Manku & another v Patel & another [2022] KEHC 15654 (KLR)

Manku & another v Patel & another (Commercial Case E776 of 2021) [2022] KEHC 15654 (KLR) (Commercial and Tax) (14 November 2022) (Ruling)

Neutral citation: [2022] KEHC 15654 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Commercial Case E776 of 2021

DO Chepkwony, J

November 14, 2022

Between

Parminder Singh Manku

1st Applicant

Elite Earthmovers Ltd

2nd Applicant

and

Pravin Marji Patel

1st Defendant

Patel Pravin Daxsha

2nd Defendant

Ruling

1. Before this court for determination are two Applications being the Plaintiff’s Notice of Motion Application dated April 20, 2022 and the Defendant’s Notice of Preliminary Objection dated October 4, 2021.

2. The Plaintiff’s Application is seeking for orders that;a.Spent;b.The 1st Plaintiff/ aplicant be granted Leave to continue the suit as a Derivative Claim seeking relief on behalf of Elite Earthmovers Limited, the 2nd Plaintiff herein, in respect of the acts and omissions by the Defendants/Respondents, involving negligence, default, breach of duty and breach of trust in their capacity as its directors on such terms as the Honourable Court considers fit.c.Spent;d.Spent;e.Spent;f.Pending the hearing and determination of the main suit, the Defendant/ Respondents be compelled to produce the books of records, banking slips, audited financial accounts, bank statements of the 2nd Plaintiff company in their custody for auditing.g.Pending the hearing and determination of the Application and the main suit, this Honorable Court be pleased to issue orders restraining the Board from intimidating and threatening the 1ST Plaintiff/ Applicant and further that he be involved in all decisions made concerning the use of the Company's machinery and equipment through a board resolution.h.Costs of this Application be in the cause.

3. The application is premised on the grounds on its face and in the Supporting Affidavit of Parminder Singh Manku sworn on April 20, 2022. It is stated therein that:a.The 1st Plaintiff and the Defendants/ Respondents are directors and shareholders in the 2nd Plaintiff Company, Elite Movers Limited, a constructions company duly incorporated under the Companies Act.b.He joined the 2nd Plaintiff in 2018 as a co-director with the Defendants/ Respondents herein and later on became a shareholder in 2020. That he is the minority shareholder whereby he holds 10,000 shares out of 100 000 shares in the 2nd Plaintiff Company whereas the 1st and 2nd Defendants are the majority shareholders where they hold 65,000 and 25,000 shares respectively.c.The Defendants/Respondents are misappropriating the funds of the 2nd Plaintiff without due regard for its well-being, the interests of its shareholders, or its creditors, causing it to accrue massive debts, putting it in a deeper financial crisis that could lead to legal proceedings and other consequences.d.The 1st Plaintiff/Applicant, have executed personal guarantees on behalf of the 2nd Plaintiff in Kenya Commercial Bank and Diamond Trust Bank, whereby there is concern that the 2nd Plainitff/Applicant may be held culpable and personally liable for criminal and civil claims arising from the issuance of the said personal guarantees.e.Some of the creditors of the 2nd Plaintiff/Applicant have instituted legal action against it for failing to repay its debts yet it is in business.f.The Defendants have on many occasions directed the financial profits of the 2nd Plaintiff to their own personal investments, repayment of their personal loans and irregular withdrawals. the Defendants/ Respondents opened numerous bank accounts with various banks without the approval of the board of directors, resulting in the loss of the monies of the 2nd Plaintiff/Applicants because the majority of them cannot be traced.g.The Defendants/Respondents have authorized the employment of the 2nd Plaintiff/ Applicant's machinery and equipment without the board of directors' approval, and that the monies associated with it have not been accounted for.h.The Defendants/Respondents have neglected to pay the required tax to the Kenya Revenue Authority and as a result the 2nd Plaintiff/ Applicant has failed to comply with tax regulations and that it is common knowledge that without KRA Tax Compliance Certificates, the 2nd Plaintiff will be unable to tender for contracts or continue with the work it was doing, resulting in further losses.i.As a result of the aforestated actions the 2nd Plaintiff has been operating at a loss as most of its finances are not disclosed.j.The Defendants/ Respondents have breached the fiduciary duty that they owe to the 2nd Plaintiff to act in utmost good faith and for its prosperity.k.The Applicants are apprehensive that unless the financial records and books of accounts are produced for a proper audit to be conducted, the 2nd Plaintiff shall continue to operate at a loss to the detriment of its shareholders and creditors.l.The Defendant/Respondents have acted unilaterally and without respect for the mandatory provisions of the Companies Act and the Memorandum and Articles of Association.m.The Applicants are further apprehensive that if the application is denied, the 2nd Plaintiff would suffer irreparable loss and damage in terms of financial mismanagement, waste and loss of assets, lack of cautious and rigorous corporate governance, and loss of funds.n.The Applicants prays for the reasons aforestated, it is imperative and in the interest of Justice that this Honorable Court issues the Orders as sought in the Application.

4. In opposition to this Application and the main suit the Respondents have filed a Notice of Preliminary Objection dated October 4, 2021 which is premised on the grounds that;a.There was no resolution of the Directors of the 2nd Plaintiff to institute the suit as against the 1st and 2nd Defendants who are the majority shareholders and directors of the 2nd Plaintiff.b.There was no resolution of the directors of the 2nd Plaintiff to appoint the Law Firm of Waruiru Karuku & Mwangale Advocates to act for and/or institute this suit for and on behalf of the 2nd Defendant Company against the 2nd Defendants directors being the 1st and 2nd Defendants.c.The 2nd defendant company did not authorize Parminder Singh Manku to swear the verifying affidavit and neither the supporting affidavit for the said application.d.The suit as filed is fatally defective as the Plaintiffs lack the requisite locus standi to institute this suit as against the 1st and 2nd defendants.e.The Application and the suit are otherwise frivolous vexatious and an abuse of Court process.f.The Plaintiffs' Notice of Motion Application and Plaint dated September 1, 2021 and filed before this Honourable Court be struck out with costs to the Defendants.

5. The Applicants opposed the Preliminary Objection vide the Replying Affidavit of Parminder Singh Manku. It is stated therein that:-a.The 1st Plaintiff has filed the suit on his own name as a shareholder of the 2nd Plaintiff and does not require the consent of the Board of Directors to institute a suit while suing in his own name and right.b.The provisions of the law being relied on by the Defendants do not require that authority be given to the deponent if the said affidavit has to be filed together with the proceedings at the initiation of the suit.c.The legal position is that such a resolution of the Board of Directors of a company may be filed at any time before the suit is fixed for hearing.d.The suit is yet to be fixed for hearing and as such there is still an opportunity to file the said resolution by the Directors of the Company.e.The mere failure to file the resolution of the Directors of the Company together with the Plaint does not necessarily invalidate the suit.f.The 1st Applicant gave two instruction letters both dated the September 6, 2021 to his Advocates on record to act on his behalf and on behalf of the 2nd Plaintiff in his capacity as a director.g.The said letters of instructions contained confidential information protected under the Advocate/client privilege and, accordingly, the advocates could not be compelled to present such information before Court.h.Although the Law gives the Court the discretion to strike out any Plaint or counterclaim which does not comply with the provisions, the Rules Committee by the use of the word 'may' which is permissive, gives the Court the leeway to consider the circumstances of each case, whether to strike out the suit or not.i.The administration of justice normally requires that the substance of all disputes should be investigated and decided on their merit and that errors should not necessarily deter a litigant from the pursuits of his right.j.Having sued in his own name as the 1st Plaintiff the suit cannot be struck out.k.Courts of Law have often expressed themselves that striking out pleadings is the last resort and that the Court is duty bound to look at alternative avenues available to parties before striking out pleadings.l.The Defendants’ Notice of Preliminary Objection is premature, baseless, devoid of merit and is solely meant to derail the hearing and determination of the suit.

6. On April 27, 2022, directions were issued that parties canvass the Notice of Preliminary Objection dated October 4, 2022 contemporaneously with the Notice of Motion application dated April 20, 2022.

7. In determining the two, this court will begin by considering the Preliminary Objection. This is because a Preliminary Objection in the case of Mukisa Biscuits Manufacturing co Ltd –vs- West End Distributors Ltd [1969] EA 69 at 701:-'Consists of a point of law which has been pleaded, or which if argued as a preliminary point may dispose of the suit'

8. To dispense with the Preliminary Objection, I am persuaded by the South African case of Francis George Hill Family Trust –vs- South African Reserve Bank & Others: 1992 (3) SA 91 (A), at 97B-G where it observed:-'It is trite that a company with limited liability is an independent legal person and separate from its shareholders or directors. In general, therefore, when a wrong is alleged to have been done to a company the proper plaintiff to sue the wrongdoer is the company itself. In English law a derivative action constitutes an exception to that general rule. The exception is recognised when (1) the wrong complained of involves conduct which is either fraudulent or ultra vires and (2) the wrong has been perpetrated by directors or shareholders who are in the majority and so control the company. See, for example: Burland and Others v Earle and Others [1902] AC 83 (PC); Edwards and Another v Halliwell and Others [1950] 2 All ER 1064 (CA) at 1066-7; Prudential Assurance Co Ltd v Newman Industries Ltd and Others (No 2) [1982] 1 All ER 354 (CA). The principle underlying the exception to the general rule is expounded thus by Lord Denning MR in Wallersteiner v Moir (No 2); Moir v Wallersteiner and Others (No 2) [1975] 1 All ER 849 (CA) at 857d-f:'If it is defrauded by a wrongdoer, the company itself is the one person to sue for the damage. Such is the rule in Foss v Harbottle. The rule is easy enough to apply when the company is defrauded by outsiders. The company itself is the only person who can sue. Likewise, when it is defrauded by insiders of a minor kind, once again the company is the only person who can sue. But suppose it is defrauded by insiders who control its affairs - by directors who hold a majority of shares - who can then sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise proceedings to be taken by the company against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. In one way or another some means must be found for the company to sue. Otherwise, the law would fail in its purpose. Injustice would be done without redress.'

9. In the instant case, the Defendants have raised objection to the proceedings herein on the ground that the 1st Plaintiff has no locus standi to institute the suit against them since there was no resolution by the Directors of the 2nd Defendant to do so or to appoint a firm of advocates to act or institute the suit.

10. The Applicant has demonstrated that he is a minority shareholder whereby he holds 10,000 shares out of 100 000 shares in the 2nd Plaintiff Company whereas the 1st and 2nd Defendants who are accused of wrong-doing are the majority shareholders where they hold 65,000 and 25,000 shares respectively. In that case, it would be hard and impossible to hold and pass a resolution to sue the very persons who control the decision making of the company. In my considered view, the Plaintiff falls within the exception in Foss vs Harbottle. The Defendants in their Notice of Preliminary Objection clearly admit they are the majority sharesholders. The Preliminary Objection therefore, fails.

11. On whether to grant permission to the 1st Plaintiff to continue a derivative suit, an appreciation of the definition of a derivative claim/suit is necessary. A derivative claim is defined in Section 238 of the Companies Act as follow:-'(1)In this Part, 'derivative claim' means proceedings by a member of a company—(a)In respect of a cause of action vested in the company; and(b)Seeking relief on behalf of the company.(2)A derivative claim may be brought only—(a)Under this Part; or(b)In accordance with an order of the Court in proceedings for protection of members against unfair prejudice brought under this Act.(3)A derivative claim under this Part may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.(4)A derivative claim may be brought against the director or another person, or both.(5)It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.(6)For the purposes of this Part—(a)'Director' includes a former director;(b)A reference to a member of a company includes a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.'

12. I am also guided by the court’s findings in the case of Isaiah Waweru Njumi & 2 Others –vs- Muturi Ndungu [2016]eKLR, which laid down the factors to be considered as follows:[21]Among other things, the Court considers the following factors:(a)Whether the Plaintiff has pleaded particularized facts which plausibly reveal a cause of action against the proposed defendants. If the pleaded cause of action is against the directors, the pleaded facts must be sufficiently particularized to create a reasonable doubt whether the board of directors’ challenged actions or omissions deserve protection under the business judgment rule in determining whether they breached their duty of care or loyalty;(b)Whether the Plaintiff has made any efforts to bring about the action the Plaintiff desires from the directors or from the shareholders. Our Courts have developed this into a demand or futility requirement where a Plaintiff is required to either demonstrate that they made a demand on the board of directors or such a demand is excused;(c)Whether the Plaintiff fairly and adequately represents the interests of the shareholders similarly situated or the corporation. Hence, a shareholder seeking to bring a derivative suit in order to pursue a personal vendetta or private claim should not be granted leave. In the American case of Recchion v Kirby 637 F Supp 1309 (WD Pa 1986), for example, the Court declined to let a derivative lawsuit proceed where there was evidence that it was brought for use as leverage in plaintiff’s personal lawsuit;(d)Whether the Plaintiff is acting in good faith;(e)Whether the action taken by the Plaintiff is consistent with one a faithful director acting in adherence to the duty to promote the success of the company would take;(f)The extent to which the action complained against – if the complaint is one of lack of authority by the shareholders or the company – is likely to be authorised or ratified by the company in the future; and(g)Whether the cause of action contemplated is one that the Plaintiff could bring as a direct as opposed to a derivative action.

13. Similarly, the court in the case of Ghelani Metals Limited & 3 others v Elesh Ghelani Natwarlal & Another {2017} e KLR, held that: -44. Statutory procedure is now the exclusive method of pursuing derivative claims. The Act sets out what sorts of company claims may be pursued and is also explicit that derivative claims may only be pursued under the Act. The question must only be the factors the court ought to consider before approving a derivative claim.45. There appears, in my view, to exist a two-stage process. The court must first satisfy itself that there is a prima facie case on any of the causes of action noted under s 238(3). S 239(2) of the Act provides that the application for permission will be dismissed if the evidence adduced in support 'do not disclose a case' for giving of permission. The essence of judicial approval under the Act is to screen out frivolous claims. The court is only to allow meritorious claims. All that the applicant needs to establish, through evidence, is a prima facie case without the need to show that it will succeed.46. The second stage entails a consideration of statutory provisions and factors which ordinarily guide judicial discretion albeit in the realm of derivative action.

14. The 1st Plaintiff has sought for court’s leave for permission to commence a derivative suit on behalf of the 2nd Plaintiff Company in which he is also a shareholder but as a minority one since it is not possible for the 2nd Plaintiff to initiate any action against the Defendants. However, the Plaintiff is required to establish a prima facie case to justify his action. I have considered and find that the wrongs being complained of are fraudulent and ultra vires in nature and the persons accused are majority shareholders. The Defendants have been accused of misappropriation of funds of the 2nd Plaintiff, neglect of fiduciary duty to the 2nd Plaintiff, failure to pay taxes when due among other breaches. I have perused the Plaint dated September 1, 2021 and the annexed documents in support of the averments therein. The Defendants have not denied nor controverted these claims. I am satisfied that these claims raised by the Plaintiff if proved successfully and are not controverted or found to be false could lead to a finding that the Defendants are culpable. I am therefore satisfied that the 1st Plaintiff has made a case for leave to continue the derivative suit on behalf of the 2nd Plaintiff as against the Defendants.

15. The 1st Plaintiff has also sought for orders restraining the Board from intimidating and threatening him. Further, he seeks that he be involved in all decisions made concerning the use of the Company's machinery and equipment through a board resolution. For such orders, an Applicant must satisfy the elements set out in the cases ofGiella –vs- Cassman Brown and Co Ltd 1973 EA 360 andMrao –vs- First American Bank of Kenya Ltd & 2 Others 2003 KLR 125 to the effect that a prima facie case must be established and evidence to the effect that if such orders are not granted, the Applicant is likely to suffer irreparable harm which cannot be compensated by way of damages. The Applicant has not proved these elements to the satisfaction of this court for grant of injunctive orders.

16. However, so as to preserve the Company’s assets and to keep the Companyas a going concern, this court directs the Defendants together with the 1st Plaintiff to adhere to the Companies Act and the Company’s Memorandum and Articles of Association in every decision they make during the pendency of this suit.

17. In the resultant, the following orders issue:-a.The Notice of Preliminary Objection dated October 4, 2021 be and is hereby dismissed.*b.The application dated April 20, 2022 is allowed in the following terms:-i.The Plaintiff/applicant be and is hereby granted leave to continue the suit as a Derivative claim seeking relief on behalf of Elite Earthmovers Limited, the 2nd Plaintiff herein.ii.The Defendants to produce all the books of records the banking slips, audited financial accounts, bank statements of the 2nd Defendant in their custody for auditing and determination of the suit.iii.Each party shall bear its own costs.It is so ordered.

RULING DELIVERED VIRTUALLY, DATED AND SIGNED AT NAIROBI THIS 14THDAY OF NOVEMBER, 2022. D. O. CHEPKWONYJUDGEIn the presence of:Mr. Mugo holding brief for Mr. Chege counsel for DefendantNo appearance by and for the PlaintiffsCourt Assistant - Godfrey