Sultan Hasham Lalji, Bahadurali Hasham Lalji & Hasham Lalji v Ahmed Hasham Lalji, Diamond Hasham Lalji, Atta (Kenya) Limited, Diamond Jamal & Azim Virjee [2014] KECA 440 (KLR)

IN THE COURT OF APPEAL AT NAIROBI

(CORAM: OUKO, M’INOTI & J. MOHAMMED, JJ.A)

CIVIL APPEAL NO. 3 OF 2003

BETWEEN

SULTANHASHAM LALJI …………....................……………………... 1STAPPELLANT BAHADURALI HASHAM LALJI …………………...................……… 2NDAPPELLANT

ESMAIL HASHAM LALJI …………………...................……………… 3RDAPPELLANT

AND

AHMED HASHAM LALJI …………….....................………………… 1STRESPONDENT DIAMOND HASHAM LALJI ……....................……………………… 2NDRESPONDENT

ATTA (KENYA) LIMITED ………………….......................…………... 3RDRESPONDENT DIAMOND JAMAL …………………….....................………………… 4THRESPONDENT

AZIM VIRJEE ……………………………….....................……………. 5THRESPONDENT

(Appeal fromtheruling of the High Court of Kenya at Nairobi (O’Kubasu, J.) dated 21stJuly,

2000)

in

H.C.C. NO. 189OF 1998)

*********************************

JUDGMENT OF THE COURT

We owe this brief explanation why an appeal initiated by a notice of appeal on 2 nd August

2000 is being decided in 2014, fourteen (14) years later.

Apart from numerous adjournments obtained at the behest of both sides the court heard and determined three (3) interlocutory applications in respect of this appeal between April 2002 and March 2012. In addition, the respondents at some stage changed their advocates.

With that brief explanation, we turn to the background of this long-drawn family dispute. The appeal arises from the decision of the High Court (O’Kubasu, J, as he then was)

striking out the suit in respect of the claims brought by the appellants.

The appellants,  Sultan  Hasham  Lalji,  Bahadurali  Hasham  Lalji  and  the late  Esmail Hasham Lalji are brothers  to the 1st  and 2nd respondents, Ahmed  Hasham Lalji and Diamond Hasham Lalji. The appellants together with Atta (1974) Limited (the company) brought an action against the 1st  and 2nd respondents along with a company  called Atta (Kenya) Limited, the 3rd respondent and two others, Diamond Jamal and Azim Virjee, the 4th and 5th respondents claiming, apart  from Diamond  Hasham  Lalji,  that the remaining  4 brothers  were  shareholders  of the company.  Diamond Hasham Lalji, according to the plaint was a non-shareholding director in the company.  Out of the 60,000 shares, the appellants held 44,367 shares, constituting 73. 9% of the total shares of the company.  The 4th and 5th respondents were directors of Samvir Management Services Limited, which acted as the company secretary for the company.

The appellants averred that on 13th November  1991 at an alleged meeting of directors of the company it was purportedly resolved that the assets of the company be disposed of by way of sale with the option to purchase going first to the existing shareholders of the company. The appellants contended that they neither had notice of the alleged meeting nor did any of them attend it. They also argued that prior to the alleged notice of the meeting being issued by Samvir Management Services Limited, that company had resigned as the company  secretary.

The appellants  further pleaded that Ahmed  Hasham Lalji,  (the 1st   respondent)  as the Managing Director of the company purported to send a letter to himself in that capacity offering to purchase the company assets for Kshs. 40 million and proceeded to forward  a banker’s cheque of Kshs. 4 million to cover the 10% deposit. On the other hand the firm of A.B. Patel and Patel Advocates,  Mombasa, purportedly acting on the instructions of the 2nd appellant wrote to the Managing Director of the company also placing an offer to buy the assets at Kshs. 35 million and forwarded with the offer a banker’s cheque in the sum of Kshs. 3. 5 million constituting 10% deposit together with a letter  of recommendation  by the Manager, Habib Bank, A.G. Zurich,

Mombasa.  The 2nd appellant denied having instructed A.B. Patel and Patel Advocates to act for him as he was not even aware that the company assets were being sold; that he did not apply for the banker’s  cheque in question;  that he had no relationship  with Habib Bank A.G. Zurich, Mombasa or any of its managers and did not request for the letter of recommendation issued by the bank to the Managing Director of the company.  The 3rd plaintiff (now deceased) denied the assertion by the respondents that he attended the meeting of the directors at which the resolution to sell the company assets was passed.

It was also the appellants’ case that after the sale of the assets, the 4th and 5th respondents who were  the directors of Samvir  Management  Services  Limited,  the company  secretary, incorporated Atta (Kenya) Limited – the 3rd respondents.  Shortly after the incorporation the two directors resigned  as such  and  were  replaced  by the 1st   and 2nd  respondents.   Atta  (Kenya) Limited then proceeded to obtain loans amounting to Kshs. 85 million from DFCK Limited, Kenya Commercial  Bank Limited  and Kenya  Commercial  Finance  Company Limited  on the security of the company assets.

These  two events,  namely,  the resolution  to dispose  of the company  assets  and  the transfer of those assets to the 1st defendant and subsequently to Atta (Kenya) Limited, were in the appellants’ estimation,  fraudulent  acts committed  by all  the five  respondents  against  all  the appellants as individual shareholders and against the company.  For this, they prayed the court in the plaint to:-

i)       declare  that the transfer of  the company assets  to  the 1st    respondent  and subsequently to the 3rd respondent was fraudulent  against the appellants and the company;

ii)       restrain the respondents by an order of injunction from alienating the assets of the

3rd respondent, (Atta (Kenya) Limited) by way of sale or otherwise pending the determination of the suit.

iii)     order that account into the affairs of the 3rd respondent (Atta (Kenya) Limited) be rendered  from the date  the assets  of the company  were  acquired  by the 1st respondent and thereafter transferred to the 3rd respondent until such date that the order would be given.

iv)     appoint  a receiver for the 3rd respondent (Atta (Kenya) Limited) and during the receivership the appellants be allowed access and/or  active  participation  in the receivership exercise especially in relation to the assets of the 3rd respondent (Atta (Kenya) Limited).

v)      order, after the accounts  are taken,  that all  assets  of the company fraudulently transferred  as explained above be restituted to the company and any money found to be due to the company paid back to it.

vi)      order for the payment of damages and costs.

Naturally, all the respondents in their respective defences denied the accusations of fraud and maintained that the meeting at which the resolution was passed to dispose of the company assets was regularly called by the company secretary before its letter of resignation was accepted by the company; that the 1st  respondent, pursuant to a  power of attorney given to him by the 2nd appellant represented the latter at the directors’ meeting while the late Ismail Hasham Lalji was present in person; that under the company’s Articles of Association, the directors were authorized to dispose of all the assets of the company without reference to the shareholders and any director outside Kenya was not entitled to receive any notice of the meeting; that the 1st respondent being the 2nd appellant’s attorney instructed A.B. Patel and Patel Advocates on behalf of the former and the offer of Kshs. 35 million was made with the 2nd appellant’s knowledge and consent.

The 3rd respondent (Atta (Kenya) Limited) specifically denied having obtained loans on the security of the company’s assets but upon a charge of its own new machinery and equipment. For these reasons, the respondents contended that the suit did not disclose any or any reasonable cause of action  in favour of the appellants,  as a result  of which the suit in the name of the company  was not maintainable  by reason of the fact that the company did not authorize its institution.

At the close of pleadings, the following six applications, bearing marked similarity in their prayers, were filed;

i)        On 10th February  1998, a notice of motion brought by the 1st  and 2nd respondents for, inter alia, the plaint, so far as it related to the claims of the 1st, 2nd and 3rd appellants to be struck out and the action in their names against the respondents be dismissed.

ii)      On 10th February,  1998,  a motion by the 3rd respondent also for the striking out or dismissal of the claim by the appellants, in so far as it was filed on behalf of the 1 st,

2nd and 3rd appellants.

iii)     On 10th February 1998 another notice of motion brought by the 1st and 2nd respondents for orders that the company’s suit against the respondents be struck out or dismissed,

iv)     On 10th February 1998, the 3rd respondent filed another motion seeking orders that the plaint  be struck out in so far as  it purported to have been filed  on behalf of the company (the 4th plaintiff).

v)      On 11th February  1998 a notice of motion was filed by the 4th and 5th respondents for orders that the appellants’ suit be struck out or dismissed, and

vi)     On 11th February 1998 another motion was brought  by the 4th and 5th respondents praying that the plaint, in so far as it purported to have been filed on behalf of the company, be struck out.

While the last four applications are still pending in the High Court, sixteen (16) years since they were filed, the first two were, by consent heard and disposed of by O’Kubasu, J. (as he then was) and constitute  the subject of this appeal.   We note further that an application  for interlocutory  injunction brought simultaneously  with the plaint  is  also  yet to be heard  inter partes.

The grounds upon which the two applications  in question  were  based were  similar, namely,  that the claims  made  by the appellants  did not disclose  or did not disclose  any reasonable cause of action against the respondents; that the claims were misconceived in law and that suit amounted to an abuse of the process of the court.

In other words, the respondents argued before the High Court that the appellants being the majority  shareholders  in the company had no capacity  to bring the suit jointly with the company complaining of transgressions against the company by the respondents; that in such a situation the proper plaintiff was the company itself.

For their part, the appellants submitted that by fraudulently transferring the company’s assets, the respondents denied the appellants the right to participate in the purchase process; that apart from making their own independent claims the appellants also sought a remedy on behalf of the company.

Upon consideration of these arguments  the learned Judge found as an uncontested  fact that the appellants were the majority shareholders in the company.  He also found that since the thrust of the appellants’ complaint was that the company’s assets were fraudulently transferred by the respondents,  it followed that the company alone could bring an action against the respondents.

Relying on the English cases of Burland V. Earle[1902] 71 LJPC, Stein V. Blake &

Others [1998], All ER 724 and Prudential V. Newman Industries[1982] 1 All ER 354, all of which followed  the celebrated  Foss V. Harbottle[1843] 2 Hare  461, the learned  Judge concluded with the following words:-

“…..it is  now clear  that the  1st,2ndand 3rdplaintiffs being  majority shareholders in the plaintiff company (the 4thplaintiff)  could notbringthis suit.I should hastento state that by upholding the preliminary objection that does not mean that the suit  had no merit.  The three  plaintiffs may have genuine complainants against the defendants but they have not come in the proper way since the  law clearly  states  that as they  are  complaining of the injury to the company (4thplaintiff) thenit is the company which should bring this suit……. It is a pity that the first three plaintiffs are shut out but that does not mean  that their  complaints cannot be entertained  since  the  company   has  the  right to ventilate their grievances in a proper suit.”

With that conclusion, the appellants’ suit was struck out leaving the company  as the only plaintiff in the suit.  Being aggrieved, the appellants have now preferred this appeal to challenge the above decision  on eight  (8) grounds which were summarized  and argued  by Mr. Kigen, learned counsel, broadly in a cluster of two, as follows:-

i)       That the learned Judge erred in holding that the suit by the appellants was a derivative action  exclusively  when infact the  cause of action  and the remedies sought  were outside  the confines  of a  derivative  action  as  the wrongs complained  of were committed against the appellants as well as the company  – jointly and severally,

ii)      That the learned  Judge erred  and misdirected  himself  by misapprehending  and/or failing to give effect to the ratio decidendiin the case of D.T. Dobie & Company (K) Ltd V. Joseph Mbaria Muchina & Another, Civil Appeal No. 37 of 1978.

Mr. Katwa submitted that there was a clear case of fraud whose particulars were set out in the plaint; that the learned Judge having appreciated that the appellants had a genuine complaint ought not to have taken the drastic action of striking out their claim; and that the appellants were individually aggrieved by the actions of the respondents of selling the assets of the company without their participation as shareholders of the company. He finally submitted that the learned Judge ought to have preserved the suit and ordered for an amendment  since the only issue was that of joinder of parties.

Learned counsel  separately  representing  the five respondents, Mr. Omuga (for the 1st respondent) Dr. Khaminwa (for the 2nd respondent), Mr. Esmael (for the 3rd respondent) and Mr. Lutta (for the 4th and 5th respondents) in opposing the appeal were unanimous in their respective submissions  that, because the alleged  wrong was committed  against  the company, it was the company, and not the company jointly with the appellants that ought to have sued; that no law allowed the appellants as majority shareholders to bring an action on behalf of the company; that it was only the company that could demand from the 3rd respondent to render account; that the appellants do not stand to suffer prejudice as the entire suit was not struck out; that the appellants

failed  to seek  to amend  the plaint  before the applications,  the subject  of this appeal,  were presented; and that the averments in the plaint were clear as regards who was aggrieved, namely, the company.

The applications were expressed to be brought under the provisions of order 6 rule 13 (1) (a)of the repealed  Civil  Procedure  Rules  which allowed  a  court, at  any  stage of the proceedings to order to be struck out or amended any pleading on any of the following grounds;

a) that it discloses no reasonable cause of action or defence; or

b) that it is scandalous, frivolous or vexatious; or

c) that it may prejudice; embarrass or delay the fair trial of the action; or

d) that it is otherwise an abuse of the process of the court.

The court may in any of the above circumstances  also  order the suit to be stayed or dismissed,  or enter judgment,  as the case may  be.  Where it is  alleged  in an application  for striking out that the pleading discloses no reasonable cause of action, no evidence is required by way of affidavit in support of the application.  In such a case, the application must state concisely the grounds on which it is made.  The two applications in question were brought on the premise that the suit by the appellants disclosed no reasonable  cause of action against the respondents, hence no affidavit in support  thereof  was necessary and none was filed, but the grounds upon which the applications were made were, in our view, concisely stated in the grounds on the face of the 1st application as follows:-

“a) That on the allegations made in the plaint, the first, second and third plaintiffs have no  or no  reasonable  cause  of action against  the defendants or any of them in that the defendants are not alleged to have done any actionable wrong to them or any of them; and

b) That the  first,  second  and third plaintiffs’  claims  as  against  the defendants,  as formulated   in the plaint, are  misconceived  in law and amount to an abuse of the process of the court.”

The grounds on the face of the 2nd application are:

“a) That in the circumstances alleged in the plaint herein only Atta [1974] Limited  can acquire a cause of action to redress the alleged wrongs done  to it by the  defendants  and/or to recover  loss  or damages allegedly caused to it by the defendants;

b) The first, second and third plaintiffs who claim to own 73. 9% of the shares in Atta [1974] Limited have not suffered any personal loss and are not directly  affected by any alleged wrong  doing done to Atta [1973] Limited by the defendants;

c)    Theclaim     by   the     first,    second     and   third    plaintiffs   is misconceived…….”

In determining this appeal, we bear in mind and reiterate that the main suit and the inter partehearing of an application for temporary injunction are still  pending in the High Court, while four applications as explained earlier are also pending before this Court. For this reason, we  shall  avoid  expressing  any  concluded  views  on the issues  that  will  be the subject  of determination by the trial court or the bench of this court that will ultimately hear the remaining applications.

The broad issue for determination in this appeal is whether the appellants’ claim against the respondents disclosed a reasonable cause of action and by extension, whether the learned Judge properly exercised his discretion in dismissing the appellants’ claim.

We emphasize  the words “reasonable  causeof action”to underscore the fact that  a pleading will  be said  to disclose  a reasonable  cause  of action  if  it exhibits  some chance of success when the allegations in the plaint or defence only are considered.  See Lord Peason in Drummond – Jackson V. B.M.A.[1970] 1 W.L.R. 688 at p. 696. A pleading or part thereof will be struck out if the court is satisfied that even if all the allegations of fact set out in the pleading are  proved,  those facts  would not establish  the essential  ingredients  of a  cause  of action  or

constitute  a  defence.But as  explained  in D.T. Dobie & Company (Kenya) Limited V.

Muchina [1982] KLR 1, the power to strike out pleadings must be resorted to sparingly and

cautiously because at that stage when striking out is sought the court does not have full facts and merits of the case through  discovery  and oral evidence.  Yet, at the same time, it is also true that the object of the summary procedure of striking out is to ensure that defendants are not burdened by claims which ultimately are bound to fail having regard to the uncontested facts.  We reiterate Lord Blackburn’s words in Metropolitan Bank V. Pooley[1885] 10 App Case 210 or p. 221 that “…a stay or even dismissal of proceedings may often be required by the very essence of justice to be done.”

The suit in the High Court, as explained earlier was brought  by Sultan Hasham Lalji, Bahadurali  Hasham  Lalji,  Esmael  Hesham  Lalji  and Atta  [1974] Limited.    The first three (brothers) are described in plaint as follows:-

“6. The 1st, 2ndand3rdplaintiffstogether with the1stdefendantwere at all material times shareholders in the 4thplaintiff company, holding

14,789shares eachin the said company. The 2nddefendant wasat all material times  a non-shareholding  director  in the  company. The 1st, 2ndand 3rdplaintiffswere therefore, at all material times holding a total of 44,367 shares in the company out of a total of

60,000shares,an equivalent of 73. 9% of the total shares  of the company.”

In view of the above pleaded shareholding, the appellants were the majority shareholders in the company. Who, according to the plaint was aggrieved by the respondents’ actions; the appellants, the company or both the appellants and the company?

The genesis of the dispute was a meeting of the company’s board of directors held on 13 th

November 1991 at which it was purportedly resolved that:-

“9.  …..all the assets of the 4thplaintiff be disposedoff by way of sale with  the  option  going first  to the  existing  shareholders  of the company…..(Emphasis ours)

The following deposition  contained  in the plaint  are  critical  in answering  the question; who was aggrieved by the transfer of the company’s shares?

“21. Very shortly after the 1stand2nddefendants becamedirectors ofAtta, Atta used the assets of Atta [1974] Limited, the 4th plaintiff herein(whichhad not as at October 1992 been transferred to Atta) to obtain loans amounting to a total of Kshs. 85 million from DFCK Limited, Kenya  Commercial Bank Limited and Kenya Commercial Finance Company Limited (KCFC).

22.   The plaintiffs shall plead at the hearing hereon that the transfer of the assets of Atta [1974] Limited to the  1stdefendantand thereafter to Atta, the 3rddefendant was fraudulent  against the plaintiffs and was done with a view to benefitting the 1stand 2nddefendants to theexclusion of theplaintiffs.”

Particulars of Fraud

i)       …………….ii)      …………….iii)   …………….iv)     …………….v)      …………….vi)  …………….vii)    …………….

viii)    The assets of the 4thplaintiff were immediatelyafter the  alleged  resolutions  transferred  to Atta (Kenya) Limited, a company whose initial  subscribers were the

4thand 5thdefendants,directorsand/or shareholders of Samvir which ought to have acted in a fiduciary capacity  as regarded the plaintiffs.  The said incorporation of Atta and the transfer thereafter was done with  the sole aim of removing the assets from the reach of the plaintiffs with fraudulent intentions.

ix)      The audited accounts of the 4thplaintiff for the year ending 31stDecember 1992 show that the 4thplaintiff as operating at a profit and the  sale of its assets was both unnecessary and not in the  interest of the company.  The plaintiffs shall, at the hearing hereof produce for reliance upon the said audited accounts.

x)      The assets of the 4thplaintiff were in any event sold at such a gross undervalueas  to point to fraud.  Atta (Kenya) Limited was able to borrow substantial sums of money using the assets of the 4thplaintiff soonafter the  fraudulent  transfer  of the  assets to itself.    The amounts  borrowed  are  clear indication  of the  then value  of the assets of the 4thplaintiff.

23.   The plaintiffs shall plead at the hearing hereof that the 1st, 2ndand

3rddefendantsfraudulent  actions  were  not too clever  way of appropriating to themselves (with the fraudulent  help of the 4thand5thdefendants) the assets of the 4th plaintiff to theexclusion ofthe 1st, 2ndand 3rdplaintiffs, the majority shareholders of the 4th plaintiff.

24.  Pursuant to the foregoing particulars of fraud, the plaintiffs plead that the 1stand 2nddefendantswith the help of the 4thand 5thdefendants  colluded tocreate the4thplaintiff into ashell bytransferring  the  assets of the   4thplaintiff  into  a  shell   by transferring the assets of the 4th plaintiff to a company – the 3rddefendant, incorporatedfor the purpose and thereby enrich themselves at the expense of and to the exclusion of the 1st, 2ndand

3rdplaintiffs.

25.   The plaintiffs fear that unless stopped by injunction, the 1stand2nddefendantswith the active help of the 4thand5thdefendantsshall,using thesamefraudulent means as set out above transfer and/or alienate   the  assets of the  3rddefendantand thereby  hopefully remove any trace of the assets of the 4thplaintiff that have been transferredwith the full knowledge and help of the 4thand 5thdefendant to the3rddefendant,Atta.”

We have set out the foregoing  in extensoto demonstrate that by their own averments in the pleading  the appellants  explicitly  conceded  that the assets  in question  belonged  to the company; that it is the company that was defrauded as pleaded.  It follows therefore that it is the company  that would be aggrieved.   Not even  in a  single  paragraph  of the plaint  have the appellants pleaded what loss they have suffered individually or jointly by the alleged fraudulent transfer of the company assets.

As  a general  rule  and subject only to specific  well  established  exceptions,  due to its separate legal personality, the law does not permit shareholders to bring an action on behalf of the company in which they hold shares. If the duty to be enforced is one owed to the company, then the primary  remedy for its enforcement is an action by the company itself against those in default. This proposition, articulated for the first time by Wigram, VC in 1843 has come to be known commonly  as the rule in Foss V. Harbottle(supra), so called after the leading authority

of company law that has stood the test of time (for the last 171 years) since it was elucidated. Normally, therefore, the company itself is the proper plaintiff, and the only proper plaintiff, in an action arising out of a dispute within the company.  And the appropriate agency to start an action on the company’s behalf is the board of directors, to whom this power is delegated as an incident of managing the company: The rule  has greatly  strengthened  the position of the majority shareholders.   Indeed if there were no exceptions to the rule the minority in a company would be completely in the majority’s hands and at their mercy.

A few years after the decision in Foss V. HarbottleJames LJ in Gray V. Lewis[1873] 8

Ch App 1035 justified the principle that any body corporate is the proper plaintiff in proceedings to recover its property by pointing to the obvious danger of a multiplicity of shareholders’ suits in the absence of the rule. That every member would be able to sue any director,  officer  or shareholder alleged to have enriched themselves at the company’s expense.  There might be as many suits as there are shareholders multiplied by the number of the defendants.  The situation would be aggravated where  suits were discontinued  at will,  or dismissed  with costs against plaintiff  shareholders  with some  or most of them  being unable  to meet  those  costs.    This justification remains true today in several jurisdictions, including Kenya, where due reverence is paid to the “proper plaintiff”principle and other aspects of the rule in Foss V. Harbottle.

In Rai & Others V. Rai and others[2002] 2 EA 537 this Court confirmed that the rule in Foss V. Harbottlestill stands in Kenya.  The Court further observed that the exceptions to the rule may only be taken advantage of by minority shareholder (and not majority shareholders) in a derivative action.  The four (4) well-known exceptions to the rule are; firstly, where the directors or a shareholding  majority use their control of the company to take actions which would be ultra viresthe constitution of the company or are illegal.  Secondly, if some special voting procedure would be necessary under  the company’s constitution  or under the Companies Act, it would

defeat both if they were to be sidestepped by ordinary resolutions of a simple majority, and no redress for aggrieved minorities were to be allowed (Edwards V. Halliwell[1950] 2 ALL ER

1064. Thirdly, where there is invasion of individual rights of the shareholder, such  as voting rights (Pender V. Lushington[1877] 6 Ch D 70 and fourthly, where a fraud on the minority is being committed.  In all those cases, a “derivative action”could be brought before the court on behalf of the company where the wrongdoer is in control of the company or by the individual shareholder whose personal right is violated.

The appellants, from our consideration of the pleadings, and without expressing any firm view, have not brought themselves within any of these exceptions.  The alleged acts of fraud as particularized in the plaint were, if proved, committed against the company.

In any  case, we  have observed  that it is  common ground that the appellants  are  the majority shareholders of the company.   It is the minority not the majority shareholders that are availed the protection by the exceptions since generally majority shareholders exercise powers of the company and control its affairs.

In his characteristic literary style, Lord Denning MR, summed up the law in Moir V.

Wallersteiner [1975] 1 ALL ER 849 at p. 857, as follows;

“It is a fundamental principle of our law that a company is a legal person with its own corporate identity,  separate from the directors or shareholders and with its own property rights and interests to which alone it is entitled.  If it is defrauded by a wrong doer, the company itself is the one person to sue for the damage. Such is the rule in Foss V. Harbottle [1843] 2 Hane 461. The rule is easy enough  to apply when the company is  defrauded by outsiders.   The company itself is the only one who can sue.  Likewise, when it is defrauded by insiders of the 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 majority  of the shares - who  then  can sue for damages? Those directors themselves are the wrong doers.  If a board meeting is held they  will not authorize  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 themselves.  Yet the company is the one person who is damnified.

Itis theperson whoshould sueotherwise thelaw would fail in its purpose; injustice  would be  done  without redress.    In  Foss V. Harbottle  (supra) Wigram V-C, saw  the problem  and suggested  a solution.   He thought the company  could sue in the name of someone who the law has appointed to be its representative.

A suit could be brought by individual cooperators in their private characters, and asking  in such  character  the  protection  of rights  to which  in their corporation character they were entitled.  This suggestion found  fulfillment in the Merry Weather case [1867]  LR 5 EQ. 464 which came before Wood V- G on two  accessions.   It was accepted in that case that the minority shareholders might file a bill asking leave to use the name of the company.   If they showed  reasonable  ground for charging the directors  with fraud, the court would appoint the minority  shareholders as the representative of the company to bring proceedings in the name of the company against the wrong doing directors.  By that means, the company  would  sue in its own name for the wrong done to it.  That would be, however, a circuitous course as Lord Hatherley L.C. said himself, at any rate in cases where the fraud itself could be proved on the initial application.

Toavoid that circuity,  Lord Hatherley  L.C.  held  that the  minority shareholders themselves  could bring an action in their own names (but in truth on behalf of the company) against the wrong doing directors for the damage done to them by the directors, provided always that it was impossible to get the company  itself to sue them. He ordered the fraudulent directors in that case to repay the  sums to the company…..stripped of mere proceeding the principle is that, where the wrong doers themselves control the company, an action can  be  brought on behalf  of the  company  by the  minority shareholders,  on the  footing  that they  are  its  representatives,  to obtain redress on its behalf.”

It is  our considered  view  that the learned  Judge in dismissing  the appellants’ claims exercised  his discretion  in the matter properly and correctly directed himself  to the facts as pleaded  and the law.   It would be wrong for this court to interfere with the exercise of that discretion  as doing so would defeat the elementary  principle  of litigation, that all  matters in dispute must be effectively and completely determined and adjudicated upon and the overriding consideration which govern parties to an action being that all necessary and proper parties to an action, but no others, should be before the court. There is no dispute that the company is in existence  and the appellants remain  its  majority  shareholders.   By partially  striking  out their claims, the learned Judge merely did what the appellants themselves ought to have done by way of an amendment as mandated, at the time by order 6 rule 13 (1)of the repealed Civil Procedure Rules.  They had no capacity to bring the action jointly with the company.  The company being the proper plaintiff, no purpose would have been served to retain the appellants’ non-existent claim in the suit only to be struck out or dismissed at the trial.

Accordingly,  we arrive at the conclusion that this appeal lacks merit and is, in the result, dismissed with costs to the respondents.

We note however, from the High Court ruling (Mwera, J. – as he then was) delivered on

18th November, 2010 that the suit by Esmael  Hasham Lalji,  named in this  appeal  as  the 3rd appellant was declared to have abated following his death on 18th November, 2006, during the pendency of this appeal.

Dated anddelivered at Nairobi this 18thday of July2014.

W. OUKO.

JUDGE OF APPEAL

K. M’INOTI

JUDGE OF APPEAL

J.MOHAMMED

JUDGE OF APPEAL

I certify that this is a true copy of the original

DEPUTY REGISTRAR