Judgment Delivered on 3rd March 1998
Court: Supreme Court of Zambia
Panel: Ngulube, C.J., Muzyamba and Lewanika, JJ.S.
Judgment of the Court by: Ngulube, C.J.
Subject Matter: Company Law – Separate Corporate Personality –
Indemnity Clauses in Share Purchase Agreements
Facts:
The respondent, Hill and Delamain Zambia Limited, sued the appellant,
Associated Chemicals Limited, to recover money for clearing and forwarding
services rendered between October 1992 and November 1993. The appellant
initially denied any transaction with the respondent. During the trial, the
appellant changed its legal representation and, based on a share purchase
agreement dated 30th November 1993, sought to join its former law firm, Ellis
and Company, as a third party. The agreement, drafted by Ellis and Company,
included indemnity clauses where the previous shareholders agreed to cover
liabilities incurred before the sale of their shares. The appellant argued that
its new shareholder and management were not liable for this "old
debt" and that the former lawyers were negligent for not using the
indemnity clauses to defend the claim. The trial judge refused to join the law
firm as a third party.
Issues:
- Whether a company's liability for its debts is
affected by a change in its shareholders or management.
- Whether an indemnity clause in a share purchase
agreement between shareholders can be used to deny a claim from a
third-party creditor against the company.
- Whether the company's former lawyers should be
joined to the suit for their alleged negligence in not relying on the
share purchase agreement.
Holding:
The Supreme Court upheld the trial judge's decision and dismissed the appeal.
The Court held that a company is a distinct legal entity, separate from its
shareholders and managers, as established in Salomon v Salomon & Co.
The liability for the debt was incurred by the company itself, not its
individual shareholders at the time. Therefore, the indemnity clauses in the
share purchase agreement were a private matter between the old and new
shareholders and did not extinguish the company's legal obligation to pay the
respondent for services rendered. The Court found no connection between the
debt owed to the respondent and the alleged negligence of the former lawyers,
affirming that the appellant could pursue a separate claim against them if it
wished. The appeal was dismissed with costs.