Muthama & another v Athusi Bar and Restaurant Company Limited & 3 others [2022] KEHC 12833 (KLR)

Muthama & another v Athusi Bar and Restaurant Company Limited & 3 others (Civil Case E067 of 2021) [2022] KEHC 12833 (KLR) (Commercial and Tax) (6 September 2022) (Ruling)

Neutral citation: [2022] KEHC 12833 (KLR)

Republic of Kenya

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

Commercial and Tax

Civil Case E067 of 2021

DAS Majanja, J

September 6, 2022

Between

Joyce Nzisa Muthama

1st Plaintiff

Connie Mbithe Muia

2nd Plaintiff

and

Athusi Bar and Restaurant Company Limited

1st Defendant

John Mutaki

2nd Defendant

Ben Mukula

3rd Defendant

Patrick Makoani Ngonyo

4th Defendant

Ruling

Introduction and Background 1. The Plaintiffs have moved the court by a Notice of Motion dated 13th September 2021 made under sections 1A, 1B and 3A of Civil Procedure Act (Chapter 21 of the Laws of Kenya), Order 51 Rule 1 of the Civil Procedure Rules and section 5 of the Judicature Act (Chapter 8 of the Laws of Kenya) seeking the following orders:1. Spent2. Thatthis Honourable Court be pleased to commit the 2nd, 3rd and 4th Defendants to civil jail for a period of Six (6) months for contempt of court for disobeying the orders issued on 8th July 2021 by the Honourable Justice D.S. Majanja.3. Thatthis Honourable Court be pleased to issue an order calling for the election of new Directors.4. Thatthe Officer In Charge of Kamukunji police station and the Officer Commanding Police Division (OCPD) Starehe oversee the election of new Directors.5. Spent6. Thatthis Honourable Court be pleased to issue an injunction restraining the 2nd, 3rd and 4th Defendants from holding out and performing their duties as the 1st Defendant’s Secretary, Chairman and Treasurer pending the hearing and determination of this suit,7. Spent8. Thatthis Honourable Court be pleased to issue an injunction restraining the 2nd, 3rd and 4th Defendants whether by themselves, their employees, servants,agents or auctioneers from interfering with the operations of the 1st Defendant pending the hearing and determination of this suit.9. Thatthis Honourable Court be pleased to issue an order that a forensic audit of the 1st Defendant be done by a certified accountant appointed by Institute of Certified Public Accountants of Kenya (ICPAK) and a report be filed in Court.10. Thatcosts of and occasioned by this Application be provided for.

2. The application is supported by grounds set out on its face, the supporting affidavits of the Plaintiffs sworn on 13th September 2021 and their supplementary affidavits sworn on 12th September 2021. It is opposed by the Defendants through the replying affidavit of the 3rd Defendant sworn on 28th September 2021.

3. Before I consider the application, a background of the matter will suffice. The 1st Defendant (“the Company”) is a limited liability company incorporated under the Companies Act (Repealed) on 15th August 1969. Its main objects include carrying on the business of a hotel, bar, restaurant, wholesales of food stuff, brokers in land and estate agents and public or private conveyance proprietors.

4. The thrust of the Plaintiffs’ suit is that the Company is not being run in a transparent manner. They claim that the 2nd, 3rd and 4th Defendants (‘the Directors’’) have been running the Company to the exclusion of the other shareholders. They accuse them of acts detrimental to the shareholders and the Company including failing to issue any dividends to the shareholders, neglecting and/or refusing to file annual returns with the Registrar of Companies thereby exposing the Company to penalties and the risk of being struck off. They further accuse the Directors of neglecting and refusing to file tax returns with the Kenya Revenue Authority thereby exposing the Company to punitive penalties and interest.

5. The Plaintiffs further state that the Directors have failed to pay land rates for the properties owned by the Company thus exposing it to punitive penalties and interest. That for the past two years, the Directors have neglected and/or refused to call an annual general meeting hence the Plaintiffs and the other shareholders are totally in the dark about the day-to-day operations of the Company. They complain that the Defendants have neglected and or refused to share the minutes of the past annual general meetings with the Plaintiffs and the other shareholders.

6. The Plaintiffs state that they are not aware of all the properties owned by the Company, its bank accounts and the amount of money therein. They stress that the Directors have personalized the Company’s operations to the exclusion of the other shareholders and have used the income and resources of the Company to personally enrich themselves and have registered and operate other companies to the detriment of the Company and shareholders.

7. For these reasons, the Plaintiffs seek the following orders against the Defendants jointly and severally:a.An order compelling the Defendants to produce and deliver to the Plaintiffs a true and accurate list of properties, assets including title deeds, books, records and documents.b.An order compelling the Defendants to produce and deliver to the Plaintiffs a true and accurate list of bank accounts owned by the Company.c.An order compelling the Defendants to produce all the duly registered special resolutions and an order calling for the election of new directors.d.An order compelling the Defendants to produce and deliver to the Plaintiffs a true and accurate record of all financial affairs of the Company from 1957 to-date.e.An order compelling the Defendants to payout all the outstanding dividends to the Company's shareholders.f.An order compelling the Defendants to remit the unpaid tax to the Kenya Revenue Authority.g.An order compelling the Defendants to pay any outstanding land rates penalties and interest.h.An order compelling the Defendants to regularize the Company’s status with the Registrar of Companies and pay any outstanding penalties.i.An order compelling the Defendants to call for an annual general meeting.j.Any other or further relief that this Honourable Court may deem [it to grant.k.Costs of this suit. [Emphasis mine]

8. When the matter came up for hearing on 8th July 2021, I issued the following ruling:This is case a between the 1st Defendant, a Company, and its shareholders. Among the prayers sought by the Plaintiff are prayers compelling the Company to provide certain documents. Given the nature of the case and the fact that the 1st Defendant through its Advocate, Mr Mutinda, accepts that it has a duty to provide its shareholders with certain documents, I hereby order as follows:a.I direct the 1st Defendant to furnish the documents sought in prayers (a), (b), (c) and (d) of the Plaint within a period of 30 days from the date hereof.b.The parties through their advocates shall meet and review documents with a view to determine the sufficiency or otherwise of the said documents.c.Mention on 08. 10. 2021 for further directions and orders on the matter.

Plaintiffs’ Case 9. In the application before the court, the Plaintiffs’ case is that the Defendants have not complied with the orders of 8th July 2021. That on 3rd August 2021, the Plaintiffs through their advocates on record wrote a letter addressed to the Defendants’ advocates requesting them to comply with the order but they did not respond.

10. The Plaintiffs’ state that they later came to find out that the Directors had issued notices to its shareholders calling for an annual general meeting on 4th September 2021 where according to the notice, the election of directors was on the agenda. On 10th August 2021, the Plaintiffs wrote to the Defendants requesting for the Plaintiffs’ names among other shareholders to be included in the ballot but that the Plaintiffs did not receive any response.

11. On 16th August 2021, the Plaintiffs wrote to the Registrar of Companies and the Inspector General of Police notifying them of the orders issued on 8th July 2021, and requesting them to send their officers to oversee the election and provide security. The Registrar of Companies declined the request by the letter dated 25th August 2021 on the ground that the Companies Act, 2015 does not envisage its involvement.

12. The Plaintiffs aver that on the day of the annual general meeting, the Defendants initially denied them entry into the meeting room that was being guarded by a menacing employee. That it took the intervention of the Defendants’ advocate to have the Plaintiffs and their advocate allowed into the meeting room.That during the meeting, the Directors informed the shareholders that they would only get dividends of Kshs. 45,000. 00 subject to a tax of 5%. The Plaintiffs contend that the imposition of the tax was unlawful and no proof was provided that the amount had been remitted to Kenya Revenue Authority. They further state that the Directors also issued the shareholders with the annual reports for the years 2018, 2019 and 2021 but neglected to issue the annual report for 2017, yet an annual general meeting had not been called in the said year. That close scrutiny of the said reports shows expenditures that do not make financial sense. The Plaintiffs accused the Directors of misappropriating the Company funds.

13. The Plaintiffs contend that the Directors have understated the value of assets owned by the Company and from the aforementioned reports, a forensic audit of the Company is required to determine the actual value of its assets and any misappropriated money be paid back by the Directors.

14. For the foregoing reasons, the Plaintiffs pray that Directors should not be allowed to continue with the operations of the Company as this will be detrimental to the shareholders’ interests. They maintain that the Directors are in contempt of court as they have not complied with the orders issued on 8th July 2021 and as such it is only fair and in the interests of justice if elections are held in order for new directors to take over the running of the Company’s operations. Thus, the Plaintiffs pray their application be allowed.

The Defendants’ Reply 15. The Defendants deny that they have disobeyed the court orders as alleged or at all. They state that when the matter came up for hearing on 8th July 2021, the Defendants’ advocate informed the court that they had supplied most of the documents sought in prayers (a), (b), (c) and (d) of the Plaint.

16. The Defendants contend that Plaintiffs’ advocate countered that the documents supplied were not sufficient and the court directed that both advocates meet to resolve the issue of the documents and their sufficiency or otherwise. The Defendants state that despite arranging a meeting, the Plaintiffs’ advocate stated that unless the Defendants produced new documents there was no purpose for the meeting. The Defendants stress that the Plaintiffs’ advocate refused to engage them on the following documents supplied:a.Certificate of incorporation.b.Memorandum and articles of association.c.Company annual returns for the years 2015-2019. d.KRA returns.e.Land rates payment receiptsf.Title deeds.g.Bank accounts.h.Register of members.i.Bank statements.j.Minutes book.

17. As regard the Annual General Meeting (AGM) held on 4th September 2021, the Defendants state that all the members including the Plaintiffs were duly notified. They state that the Plaintiffs attended the meeting where elections were conducted in accordance with the Companies Act, 2015. The refute the Plaintiffs’ allegation that they were denied entry to the venue. They state that the Plaintiffs brought with them strangers whom they insisted had to attend the meeting. It is the Defendants’ position that only members can participate in the AGM and that the Plaintiffs’ acts which created a standoff only eased after they agreed to shed off the strangers.

18. The Defendants further stated that most of the persons who had offered themselves for election as directors were not eligible except one who was elected as a director. They state that the Plaintiffs did not officially offer themselves hence they could not be elected.

19. The Defendants urge that the issues as contained in the impugned reports and as raised by the Plaintiffs are in-house issues which ought to have been raised at the AGM. The Defendants state that they are not opposed to any forensic audit but are opposed to the Plaintiffs’ order seeking to bar the 2nd and 3rd Defendants from operating the affairs of the Company as there are no sufficient reasons or grounds given to have them removed.

20. The Defendants complain that the Plaintiffs’ refusal to have a meeting to resolve the issues before the court smacks of an ulterior motive and are at best self-serving as the Plaintiffs are consumed by a burning desire to take the helm of the Company by any means possible. The Defendants submit that they are not opposed to any members including the Plaintiffs from being elected as directors so long as they meet the criteria.

Analysis and Determination 21. The main issue for the court’s determination is whether the Defendants are in contempt of the court’s orders issued on 8th July 2021. Allegations of contempt of court should not be taken lightly. Our courts have been emphatic about the importance and obligation of obeying court orders and the Court of Appeal in Fred Matiang’i the Cabinet Secretary, Ministry of Interior and Co-ordination of National Government v Miguna Miguna & 4 others NRB CA Civil Application No. NAI. 1 of 2017(UR 1/2018) [2018] eKLR could not have been clearer when it held as follows:When courts issue orders, they do so not as suggestions or pleas to the persons at whom they are directed. Court orders issue ex cathedra, are compulsive, peremptory and expressly binding. It is not for any party; be he high or low, weak or mighty and quite regardless of his status or standing in society, to decide whether or not to obey; to choose which to obey and which to ignore or to negotiate the manner of his compliance. This Court, as must all courts, will deal firmly and decisively with any party who deigns to disobey court orders and will do so not only to preserve its own authority and dignity but the more to ensure and demonstrate that the constitutional edicts of equality under the law, and the upholding of the rule of law are not mere platitudes but present realities………once a party is found to have breached, disobeyed or violated court orders such person will not be given audience before court until he first purges his contempt. [Emphasis mine]

22. The court’s orders of 8th July 2021 are common ground and from the parties’ pleadings, everyone knew and understood what they needed to do. The Company was to furnish the documents sought in prayers (a), (b), (c) and (d) of the Plaint as shown at paragraph 7 above. For ease of reference these included a true and accurate list of properties, assets including title deeds, books, records and documents, a true and accurate list of bank accounts owned by the Company, all the duly registered special resolutions and a true and accurate record of all financial affairs of the Company from 1957 to-date.

23. The court further directed the parties through their advocates to meet and review documents with a view to determine the sufficiency or otherwise of the said documents. The Defendants depone that they have furnished the Plaintiffs with documents including the Company’s Certificate of incorporation, Memorandum and articles of association, Company annual returns for the years 2015-2019, KRA returns, Land rates payment receipts, Title deeds, Bank accounts, Register of members, Bank statements and the Minute book.

24. The Plaintiffs have claimed that the documents supplied are insufficient. The issue of sufficiency of documents was left for the parties to discuss. Sufficiency relates to the quality of the document rather than the document itself which the party must take as it is. From the documents on record, I find that the Defendants have supplied a list of properties including title deeds and letters of allotment, records of the company including the certificate of incorporation and articles of association, land rates payment receipts and annual financial statement reports of the company for the years 2015-2019. These documents sufficiently dispose prayer (a) of the Plaint. The annual financial statement reports indicate that the Company’s principal bankers are KCB Bank which sufficiently disposes prayer (b). The production of the minute book disposes of prayer (c).

25. The Defendants supplied the Plaintiffs with financial statements for the years 2015 to 2019 and yet what the Plaintiffs sought in prayer (d) were financial statements from 1957 to-date. The Defendants have not indicated or explained why they have not supplied the financial statements.

26. As to whether the court should commit the Directors to civil jail, I would note that the courts have always taken the position that they will only resort to committal to civil jail as a last option and in rare and exceptional circumstances as it means limiting a person’s right to liberty. In Mbugua v Mbugua [1992] KLR 448 Kuloba J., (as he was then) poetically summed up this position as follows:The committal to civil jail will be an end in itself, serving no useful purpose. It will be for vindictiveness only; but civil justice is placatory, not retaliatory or revengeful. As Courts administering civil justice we do not sit here unleashing reprisals of vengeance to satisfy egoistic vendetta veneered with some court orders. Committal to civil jail is redressal, not merely punitory. In this case if the Court sends the defendant to jail for six months, the wrong will not have been redressed; her sojourn in jail will be punishment to her, but it will not enforce the order said to have been disobeyed.

27. The Defendants shall be given an opportunity to show cause why they should not be held in contempt of court for failing to supply the Plaintiffs with financial statements or reports on the Company’s financial affairs from 1957 to-date.

28. I now turn to consider the other prayers in the application. The orders of 8th July 2021 did not direct to the Defendants to call a general meeting. It was limited to the production of documents. I however note that it is a statutory obligation of the Company to call an annual general meeting. Such a meeting having been called rendered Prayer 3 and 4 moot. In any case, another annual general meeting is now due. This also disposes of prayer (i) of the Plaint.

29. In prayers 6 and 8 of the application, the Plaintiffs seek to restrain the Directors’ from holding out and performing their duties in the Company and from interfering with the operations of the Company pending the hearing and determination of this suit. I reject this plea as the election of directors is the preserve of shareholders. The Plaintiffs, as shareholders, can initiate a process of effecting changes to the Company’s management and operations through the internal processes provided in the Company’s Articles of Association.

30. The Plaintiffs seek that a forensic audit of the Company be carried out under prayer 9. While the Defendants do not oppose such an exercise, its nature and extent is not defined. Further, this prayer as it is not grounded on the reliefs sought in the Plaint.

Conclusion and Disposition 31. Apart, from the issue of the outstanding documents, I am of the view that the remaining prayers (e), (f), (g) and (h) are matters of internal management of the Company. The court having facilitated the Plaintiffs’ right to obtain information, they are entitled to take whatever action they wish to take.

32. For these reasons, I find that the Plaintiffs’ application dated 13th September 2021 is partly merited and is allowed in the following terms:1. The Defendants are directed to supply to the Plaintiffs a true and accurate record of the financial affairs of the Company from 1957 to-date within 14 days of this court’s ruling.2. The Defendants shall bear half the costs of this application.

DATED AND DELIVERED AT NAIROBI THIS 6TH DAY OF SEPTEMBER 2022. D. MAJANJAJUDGECourt of Assistant: Mr M. OnyangoMs Maina instructed by Maina King’ara and Company Advocates for the Plaintiffs.Mr Mutinda instructed by M. Mutinda and Associates Advocates for the Defendants.