Mabel Dete v Muungwe Investments (Private) Limited and 4 Others

### Preamble
1
HH 107-22
HC 10161/19
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MABEL DETE

versus

MUUNGWE INVESTMENTS (PRIVATE) LIMITED

and

DIDYMUS NOEL MUTASA

and

TEMBA PETER MLISWA

and

MARTIN MUTASA

and

THE REGISTRAR OF DEEDS N.O.

HIGH COURT OF ZIMBABWE

ZHOU J

HARARE, 12 October 2020 & 17 February 2022

Opposed Application

T W Nyamakura, with him S K Chivizhe, for the applicant

T Makamure, with him V Mhungu, for the second respondent

ZHOU J:    This is an application instituted in terms of s 196 of the Companies Act [Chapter 24:03].  The applicant, who asserts that she is a shareholder, holding 10 percent of the shares, in the first respondent, complains about the manner in which the affairs of the first respondent are being conducted by the second respondent who is the majority shareholder. The application is opposed by the second respondent.

Background

The first respondent is a company in which the applicant and the second, third and fourth respondents are presented as the shareholders.  The second respondent holds 70 percent shareholding while each of the other three holds 10 percent of the shares.  The shareholding structure is contained in an agreement signed by the parties.  In 2007 the first respondent was allocated tracts of land by the Government through the relevant Ministry.  The land was meant for the development of residential properties, industrial use, commercial use, and for the construction of a hotel.  The land was registered in the name of the first respondent under the following deeds: Deed of Transfer Number 7972/2008, Deed of Grant Number 6600/2008 and Deed of Grant Number 8874/2008.  The applicant states that she was the Project Coordinator for the first respondent.  She details what she did in respect of the acquisition and registration of the properties in the name of the first respondent and in doing other work for the company.  The applicant resigned as director of the first respondent in 2017 but retained her shareholding.

She alleges that she has discovered that the second respondent who is the Chairman and a director is managing the affairs of the first respondent in a manner which is oppressive and pre-judicial to her interests and those of the other shareholders.  The applicant states that the second respondent has encumbered the immovable properties by mortgage bonds executed to secure loans which he took in his individual capacity and for his personal gain.  The mortgage loans are said to have been taken without the consent and authority of the other directors and shareholders of the first respondent.  The applicant gives a detailed narration of the mortgage bonds registered on the properties at the instance of the second respondent.  The total amount of the loan secured through the mortgage bonds is USD1 135 000.00 which, according to the applicant, exceeds the value of the properties which is USD1 100 000.00.  The loans are not for the benefit of the first respondent.  The applicant contends that she is entitled to convert her 10 percent shareholding into land title as provided for in the shareholders’ agreement.  She states that she is entitled to 110 hectares of land.

The second respondent through an affidavit deposed to by his legal practitioner, has opposed the application on what are perceived to be questions of law.  In other words, in the absence of an affidavit by the second respondent himself all the averments of fact as contained in the applicant’s founding affidavit must be taken as admitted because they have not been disputed.   (See Fawcett Security Ops (Pvt) Ltd v Director of Customs & Excise 1993 (2) ZLR 121(S) at 127F; Shumba & Anor v ZEC & Anor 2008 (2) ZLR 65(S) at 70G-71A;  Chindori-Chininga v National Council for Negro Women 2001 (2) ZLR 305(H) at 308H-309A.

The grounds of opposition taken on behalf of the second respondent are that (a) the application is defective because it seeks to vindicate the rights of the applicant rather than those of the company; (b) that the application was prematurely instituted in the absence of a decision by the shareholders as to how to protect the rights of the first respondent; (c) that the relief sought is incompetent because it seeks to usurp the function of majority of the shareholders; and (d) that there is no cause of action because the mortgage bonds complained of pre-date the shareholders’ agreement relied upon by the applicant.  Based on this same ground, the second respondent also submits that the applicant has no locus standi to institute the proceedings for the relief sought.

In the answering affidavit, the applicant objects to the opposing affidavit having been deposed to by the second respondent’s legal practitioner on the grounds, firstly, that authority to depose to it has not been established and, secondly, that the legal practitioner deposes to facts which are not within his knowledge.  Although this point was discussed in the applicant’s heads of argument, no relief was sought in respect of the opposing affidavit.  In this case I would have seriously considered striking out the legal practitioner’s affidavit if the court had been moved to do so, for the reason there is no evidence of authority given to the legal practitioner to depose to the affidavit.  It has been held in many cases that legal practitioners should not depose to affidavits on behalf of their clients except in those cases where the facts are within the exclusive knowledge of the legal practitioner.  Even then, the litigant must confirm that he or she is relying on the evidence of the legal practitioner.  In the absence of an affidavit from the litigant such a litigant would not have placed himself or herself before the court. Secondly, in the context of the instant case, the legal practitioner, apart from using his affidavit to make legal arguments and other argumentative submissions which should be contained in heads of argument, goes on to make averments on factual issues which are not within his knowledge save by way of hearsay.  Paragraphs 24, 25 and 26 contain factual averments.  In para 30 the deponent to the opposing affidavit even has the temerity to deny “each and every averment in the applicant’s founding affidavit which is inconsistent with the above facts”.  Also, the legal practitioner’s affidavit in this case is even presented as the “second respondent’s opposing affidavit”.  In future the court might be persuaded to order a legal practitioner who has taken it upon himself or herself to depose to an affidavit on behalf of a client to pay costs de bonis propriis in a case where the judgment is against his or her client.

A point in limine was taken on behalf of the second respondent that the applicant has no locus standi to institute the application.  I dismissed the objection and indicated that the reasons for the dismissal would be given in the final judgment.  The ground upon which the objection was taken was that the applicant is not a member of the first respondent, and could therefore not institute this application seeking relief in terms of s 196 of the Companies Act [Chapter 24:03].  The question of whether or not the applicant is a member is a factual issue that falls for determination in relation to the merits of the application.  In the founding affidavit the applicant avers that she is a member, see para(s) 22 and 25.  If the second respondent was challenging such membership then it was up to him to lead evidence in support of his case.  He could not raise an objection in limine based on the issue of membership as if his version is common cause.  The objection was thus unsupportable.

The law

Section 196(1) of the Companies Act [Chapter 24:03] provides as follows:

“A member of a company may apply to the court for an order in terms of section one hundred and ninety-eight on the ground that the company‘s affairs are being or have been conducted in a manner which is oppressive or unfairly prejudicial to the interests of some part of the members, or that any actual or proposed act or omission of the company, including an act or omission on its behalf, is or would be so oppressive or prejudicial.”

The above provisions afford a member, including a minority shareholder, relief from oppression by the majority, through the personal action which is provided for.  The provisions encapsulate the common law derivative action by which a minority shareholder has a remedy for fraud or maladministration being committed by the majority shareholders against the company to its prejudice or to the prejudice of the minority shareholders. See Tett and Chadwick, Zimbabwe Company Law 2nd ed. p. 79.  It has been held that the derivative action is an exception to the rule in Foss v Harbottle (1843) 67 ER 189, which prescribes that if it is defrauded by a wrongdoer, the company itself is the one person to sue for the damage, and that, generally speaking, an individual member cannot sue to redress a wrong done to the company see L Piras & Son (Pvt) Ltd & Anor v Piras 1993 (2) ZLR 245(S) at 250H-251E.  In the case of L Piras & Son (Pvt) Ltd & Anor v Piras, supra, at p. 251F, GUBBAY CJ said:

“The nature, then, of a derivative action is that it is a device designed to enable the court to do justice to a company controlled by its wrongdoers and prevents a serious wrong from going unremedied.  A shareholder is allowed to appear as the plaintiff.  He acts, not as representative of the other shareholders, but as a representative of the company to enforce rights derived from the company.  The action is brought by him in his own capacity to vindicate the company’s rights.”

However, the remedy provided by s 196 is unique and distinct in that it is meant to afford recourse to the member rather than to the company per se.  In other words, while in the derivative action the shareholder acts as a representative of the company, the member who institutes proceedings in terms of s 196 is representing himself or herself although in essence he is protecting the interests of the members of the company and, indeed, the company itself.

Section 198 of the same Act defines the powers of the court where an application is made in terms of s 196.  It states:

“198 Powers of court in applications under sections 196 and 197

If the court is satisfied that an application under section one hundred and ninety-six or one hundred and ninety-seven is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.

Without prejudice to the generality of subsection (1), the court’s order may –

regulate the conduct of the company’s affairs in the future.

require the company to refrain from doing or continuing an act complained of by the applicant or to do an act which the applicant has complained it has omitted to do.

authorize civil proceedings to be brought in the name and on behalf of the company by such person or persons as the court may direct.

provide for the purchase of the shares of any members of the company by other members or by the company itself and in the case of a purchase by the company itself the reduction of the company’s capital accordingly.”

The powers given to the court in terms of s 198 are wide and far reaching, and involve the exercise of a discretion.  That discretion must, of course, be exercised judicially.  The idea is to ensure that the wronged shareholder or shareholders or the company are afforded protection against the oppressive or prejudicial conduct of those who are conducting the affairs of the company contrary to the interests of the other shareholders or the company itself.

The issues for determination

The issues to be determined are: (a) whether the applicant is a member of the first respondent and (b) whether she is entitled to the relief sought.  The second respondent submitted that the applicant is not a shareholder of the first respondent. But the applicant’s factual averments that she is a shareholder have not been disproved.  The affidavit deposed to by the legal practitioner cannot contest these factual averments.  There is a shareholders’ agreement duly signed by the shareholders of the first respondent, including the second respondent and the applicant.  The minutes of a meeting of 20 December 2008 record the applicant as one of the members of the first respondent.  The second respondent, so it seems, signed those minutes as the Chairman.  The applicant has thus proved that she is a member of the first respondent.

The second respondent’s contention that the application is improperly before the court because it was not authorized by the shareholders of the first respondent is not sound, because the cause of action is one that is available to a member.  Proceedings in terms of s 196 of the Companies Act or under the derivative action require no authorization by the shareholders.  The shareholder who alleges oppression or prejudice arising out of the manner in which the company is being run is the one who has the entitlement to approach the court for relief.  For these reasons, too, the suggestion that the application is invalid because the applicant is seeking to protect her rights is without substance.

It was also argued on behalf of the second respondent that the mortgage bonds complained of were constituted over the properties of the first respondent before the applicant became a member.  In this respect, the legal practitioner who deposed to the affidavit on behalf of the second respondent points to the dates of the mortgage bonds and the date on which the shareholders’ agreement attached to the papers was signed.  The applicant has stated that she has been a member of the company since 2007, and that the written memorandum was meant to confirm her shareholding.  Her averments stand unchallenged.  Indeed, the minutes of annual general meeting referred to earlier on pertain to a meeting that was held on 20 December 2008, which shows that by that time she was already a member of the company.

The fact that mortgage bonds were constituted over the property of the first respondent has not been disputed by the second respondent.  Second respondent has also not disputed that the other shareholders and directors were not involved and did not consent to the mortgaging of the company’s assets.  It has not been denied that the bonds were meant to secure the second respondent’s personal obligations and not those of the company.  Allegations that the creditors are threatening to foreclose on the mortgage bonds have not been denied.  The allegation that the second respondent has not called any meeting but has been unilaterally making decisions affecting the company by himself have also not been denied.  All these allegations must therefore be taken as admitted.  The allegations prove that the affairs of the first respondent are being conducted by the second respondent in a manner that is not only oppressive but also prejudicial to the other shareholders and the company.  The exposure of the company to the personal liabilities of the second respondent exposes the company to liquidation.  The applicant was therefore entitled to approach the court in terms of s 196 of the Companies Act to seek relief.

The relief sought

The applicant asks for an order directing the first respondent to transfer to her one hundred and ten (110) hectares of unencumbered land with road frontage on the Rusape dam highway.  The land is to be taken from the properties registered under the deed of transfer and deeds of grant stated in the draft order.  She wants the court to order the first respondent to pay the taxes and costs involved in the said transfer.  The applicant, further, asks that pending the transfer of the land to her, the second respondent must be interdicted from encumbering or alienating the immovable property of the first respondent other than with the consent of the applicant given in a general meeting of shareholders.

In the shareholders agreement, the shareholders contemplated the kind of relief which the applicant seeks in casu, hence the provision under the clause numbered “D”, that a member was entitled to land equal to the value of his or her shareholding and to title to that share of land.  The applicant’s shareholding translates to one hundred and ten hectares of land.  She is therefore entitled to that land.  There is, however, the reality that if there are mortgage bonds registered on the property they would have to be uplifted before any portion of the land can be alienated.  This is so because the mortgage bond encumbers the entire, not a portion of, the land, if the land is under one deed of transfer or deed of grant.  However, these are matters that the first respondent can attend to in the course of the subdivision of the land.

Costs

The applicant has sought costs against the second respondent on the attorney-client scale.  This is a punitive order of costs which is granted in special circumstances, such as where the defence advanced is vexatious, or where the affected party is guilty of some reprehensible conduct.  In the present case no such special reasons were shown to exist.  The conduct complained of has been going on for a long time.  The applicant only approached the court in 2019.  There is no evidence that the applicant tried to stop the second respondent from conducting the affairs of the first respondent in the manner complained of at the time that he registered the mortgage bonds.  Also, the second respondent himself did not personally contest the application.  Instead, his legal practitioner filed an opposing affidavit in circumstances which even the applicant has challenged.  For these reasons, only costs on the ordinary scale would be justified.

Disposition

In the result, IT IS ORDERED THAT:

The first respondent transfers to the applicant one hundred and ten (110) hectares of unencumbered land with road frontage on the Rusape dam highway from the property held under Deed of Transfer Number 7972/2008, Deed of Grant Number 6600/2008 and Deed of Grant Number 8874/2008, failing which the Sheriff of the High Court be and is hereby authorized to take all steps reasonably necessary, including signing all the necessary documents, to give effect to this order.

The first respondent shall pay all the costs, including taxes and outstanding rates, necessary to give effect to paragraph 1 hereof.

Pending compliance with paragraphs 1 and 2 hereof, the second respondent be and is hereby interdicted from mortgaging, alienating or otherwise encumbering the immovable property described in paragraph 1 hereof other than with the consent of the applicant given in a general meeting of shareholders of the first respondent.

Second respondent shall pay the costs of suit.

AB & David, applicant’s legal practitioners

GN Mlotshwa & Company, second respondent’s legal practitioners