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Courts - Discretionary power - Exercise of - Circumstances in which appellate court will interfere.

Practice and procedure – Injunction – Interim – Circumstances in which courts may restrain directors from managing company.

Company law - Capital – Ownership - Investor transferring equipment to company partly for shares and partly as loan - Whether creditor may seek injunction to restrain directors from utilising equipment for company business.

Company law – Incorporation – Parting the veil – Circumstances in which veil may be parted.

The parties agreed to form Horteng Limited to take over the 2nd defendant’s sole proprietorship business, Horteng Enterprise. Originally it was agreed that the plaintiffs would own 30% shares each while the 2nd defendant, the managing director would own 40% but eventually the 1st plaintiff, the technical director was registered as the owner of 43% shares in consideration of DM 110,000 worth of equipment shipped to Ghana for the company. A further consignment valued at DM 140,000 was credited as a loan to the company.

The board of directors removed the 1st plaintiff as a director and he lost his position as technical director. Aggrieved by the removal the plaintiffs sued the company and the majority shareholder in the High Court for declarations inter alia that they held 30% shares each in the company and that the removal of the 1st plaintiff was null and void. They sought a further order that the court regulate the affairs of the company, alternatively that the defendants return all equipment invested in the company or the value, plus compensation for the use of the equipment and all salaries due to the 1st plaintiff.

The plaintiffs applied for interim injunction to restrain the defendants and all directors from interfering with the equipment pending the final determination of the suit. The trial judge declined the application on the ground that the equipment was invested for shares and had become company property. The plaintiffs appealed.

Held: (1) An appeal against the exercise of discretion would succeed only if it could be established that the lower court had misapprehended the facts. The trial judge indeed misapprehended the facts when he held that the equipment was invested in the company when not all the equipment was so invested. Out of the equipment valued at DM250,000 only DM110,000 representing 43% shares was invested; the rest was a loan. It could therefore not be said that all the equipment had become company property. The equipment comprising the loan would become company property after repayment of the loan. Till then the 2nd plaintiff remained a creditor to the company and was entitled to be assured of the safety of her security. By the removal of the 1st defendant the 2nd plaintiff, a non-resident creditor had lost all assurance of repayment of the debt.

(2) The Companies Code and other laws affecting companies were made to regulate business relationships and the affairs of human beings. Notwithstanding the corporate personality of a company, the law recognised the human element in the management of companies. In fitting situations the law would ignore the legal personality of the company in order to ensure fairness. The trial court was invited to exercise its discretion to grant an equitable relief. The Companies Code 1963 (Act 179) recognised the right to remove a director but equity would intervene. The participation of the foreign partners in the management of the business was terminated through the removal of the 1st plaintiff as technical director despite their substantial inputs. It was only fair that pending the determination of the action the other directors should also be excluded from the management of the company. The courts were bound to ensure that smart businessmen did not manipulate the laws of the land to the detriment of their foreign partners and in this instance the court would grant an interim injunction to restrain the 2nd defendant and all other directors from acting or receiving any remuneration as directors pending the final determination of this suit. In their place the Registrar-General would be the receiver and manager to take over the management of the company. Littlewoods Stores v IRS [1969] 1 WLR 1241, Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492 referred to.

Cases referred to:

Ballmoos v Mensah [1984-86] 1 GLR 724, CA.

Littlewoods Mail Order Stores Ltd v McGregor (Inspector of Taxes) [1969] 1 WLR 1241, [1969] 3 All ER 855, 113 Sol Jo 488, 45 TL 519.

Westbourne Galleries Ltd, Re [1970] 3 All ER 374, [1970] 1 WLR 1378, 114 Sol Jo 785, revsd [1971] Ch 799, [1971] 1 All ER 561, [1971] 2 WLR 618, 115 Sol Jo 74, CA, revsd sub nom Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, [1972] 2 All ER 492, [1972] 2 WLR 1289, 116 Sol Jo 412, HL.

APPEAL against the ruling of the High Court to the Court of Appeal

Ayikoi Otoo for the appellants.

Seth Danquah Wiafe for the respondents.

ACQUAH JA. My Lords, the issue in this appeal is whether the High Court exercised its discretion properly in refusing the appellants’ application for interim injunction to restrain “the defendants and all the other directors, privies, assigns, employees workmen servants and by whomsoever from interfering in whatsoever manner with all the machines, equipment and vehicles brought to the company by the plaintiffs-applicants pending the final determination of the suit herein and for such order or further orders as to this honourable

court may deem fit.” The details and particulars of the machines and equipment were set out in paragraphs 8 and 9 of the supporting affidavit.

Now the facts of the case are that the plaintiffs are German nationals and the 2nd defendant is a Ghanaian. Prior to 1990 the 2nd defendant had been running his one-man ice-cream business under the name Horteng Enterprise registered in 1978 under the Registration of Business Names Act 1962 (Act 152). Later the 2nd defendant and the plaintiffs agreed in Germany to enter into a joint-venture by converting Horteng Enterprise into a limited liability company with the plaintiffs holding 30% shares each while the 2nd defendant held 40%. This agreement was the result of the plaintiffs' willingness to bring down machinery and equipment to expand the business. A formal agreement to this effect was signed in Germany on 24 January 1990. The relevant part of the English version of that agreement states:

“Owners and directors of the company are the under-mentioned persons with their individual percentages of shares:

The conversion was effected by the 2nd defendant on 2 March 1990 with the formation of Horteng Limited, the directors of which were the 2nd defendant and one Thomas Mensah, a total stranger to the agreement. Indeed prior to the signing of the agreement the plaintiffs had in 1989 shipped into Ghana the first batch of their machinery and equipment. The 2nd batch was brought down in May 1990. The total value of the machinery and equipment brought in by the plaintiffs was DM 250,000.

The 2nd defendant then initiated the necessary processes for permission from the National Investment Centre for the participation of the plaintiffs in the business of Horteng Ltd. Subsequently the company was granted approval for 43% foreign equity share holding and a resident permit for only one expatriate shareholder. Accordingly DM110,00 representing 43% equity shares out of the DM 250,000 was registered as the foreign equity share of the 1st plaintiff, while the 2nd plaintiff was made only a director. The excess deutsche marks of the value of the machinery and equipment was treated as a loan to the company. The 2nd defendant on the other hand took the remaining 57% as his equity share.

The defendants plead that the DM110,000 investment in the company with the 1st plaintiff being the only shareholder was the result of agreement between the plaintiffs, because what was left after taking the DM110,000 out of the value of the machinery and equipment was not enough to satisfy the statutory minimum foreign capital investment of DM110,000 or US60,000. But this is denied by the plaintiffs since DM110,000 out of DM250,000, leaves more than the required DM110,000 foreign capital. Indeed the truth of the matter is that in his application to the National Investment Centre by the 2nd defendant dated 5 June 1990, for foreign participation in Horteng Limited, he applied for inter alia:

“2. Approval for the sale of 43% of the shares in the company to Mr Heinrich Koch, a West German businessman in return for the investment of DM110,000.00 in the company.

3. Approval for the repayment at the appropriate time of the loan of DM124,648.20 as set out in item 3 (investment).”

Be that as it may, the factual situation is that the 1st plaintiff alone was registered with the Registrar-General as a foreign shareholder with 43% equity shares on 16 February 1994, as stated in the affidavit of the 2nd defendant at page 181 of the record of proceedings while the 2nd plaintiff was made only a director but not a shareholder. In order to satisfy the participation of the plaintiffs in the management of the company the 1st plaintiff was also appointed the technical director.

The 2nd defendant held the post of managing director, and because the 2nd plaintiff was not granted a resident permit she resides in Germany.

Now in a resolution initiated, moved and voted for by the 2nd defendant with the support of Thomas Mensah on 1 June 1993 at a directors’ meeting, the 1st plaintiff was removed as a director and thereby lost his position as a technical director and by necessary implication, his participation in the management of the business. Aggrieved by this removal, the two plaintiffs took the instant action against the company as 1st defendant and the majority shareholder-cum-managing director as 2nd defendant, claiming as per their amended writ of summons:

“1. A declaration that plaintiffs hold 30% shares each in the 1st defendant company.

2. An order that the shareholding structure of the company be altered to reflect the shareholding of the plaintiffs.

3. A declaration that the removal of the 1st plaintiff as director of the 1st defendant company is null and void and of no legal effect.

4. An order for disclosure of all business carried on by the defendants from January 1990, when the assets and liabilities of Horteng Enterprise were taken over by 1st defendant company to date of judgment.

5. An order that 1st defendant (a) register the plaintiffs as shareholders-directors, (b) issue them with share certificates and (c) put their names on the company's register as members.

6. That the court regulate the conduct of the affairs of the defendant company in future. Alternatively:

(a) An order that the defendants return all vehicles, machinery and equipment shipped by the plaintiffs to the defendants namely, 4 ice-cream machines, two pastolab machines, one (1) big mixing machine, 40 deep-freezers, 6 cold compressors, 2 display deep-freezers, 5 big flasks, 18 big silver pans, 8 small silver pans, 1 big standing freezer, 1 cones container, one big flask holder, several ice-cream cups, 7 ice-cream spoons, container or box, 1 ice-cream cone holder, 1 shovel for flour, sugar, milk powder, ice-cream beater, 1 big Canos Automatic Machine, 1 big scale for weighing flour, sugar and milk-powder, 5 cream-scoops, cooler, 1 electric stove with 4 hot plates, water-pump, 1 big heat remover and several other equipment. 1 VM Transporter, 1 Mitsubishi Gallant caravan, 1 Talbot saloon car, 1 Nissan Sunny coupe saloon car, 1 Terra Combe bus, 2 Seat saloon cars 1 Trailer van, 1 drill machine, several spare parts, 1 wheel-barrow, 1 concrete-mixer, several carpentery tools assorted tools for the maintenance of the machines, 1 Ivoco Cold Van-tenner, 1 VW LT van, starch, stabilizer, flavour, colours & Heavy duty jack, Hand Fork-lift, 1 Unit Urvan Bus or their present day market value.

(b) An order that the defendants pay for the use of the vehicles, machinery and equipment from the date they were installed in the factory or were put into use in or about March 1990 to the date they hand them over.

(c) Payment to the 1st plaintiff of all salaries wrongly withheld from him since June 1993, and for arrears or salaries owed him since his appointment as technical director as well as dividends due.”

The plaintiffs subsequently filed an application for interim injunction as set out at the beginning of this judgment. In refusing the application the trial judge held:

“Reading carefully the affidavits for and against I come to one and only one conclusion that the machines etc. were invested in the company and plaintiffs were given shares. The said machines therefore became company property.

Currently the 1st defendant-company is using the machines for the running of the company. Why then should an order for interim injunction be placed on the company’s property where there is a misunderstanding between the plaintiffs and the 2nd defendant.”

Arguing against the ruling of the High Court Mr Ayikoi Otoo, learned counsel for the appellants submitted that the trial judge misapprehended the facts and thereby took irrelevant matters into consideration. He argued that if the trial judge had taken into consideration the agreement entered into between the plaintiffs and the 2nd defendant in Germany prior to the formation of the company and the subsequent conduct of the 2nd defendant, he would have realised that the 2nd defendant had manipulated the company laws of the country to defraud and cause injustice to the plaintiffs, and thereby made it imperative for the courts to intervene. Relying on the case of Ballmoos v Mensah [1984-86] 1 GLR 724 CA, Halsbury’s Laws of England, 3rd edition, vol 6 page 295 paragraph 598, and the just and equitable rule as expounded in Gower's Modern Company Law, 3rd ed pages 659-660, he prayed that the appeal be allowed and the prayer of his clients granted.

In a contrary submission on behalf of the respondents learned counsel, Mr Wiafe Dankwa argued that the trial judge exercised his discretion on a proper appreciation of the facts. He submitted that the machines and equipment, having been invested in the company, had in law become the property of the company, which is a separate and distinct body from its members. The machinery and equipment no longer become the property of the plaintiffs for an injunction to lie. He argued that shareholders of a company are entitled to their dividends when declared and not the assets of the company. Relying on the corporate personality of a registered company he pointed out that the application for interim injunction was grievously misconceived and the trial judge was right in holding so.

I think it is trite learning that an appeal against the exercise of a lower court’s discretion can only succeed if it can be established that the lower court misapprehended the facts and thereby exercised its discretion on wrong or inadequate grounds. In this connection, I must commend counsel for the respondents, Mr Wiafe Dankwa, for honourably conceding that on the undisputed facts, the trial judge’s findings are, with respect, not wholly correct. For first, not all the machinery and equipment were invested in the company. Of the DM 250,000 value of machines only DM110,000 representing 43% shares were invested. The remaining was treated as a loan. Thus it is not true that all the machinery and equipment had become the property of the company. Only a portion had become the company's property. The remaining becomes the property of the company after payment of the loan. Of course the defendants alleged that they had paid off the loan, but the plaintiffs deny this.

Secondly, it is also not correct that both plaintiffs were given shares in the company. Only the 1st plaintiff was allotted 43% shares. The 2nd plaintiff was not made a shareholder although the defendants admit that the DM250,000 worth of machines and equipment were brought in by both plaintiffs. Paragraph 10 of the 2nd defendant’s affidavit sworn on 27 July 1993 and filed on 28 July 1993, at page 28 of the record of proceedings, reads:

“10 That not all the machinery sent by the plaintiffs was invested in 1st defendants company. Part of it was given to the 1st defendant’s company as loan, and the cost of the said machinery is being repaid by 1st defendant to the bankers of the plaintiffs.” (Emphasis mine.)

Accordingly, until it is satisfactorily proved at the hearing of the substantive action that the said loan had been repaid, the 2nd plaintiff, although not a shareholder remains a creditor of the company and entitled to be assured of the security of her investment.

I take note of the fact that the hearing of the substantive action had not started and therefore the enforcement of the agreement entered into in Germany between the parties, the wrongfulness or otherwise of the removal of the 1st plaintiff as a director, the alleged repayment of the loan of over DM110,000 and a host of other disputed issues remain to be resolved.

But from the facts as set out earlier and materials on the record of proceedings it cannot be doubted that first, the plaintiffs brought in DM250,000 worth of machinery towards the conversion of Horteng Enterprise to Horteng Limited.

Secondly, that they brought in those machines to entitle them to become members and take part in the management of the company, Thirdly, that although both of them were made directors it was only the 1st plaintiff who was made a shareholder with 43% equity shares. Fourthly, that less than six months after the 1st plaintiff had signified his acceptance of the 43% equity shares he was removed as a director of the company on a resolution initiated, moved and voted for by the 2nd defendants supported by the other director, Thomas Mensah. Indeed the fact that the plaintiffs brought in the machinery not only to become members of the company but also to participate in its management is admitted by the 2nd defendant when in his application to the National Investment Centre for approval for participation of the plaintiff in the company he stated in paragraph 3 on the benefits and incentives as:

“(3) Approval for Mr Hainrich Koch, his wife Sybilla Franssen and daughter Sandra Gonow to live in Ghana to help manage the company.” (Emphasis mine.)

With the removal of the 1st plaintiff as technical director thereby denying the plaintiffs participation in the management of the company, a fundamental underlying aspect of the relationship they agreed had therefore been denied. The 1st plaintiff, through ceasing to be a director had lost his share in the directors’ remuneration, retaining only the chance of receiving dividends as a minority shareholder. And it must be pointed out that no dividends of the company had since its inception been declared. The fact remains therefore that the 1st plaintiff, as only a shareholder, will remain henceforth at the mercy of the 2nd defendant as to what he should receive out of the profits and when. The 2nd plaintiff who is only a creditor and director, and resident in Germany has by the removal of her colleague 1st plaintiff as director, lost all assurance that the huge debt owed by the company would be paid. What guarantee has she got of the safety and proper utilization of her machinery as the management of the company is now under the complete control of the 2nd defendant? For as pointed out, the defendants concede that although the 2nd plaintiff is not a member, she and the 1st plaintiff brought in the machinery.

In this appeal counsel for the respondents had contended that the removal was in compliance with the Companies Code 1963 (Act 179) and he made capital out of the corporate personality of that company. But it must not be forgotten that the Code and the other laws affecting companies, are made to regulate the business relationship and affairs of human beings. Notwithstanding the company's corporate personality therefore, the law recognises the human element in the management of companies and in fitting situations ignores the legal personality and intervenes to ensure equity and fairness to an aggrieved party. For, as pointed out by Prof Gower in his Final Report of the Commission of Enquiry into the Working and Administration of the Present Company Law of Ghana the rules of common law and equity applicable to companies and consistent with the Companies Code continued in force. As Lord Denning cautioned in Littlewoods Mail Order Stores Ltd v McGregor (Inspector of Taxes) [1969] 1 WLR 1241:

“The doctrine laid down in Salomon’s case has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But this is not true. The courts can and often do, draw aside the veil. They can and often do, pull off the mask. They look to see what really lies behind.”

Lord Wilberforce in Ebrahimi v Westbonrue Galleries Ltd [1972] 2 All ER 492 at 500, hit the nail directly on the head when he said:

“[A] limited company is more than a mere judicial entity, with a personality in law of its own; that there is room in company law for recognition of the fact that behind it, or amongst it there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure… The just and equitable provision does not as the respondent suggests, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations that is of personal character arising between one individual and another, which may make it unjust or inequitable, to insist on legal rights, or to exercise them in a particular way.”

My Lords, the application before the trial court was an invitation to exercise its discretion to grant an equitable relief, to wit, interim injunction. And on the facts is it equitable to allow the 2nd defendant aided by Thomas Mensah to take advantage of the law to the prejudice of the plaintiffs? The Companies Code undoubtedly recognises the right in many ways to remove a director from the board. But equity may intervene on behalf of the affected person if there is an underlying obligation of his fellow member in good faith, or confidence that so long as the business continues he shall be entitled to management participation. In the instant case such an underlying obligation was implied by the agreement entered into in Germany and the application for the plaintiff’s participation in the management of the business made by the 2nd defendant to the Investment Centre.

I concede that to grant the actual request of the plaintiffs would cripple the company and throw out about fifty employees. But it is at the same time unfair to allow the 2nd defendant and Thomas Mensah to manage and enjoy director's remuneration and allowances out of the proceeds of the use of the machinery. An earlier order by the High Court for the 1st plaintiff to be paid some remuneration pending the determination of this suit was vehemently resisted by the respondent with the result that the Court of Appeal stayed the execution of that order. The plaintiffs are therefore currently earning nothing from their investments in the company.

In all the circumstances of the case and to strike an even balance between the parties, I will allow the appeal and set aside the order of the High Court. And exercising my powers under rule 31 of the Court of Appeal Rules 1962 (LI 218) grant an interim injunction restraining the 2nd defendant and all other directors from acting and receiving any remuneration as directors pending the final determination of this suit. In their place I appoint the Registrar-General as receiver and manager to take over the management of the company.

The 2nd defendant and all other directors are therefore to hand over all the books of the company to the Registrar-General within 30 days of this order. I have made the above orders firmly believing that if the 2nd defendant and the other directors have terminated the participation of their foreign partners (through the removal of the 1st plaintiff as technical director) in the management of the business in the face of the foreigners’ substantial inputs in the company and the avowed understanding that they would take part in the management thereof, then it is fair that pending the final determination of this suit the said directors should also be excluded from the management of the company. For the courts of this country are duty bound to ensure that our company laws are not cunningly manipulated by smart businessmen to the detriment of their foreign partners.