Kofinaf Company Ltd & Zeebo Investments Limited v Nahashon Ngige Nyagah, Jocktan Mboe Mwanjala, Violine Nakha Nyongesa, Jared Omondi Obor, Mary Angela Achieng Odhiambo, Jane Wambui Gacoka, Samuel Ojoro Malaki, Rosemary Wanjiru Mugo, Zuhrah Atieno Awendo, Catherine Wanja Kiriamburi, Naila Nengondo Ibrahim, Lucas Akunga Omariba, Solomon Kioko Kivuva, Nelson Havi,Osundwa Sakwa, Gunga Properties Ltd & Registrar Of Companies [2016] KEHC 982 (KLR)

Full Case Text

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

COMMERCIAL & ADMIRALTY DIVISION

HCCC NO. 237 OF 2015

KOFINAF COMPANY LTD & ANOTHER…..............…………1st PLAINTIFF

ZEEBO INVESTMENTS LIMITED ………….........………….2ND PLAINTIFF

VERSUS

NAHASHON NGIGE NYAGAH ……….…........………… 1ST DEFENDANT

JOCKTAN MBOE MWANJALA …….…...……………..2ND DEFENDANT

VIOLINE NAKHA NYONGESA …….……….....………..3RD DEFENDANT

JARED OMONDI OBOR ……………….…....…………..4TH DEFENDANT

MARY ANGELA ACHIENG ODHIAMBO …..….....……..5TH DEFENDANT

JANE WAMBUI GACOKA…………….….....……………6TH DEFENDANT

SAMUEL OJORO MALAKI………….……...……………7TH DEFENDANT

ROSEMARY WANJIRU MUGO………….....…………….8TH DEFENDANT

ZUHRAH ATIENO AWENDO …………........…………….9TH DEFENDANT

CATHERINE WANJA KIRIAMBURI ........……………….10TH DEFENDANT

NAILA NENGONDO IBRAHIM……….........……………..11TH DEFENDANT

LUCAS AKUNGA OMARIBA…….….….....……………..12TH DEFENDANT

SOLOMON KIOKO KIVUVA ……….......………………..13TH DEFENDANT

NELSON HAVI ………………………......……………….14TH DEFENDANT

OSUNDWA SAKWA …………………......……………...15TH DEFENDANT

GUNGA PROPERTIES LTD………….....……………….16TH DEFENDANT

THE REGISTRAR OF COMPANIES……....…………….17TH DEFENDANT

RULING

1. The Application that this Court is asked to determine typifies the battle for the control of the Affairs, Management and Business of Gunga Properties Ltd(the 16th Defendant and hereinafter referred to as Gunga).It is the Notice of Motion of 26thOctober 2015 which seeks the following two prayers;-

2. The Notice of Appointment of Advocates dated 19th May, 2015 filed by Mbugua, Atudo & Macharia Advocates on behalf of the 16th Defendant be struck out.

3. The Order made herein on 15th May, 2015 be and is hereby varied and/or discharged and set aside.

Following an agreement of Counsel representing parties herein the question of Representation is to be dealt with first.

2. On 15th May 2015,Kofinaf Company Limited (Kofinaf)presented a lengthy Plaint running into some 79 paragraphs seeking various reliefs against some 17 Defendants. For purposes of the matter at hand, the Court need only highlight some aspects of the claim.

3. It is alleged by Kofinaf and Zeebo Investments Limited (Zeebo) and this is common ground, that Zeebo is the majority Shareholder of Gunga with 993 Shares out of 1000 authorized and issued Shares. It is also uncontested that at the time of Incorporation of Gunga, the 2nd to 8th Defendants were registered as Shareholders of the Company holding one (1) Share each. Common ground as well is that the 2nd to 8th Defendants transferred their Shares to the 9th , 10th and 11th Defendants and resigned as Directors of Gunga. The 9th, 10th and 11th Defendants assert that they are valid Shareholders of Gunga.

4. One of the controversies raised in the Plaint is whether or not the aforesaid share transfers were lawful. Connected with that is the legitimacy of the appointment of the new Directors

5. Put in its simplest form, the claim by Kofinaf and Zeebo is that Gunga is a special purpose vehicle with its shareholding and Directorship held by nominees in trust for Kofinaf. Zeebo having been incorporated as the beneficial owner of Gunga and in turn holding Shares for the benefit of Kofinaf. That the 1st and 12th Defendants were privy to these arrangements and undertook the task of identifying individuals who would be nominee Shareholders and Directors. Enter the 2nd to 8th defendants.

6. At the heart of the dispute is land reference 11285(original number 6772/1. The assertion of Kofinaf and Zeebo is that as a special purpose vehicle Gunga was to hold this high value property measuring about 1005 acres in trust for Kofinaf. And in continuance of that arrangement the property was transferred to Gunga by an instrument dated 4thJuly 2013.

7. The allegation by Kofinaf and Zeebo is that in breach of the trust arrangement,the 1st Defendant, using his influence and control over the 2ndto8thDefendants, procured the transfer of the Shares held by them to the 9th,10th and 11th Defendants. The 13th,14th and 15th Defendants are accused of using their professional standing and qualifications to facilitate the said transfers. Kofinaf and Zeebo maintain that the said transfers are fraudulent.

8. The apprehension of the Plaintiffs is that the Defendants intend to take over the property now registered in the name of Gunga and to transfer it to third parties. In the Plaint,that apprehension is described as real and present.Also,that there is a further intention to alter the structure of the Shareholding and Directorship of Gunga thereby permanently depriving Kofinaf and Zeebo of their beneficial ownership.

9. Ultimately the prayers sought are;-

i. A declaration that the trust property, L.R. No.11285 was reserved in terms of the resolution of the Board of Directors of the 1st Plaintiff dated 11th March 2010 as one of the properties to be sold and the proceeds applied towards reduction of the loan obligation of US$62,500. 000. 00;

ii. A declaration that the 1st Defendant is the directing mind and will and has influence and control over the 2nd – 11th Defendants for the purpose of effecting the scheme for the takeover of the 16th Defendant and the beneficial ownership of the trust property;

iii. A declaration that the 2nd - 8th Defendant hold one share each in the 16th Defendant in trust for the Plaintiffs;

iv. A declaration that the 1st Defendant is unfit and unsuitable to continue holding office as a Director and the Chairman of the 1st Plaintiff;

v. A declaration that the purported transfer of shares from the 2nd – 8th Defendants to the 9th – 11th Defendants was fraudulent and accordingly null and void;

vi. A declaration that the 9th, 10th, and 11th Defendants have no authority to act for or in relation to any of the affairs of the 16th Defendant;

vii. An Order expunging from the records of the 16th Defendant held by the 17th Defendant, Forms No.213 and 203A presented by the 15th Defendant;

viii. A permanent Injunction restraining the 9th – 11th Defendants from issuing any notices, convening any meetings, meeting or in any way purporting to conduct any business in relation to the affairs of the 16th Defendant;

ix. A permanent Injunction restraining the 17th Defendant from accepting any resolutions issued by the 9th – 11th Defendants in relation to the 16th Defendant;

x. A permanent Injunction restraining the 13th Defendant from purporting to act as the Company Secretary of the 15th Defendant;

xi. A permanent Injunction be issued restraining the 14th Defendants from acting as Advocates or in any other capacity in relation to the affairs of the 16th Defendant;

xii. A permanent injunction be issued restraining the 1st – 15th Defendants whether by themselves, their servants, agents, employees or assigns or otherwise from removing, transferring, disposing or charging in any manner or dealing with all that property known as L.R No.11285;

xiii. Damages for Fraud;

xiv. Exemplary damages;

xv. Costs of this suit;

xvi. Any such other or further relief as this Honourable Court may deem fit to grant.

10) Avoiding more detail than is necessary for now, the Defendants take a position that there was no trust in favor of Kofinaf and Zeebo by the 2nd to 8thDefendants. The nominee arrangement is refuted. The 2nd to 8th Defendants assert that they hold the Shares as of Legal Right and the transfersto the 9th, 10th and 11thDefendants did not require the authority or sanction of Kofinaf and Zeebo.

11) In respect to the property, Gunga contends that it was sold and transferred to it for valuable consideration pursuant to an agreement for sale dated 4th July 2013. Consequently, Gunga holds the property as absolute owner and not in trust for Kofinaf and Zeebo. In any event it is stated, a claim for trust would be null and void and therefore unenforceable in view of the provisions of section6(2) of the Land Control Act. The property being Agricultural land.

12) The Notice of Appointment which is sought to be impeached was filed by the firm of Mbugwa, Atudo and Macharia Advocates on 20th May 2015. The firm declared that it was appointed to act by Gunga in this litigation. The grounds and reasons raised in support of the impeachment are on the face of the Application and the Affidavit in support sworn by Naila Nengondo Ibrahim on 26th October2015. It is asserted that Gunga did not authorize the filing of the Notice of Appointment and that Kofinaf and Zeebo had, and have, no legal right to determine the Company Secretary and or Advocates for Gunga. The appointment is seen as step to procure the compromise of the suit to the detriment of Gunga.

13) Mr. Kamau Wa Mbugwa an Advocate and partner in the firm of Mbugwa, Atudo and Macharia Advocates swore an Affidavit in opposition. It was sworn on 8th March 2016. Mr. Kamau deponed that the Notice was filed pursuant to instructions received by the firm,initially, conveyed orally by a Mr. Robert James Reid and later by a written Company Resolution by Zeebo. Mr. Reid is said to have held a power of attorney to sign Court pleadings on behalf of Zeebo and Gunga.The Resolution by Zeebo also set out the following;

(i) That the above matter be investigated and remedial action be taken.

(ii) That the appointment of Messers, Ochieng, Onyango, Kibet & Ohaga Advocates to represent the Company in the above matters be and is hereby approved.

(iii) That the appointment of Messers Mbugwa, Atudo & Macharia Advocates to represent Gunga Properties Limited in the above matters be and is hereby approved;

(iv) That Havi & Company Advocates shall have no right and authority to represent the companies.

14) Kofinaf opposes the Application. In a lengthy Affidavit sworn on 24th February 2016, Stephen Armstrong Jennings sets out Kofinaf’s view of the dispute. That history reiterates and elaborates the contents of the Plaint that I have abridged earlier in this decision. The position of Kofinaf is unequivocal! Zeebo is the beneficial owner of Gunga and duly exercised its legal right when it appointed the firm of Mbugwa, Atudo and Macharia to represent Gunga.

15) Against this short background and arguments made by counsel, the court sees the following as issues to be resolved;

a) Whether, in the circumstances of this case, Zeebo could properly and lawfully appoint counsel to represent Gunga in the proceedings.

b) If the answer to (a) above is in the affirmative, whether the firm of Mbugwa Atudo and Macharia were duly appointed in the manner required by law.

The Court does not intend to rehash the arguments made by Counsel.Instead, the Submissions will be discussed as the Court makes its rendition.It is trusted nevertheless that the fervor with which the arguments were made will not be lost.

16) At outset it needs to be noted that the contention raised by Mr. Busaidy for the Plaintiffs that the appointment of Havi and Co. to represent Gunga was made in contempt of the Court Order of 15thMay 2015 may not pose a serious challenge to the Application.The point pressed by Counsel was that the firm needed to be barred from arguing the matter. However, the Application is alsopresented on behalf of the 9th to 11th Defendants and so even if that the Court was to uphold that argument in regard to Gunga, the Application will survive the objection in so far as it is also an Application by three other Defendants.The Court must however revisit that issue in another context.

17) It is avowed by Counsel for both sides that the dispute herein is essentially about the control of the Management, Business and Affairs of Gunga. Joined to the hip is the question whether the property registered in the name of Gunga is held in trust for Kofinaf. Take for example when Mr. Mbugua depones;

5. “The Plaintiffs claim the right of ownership over the 16th Defendant and its assets having incorporated the Company and purchased its assets which were held in trust by individuals introduced to the Plaintiffs by the 1st Defendant who was at the time the Chairman of the 1st Plaintiff’s Board of Directors.

6. The beneficial owners of the 16th Defendant contend that the 1st to 11th Defendants acting in concert with the 12th, 14th and 15th Defendant have, in breach of the terms of declarations of trust executed by the 2nd to 8th Defendants, inclusive, conspired to defraud the Plaintiffs of their shareholding in the 16th Defendant so as to ultimately seize control and ownership of the 16th Defendant’s parcel of land situated in Ruiru identified as Land Reference No.11285 which comprises one thousand and five (1005) acres (less road reserve of 8 acres) or thereabouts”.

Indeed that characterization of the dispute is borne out by the Plaint itself.The nature of the dispute will turn out to be pivotal in the resolution of the matter at hand.

18. It is not in dispute that the impugned appointment of Mbugwa Atudo and Macharia Advocates was made or ratified in a Resolution of the meeting of Zeebo held on 29th May 2015. Whether that Resolution could lawfully support the Notice filed earlier on 20th May 2015 need not be decided now. Agreed however is that Zeebo holds 993 out of 1000 issued shares of Gunga. Contested is whether the 2nd to 8th Defendants held or still hold those Shares merely as nominees for Kofinaf. Also contested is whether those Shares were lawfully transferred to the 9th,10th and 11th Defendants.The imperative is that Zeebo is by a long way the majority Shareholder of Gunga.

19. That notwithstanding, Mr. Havi argues that Zeebo cannot use its dominant position to usurp the powers of the Directors and appoint Counsel. Counsel drew the attention of Court to Halsburys laws of England 5th Edition paragraphs 302;

“302. As regards litigation by an incorporated company, where management powers are vested generally in the board of directors, it is the directors who have authority to act for the Company. In the absence of any provision to the contrary in the articles of association, the majority of the members of a company are not entitled to decide whether an action in the company’s name should be begun or allowed to proceed. The secretary’ of a company cannot institute proceedings in its name in the absence of express authority to do so; but proceedings begun without proper authority may subsequently be ratified”.

Also cited to support this proposition was the Decision in NrbMilimaniCommercial HCC No.524 of 2004Affordable Homes Africa Ltd v Ian Henderson and 2 others.

20. Mr. Macharia was of a different view. He asked the Court to bear in mind that Gunga was simply a special purpose vehicle that was owned by the Plaintiffs. Further the Defendants had sought to disrupt that arrangement by use of fraudulent devise and that the allegations of fraud were not spurious. In this regard the Court was asked to pay heed to the remarks of Gikonyo J. in a related case of HCC No.320 of 2015 (Kofinaf Company Ltd & Another vs.Nahason Ngige Nyagah)There the Judge observed;

“On consideration of the pleadings as couched and without probing for any extrinsic evidence, does the Amended Plaint disclose a cause of action with some chances of success? Or can the Amended Plaint herein be said to be one which is beyond redemption such that it cannot even be cured by any amount of amendments?The 16th, 17th and 18th Defendants argued that they acted as advocates and agents of disclosed principal and so they cannot be joined in a suit against the disclosed principal. They have stated the true position of the law except in each case the facts must support the said inference of the law. One thing that is coming out clearly is that, this action is based on alleged fraud and collusion among the 16th, 17th and 18th Defendants to defraud the plaintiffs from beneficial ownership of the 19th Defendant through alleged fraudulent scheme or design hatched by the 17th Defendant and executed by him, and through the 16th and 18th Defendants; wherein they registered transfer of shares thereby altering the register of members of the company to the detriment of the plaintiffs. The particulates of the fraud have been specifically stated in the amended plaint at paragraph 79 showing the basis of those allegations and the nexus among the parties herein. The way I understand the law is that an agent may be sued personally for fraud he has committed. Fraud bears a criminal characteristic and will result into personal liability once it is proved. I do not therefore think it would be astute move to lay as law that an agent will go unpunished for fraud he has committed because he did so on instructions by the principal. There is no such thing as instructions to commit fraud lest we should catapult ourselves back to the dark days of ‘’instruction from above’.

21. That argument found support in the submissions by Mr. Busaidy that the minority shareholders had denied the majority of control and affairs of Gunga.

22. In view of those unhappy circumstances, from the standpoint of Kofinaf and Zeebo, he Court was asked to find that it is not only theDirectors who could appoint Counsel. That in determining the vexed issue the Court should lift the corporate veil. For this proposition the Court was referred to some English cases;

In Atlas Maritime vs. Avalon Maritime No. 1, [1991]4 AII ER 769, Neill LJ.held as follows;

“There are case where, notwithstanding the principle of Salomon v. Salomon Co. Ltd [1897] AC 22, [1895-9] AII ER Re 33, the corporate veil’ between two companies can be pierced so that one company is to be regarded as the alter ego of the other. But this is not such a case, as I have already demonstrated when dealing with the question of agency. Nevertheless in the exercise of a discretion in relation to injunctive relief ‘the eye of equity’ (see jones v Lipman [1962] 1 AII ER 442 at 445, [1962] 1 WLR 832 at 836 per Russell J) can, I think, look behind the corporate veil in order to do justice. This approach was recognized by Danckwerts LJ in Merchandise Transport Ltd v British Transport Commission [1961] 3 AII ER 495 at 518, [1962] 2 QB 173 at 206, where he said:

‘…where the character of a company, or the nature of the persons who control it, is a relevant feature the court will go behind the mere status of the company as al legal entity, and will consider who are the persons as shareholders or even as agents who direct and control the activities of a company which is incapable of doing anything without human assistance’.

It is to be noted that in Adams v Cape Industries plc [1991] 1 AII ER 929 at 1024, [1990] Ch 433 at 542 Slade LJ accepted this approach as being correct in an appropriate case”.

His Lordship made reference to the decision in Adams and Others vs.Cape Industries plc and Another[1991] 1 AII ER 929, also cited by the Respondents herein.

23. It was argued that the appointment of that firm was necessary because Mr. Havi had obtained confidential information as to the strategy and structure of the transaction that would be undertaken by Kofinaf and used that information to instigate the fraud complained of. The Court understood that submission to be that Mr. Havi and his firm could not be trusted to represent the best interests of Gunga. The Court was to give regard to the following passage in the Decision in Pender vs. Lushington[1877]vi.Ch.D.70;

“In all cases of this kind, where men exercise their rights of property, they exercise their rights form some motive adequate or inadequate, and I have always considered the law to be that those who have the rights or property are entitled to exercise them, whatever their motives may be for such exercise- that is as regards a Court of Law as distinguished from a court of morality or conscience, if such a court exists”.

24. Article 91 of the Articles of Association of Gunga provides;

“The business of the Company shall be managed by the Directors who may pay all expenses incurred in promoting and registering the Company, and may exercise all such powers of the Company as are not, by the Act or by these Articles, required to be exercised by the Company in general meeting, and the exercise of the said powers shall be subject also to the control and regulation of any general meeting of the Company, but no resolution of the Company in general meeting shall invalidate any prior act of the Directors which would have been valid if such resolution had not been passed”.

That article vests the Management of Gunga in the Board of Directors. Where, like here,the powers of Management are generally vested in the Board of Directors,it would be the Directors who have the authority to appoint the Advocates for the Company in litigation(see Halsburys supra at paragraph 302). That finds support in this holding in Affordable Homes(supra);

“With regard to the powers and duties of its board of directors, article 94 of the plaintiff’s articles of association is in the following words-

‘The business of the Company shall be managed by the Board which …may exercise all such powers of the Company as are not by the Act or by these Articles required to be exercised by the company in general meeting…’

This article is substantially identical with article 80 of Table A in the first schedule of the Act and will therefore receive the same judicial interpretation as the said article 80. From QUIN & AXTENS LTD V. SALMON[1909] AC 442 HL and subsequent cases, it seems to be well settled that where the formula in article 80 is employed, the general meeting cannot interfere with a decision of the board of directors unless they are acting contrary to the provisions of the Companies Act or the Company’s Articles of Association. This view was adopted in SHAW& SONS (SALFORD) LTD V. SHAW [1935] 2 K. B.113, C.A in which Lord Justice Greer reiterated, at page 134-

‘..if powers of management are vested in the directors, they and they alone can exercise these powers”.

Since article 94 of the Plaintiff’s Articles of Association is in pari material with article 80 of Table A, it follows that the power to manage the Plaintiff Company’s affairs is vested in its board of directors and they alone should authorize the commencement of court proceedings in the company’s name”

25. Do the circumstances of this case warrant a deviation from this conventional position?

26. The Court proceeds to answer this question on the footing that the nature of the claim by Kofinaf and Zeebo is faithfully set out in paragraphs 5 and 6 of Mr. Kamau’s Affidavit of 8thMarch 2016;

“5. The Plaintiffs claim the right of ownership over the 16th Defendant and its assets having incorporated the company and purchased its assets which were held in trust by individuals introduced to the Plaintiffs by the 1st Defendant who was at the time the Chairman of the 1st Plaintiff’s Board of Directors”.

6. The beneficial owners of the 16th Defendant contend that the 1st to 11th Defendants acting in concert with the 12th, 14th and 15th Defendant have, in breach of the terms of declarations of trust executed by the 2nd to 8th Defendants, inclusive, conspired to defraud the Plaintiffs of their shareholding in the 16th Defendant so as to ultimately seize control and ownership of the 16th Defendant’s parcel of land situated in Ruiru indentified as Land Reference No.11285 which comprises one thousand and five (1005) acres (less road reserve of 8 acres) or thereabouts”.

27. In the Plaint, the wrong doing and Acts of fraud are attributed to the 1st to 15thDefendants.This is best illustrated by paragraph 75 thereof. Just as Kofinaf and Zeebo, Gunga is depicted as a victim of these Acts.In a sense therefore the joinder of Gunga to these proceedings was inevitable as it is the subject of the alleged misfeasance, while the true protagonists are the Plaintiffs on the one hand and the Defendants (save for Gunga) on the other hand.

28. Kofinaf and Zeebo have sought the intervention of the Court to reassert their control and ownership of Gunga and by extension ownership of LR No. 11285. This action is a plea to Court to reverse certain acts of the 1st to 15thDefendants and to make Orders and Declarations that will assure and protect the supposed rights of Kofinaf and Zeebo. The prayers in the Plaint speak to this;