ALP Legal Alert

No legal requirement for a foreign company to register in Uganda unless it intends to establish a place of business: Krone Uganda Limited v. Kerilee Investments Limited [2021] UGCommC 16

By ALP Advocate
on
June 25, 2021

High Court underscores a difference between incorporation of a company and its registration for purposes of foreign presence, and holds that a foreign company need not register in Uganda unless it has the intention of establishing a place of business in Uganda.

No legal requirement for a foreign company to register in Uganda unless it intends to establish a place of business: Krone Uganda Limited v. Kerilee Investments Limited [2021] UGCommC 16


Brief facts

The Applicant brought an application seeking to set aside a consent judgment it had executed with the Respondent arising from HCCS No. 365/2015. The Applicant sought to set it aside on grounds that its consent had been obtained illegally, fraudulently and erroneously. The basis of illegality was founded on the contention that, at the time of instituting HCCS No. 365/2015, the Respondent was a non-existent entity since it was not registered in Uganda as a foreign company and, as such, could not bring or maintain a court action in Uganda. In rebuttal, the Respondent argued there was no legal requirement for an incorporated company to register as a foreign company under the Companies Act 2012 before it could institute legal proceedings.

This Alert examines the ruling of the High Court (Commercial Division) on this question and reflects on the impact of the ruling in light of the provisions of the Companies Act 2012 and a comparative review of company legislation and case law of a number of common law countries in Africa. The Alert assesses the correctness or otherwise of the ruling and examines, if at all, its reasoning might have benefited from a comparative understanding of the company laws in other African jurisdictions.

Ruling of the High Court

The High Court rendered its ruling on the application on May 21, 2021. In rejecting the prayer to set aside the consent judgment on grounds of illegality, the court held there was no legal requirement for a foreign company to register under the Companies Act 2012 before it could institute legal proceedings or carry out business in Uganda. Further, the court stated that a company, duly incorporated in another jurisdiction, was only required to register as a foreign company in situations where it desired to establish a place of business in Uganda. In the end, the court held that the respondent, incorporated in the United Kingdom in 2010, was a duly incorporated entity when the main suit was instituted in 2015, and the registration in 2017 was “for purpose of complying with the provisions of Part VI of the Companies Act and being able to establish a place of business in Uganda.” In the court’s view, the non-registration as a foreign company did not "disempower a duly incorporated company from transacting business in Uganda and from bringing or maintaining a court action in Uganda.”

Reflections on other cases and company legislation in other jurisdictions in Africa

In its ruling, the High Court distinguished the case of Abdul Rahman Elamin v Dhabi Group & 2 Others, CACA No. 215/2013 which was relied upon by the Applicant in its contention that the respondent was a non-existent entity since it was not registered as a foreign company. In that case, the Court of Appeal, in agreeing with the trial judge that the First Respondent was not legally registered as a foreign company in Uganda, stated: “The law is that if a company is not incorporated in Uganda, as it is alleged to be, then that means that it does not exist in Uganda as a body corporate.” In distinguishing the appellate court’s decision, the High Court judge noted that the Court of Appeal held that there was nothing in the First Respondent’s pleadings to demonstrate that it was a company that existed within the court’s jurisdiction, Further, the judge noted that, unlike the Applicant’s case, Dhabi Group was not privy to the contract that was the subject of the appeal.

Be that as it may, while the ruling of the High Court is likely correct in terms of the provisions of the Companies Act 2012,the reasoning is confusing and quite unclear. A difficulty with the reasoning is the court’s repeated distinction between the respondent company’s capacity to “transact business” and “establish a place of business.” While significant, the distinction is confusing, and is like that of six and half dozen, especially when viewed through the prism of comparative company legislation in other African common law jurisdictions.

What is clear from Uganda’s Companies Act 2012 and company legislation of ten countries—Botswana, Ghana, Kenya, Lesotho, Malawi, Mauritius, Nigeria, South Sudan, Tanzania, and Zambia—is a mandatory requirement to register as a foreign company for purposes of foreign presence or establishment. The phraseology used differs—from “establish a place of business” (Uganda, Botswana, Ghana, Lesotho, Tanzania, and Zambia)’“carry on business” (Kenya) to a combined “place of business or carrying on business” (Malawi, Mauritius, Nigeria, and South Sudan). The countries’ laws require registration as a foreign company within a specified time after establishing of “place of business” or commencing “carrying on business”—with exception of Lesotho at 10 days, the majority, as is the case of Uganda, is 30 days (or one month).

In light of the comparative legislative language, the High Court’s repeated references in Krone Uganda Limited case to “transact business” is confusing. Notably, company legislation of other African countries reveals indicia or criteria of what constitutes either “place of business” or“ carry on business” in order to bring in play the mandatory requirement to register as a foreign company. The indicia or criteria is not in Uganda’s Companies Act 2012 which, unfortunately, but for a few changes, replicates provisions on “foreign companies” of the previous Companies Act Cap 110 (and is a case of old wine in a new bottle). The company legislation of Ghana and Zambia are instructive as regards what constitutes(and does not constitute) establishment of a “place of business.” A foreign company (or, in Ghana’s legislation, external company) has an established place of business if it has a branch or management office; office for registration of transfer of shares; factory, mine, or any other fixed place of business. Conversely, there is no established place of business where a foreign company(i) has an agent without contractual authority or regularly filled stock of merchandise; (ii) carries on business dealings through a broker or commission agent; and (iii) has subsidiary that is incorporated, resident, or carrying on business. In the latter two instances, the office of a broker or commission agent and setting up a subsidiary of itself is not an established place of business of a foreign/external company. Interestingly, the previous Companies Act Cap 110 provided for a foreign company not to be deemed to have a place of business in Uganda solely on account of doing business through an agent. This was not retained in the 2012 Act. The legislation of Ghana and Zambia, enacted in 2019 and 2017 respectively, reform the “agent” qualification for purposes of an established place of business in terms of contractual capacity and merchandise.

On the other hand, company legislation of Malawi, Mauritius and South Sudan are instructive as regards what constitutes (and does not constitute) “carry(ing) on business. ”The Mauritius and South Sudan legislation provide indicia of “carrying on business” similar to “establish a place of business” in foregoing legislation—(i) establish or use a share transfer or registration office; and(ii) administer, manage, or deal with property (as an agent, personal representative or trustee). As regards indicia or criteria of when a foreign company is not be held to “carry on business”, the list is long and is reproduced as follows—

… A foreign company shall not be held to carry on business in [Malawi, Mauritius, South Sudan] merely because in [Malawi, Mauritius, South Sudan] it—

(i) is or becomes a party to a legal proceeding or settles a legal proceeding or a claim or dispute;

(ii) holds meetings of its directors or share holders or carries on other activities concerning its internal affairs;

(iii) maintains a bank account;

(iv) effects a sale of property through an independent contractor;

(v) solicits or procures an order that becomes a binding contract only if the order is accepted outside [Malawi, Mauritius, South Sudan];

(vi) creates evidence of a debt or creates a charge on property;

(vii) secures or collects any of its debts or enforces its rights in relation to securities relating to those debts;

(viii) conducts an isolated transaction that is completed within a period of 31 days, not being one of a number of similar transactions repeated from time to time; or

(ix) invests its funds or holds property.

As noted, the High Court’s ruling of the Krone Uganda Limited case is likely correct in terms of the provisions of the 2012 Act. While the repeated reference to a foreign company’s capacity to “transact business” is confusing and unhelpful—given that it is unclear what business the respondent was involved in, beyond the “export permit (and documents”) that were subject of orders sought for specific performance in HCCS No 365/2015—the finding that the respondent is not disempowered from instituting court action in Uganda on account of non-registration as a foreign company is correct. However, the correct legal premise for a foreign company to bring or maintain court action in Uganda is the fact that such capacity is not deemed to constitute establishment of foreign presence in Uganda. Overall, the ruling is correct to the effect that there is no need for a foreign company to register unless it is establishing foreign presence, by way of either a “place of business” or “carrying on business.”

That said, two company legislation are noted in relation to implications of non-registration by a foreign company. Under Kenya’s Companies Act 2015, a foreign company shall not carry on business unless it is registered (with a rider for an application for registration not dealt with within a prescribed period). Notably, as is the case with legislation in other African countries, a certificate of registration serves as conclusive evidence of registration as a foreign company. In RootC apital Incorporated v Tekangu Farmers Co-operative Society Limited &Another, Civil Case No. 11/2016, the High Court at Nyeri held: “When the applicant’s legal capacity was contested, a certificate of registration issued by the registrar of companies showing that the applicant is duly registered in this country as a foreign company would have sufficed to show that the provisions of the repealed Companies Act Cap 486 or the Companies Act, 2015 were complied with and that the applicant has been certified as a juristic person with legal capacity to perform such tasks as can only be performed by duly registered companies such as filing suits.” In absence of such a certificate, the court was “not satisfied that [the applicant] has the legal capacity to institute the present suit.” In effect, a foreign company is required to register in order to be able to institute legal action in Kenyan courts (and such legal action may be considered a facet of carrying on business).A similar position existed under Nigeria’s Companies and Allied Matters Act Cap C20 (now replaced by a 2020 Act). Both Cap C20and the 2020 Act bar a foreign company not incorporated in Nigeria from carrying on business in Nigeria—a foreign company has only limited powers of receipt of notices and other documents, as matters preliminary to incorporation—and any act of an unregistered foreign company is void. In Citec Internation Estates Limited v Edicomisa International Inc. &Associates, SC No 163/2006 [2017] NGSC 13, the Supreme Court upheld the decision of the High Court (that had been reversed by the Court of Appeal) that the respondent as a foreign company, not registered to carry in business in Nigeria, could not maintain an action in Nigerian courts. The Supreme Court (Kekere-Ekun,JSC) held—

I have had a careful look at the provisions of sections 54 and 55 of CAMA ... Section 54(1) clearly states that every foreign company incorporated outside Nigeria before or after the commencement of the Act must take steps to obtain incorporation in Nigeria. Until the process is complete and certificate of incorporation issued, the company is not entitled to carry on business in Nigeria nor can it exercise any of the powers of a registered company. It is forbidden from having a place of business or an address for service of processes in Nigeria for any purpose other than the receipt of notice and other documents, as matters preliminary to incorporation ... I am of the considered view that the findings of the trial court … is a correct statement of the law on this issue. There is no doubt that the respondent is carrying on business in Nigeria without being incorporated under CAMA and therefore was in breach of section 54(1) of the Act. The consequence of the non-compliance is clearly spelt out in subsection (2). The agreement is null and void.

The provisions of sections 54 and 55 of Cap C20 considered by the Supreme Court are retained as sections 78 and 79 of the Companies and Allied Matters Act 2020. There are exemptions under Nigeria’s company legislation—Cap C20 and the 2020 Act—where a foreign company can have the status of an unregistered company and, in such situations, the rights or liability of the unregistered foreign company to sue or be sued are unaffected.

Conclusion

The ruling of the High Court in Krone Uganda Limited case does, on the face of it, certainly pose concerns. In particular, it raised eyebrows that an unregistered foreign company, legally incorporated in another jurisdiction, can “transact business” and even institute court action in Uganda. The concern is undeniable with “fly-by-night” foreign companies that might send representatives or agents to transact in Uganda without setting up shop or even an office. It certainly poses questions of how to effect service on such companies or enforce any judgment—however, if we proceed from the perspective that a foreign company in such an instance is not planning to “establish a place of business” for lack of visible foreign presence, the liability of such a company to civil claims in Uganda’s courts is unaffected by lack of such foreign presence and is therefore not dependent on registration as a foreign company.

Notably, in including Part VI in the Companies Act2012, the law-makers intended all foreign companies, before they can legally operate in Uganda, to duly register and be recognized under the laws of Uganda so that their activities could be legally monitored. The ruling may be seen as opening a floodgate for foreign companies, unregulated by the agencies of the government, to operate freely and unrestrained, to the detriment of the citizens of Uganda. That is far from the case.


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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, Corporate & Commercial Department

        anamara@alp-ea.com

  • Rebecca Muheki

         Associate, Corporate & Commercial Department

         rmuheki@alp-ea.com