CBZ Bank Limited v Eunigold Tours and Safaris and Eunice Tambudzai Mangwende and Mr Kandodo Mangwende

### Preamble
1
HH493 -13
HC 13074/12
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CBZ BANK LIMITED

versus

EUNIGOLD TOURS AND SAFARIS

and

EUNICE TAMBUDZAI MANGWENDE

and

MR KANDODO MANGWENDE

HIGH COURT OF ZIMBABWE

MTSHIYA J

HARARE, 3 October 2013 and 18 December 2013

Opposed matter

B. Mugomeza, for the plaintiff

Ms Z. Takawira, for the defendant

MTSHIYA J: On 7 November 2012 the respondent (plaintiff in the main matter) issued summons against the excipients (second and third defendants in the main matter).  The respondent’s claim was for:-

“(a) Payment by all defendants jointly and severally the one paying the other to be absolved in the sum of US$345 910.53 (Three hundred and forty five thousand nine hundred and ten United States dollars and fifty three cents) with interest at a rate of 36% per annum calculated daily on any daily balance and capitalized monthly from 18th October 2012 until the date of issuing of summons.

(b) Payment of costs of suit on a legal practitioner and client scale.

(c) Interest at a prescribed rate.

Or

An order declaring movable property which is subject of a National General Covering Bond No. 4123/2011 dated 10th June 2011 registered in favour of plaintiff to be executable.

Payment of costs of suit on a legal practitioner and client scale.

Interest at the prescribed rate”

In para(s) 4-9 of its declaration, the respondent states as follows:-

”4. On two (2) different dates, being 9th May 2011 and 19th October 2011 the plaintiff and the1st defendant (being duly represented by the 2nd defendant) entered into two (2) Loan agreements in terms of which the plaintiff lent and advanced to the 1st defendant sums of money in total sum of US$487,300-00(Four hundred and eighty seven thousand three hundred United States dollars), being loan and overdraft facilities.  The interest accruing on the said loans would be payable on a monthly basis.

5. it was a term of the Parties agreement that the following interest rates were to be originally charged on the two (2) loan facilities.

5.1 9th May 2011- interest at a rate of 11% per annum

5.2 19th October 2011 – interest at the rate of 14 % per annum

6. Sometime in May 2011, the 2nd and 3rd defendants issued an unlimited guarantee in favour of the plaintiff with regards to the financial obligations in terms of the loan agreements, wherein they bound themselves jointly and severally liable as sureties and co-principal debtors to any amount owing on the loans lent and advanced to the 1st defendant.

7. In pursuance of the abovementioned sum of money lent and advanced to the 1st defendant the 2nd defendant resolved to pass a Notarial General Covering Bond No. 4123/2011 in the Office of the Registrar of Deeds at Harare on 10th June 2011.

8. The plaintiff was empowered by the said agreements to give notice of any alteration in the rate of interest and thereafter was entitled to charge such other interest rate.

9. Subsequently, through the subsistence of the Loan Overdraft agreement, the 1st defendant made various transactions in terms of withdrawals, accruing interest, administration fees, insurance premiums, stamp duty, service charges and unserviced monthly charges. The aforementioned withdrawals were not matched with deposits into the Bank Account to service the debt outstanding.  In that respect the balance on the account has continued to increase, thus presently, attracts the total sum of US$345 910.53 (Three hundred and forty five thousand nine hundred and ten United States dollars and fifty three cents)”

The summons was served on the excipients who did not deny the loan advances to first defendant but responded by filing an exception in the following terms.

“1. There is no cause of action disclosed against 1st and 2nd excipients as they did not sign any unlimited guarantees in favour of respondent binding themselves as sureties and co-principal debtors with Eugniod Tours and Safaris ( Private) Limited for any sums due to the respondent.

2. 1st and 2nd excipients are only directors of Eunigod Tours and Safaris (Private) Limited and they cannot de held liable for its debts, neither can they be sued for any debts owed by Eunigod Tours and Safaris (Private) Limited.

Wherefore the excipients pray the exception be upheld and the claim against them be dismissed with costs on a legal practitioner and client scale.”

As I have already indicated, there is no denial that, following the signing of the Loan Agreements, the respondent advanced funds to Eunigod Tours and Safaris (Pvt) Limited (Eunigod) (the first defendant in the main matter).

The main reason for the exception is that the excipients did not sign the guarantees as provided for in the Loan Agreements.

Let me start by accepting that Eunigod has a separate legal identity from the excipients who are only its shareholders.  However, every corporate entity speaks through its agents, who, in casu, are the excipients, particularly the first excipient who executed all the documents relating to the financial transactions between Eunigod and the respondent.

On 21 November 2012 the first excipient, as agent of the Eunigod, was able to write to the respondent’s legal practitioners in the following terms:-

“CBZ BANK LIMITED TOURS AND SAFARIS AND 2 OTHERS CASE NUMBER  13074/12

________________________________________________________________

We refer to the above matter and acknowledge receipt of the above summons.

The amount which is claimed in the summons arose out of a loan and overdraft facility which was extended to Eunigod Tours and Safaris (Private) Limited around April 2011.  The purpose for which the loan was applied for was to finance the construction of a private school in Mutare.  The approval process which was being done by the relevant authorities took longer than anticipated.  Be that as it may, we managed to purchase the land on which the school is to be built and the size of the land is 26 acres.  The school investor’s financial year begins 1st June 2003 and funds will only be released thereafter and also upon sight of the school plan.

It is therefore our proposal that we be given time up to end of June 2013 to pay the amount being claimed as by then we are confident that funds will have been released by the school investor.  It is noteworthy that this is a gigantic project which will include exchange programs.

Taking into the value of the project (sic), CBZ Bank can take up a stake in the project in lieu of a loan payment by us.

Further, a company to which the writer is both a shareholder and director, Global King and Jewellery (Private) Limited has 22 new ten tonne rigid trucks, 13 new 30 tonne horses and new trailers which combined value is about seven million United States American dollars ($7,000,000-00).  The trucks and trailers are currently held by ZIMRA pending payment of duty.  The total amount payable is four hundred and seventy nine thousand three hundred and seventy on United States dollars strictly four cents (US$479,371.64).  We have the following proposals in this regard;

We have made inroads in relation to the sale of the abovementioned vehicles.  The Zimbabwe Defence Forces has approved the purchase of the trucks.  We had anticipated that by now we could have received payment.  However, doe to bureaucracy obtaining in government departments we are yet to receive payment.  We are pursuing the issue of payment and once it is done, payment will be made directly into an account with CBZ Bank.

Earlier on, we had proposed that CBZ Bank could assist in the payment of the above stated duty and the trucks would be released by ZIMRA.  Once the trucks are released, the sale of these can be supervised by CBZ Bank.

We have to underline that Eunigod is not in anyway running away from its obligation to pay.  As illustrated above there are real sources of income which unfortunately cannot be released into cash immediately.

In the circumstances, we ask that your client would consider giving us up to June 2013 to pay the amount outstanding or take up a stake in the school project which can be discussed and agreed.

Further, we are asking that a round table conference be held so that we can clarify on the above proposals to your client.

We are committed to resolving this amicably.

Yours faithfully

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Eunigold Tours and Safaris”

In terms of the Loan agreement, the respondent duly discharged its obligations as admitted in the second paragraph of the above letter.  All that the excipients are now saying is that they should not have been cited because they did not sign loan guarantees.

The respondent admits that the loan guarantees were not signed and that, generally, liability should be limited to Eunigod.  It, however, goes on to submit as follows:-

“However, there are certain circumstances courts will ignore the corporate identity and holds the individual shareholders liable for the debts and obligations of that corporation by applying a legal theory that is commonly refereed to as “The Alter Ego Doctrine”.   Under this doctrine, if a party whose interests have been injured due to the acts of a corporation can prove that the corporation entity is the alter ego of one or more individuals, the court may hold the individuals themselves personally responsible for the injurious conduct.  The courts may disregard the concept that a corporation’s separate existence is distinct from that of its shareholders, and pierce the veil thereby exposing the shareholders to personal liability for the corporate debt.

14. Further, there are other well recognised circumstances in which the courts will intervene where a company is used primarily as a vehicle of fraud or as a means of escaping pre-existing legal obligations.  The respondent sincerely believes that it has encountered the same circumstances as expounded below.  Which calls for piercing the corporate veil.

15. “Piercing the Veil” is a very important concept of limited liability.  Piercing or lifting the Corporate veil is a legal decision to treat rights or duties of a Corporation as the rights or liabilities of its shareholders.  If a corporate is considered completely separate from the individual, who owns and manages the business, those owners cannot be held responsible for the corporate’s actions; the company and individual are separate.   But if the individual acts in a way that dissolves or appears to dissolve this separation, the “Corporate Veil” between the company and individual needs to be pierced and the actions of the individual will no longer be separately considered.  Consequently the action of the shareholder/director cause other actions to be considered in weighing ability (sic) as illustrated by the cases quoted below:

15.1 in the Zimbabwean jurisdiction, in a matter between the Deputy Sheriff Harare v Trinpack Investments (Private Limited) and Anor, before PATEL J. it is aptly articulated that the cardinal principle of company law, as enunciated in Salomon v Salomon & Co Ltd [1897] AC22 (HL) and Dadoo Ltd &Ors v Krugersdorp Municipal Council 1920 AD 530 at 550, is that a company is a separate entity distinct from its members.  Nevertheless, there are well established exceptions to the principle grounded in policy considerations.  As was held in US v Milwaukee Refrigerator Transit Co (1905) 42 Fed 247 at 255:

“….when the notion of a legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association.”

Notwithstanding the above legal principles, the thrust of the excipients’ arguments come out clearly in the following paragraphs:-

“12. Excipients contend that they did not sign any unlimited guarantees in favour of respondent binding themselves as sureties and co-principal debtors as alleged by the respondent in  paragraph 6 of the declaration and therefore are not liable in anyway and that there is no cause of action against them.

12.1 It is clear at law that when shareholders of directors guarantee the obligations of the company they effectively nullify the limited liability they enjoy (See Cassim et al, Contemporary Company Law at p 39)

12.2 In terms of the loan agreement, excipients should have signed unlimited guaranteed which they did not sign.  The unlimited guarantee was the only way in which the excipients would have been bound as sureties and co-principal debtors.

13.  If the excipients had signed the unlimited guarantees, a contract of suretyship would have arisen as between them and the respondent

13.1 A contract of suretyship is concluded by agreement between the creditor and the surety.  The normal requirements for the conclusion of a valid contract have been met.

See Gower’s General Principles of Commercial Law at page 359

13.2 A person who signs as surety and co-principal debtor is both a surety and debtor.  As far as the creditor is concerned he is a co-debtor, this obligation is co-equal in extent with that of the principal debtor.

Muchabaiwa v Grab Enterprises (Pvt) Ltd 1996 (2) ZLR 691 (SC) see Mahommed Lockhart Brothers and Company Limited 1944 AD 230 at page 238

14. The agreement of the surety is accessory to the principal obligation and from these circumstances several important consequences ensue.”

Ordinarily the above arguments make so sense but they must be examined against the applicable provisions in the actual loan agreements.

Paragraph 8 of the loan facility granted on 5 April 2011 provides as follows:

“8 SECURITY

8.2 Security Held

Directors guarantees for all sums due supported by

First mortgage bond for USD234 500 over residential property on stand 424 Glen Lorne Township 14 of Lot 41 of Glen Lorne in the name of Godfrey M. Mangwende and Eunice T. Mangwende.

8.3 Security Proposed

Notarial General Covering Bond for USD171 000.00 over the company’s movable property.

Cession of insurance policy covering property to be mortgage to the bank.”

The above conditions were accepted by the first excipient on behalf of Eunigod on 9 May 2011 and the “Directors” referred to under 8.2 above are the excepients.

Paragraph 8 of the facility letter of 19 October 2011 also provides as follows:

“8 SECURITY

.1 Security Held

Unlimited directors guarantees for all sums due supported by

1st m/bond for US$234 500.00 over residential property in the name of Godfrey Machona Mangwende and Eunice Tambudzai Mangwende being no. 424 Glen Lorne Township 14 of Lot 41 of Glen Lorne.

NGCB for US$171 000.00 over the company’s movable property.

.1 Security Proposed

Nil”

Again the ‘directors’ referred to in 8.1 above are the excipients herein. The first excipient again accepted the above conditions on the same date the facility was granted.

It is also important to note that, apart from the undertakings of the excipients in terms of para 10 in both facilities, para 12 in both facilities, also provides as follows:-

“12. The bank will make this facility available to the Borrower upon receipt by the Bank of a signed copy of this letter, indicating acceptance by the borrower of the terms contained herein and upon the perfection of all outstanding and proposed securities as detailed in clause 8 above.  In the event of the facilities, or any portion thereof, being utilised by the Borrower prior to a signed copy of this letter being received by the Bank, the Borrower shall be deemed to have accepted the terms and conditions set out herein.” (My own underlining).

In light of the above clear condition, my view is that the release of the funds before the signing of the guarantees does not absolve the excipients from their obligations contained in para(s) 8 of both facility letters.  The excipients accepted those conditions and because of that, funds were released to Eunigod. In terms of para 8 in both facilities, Eunigod’s obligations were guaranteed by the excipients as its directions.  The guarantees were deemed to be in place as provided for under para 8 in both facilities.  The excipients expressly accepted that condition as read with para 12 quoted above.

Given that position, I do not think there was ever any need on the part of the respondent to consider an application for the lifting of the corporate veil. The facility letters, through para 12, clearly indicate that the release of funds would not be withheld pending the signing of ancillary documents.  The other formalities could be finalized after the release of the funds - but in terms of the facility letters already in place.  In casu, the funds were released on the strength of the agreements that were actually accepted by the excipients on behalf of Eunigold. In so doing the “Directors” accepted the terms of the agreements wherein they were guarantors of the funds advanced.

I therefore believe that by accepting the release of funds before signing the guarantees, the excipients were fully aware of their full obligations under the loan agreements.  Accordingly I find no merit in their exception.

The exception is dismissed with costs.

Messrs Mugugu & Associates, plaintiff’s legal practitioners

Messrs Mutezo & Mugomezo Guest,defendant’s legal practitioners