ALP Legal Alert

Biyinzika Enterprises Ltd & Others v Biyinzika Farmers Ltd & Another

By ALP Advocate
on
August 20, 2021

Court of Appeal holds that where the Articles of Association of a company do not restrict transfer of shares to non-Ugandan citizens, the company is deemed a foreign company and cannot hold mailo land irrespective of the fact that Ugandan citizens have majority controlling interest.

A company with no restrictive clause on transfer of shares to non-Ugandans is deemed a “non-citizen” company: Biyinzika Enterprises Ltd & Others v Biyinzika Farmers Ltd & Another, Civil Appeal No. 18/2012

Background

In 2004, the1st respondent was incorporated by the 1st appellant (a limited liability company incorporated in Uganda) and the 2nd respondent (a limited liability company incorporated in Denmark) as shareholders holding 88% and 12% shares respectively. The 1st respondent’s articles of association did not restrict transfer of shares to non-citizens. On 11/07/2005, the 1st respondent was registered as proprietor of mailo land that had been purchased. On 06/08/2005, pursuant to a shareholders agreement, the 1strespondent’s shareholding was altered and each shareholder held 50% shares. Earlier, by a debenture dated 24/05/2005, the 2nd respondent advanced a loan to the 1st appellant secured by the latter’s shares. Upon defaulting on its loan obligations, on 01/07/2006, by memorandum of satisfaction of the debenture, the1st appellant transferred its shares in the 1st respondent to the 2ndrespondent, making the 2nd respondent the sole shareholder in the 1strespondent.

However, unknown to the respondents, the 1st respondent’s land had been sold and transferred to a one Emmanuel Bwanika who took possession and evicted the respondents from the land. The respondents sued the appellants and Emmanuel Bwanika for loss of income, damage to property, the value of the suit land or its recovery in physical form, the purchase price or its balance and general damages. The High Court entered judgement in favour of the respondents and the appellants were ordered to pay for the current value of the land, balance on purchase price, money lost in construction and labour, general damages, and costs of the suit.

The appellants filed an appeal against the judgment of the High Court in its entirety.

Judgment of the Court of Appeal

The Court of Appeal rendered its judgment on the appeal on 22/07/2021 and it allowed the appeal in part and held as follows:

1. Where the Articles of Association of a company do not restrict the transfer of shares to non-Ugandan citizens, a company, despite its majority shareholders being citizens, is a non-citizen company pursuant to s. 40(7)(e) of the Land Act Cap 277.

2. The 1st respondent was a non-citizen company even at the time of its incorporation where the 1st appellant, a Ugandan company, was still a majority shareholder.

3. Being anon-citizen company, the ownership and registration of the suit land, which was mailo land, was illegal as anon-citizen company could not in law own mailoland.

Further, the court held that no claim can succeed based on an illegality and held that ignorance of the law is no excuse and the parties should have been aware of the illegality of the land transaction. Accordingly, it set aside the High Court’s orders requiring the appellants to pay to the respondents’ monies equivalent to value of the suit land, general and special damages, and interest on the damages. However, it upheld the trial judge’s order for the appellants to refund the excess amounts of money they had received and had not used in the purchase of the land based on the principle of unjust enrichment.

Reflection on other previous decisions before Ugandan courts

In Bagalye & Another v Damanico Properties Ltd & Another, Constitutional Reference No 20/2011 [2013] UGCC 12—where the managing partner of a company with controlling interest was a British citizen—the Constitutional Court noted, in obiterdicta, that freehold title cannot be impeached solely on grounds that a registered proprietor is not a Ugandan citizen, where such a title, freehold as it may be, was issued prior to the 1975 Land Reform Decree given that the tenure of ownership would simply change from freehold to leasehold of 99 years under s. 40(5) of the Land Act.

In Lakeside City Ltd v Sam Engola & Others, HCCS No 251/2010—in which the facts were similar to the Biyinzika case—the High Court held that the 2nd defendant, having its controlling interest with non-citizens, was a non-citizen company and could not transfer interest in freehold land to the 3rd and 5th defendants. The court also noted that the 2nd defendant lacked “a clause in its Articles of Association restricting the transfer of shares to non-citizens”, which qualified it as a non-citizen. And it likewise held the 3rd and 5th defendants ’lack of restrictive clauses in their articles rendered them non-citizens“ despite their being composed of Ugandan citizens”. Notably, the court held that where a company changes its shareholding to have a controlling interest in Ugandans and amends its articles to restrict the transfer of majority shares to non-citizens, it becomes a citizen company capable of owning freehold (or mailo) tenure.

A comparative look at legislative frameworks in East Africa

Enshrined in Article 65 of the Constitution of Kenya 2010 is a provision that provides for the mode of ownership of land by non-citizens that is similar to Article237 of the 1995 Uganda Constitution. The provision of the Kenya Constitution is to the effect that a non-citizen can only own a leasehold of up to ninety-nine years and it defines a citizen company as one that is wholly owned by one or more citizens. However, the Kenyan provision departs from article 237 of the Uganda Constitution by providing that should a non-citizen be conferred interest in land other than a leasehold interest, that interest is converted to a leasehold interest of ninety-nine years and no more.  On its part, the Land Control Act Cap 302, under s. 9(1)(c), prohibits the grant of consent in respect of controlled transactions—especially in relation to agricultural land as defined in s. 6(1) of the Act—in instances where the private company or otherwise whose membership is wholly non-Kenyans.

In Tanzania, the Land Act 1999, under s. 20, provides that non-citizens can only be granted land for investment purposes—such investment purposes are defined by the Tanzania Investment Act 1997 and the procedure of applying for such grant is also provided for under the Investment Act. Further, s. 20(4) of the Land Act is to the effect that a corporate body is considered a non-citizen if majority of its shareholders are non-citizens of Tanzania.

Effect of judgment of the Court of Appeal

The judgment shines a light on a regulatory and compliance aspect that has been ignored by several Ugandan companies when drafting the Articles of Association. This is provided in s. 40(7)(e) of the Land Act which lists, in defining a non-citizen: “a company incorporated in Uganda whose Articles of Association do not contain a provision restricting transfer or issuance of shares to non-citizens.” The requirement of having a controlling interest with Ugandans is not enough to excuse a company from being anon-citizen, for a company’s articles should additionally contain a clause that restricts issuance or transfer of shares to non-citizens.

The rationale of a restrictive clause, as required under the land law, was mooted in the Lakeside City Ltd case, in which the High Court noted that merely because a company is a private company that ordinarily restricts share-transfer “does not in any way infer that it restricts the issuance or transfer of its shares to non-citizens”. The inclusion of the restrictive clause in a company’s articles is imperative. Ands. 40(7) of the Act should be adhered to in totality, and not in isolation, of the requirements. All the criteria under s. 40(7) of the Act ought to be satisfied for a company to qualify as either a citizen or a non-citizen company for the purposes of dealing in land in Uganda.

This calls for several companies to revise their Articles of Association and, where they fall short of the requirement, make the necessary amendments to avoid illegal dealings in land.

Conclusion

Diligence should be undertaken by companies at incorporation to make sure that their Articles of Association satisfy all the requirements under s. 40(7) of the Land Act in order to qualify as a citizen company for purposes of owning land in Uganda. In the alternative, where the memorandum and articles of association do not satisfy this requirement, these company documents need to be very swiftly amended.

In addition, persons dealing with land—buyers, sellers, lawyers, land registrars, etc.—should take due diligence in ensuring that the parties to land transactions satisfy the legal requirements as enshrined in the Constitution and land law.


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Disclaimer

No information contained in this alert should be construed as legal advice from ALP East Africa or ALP Advocates or the individual authors, nor is it intended to be a substitute for legal counsel on any subject matter.

For additional information in relation to this alert, please contact the following:

  • Ann Namara Musinguzi

         Head, Regulatory and Compliance Department

       anamara@alp-ea.com

  • Fiona Latigi

         Extern, Regulatory and Compliance Department