UNDERSTANDING LOCUS STANDI, THE RIGHT TO SEEK RENDITION OF ACCOUNTS, AND DERIVATIVE ACTIONS IN LAW.

Insights from the case of  Chen Jianwen & 2 Ors Vs. Bang Cheng Investment Co. Ltd & 3 Ors Miscellaneous Application No. 0530 Of 2023 (Arising from Civil Suit No. 0033 of 2022)

ABSTRACT This article examines the legal concepts of locus standi, rendition of accounts, and derivative actions, based on the recent case of Chen Jianwen & 2 Ors vs. Bang Cheng Investment Co. Ltd & 3 Ors (Miscellaneous Application No. 0530 of 2023) (Arising from Civil Suit No. 0033 of 2022).

The case concerns a dispute in a Ugandan company where the applicants, who were promised a large stake, faced allegations of mismanagement and were arrested. Justice Stephen Mubiru analyzed the importance of locus standi, the right of a party to appear in court, especially in matters of sufficient interest and urgency.

The article also explores the right to seek rendition of accounts, which arises from specific relationships, such as principal-agent or partner-trustee, not from convenience or hardship. Justice Mubiru’s findings emphasize the need for a fiduciary relationship for such a suit to be valid.

Additionally, the article explains the concept of derivative actions, which are suits brought by shareholders on behalf of the company against those who breach their duties. The article outlines the requirements for a derivative suit, such as maintaining shareholder status and representing the interests of other shareholders.

This abstract gives a comprehensive overview of the legal issues in the case, highlighting the complex connections of locus standi, rendition of accounts, and derivative actions in corporate law.

INTRODUCTION

Corporate law is a complex and dynamic field that regulates the rights and obligations of various stakeholders in a company. One of the challenges that corporate law faces is how to balance the interests of the company as a whole and the interests of individual shareholders who may have different views and expectations.

This challenge becomes more acute when there is a conflict or dispute within the company, involving allegations of mismanagement, breach of duty, or fraud by the directors, officers, or other shareholders. In such situations, the question arises as to who has the right to sue on behalf of the company and seek redress for the harm caused to the company.

This article examines three legal concepts that are relevant to this question: locus standi, rendition of accounts, and derivative actions. Locus standi is the ability of a party to demonstrate to the court sufficient connection to and harm from the law or action challenged to support that party’s participation in the case[1]. In the instant case, Justice Mubiru defines Locus standi as a term locus  which literally means a place of standing. It means a right to appear in court, and, conversely, to say that a person has no locus standi means that he has no right to appear or be heard in a specified proceeding (see Njau and others v. City Council of Nairobi [1976–1985] 1 EA 397 at 407). 

Whereas the Rendition of Accounts is the claim for an account that is recognised in law where a person suing has a right to receive an account from the defendant, based on a special relationship, such as principal-agent or partner-trustee, not from convenience or hardship. In the instant case, Justice Mubiru defines rendition to mean The claim for an account is recognised in law where a person suing has a right to receive an account from the defendant. 

Lastly, Derivative actions are suits brought by shareholders on behalf of the company against those who breach their duties. In Hamadziripi F, Osode PC[2] he observes in the words of Griggs, that derivative litigation acts as a form of “corporate watchdog, to pursue an action against a wrongdoer, when the board refuses to act”[3]. He further notes that Derivative actions can also be viewed as a practical and tangible expression of the checks and balances invoked by shareholders to monitor directors’ conduct[4]. The article notes further, that derivative litigation plays a critical role in securing compensation for corporate losses or injuries[5]. The remedy protects the interests of the company for the benefit of all shareholders[6]. The article draws insights from the recent case of Chen Jianwen & 2 Ors vs. Bang Cheng Investment Co. Ltd & 3 Ors (Miscellaneous Application No. 0530 of 2023) (Arising from Civil Suit No. 0033 of 2022), which involved a dispute within a Ugandan company where the applicants, who were promised a large stake, faced allegations of mismanagement and were arrested. Justice Stephen Mubiru analyzed the importance of locus standi, the right of a party to appear in court, especially in matters of sufficient interest and urgency. The article also explores the right to seek rendition of accounts, which arises from specific relationships, such as principal-agent or partner-trustee, not from convenience or hardship. Justice Mubiru’s findings emphasize the need for a fiduciary relationship for such a suit to be valid. Additionally, the article explains the concept of derivative actions, which are suits brought by shareholders on behalf of the company against those who breach their duties. The article outlines the requirements for a derivative suit, such as maintaining shareholder status and representing the interests of other shareholders.

The article aims to provide a comprehensive overview of the legal issues in the case, highlighting the complex connections of locus standi, rendition of accounts, and derivative actions in corporate law.

BACKGROUND OF THE CASE

The case concerns a Ugandan company, incorporated in 2015, where the applicants expected a 71% stake through their sister, Ms. Chen Jian Fang. In 2019, the applicants and the 3rd respondent signed an investment agreement to fund the company, which operated in mining and stone quarry. However, in 2021, the applicants faced access denial and arrest for trespassing.

The applicants accused the 3rd respondent, the main manager, and the 2nd respondent of mismanagement. They alleged further no returns on their investment since 2019 and fraud, including share transfer without consent. The applicants requested a court order for the 4th respondent to manage the company until the case is settled, claiming financial losses and incompetence by the 2nd and 3rd respondents.

DETERMINATION BY COURT.

Before delving into the matter at hand, the court observed that as per Order 15 rule 3 of The Civil Procedure Rules, the court has the authority to formulate issues based on sworn allegations, statements in pleadings or answers to interrogatories, and the contents of presented documents. Additionally, the court can amend or introduce issues before passing a decree. In addressing the matter at hand, the court considers several key issues:

(i) The locus standi of the applicants in the dispute,

(ii) The subject matter jurisdiction of the court over the dispute,

(iii) The legal mandate of the 4th respondent to manage the 1st respondent during ongoing litigation, and

(iv) The feasibility of granting the orders requested by the applicants. The court will scrutinize these issues to determine their relevance in resolving the dispute between the parties.

Whether the applicants have locus standi in respect of the subject of dispute

THE COURT’S OBSERVATION ON LOCUS STANDI

The court emphasized that the matter of locus standi is a legal concept, where examination involves scrutinizing pleadings and relevant records. (see Mukisa Biscuit  v. West End Distributors [1969] EA 696 and Omondi v. National Bank of Kenya Ltd and others, [2001] 1 EA 177).

The court further determined,

Locus standi, meaning the right to appear in court, implies the entitlement to be heard in a proceeding. Denying someone locus standi implies they lack the right to present their case.

To establish locus standi, a person must possess a "sufficient interest" in the subject matter, characterized by adequacy, proximity, actuality, and currency. This safeguard is crucial to prevent frivolous or baseless litigation.

The court observed that,

“…The interest must be actual, not abstract or academic; and the interest must be current, not hypothetical. The requirement of sufficient interest is an important safe-guard to prevent having “busy-bodies” in litigation, with misguided or trivial complaints. If the requirement did not exist, the courts would be flooded and persons harassed by irresponsible suits…”

The court clarified that sufficient interest requires an immediate, direct, and substantial connection to the subject matter. Being aggrieved involves having a direct and pecuniary interest in the proceedings, surpassing the common citizen's interest in law compliance.

A substantial interest is one that goes beyond the general public concern. For an interest to be considered "direct," there must be a clear causal link between the issue at hand and the alleged harm.

Lastly, an interest is "immediate" when the causal connection is close and not remote or speculative. The court highlighted these criteria to ascertain whether a party is the appropriate entity to seek relief in legal proceedings.

The court observed that, The dispute centered around the capital contributions made by the applicants, totaling ¥ 57,919,927, to the business operations of the 1st respondent. The contributions were made under a nominee shareholding agreement in 2015 and an investment agreement in 2019.

Seeking legal intervention, the applicants aim to secure orders for inspecting the 1st respondent's books of account, reviewing its operations, withdrawing their contributions, recovering returns on investment, and enforcing the terms outlined in the investment agreement. The crux of the matter involves the examination and validation of the financial transactions and obligations between the parties.

THE COURT’S OBSERVATION ON THE RENDITION OF ACCOUNTS

The court observed,

“The right to seek rendition of accounts cannot be claimed as a matter of convenience or on the ground of hardship or on the ground that the person suing does not know the exact amount due to him, as that will open the floodgate for converting several types of money claims into suits for accounts, or to avoid payment of Court fees at the time of institution. The claim for an account is recognised in law where a person suing has a right to receive an account from the defendant.

Justice Steven Mubiru further noted that,

Such a right can either be

(a) created or recognised under a statute; or

(b) based on the fiduciary relationship between the parties as in the case of a beneficiary and a trustee, or

(c) claimed in equity when the relationship is such that rendition of accounts is the only relief which will enable the person seeking account to satisfactorily assert his legal right, such as in suits for administration of any property, suits by a partner of a firm for dissolution of the partnership firm and accounts, suits by beneficiary against trustee(s), suits by a co-sharer against other co-sharer(s) who has/have received the profits of a common property, suits by principal against an agent, and suits by a minor against a person who has received the funds of the minor.

NATURE OF SUIT FOR RENDITION OF ACCOUNTS:

The court observed that a suit for rendition of accounts is permissible only under specific circumstances, notably when a special relationship, such as principal and agent, bailor and bailee, guardian and ward, partner, or trustee/receiver, exists between the parties. The essential condition for maintaining such a suit is the presence of a fiduciary relationship between the plaintiff and defendant, with the latter being obligated to provide an account. This relief is not applicable solely based on a contractual relationship, even if accounts need examination during a suit.

In the context of the current suit, the component seeking rendition of accounts is intricately linked to the attempt to secure the specific performance of an investment agreement between the applicants and the 3rd respondent.

Therefore, it is a suit arising from the alleged breach of the investment contract dated 25th September 2019, where the applicants are named as parties. The focus is on the contractual obligations and fiduciary aspects governing the relationship between the parties involved.

DERIVATIVE ACTIONS AND MEMBERSHIP STATUS: LEGAL PERSPECTIVE.

The court defined a derivative suit to mean one brought by a shareholder or group of shareholders on behalf of and in the name of the corporation against the corporation’s directors, officers, or other third parties who breach their duties

To qualify as a plaintiff in a derivative suit, the individual must:

1.    Be a shareholder at the time of the act or omission forming the subject matter of the suit or become one by operation of law.

2.    Maintain shareholder status throughout the proceedings.

3.    Fairly and adequately represent the interests of similarly situated shareholders.

4.    Make a written demand for suitable action from the corporation before filing the suit, with exceptions allowing early filing under specific circumstances.

Damages in derivative suits address wrongs against the corporation, not individual shareholders, and are awarded to the corporation itself.

The applicants must hold the status of shareholders or members of the 1st respondent to maintain this aspect of the suit.

ACQUISITION OF MEMBERSHIP IN A COMPANY

The court observed further according to section 47 of The Companies Act, 2012, that membership in a company can be acquired in two ways:

1.    by subscribing to the memorandum or

2.    by agreeing to become a member and having one's name entered in the register of members.

However, a person may subscribe or agree on behalf of another, acting as a nominee shareholder.

A nominee shareholder is the registered owner of shares held for the benefit of another (the beneficial owner). 

The Companies Act defines a "beneficial owner" as a person who ultimately owns or controls a company. While there is no fixed threshold for determining effective control, 25% ownership is commonly considered acceptable. As of January 11, 2023, companies are legally required to submit information about their beneficial shareholders to the Uganda Registration Services Bureau.

WHO IS A NOMINEE SHAREHOLDER?

The court defined a nominee shareholder as a Nominee is the one who covers anyone who votes or collects dividends on behalf of the beneficial owner. 

It also includes any natural person that has voting rights, invested initial capital investment or provided funding, has a right to annual profits or has the right to the assets of the  legal person can be registered as a beneficial owner.

In addition, any natural person who is entitled to appoint, replace, or terminate members of the board of directors / commissioners, or who is authorised or entitled to influence or control the legal person without any prior authorisation from any party, also qualifies as a beneficial owner, independently of their direct or indirect ownership of shares, voting rights, or capital.

DISTINGUISHING NOMINEE AND PROXY SHAREHOLDERS IN THE LEGAL CONTEXT

The court distinguished Nominee shareholders and proxy shareholders serve distinct roles in corporate structures. Unlike proxy shareholders, who act on behalf of shareholders in their absence with full voting powers, nominee shareholders primarily function to safeguard the anonymity of the true owner and maintain privacy in public records. This arrangement is often chosen by overseas investors for simplicity and cost reduction.

In a nominee shareholder setup, a confidential declaration of trust is established between the nominee and the beneficial owner. This legal document specifies that the nominee holds the shares solely on behalf of the beneficial owner, who retains exclusive rights and benefits associated with ownership. Although the nominee's name appears on share certificates and public registers, they are a shareholder only in name. The beneficial owner retains the authority to dispose of shares, receive dividends, exercise voting rights, and enjoy other ownership benefits.

According to the facts,

Ms. Chen Jian Fang, being a subscriber to the 1st respondent's memorandum and articles of association, became a nominee shareholder through an agreement with the applicants. In their roles as signatories to the investment agreement and as the beneficial owners of shares held by Ms. Chen Jian Fang, the applicants possess locus standi.

This legal standing enables them to maintain a suit for breach of contract, seek specific performance, and potentially commence a derivative suit if the need arises.

The court affirms that the applicants have the legal standing (locus standi) concerning the subject of dispute.

THE OTHER ISSUE AROSE AS TO WHETHER THIS COURT HAD SUBJECT MATTER JURISDICTION OVER THE DISPUTE.

SUBJECT MATTER JURISDICTION IN CORPORATE DISPUTES

The court observed that,

Subject matter jurisdiction, a crucial facet of legal proceedings, is a question of law and cannot be presumed, waived, or conferred by agreement. Its absence can be raised at any time, even spontaneously by the court. The court must have subject matter jurisdiction over the specific issue in question to hear a case.

As per Section 15(c) of The Civil Procedure Act, a suit should be filed within the local limits of the court's jurisdiction where the cause of action, wholly or in part, arose. In contract-related suits, the cause of action arises where the contract was made, where it was meant to be performed, or where any money related to the suit was payable during contract performance.

In the context of the dispute arising from the nominee shareholding and investment agreements, though both were made in China, they were intended to be performed in Uganda, and all the alleged wrongs occurred there. Given that the essence of the suit is a breach of the investment agreement, with remedies sought such as specific performance, rescission, and an account, the cause of action is deemed to have arisen in Uganda.

Citing Article 139(1) of The Constitution of the Republic of Uganda, 1995, and Section 14(1) of The Judicature Act, the court asserts its unlimited original jurisdiction in all matters, subject to constitutional provisions. Consequently, the court affirms its subject matter jurisdiction over the dispute, aligning with the nature of the controversy and the location of the alleged breaches.

WHETHER THE 4TH RESPONDENT HAS THE LEGAL MANDATE TO UNDERTAKE MANAGEMENT OF THE 1ST RESPONDENT, PENDING THE ONGOING LITIGATION BETWEEN THE PARTIES;

STATUTORY AUTHORITY OF THE 4TH RESPONDENT IN CORPORATE MANAGEMENT

The court observed that,

The relief sought, involving the 4th respondent as a statutory body, assumes significance in understanding the limitations of statutory bodies' functions and powers. It is a fundamental legal principle that a statutory corporation, created by an act of parliament, can only act within the confines of its establishing legislation. The functions and powers of such bodies must align with their statutory purposes and objectives .

Court observed that

It must, therefore, be now considered as a well-settled doctrine that a Company incorporated by Act of Parliament for a special purpose, cannot devote any part of its funds to objects unauthorised by the terms of its incorporation, however desirable such an application may appear (see Eastern Counties Ry Co v Hawkes (1855) 5 HLC 331)

In this context, the 4th respondent, governed by The Uganda Registration Services Bureau Act, is entrusted with specific objects and functions. These include administering and giving effect to relevant laws, providing registration services, collecting and accounting for revenue, and advising the government on registration-related matters. The Act explicitly outlines the functions, limiting the 4th respondent to activities directly linked to the enforcement of relevant laws and the collection of revenue.

The applicants argued that the 4th respondent is mandated by law to manage and administer companies for the benefit of members and the protection of business assets and revenue to the Ugandan government. However, a closer examination of the statutory provisions reveals that the 4th respondent's functions are primarily focused on registration services and revenue collection, not on the ongoing management of companies.

Additionally, the powers conferred upon the Registrar of Companies, including the authority to investigate, report, and take specified actions, are limited to matters within the scope of company registration and compliance with relevant laws. The legislative intent, as expressed in the long title of the Act, emphasizes the establishment of an agency for miscellaneous registrations and revenue collection, without extending its reach to the management and administration of companies as going concerns.

The court concluded that the 4th respondent lacked the legal mandate to undertake the management of the 1st respondent during the ongoing litigation between the parties. The statutory authority of the 4th respondent, as per the Uganda Registration Services Bureau Act and The Companies Act, is circumscribed by specific functions related to registration and revenue collection, excluding the broader role of managing companies as ongoing concerns.

KEY TAKEAWAYS:

1. Locus Standi:

·  Locus standi is the right of a party to appear in court.

·  The party must have a sufficient interest in the subject matter, demonstrating adequacy, proximity, actuality, and currency.

·  Frivolous or baseless litigation is prevented by requiring an immediate, direct, and substantial connection to the issue.

2. Rendition of Accounts:

· The right to seek rendition of accounts arises from specific relationships, such as principal-agent or partner-trustee.

· It cannot be claimed based on convenience or hardship; there must be a recognized right to receive an account.

· Fiduciary relationships are crucial for a rendition of accounts to be valid.

3. Derivative Actions:

· Derivative actions are suits brought by shareholders on behalf of the company against those who breach their duties.

· Shareholders must maintain their status throughout the proceedings and fairly represent the interests of others.

· Damages in derivative suits address wrongs against the corporation, not individual shareholders.

4. Membership in a Company:

· Membership in a company can be acquired by subscribing to the memorandum or agreeing to become a member.

· Nominee shareholders act on behalf of beneficial owners, maintaining privacy in public records.

· Effective control is often considered at 25% ownership.

5. Subject Matter Jurisdiction:

· Subject matter jurisdiction is a question of law and cannot be presumed, waived, or conferred by agreement.

· The court must have jurisdiction over the specific issue in question to hear a case.

· The location where the cause of action arises is crucial for determining jurisdiction.

6. Statutory Authority of the 4th Respondent:

· Statutory bodies can only act within the confines of their establishing legislation.

· The functions and powers of statutory bodies must align with their statutory purposes and objectives.

· The 4th respondent's functions are primarily focused on registration services and revenue collection, not ongoing management of companies.

General Conclusion:

The case of Chen Jianwen & 2 Ors vs. Bang Cheng Investment Co. Ltd & 3 Ors provides valuable insights into the legal concepts of locus standi, rendition of accounts, and derivative actions in the context of a corporate dispute. The court's meticulous examination of these concepts emphasizes the importance of legal standing, recognized rights, and fiduciary relationships in seeking redress for alleged wrongs in the corporate realm.

Furthermore, the court's determination on subject matter jurisdiction and the statutory authority of the 4th respondent underscores the necessity for legal actions to be grounded in law and aligned with the specific functions outlined in legislation.

This case serves as a comprehensive exploration of the intricate legal connections involved in corporate disputes, contributing to a clearer understanding of the interplay between shareholders, statutory bodies, and the court in matters of corporate governance and legal remedies.

By Waboga David (PGDLP Candidate) Find this paper https://www.linkedin.com/feed/update/urn:li:activity:7140896505015554048 or on Telegram https://t.me/+jZ2V-hYEgcEwN2U1

Disclaimer!!!

This article is provided for informational purposes only and should not be considered as legal advice. It is important to consult with a qualified attorney for advice regarding your specific legal situation. Laws and regulations may change, and this article may not reflect the most current legal standards or interpretations. The information provided in this article is based on the knowledge available as of the publication date of the decision (August 9th 2023), and it may not reflect subsequent developments in the law

[1] Oxford Constitutional Law: Standing (Locus Standi) (ouplaw.com) accessed at 12/14/2023 3:48 AM

[2] Hamadziripi F, Osode PC. A Critical Assessment of Pertinent Locus Standi Features of the Derivative Remedy under Zimbabwe's New Companies and Other Business Entities Act. Journal of African Law. 2022;66(2):315-338. doi:10.1017/S0021855321000516 

[3] Ibid

[4] Ibid

[5] Ibid

[6] Ibid