ETHIOPIAN AIRLINES LIMITED v SUNBIRD SAFARIS LIMTIED SHARMA’S INVESTMENT HOLDING LIMITED

VIJAY BABULAL SHARMA

SUPREME COURT

CHIRWA, MUMBA AND MUSHABATI JJS

1ST AUGUST, 2006 AND 13TH NOVEMBER, 2007

(S.C.Z. JUDGMENT NUMBER 26 OF 2007)

Flynote

Company Law – Companies Act – Section 383 (1) – Whether a director personally liable for the debts of
the Company.

Headnote

This appeal arises from the decision of the High Court in which the appellant had petitioned for the
winding up of the 1st respondent and sought that the 2nd and 3rd respondents be liable personally for
the debt of the 1st respondent. The facts of the case were that the 3rd respondent incorporated both
the 1st and 2nd respondent companies. The 3rd respondent was the Managing Director of both
companies. The 1st respondent had a long standing business relationship with the appellant and was
involved in the supply of air tickets to the 1st respondent and the 1st respondent sold the tickets on
behalf of the appellant and remitted the proceeds less the agreed commission. In due course, the 1st
respondent failed to account for a sum of US$ 399, 902=00. Although the 1st respondent disputed this
figure, this was confirmed in a court action commenced by the appellant against the 1st respondent to
recover the same. An attempt to execute the judgment was made by way of writ of fieri facias. The
execution failed as the 1st respondent was reported to be non operational. As a result of the failure to
execute, the appellant petitioned the High Court for the winding up of the first respondent and also
requested that the 2nd and 3rd respondents be personally liable for the debt of the 1st respondent
under section 382 (1) of the Companies Act. After the trial, the trial judge found the 1st respondent
insolvent and ordered it’s winding up. The trial judge however declined to hold the 3rd respondent
personally liable for the 1st respondent under section 383 (1) of the Companies Act. It is against the
refusal to hold the 3rd respondent personally liable that gave rise to this appeal.

HELD:
(1) The 3rd respondent was the Managing Director of the 1st respondent and was responsible for
the day to day running of the company therefore, the trial judge ought to have found the 3rd respondent
personally liable for the 1st respondent’s debts.

(2) The 3rd respondent fraudulently allowed the 1st respondent to continue to trade and therefore
was personally liable for the debt to the 1st respondent.

Cases referred to:

1. R William C – Leitch Brothers Limited (1932) 2 CL. 71

B. C. Mutale S. C. with L. Kalaluka of Messrs Ellis and Company for the appellant.

C. Mwanakatwe of Messrs J. M. Chambers for the respondents.

Judgement

CHIRWA, J. Delivered judgment of the court.

The delay in delivering this judgment is deeply regretted. This is due to pressure of work. The appeal
arises from the decision of the High Court in which the appellant had petitioned for the winding-up of
the 1st respondent and sought that the 2nd and 3rd respondents be liable personally for the debt of the
1st respondent. The undisputed facts in this case are that the 3rd respondent formed both and 1st and
2nd respondent companies and both companies were operating from the same premises. The 3rd
respondent was Managing Director of both companies. The 1st respondent had a long standing business
relationship with the appellant starting from 1994 and the business involved the supply of air tickets to
the 1st respondent and the 1st respondent was selling them on behalf of the appellant and remitted the
proceeds to the appellant, less the agreed commission. This good business relationship went on until
2000, when the 1st respondent started failing to account for the proceeds from the sale of tickets. The
amount came to

US$399, 902.00. Although the 1st respondent disputed this figure, this amount was confirmed in a court
action commenced by the appellant against the 1st respondent to recover the same. An attempt to
execute this judgment was made by way of a writ of fieri facias, but execution failed as the 1st
respondent was reported not to be operational. A number of letters of demand were written, but the
1st respondent failed to pay the debt.
As a result of their failure, the appellant petitioned the High Court for the winding up of the 1st
respondent and also prayed that the 2nd and 3rd respondent be personally liable for the debt of the 1st
respondent under section 383 (1) of the Companies Act. Filed with this petition was an affidavit
verifying the fact alleged in the petition. On behalf of all the respondents, the 3rd respondent filled an
affidavit in opposition to the winding up petition. After trial, the trial judge found on the evidence
before him, that the 1st respondent was insolvent and ordered it’s winding up and appointed one
Fredrick Siamulandabala Mudenda, as a provisional liquidator without security. On the evidence, the
learned trial judge found the 2nd respondent had shown sufficient interest in the 1st respondent and
held it liable for the debts of the 1st respondent. The learned trial judge, however, declined to hold the
3rd respondent personally liable for the debt of the 1st respondent under section 383 (1) of the
Companies Act. It is against the refusal to make the 3rd respondent personally liable that the appellant
has appealed.

Originally there were two grounds of appeal, but these were later substituted with one ground. The one
ground of appeal was that the learned trial judge erred in law when he held that there was no
justification for holding the 3rd respondent to be personally liable for the 1st respondent’s debts. This
ground of appeal was supported by detailed written arguments. The gist of this ground is that the
learned trial judge erred in failing to give due regard to section 383 of the Companies Act, when
attempting to determine whether the 1st respondent’s conduct constituted fraudulent trading by taking
a narrow view of what constituted fraud. It was submitted that in considering the effect of section 383
of the Companies act the issues to be satisfied before liability attaches personally to a director of a
company were two. Namely, that that person was knowingly a party to the carrying of any business of
the company, and it must be established that he occupied some kind of controlling or managerial role. It
was argued that from the evidence before the court, it could not be disputed that the 3rd respondent
was managing director of the company and as a small company, the 3rd respondent was actively
involved in its management. It was argued that large amounts of monies were received on behalf of the
appellant and he never accounted for the same and failure to account for US$299, 303, an inference of
fraud ought to be drawn. To support this argument, the case of R William C –Leitch Brothers Limited (1),
was referred to in particular page 77 of the report where Maughan J said:-

“If a Company continues to carry on business and incur debts at a time when there is, to the
knowledge of the directors, no reasonable prospect of the creditors ever receiving payments of those
debts, it is , in general, a proper inference that the company is carrying on business with intent to
defraud”.

Counsel further submitted that the law is further expounded by Justice Maughan where he said.

“In my judgment, there is nothing wrong in the fact that directors incur debt at a time when, to their
knowledge, the company is not able to meet all its liabilities as they fell due. What is manifestly wrong is
if directors allow a company to incur debts at a time business is being carried on in such circumstances
that it is clear that the company will never be able to satisfy its creditors”.

It was finally submitted that the facts in the present case are similar to the William Leitch Brothers case
(1), in that the 1st respondent continued to trade and to receive monies from sales agents when it was
quite clear that the said monies were not being accounted for to the appellant. The court was asked to
draw the inference that the company was carrying on business with intent to defraud and the 3rd
respondent as the Managing Director of the 1st respondent be held personally liable for the debt due to
the appellant.

In answer to submissions by counsel for the appellant, counsel for the respondent made oral
submissions supporting the judgment of the learned trial judge. Mr. Mwanakatwe submitted that the
facts were common and that in dealing with personal liability of the 3rd respondent, the learned trial
judge did have the opportunity of hearing the evidence and he evaluated it and found that the 3rd
respondent was not personally liable for the debt of the 1st respondent and urged the court to uphold
this finding.

We have considered the judgment of the court below and the submissions made before us. As the
parties conceded before us, the facts are common. The common facts found by the learned trial judge
are that the 1st and 3rd respondents were run by the 3rd respondent as one company in that they
shared the same registered office; all correspondence as one company in that they shared the same
registered office; all the 2nd respondent; both shared the same Managing Director who was the third
respondent; employees of the 1st and 2nd respondents are the same and that the 2nd respondent had
on two occasions offered its properties as security for 1st respondent’s loan from First Merchant Bank
Limited (In liquidation ). The learned trial judge further found that the said common matter did not
amount to fraudulent conduct on the part of the 3rd respondent or 2nd respondent; they did show a
degree of involvement and knowledge of how the 1st respondent ran its business. However, the learned
trial judge found that in view of the good business relationship that existed between the appellant and
the 1st respondent from 1994 to 2000, when the 1st respondent ran into financial difficulties and the
explanations made by the 3rd respondent on how the 1st respondent failed to meet its obligations, this
did not amount to or constitute fraudulent trading and declined to declare the 3rd respondent
personally liable and that it was never their intention to defraud the appellant. All they were asking for
was a suitable repayment programme which the appellant denied them. With this explanation, the
learned trial judge was not satisfied that their conduct amounted to fraud so as to make the 3rd
respondent personally liable for the debt of the 1st respondent. He, however, found that there was an
interest shown that the 2nd respondent was keenly interested to rescue the 1st respondent as shown by
its desire to use its property as security for loans to be advanced to the 1st respondent by the First
Merchant Bank (In liquidation). It was on this basis that he held the 2nd respondent liable for the debt
of the 1st respondent.
We take into account that this case presents common facts and these have to be discerned from the
pleading and the evidence that is not controverted or which as found by the learned trial judge or have
been accepted by the parties. The amended petition was accompanied by a verifying affidavit and there
was an affidavit in opposition to the winding-up petition sworn by the 3rd respondent. There are a
number of facts that were pleaded in the petition which the 3rd respondent did not challenge. The more
serious ones are paragraphs 14, 16 and 17, of the amended petition (paragraph 15 was numbered twice;
this should be a typographical error). These paragraphs allege as follows:

“14. The petitioner also avers that the 3rd respondent has not fully paid up his shares in the 1st and
2nd respondent companies.

“16. The Petitioner in the alternative pray for an order that the 3rd respondent be held personally
liable for running the 1st respondent company when it did not meet the minimum membership
requirement under section 26 (1) of the Companies Act.

“17. That in the further alternative that the 3rd respondent be held personally liable on account of
the fact that the 1st respondent has not fully paid up share capital and the said 1st respondent is
therefore liable under section 265 (1) of the aforesaid Act”.

These are very serious averments in the petition and the 3rd respondent never disputed them in his
affidavit in opposition. They should and are deemed accepted. Having been deemed to have been
accepted, with the proved facts of the case that the 3rd respondent was Managing Director of the 1st
respondent and was responsible for day to day running of the Company, the learned trial judge ought to
have found the 3rd respondent personally liable for the 1st respondent’s debts. The learned trial judge
in holding the 3rd respondent not liable for the debts of the 1st respondent after dealing with the good
business relationship between the parties and refusal by the appellant to give the respondent suitable
repayment of programme stated in his judgment:-

“There is no doubt in my mind as I have earlier stated that the 1st and 2nd respondents failed to
remit to the petitioner the proceeds from ticket sales. However, I do not agree and I am not satisfied
that their failure in view of the foregoing reasons and explanations given in the preceding paragraph
constitute or amount to fraudulent trading. Consequently, I find no justification for holding the 3rd
respondent to be personally liable for acts committed or omissions made by him in his official capacity as
the Managing Director of the 1st respondent company”.

Thisconclusion, we find, is misdirection because it did not take into account the fact not denied in the
petition. The 1st respondent had been doing business with the appellant from 1994 , up to 2000 and in
doing such business it had less than two members as alleged and not denied by the 3rd respondent, the
3rd respondent is liable under section 26 (1) of the Companies Act. Had the learned trial judge taken
into consideration these admitted facts, he ought to have arrived at the conclusion that the 3rd
respondent fraudulently allowed the 1st respondent to continue to trade and therefore personally liable
for the debt of the 1st respondent. There is clear manifestation of fraudulent trading and the 3rd
respondent ought to be held responsible. On these grounds, we uphold and allow the appeal. The lower
court’s decision in as far as it exonerates the 3rd respondent is personally liable for the debts of the 1st
respondent.

Appeal Allowed.