Last updated on August 16th, 2024 at 09:33 am
The commercial division of the High Court of Uganda has struck out a lawsuit brought by a company founder on behalf of the company for offending the “proper plaintiff rule” as was enunciated in the landmark case of Foss v. Harbottle.
The Court presided over by Hon. Lady Justice Harriet Grace Magala (pictured), struck out one Kigongo William’s suit on behalf of Victoria Construction Ltd, a company he incorporated on 4th October 2020 together with Kayongo Evarist, one of the defendants in the suit after finding that the founder had no authority to institute the legal action on behalf of the company such action being the preserve of the company’s board of directors and managing director as per the company’s articles of association.
According to court filings, although Mr. Kigongo William was the company’s director, secretary, and one of its shareholders, he was removed as such and replaced with one of the defendants.
In his suit, Kigongo William challenged the company’s actions of borrowing a UGX 200M loan from Equity Bank, also one of the defendants.
Citing the cases of United Assurance Co. Ltd v. Attorney General (SCCA No. 1986) and Kabale Housing Estate Tenants Association Ltd v. Kabale Municipal Local Government Council (SCCA No. 15 of 2013) where it was held 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,” Justice Harriet Grace Magala in her decision delivered on 31st July 2024 observed:
“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 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…”
The learned Judge, however, noted that there are situations where the application of the “proper plaintiff rule” will be limited in the interest of justice including cases for enforcement of minority shareholder rights or where the actions of the company complained of were done ultra vires (without legal power) of the company such that they can’t be said to have been confirmed by the majority.
In Kigongo William’s case, not even the limitations of the proper plaintiff rule could help his suit because he was no longer a director, shareholder, or secretary in the company following his removal from those positions, and as such his lawsuit could not be maintained as an action for enforcement of minority rights.
“In the case of Allied Bank International Ltd Versus Sadru Kara and Another [HCCS 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 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 control, would not allow the company to sue. The exception to the Foss vs Harbottle rule does not apply to the 2nd Plaintiff [Kigongo William]. 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 Plaintiff. The suit is hereby struck out with costs to the 4th Defendant [Equity Bank]” Justice Harriet Grace Magala ruled.
Conclusion
In conclusion, this decision illustrates that it is only the company that has a right to sue (proper plaintiff) or authorise anyone to sue on its behalf as provided for per its articles of association and under the case of Foss v. Harbottle.
Secondly, the decision points out that when a shareholder in the company has lost his shareholding in the company, he loses ground to sue for enforcement of minority shareholder rights.
Parties; Victoria Construction Ltd & Anor v. Yiga Allan & Others Counsel; Mr. Kaweesi Kakooza of Jingo, Ssempijja & Co. Advocates (for the plaintiffs) and Mr. Goloba Mohamed and Mulumba Rashid (for the 4th Defendant).
