Ames Engineering (Pvt) Ltd v Mekias Munyaradzi and Others

Ames Engineering (applicant) entered into a verbal agreement with Nu Aero (Pvt) Ltd t/a Fly Africa (6th respondent/the company) in November 2017. The agreement was that applicant would pay money to the company in Zimbabwe and the company would in turn pay applicant's suppliers in South Africa. Between 21-30 November 2017, applicant paid USD220,336.42 to the company. The company's representatives, including the 7th respondent and one Mr Chimedza, represented that they had Reserve Bank of Zimbabwe approval for such transactions. The company failed to pay applicant's suppliers and failed to return the funds. Applicant obtained summary judgment against the company in HC 2915/18 on 29 November 2018. A writ of execution was issued but the Sheriff returned a nulla bona, indicating insufficient assets. Applicant then brought this application under section 318 of the Companies Act to hold the directors (1st and 7th respondents) personally liable for the judgment debt, alleging the business was conducted fraudulently, recklessly or with gross negligence. The 1st respondent opposed, claiming he resigned as director on 24 January 2017 and had an indemnity from the company. The 7th respondent and company did not oppose.

• Whether the directors of the company conducted its business in a fraudulent manner within the meaning of section 318(1) of the Companies Act
• Whether the 1st respondent could rely on his purported resignation as a director to escape personal liability
• Whether the distinction between executive and non-executive directors is relevant for purposes of liability under section 318(1)
• Whether an indemnity agreement between a director and company can shield the director from personal liability to third parties under section 318(1)
• Whether the Turquand Rule applies to entitle third parties to assume compliance with internal company procedures

1. It is declared that Mekias Munyaradzi and Cassindy Mugwagwa (1st and 7th respondents) be and are hereby declared personally responsible, without limitation, for the debt owed to the applicant by Nu Aero (Pvt) Limited t/a Fly Africa in terms of section 318 of the Companies Act. 2. The 1st and 7th respondents be and are hereby joined as judgment debtors to the judgment debt owed to the applicant in terms of the court order handed down by the Honourable Mr. Justice Mabhikwa J on 29th November 2018 in case No. HC 2915/18. 3. The 1st and 7th respondents be and are hereby ordered to pay costs of suit, jointly and severally, the one paying the others to be absolved.

Under section 318(1) of the Companies Act [Chapter 24:03], directors who carry on the business of a company in a fraudulent manner can be held personally liable, without limitation, for the company's debts. For purposes of section 318 liability, there is no distinction between executive and non-executive directors - all directors owe fiduciary duties to the company. A director's resignation does not relieve him of directorial duties under section 187(7) unless he notifies the Registrar of Companies and has reasonable grounds to believe the company will update its records. Where a director's name remains on the CR14 register, there is a presumption under section 12 of the Companies Act that he is a director, and he is deemed to hold himself out as such to third parties. An indemnity agreement between a director and company is merely an internal arrangement and cannot affect the rights of third parties or shield a director from personal liability under section 318. Third parties dealing with a company are entitled under the Turquand Rule to assume that internal company procedures have been complied with.

The court observed that the nature of a company as an artificial entity means it can only act through the agency of directors and employees, with directors being those who direct and control the company's affairs. The court also noted that once a judgment debt has been established against a company in prior proceedings, issues regarding the validity of the underlying transaction (such as board resolutions) cannot be reopened in subsequent section 318 proceedings - permitting such debate would amount to opening the prior cases "via the back door." The court referenced the English case of Orkin Bros Ltd v Bell 1921 T.P.D. 92 as illustrative of how directors who purchase goods on credit without believing they can be paid for can be held personally liable for fraudulent misrepresentation.

This case is significant in Zimbabwean company law as it reinforces the principle that corporate personality can be pierced to hold directors personally liable for fraudulent conduct. It establishes that: (1) the distinction between executive and non-executive directors is irrelevant for section 318 liability; (2) directors cannot escape liability through purported resignation if they fail to comply with notification requirements under section 187(7) of the Companies Act; (3) indemnity agreements between directors and companies cannot shield directors from third party claims; and (4) section 318 serves to discourage abuse of corporate personality and fraudulent use of corporate entities. The case demonstrates the court's willingness to look beyond the corporate veil where directors engage in fraudulent representations to induce third parties to contract with the company.