court

Judge Name

• KAROKORA, J.S.C.
• ODOKI, J.S.C.
• ODER, J.S.C.

Passage Text

• "The corporate personality cannot be used in my view as a cloak or mask for fraud. Where this is shown to be the case it may be an appropriate case for lifting the veil of corporate personality to ensure that justice is done and the court does not look hopelessly on in face of such fraud. In the case of Pioneer Laundry and Dry Cleaners Ltd Vs Minister of National Revenue 1939 4, All E.R.254, Lord Thankerton who delivered the opinion of the Privy Council stated." The above opinion seems to suggest that where fraud or improper conduct can be shown then it may be possible to disregard the corporate personality. I am aware this was in respect of a matter related to revenue law but I think the principle is nevertheless important and transcends revenue law. In the instant case plaintiff No. 2 was incorporated solely for the purpose of purchasing plaintiff No.1. The purchase money put up by plaintiff No.3 was sourced from the proceeds of plaintiff No.3 and defendant No.3.'s trading or investment activities. Plaintiff No.2 owns all the shares (save one) in plaintiff No.1's share capital. Plaintiff No.2 therefore overwhelmingly controls plaintiff No.2 was in reality a difference in names only for it was controlled by the majority of Directors of plaintiff No.2. In the light of all the facts of this case, particularly the fraud committed by defendant No.1 a nominee agent and brother to No.3, I find that the plaintiff maintain this action against the defendants in order to protect his substantial holding in plaintiff No.2 which virtually owned plaintiff No.1 (save for the share held by the defendant No.3). Short of allowing this action the plaintiff No.3 would have no remedy against the fraudulent acts of defendant No.1 in particular and supported and protected by defendant No.3."
• "It is a fundamental principle of our law that a company is a legal person with its own corporate identity, separate and distinct from the directors or shareholders and with its own property rights and interests to which alone it is entitled. If it is defrauded by a wrongdoer, the company itself is the one person to sue for the damage. Such is the rule in Foss V. Harbottle (1843) 2 Hane 461. The rule is easy enough to apply when the company is defrauded by outsiders. The company itself is the only one who can sue. Likewise, when it is defrauded by insiders of the minor kind, once again the company is the only person who can sue. But suppose it is defrauded by insiders who control its affairs - by directors who hold majority of the shares - who then can sue for damages? Those directors themselves are the wrong doers. If a board meeting is held they will not authorise proceedings to be taken by the company against themselves. If a general meeting is called they will vote down any suggestion that the company should sue themselves. Yet the company is the one person who is damnified. It is the person who should sue otherwise the law would fail in its purpose; injustice would be done without redress. In Foss V. Harbottle (supra) Wigram V-C, saw the problem and suggested a solution. He thought the company could sue in the name of someone who the law has appointed to its representative. A suit could be brought by individual corporators in their private characters, and asking in such character the protection of rights to which in their corporate character they were entitled."
• "In the circumstances ground five of the appeal succeeds to that extent. In the result, this appeal should partially succeed, but the respondents should have 5/6 of the cost of the appeal and of the suit in the court below. The orders of the learned trial judge should be set aside and be substituted with the following: (a) The plaint in the suit should be amended, indicating Shamji as the only plaintiff, and that he is suing as a shareholder and as a representative of the other shareholders of UOL. (b) the plaint, in the suit should be amended, joining UOL as the 4th defendant; (c) The issue of fraud by the three appellants against UOL having proved and not challenged in this appeal should not form an issue in the amended plaint. (d) The amended plaint should be restricted only to the issue of quantum of liability by the three appellants (as defendants,) in favour of, and should pray for remedies to UOL. (e) The amended plaint should be filed in court and served on all the four defendants within 21 days from the date hereof. Dated at Mengo this 14th day of April 1997. A.H.O. ODER, JUSTICE OF THE SUPREME COURT."