A DEBTOR MUST MAINTAIN COMMUNICATION WITH THE CREDITOR, PARTICULARLY IN CASES OF FINANCIAL DIFFICULTY, HIGH COURT REAFFIRMS

Brief of the case Automan International (U) Limited v Dahable Limited & Another (Civil Suit 545 of 2023) [2025] UGCommC 40 (28 March 2025)

Area of law: Commercial Transactions and Civil Procedure

Topic: Application of an interlocutory judgment where the defendant has not filed a written statement of defense under O.9 rule 8 of the Civil Procedure Rules.

Introduction

Justice Mutesi Patricia has ruled on the issue of whether the Plaintiff was entitled to general damages for financial loss, inconvenience, and hardship resulting from the Defendant's failure to pay the agreed purchase price for supplied equipment.

The Court awarded general damages of UGX 40,000,000 and upheld the Plaintiff’s claim for the unpaid balance and interest. However, the Court declined to hold the 2nd Defendant personally liable, rejecting the Plaintiff’s argument to lift the corporate veil, stating that mere control or majority shareholding is insufficient to justify lifting the corporate veil; there must be evidence of wrongdoing or improper use of the corporate structure to evade liability.

Facts

The case involved a dispute over unpaid equipment supplied for a petrol station. In 2021, the 2nd Defendant agreed to purchase equipment for a petrol station at Kawempe Kagoma but requested that the invoices be issued in the name of the 1st Defendant, a company in which he is the majority shareholder and director. The Plaintiff supplied equipment worth USD 55,150, and a payment plan was formalized on June 2, 2022, stating that ownership would transfer only after full payment. However, the Defendants only paid USD 24,014.12, leaving a balance of USD 31,135.88.

Despite multiple demands, the Defendants failed to clear the balance and eventually sold the petrol station, including the supplied equipment, to a third party without settling the debt. Additionally, the Defendants had mortgaged the petrol station to Stanbic Bank, which later sold the property after the Defendants defaulted on their loan.

The Defendants did not file a defense, leading to an interlocutory judgment in favor of the Plaintiff, ordering the recovery of USD 31,135.88 plus 18% interest per annum from January 31, 2023, until full payment.

The Plaintiff sought general damages and requested the court to lift the corporate veil of the 1st Defendant, holding the 2nd Defendant personally liable for the outstanding debt.

Holding

The Court reaffirmed that the court's primary obligation is to restore the injured party, as far as possible, to the position they would have been in had the damage not occurred as stated in Nasif Mujib & Anor v Attorney General, HCCS No. 160 of 2014

Furthermore, general damages flow naturally from a defendant’s breach and are presumed to be the immediate and direct consequence of the wrongdoing. As seen in Opia Moses v Chukia Lumago Roselyn & 5 Ors, HCCS No. 0022 of 2013

Factors considered in assessing general damages include the value of the subject matter, economic inconvenience suffered, and the nature and extent of the injury. Citing the precedents of Uganda Commercial Bank v Kigozi [2002] 1 EA 305; Bank of Uganda v Fred William Masaba & 5 Ors, SCCA No. 3 of 1998

On Lifting the Corporate Veil & Director’s Liability

The Court affirmed that the Companies Act, Cap 106, Section 20 allows the High Court to lift the corporate veil where there is fraud, tax evasion, or other exceptional circumstances. The UK Supreme Court in Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34 clarified that the corporate veil can only be pierced where there is concealment or evasion of legal obligations.

Mere control or majority shareholding is insufficient to justify lifting the corporate veil; there must be evidence of wrongdoing or improper use of the corporate structure to evade liability.

Rule of Law.

The judgment reinforces that legal persons, including corporations, must adhere to contractual obligations and that remedies for breach are clearly defined.
The assessment of damages aligns with the principle that compensation should reflect actual losses rather than serve as a punitive measure.
The Court upheld that corporate entities and individuals must operate within the legal framework without preferential treatment.

Key Takeaways

The Court reiterated that general damages should compensate for actual loss and should not serve as punishment or a windfall.
A debtor has an obligation to maintain communication with the creditor, particularly in cases of financial difficulty.
The 1st Defendant was held liable for the unpaid balance, interest, and general damages, but the 2nd Defendant was not personally liable, as there was no sufficient ground to lift the corporate veil.
The ruling underscores the importance of clear evidence when attempting to attribute personal liability to company directors.

Conclusion

This judgment reinforces the principle that corporate entities maintain distinct legal identities, and liability does not automatically extend to their directors absent sufficient evidence of fraud, concealment, or evasion of legal obligations.