Trt Investments Limited v Mwalo & 3 others [2025] KEHC 1822 (KLR)

Trt Investments Limited v Mwalo & 3 others (Civil Case 223 of 2023) [2025] KEHC 1822 (KLR) (Commercial and Tax) (27 February 2025) (Ruling)

Neutral citation: [2025] KEHC 1822 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts)

Commercial and Tax

Civil Case 223 of 2023

F Gikonyo, J

February 27, 2025

Between

Trt Investments Limited

Plaintiff

and

Bramuel Mwalo

1st Defendant

Xetova Inc

2nd Defendant

Xetova Limited

3rd Defendant

Extra Dimensions Company Limited

4th Defendant

Ruling

Independent report on affairs of company 1. This ruling determines the issue of whether the court should adopt the report dated 10th October 2023 by Grant Thornton, in place of an inspector's report under section 786 of the Companies Act.

Background 2. The plaintiff/ applicant filed this suit against the defendants/ respondents claiming that through a Founder's Agreement dated 18th May 2022, it invested USD 1,900,000 in the 3rd respondent for 49% shareholding. The agreement also stipulated that the 2nd respondent was to own 100% of the 3rd respondent. It also disbursed USD 1,480,000 to the 4th respondent through loan agreements of 28th June 2022 and 16th September 2022, allegedly through misrepresentation by the 1st respondent.

3. The applicant alleges that the respondents have failed to finalize the constitution of a board with directors, formation of an advisory board, review of financials, repayment and accounting for the sums owed to it. That on 3rd February 2023, it received anonymous complaints against the 1st respondent, the CEO of the 2nd and 3rd respondents for corporate malfeasance, erosion and misuse of investor funds, sexual harassment and default in tax obligations. On 16th February 2023, it was discovered that the 2nd respondent is a tax-delinquent entity in Delaware, USA owing USD 88,168. 58. As a result, together with the 1st and 3rd respondents, it commissioned Grant Thornton to conduct an independent review of the 3rd respondent’s affairs due to the applicant's concerns and to undertake a capital raise for the 3rd respondent.

4. Grant Thronton released its first report on 17th April 2023 in which it observed that the 3rd respondent’s shareholding does not reflect the agreement between it and the 1st respondent; that the 1st respondent failed to supply a general ledger and bank statements required to authenticate various transactions reported in the 3rd respondent’s information provided; that the bank statements that were ultimately provided were manipulated; that in some cases there was reluctance to provide documentation to show the generation of income, expenses incurred, payment of taxes, repayments received in respect of the loan advanced to the 4th respondent.

5. Based on the first report, the applicant filed an application dated 26th May 2023 seeking an order that the court or the deputy registrar (DR) appoint an inspector to interrogate and inspect the accounts and affairs of the respondents and provide a report to the Court.

6. On 26th June 2023, the court allowed the application and issued an order appointing an inspector to inspect the affairs of the companies and to report to the court on:-a.Company registration and shareholding of the 3rd respondent from 18th May 2022 to date.b.Intellectual property registrations.c.Governance and management of the 3rd respondent from 18th May 2022 to date with respect to allegations ofi.Corporate malfeasanceii.Erosion and misuse of investor funding.iii.Sexual harassment.iv.Dishonour of tax obligations to Kenya Revenue Authority of USD 400,000. d.Annual filings made from 18th May 2022 to date.e.All bank accounts of the 3rd respondent from 18th May 2022 to date.f.Investigation into any company associated with the 3rd respondent that has been in operation from 18th May 2022 to date contemporaneous with the 3rd respondent.g.The 3rd respondent's operations and bank accounts relating to the contract of 20th June 2022 with the 4th respondent.

The present application 7. The Notice of Motion dated 12th April 2024 is seeking that this court adopt the final investigation report dated 10th October 2023, prepared by Grant Thornton, concerning the affairs and management of the 3rd respondent in respect of the court order dated 30th June 2023. The application is brought under sections 238, 780(1), 782, 786, 787, 789, 797, 1004 (1) (b) and (2), of the Companies Act, 2015, Order 40 Rule 2 and 4 of the Civil Procedure Rules, 2010.

8. The application is based on the grounds in the supporting affidavit sworn by the respondent’s compliance and administration manager, Vimla Ramasamy on 12th April 2024 and written submissions dated 5th June 2024. The grounds are that: -1. On 30th June 2023, this Court allowed the application dated 23rd May 2023 for the appointment of an inspector to interrogate and investigate the affairs of the 3rd respondent.2. The applicant has unsuccessfully pursued the appointment of an inspector through this court's DR, the Companies Registry and the Attorney General.3. Grant Thornton, an accounting firm, jointly engaged by the applicant, the 1st and 3rd respondents, submitted a final report on 10th October 2023 responding to the questions raised in the application dated 23rd May 2023.

9. In its submissions, the applicant asserted that Grant Thornton has specialized expertise in forensic accounting and auditing; and that according to Section 786 of the Companies Act, the qualification for an investigator appointed by the court is competence to carry out the investigations and that the provision does not provide for a specific list of investigators that can be appointed that is left to judicial discretion, subject to technical competence. The applicant relied on the decision in Fredrick Nthumo Maingi & another v Jones Makau Mutisya & 2 others [2017] eKLR, where the court while allowing an application for the appointment of an investigator, required the parties to present to the court names of two qualified and independent financial audit practitioners for their appointment showing that the investigators can be privately contracted.

10. The applicant also asserted that the respondents are estopped from questioning the report as they had an opportunity to dispute the finding of the initial report during the proceedings in the application dated 23rd May 2023 but failed to respond to that application. The 3rd and 4th respondents have made unsubstantiated allegations of partiality but have not provided any evidence to demonstrate the basis of these claims nor shown the interest Grant Thorton has in the dealings between the parties.

11. The applicant argued that the admission of the report does not necessarily imply that it is binding upon the court; that the report contains both factual and opinion evidence, which would conclude these proceedings as there is no further order required. In support, it relied on the English decisions in Rogers v Howyle (Neutral Citation Number: [2013] EWHC 1409 (QB) and Hoyle v Rodgers (Neutral Citation Number: [2014] EWCA Civ 257).

12. The applicant acknowledged that the Companies Act does not contain provisions on the production of an independent private investigation or audit report, but asserted that the Act does not prohibit the adoption of an independently, jointly commissioned report. The applicant also asserted that the court has discretion under Section 3A of the Civil Procedure Act to admit the report.

Responses 13. The application is opposed through: -1. The 1st respondent’s grounds of opposition and written submissions dated 24th June 2024 and 19th July 2023 respectively;2. The 2nd respondent’s grounds of opposition and written submissions both dated 24th June 2024;3. The 3rd respondent’s replying affidavit sworn by its director, Bramwel Mwalo Opiyo on 22nd May 2024 and written submissions dated 20th June 2024; and4. The 4th respondent’s replying affidavit sworn by Wambui Njoora on 20th August 2024 and written submissions dated 16th October 2024.

14. The central points raised by the 1st and 2nd respondent against the adoption of the report is that the Final Investigation Report dated 10th October 2023 was not prepared by a court-appointed inspector as provided by Section 786(1) of the Companies Act. They faulted the applicant for failing to follow up with the relevant bodies to appoint an inspector from 12th June 2023 when the order was issued to 12th April 2024 when the instant application was filed as they only attached one letter from the DR dated 10th July 2023. They claimed that the applicant did not intend to have a report by a court-appointed inspector but to use the report by Grant Thornton. They pointed out that there is no letter from the DR informing the applicant that the pursuit of appointment of an inspector has been unfruitful.

15. The 1st and 2nd respondents relied on the maxims of equity aids the vigilant not the indolent and equity follows the law. They also relied on the decisions in Republic v Council of Legal Education & another ex parte Sabiha Kassamia & another [2018] eKLR for the proposition that there can never be a deviation from statute for a party's convenience; Kings Bench in Rookey's case, that exercise of discretion is governed by rules of law and equity.

16. The 3rd respondent submitted that the report prejudices the respondents as it was not prepared by an inspector and that it cannot inform the court in an independent, judicious and fair manner of its affairs. It relied on Gitau v Kenya Methodist University (Kemu) Petition 5 of 2020 [2021] eKLR KEHC 322 (KLR) (8 December 2021). It also relied on Regina v Special Commissioner and Another, Ex P Morgan Grenfell & Co. Ltd [2002] UKHL to argue that the applicant's proposal is precluded from consideration by the doctrine of necessary implication.

17. The 4th respondent asserted that since the report was not endorsed by an inspector as required by law, the implication of a possibility of collusion between it and the 1st respondent is unjustified and unfair. It highlighted that information and documents were not sought from it in the preparation of the report, asserting that if the report is adopted it would be condemned unheard. It relied on Stephen Kinini Wang’ondu v The Ark Limited [2016] KEHC 3449 (KLR) to argue that the court should not adopt the report in a vacuum and deny itself the opportunity of weighing the accounting firm’s opinion against the 4th respondent’s case and evidence. On the right to be heard, it relied on Article 50 of the Constitution and the decisions in Republic v National Land Commission & 2 others Ex Parte archdiocese of Nairobi Kenya Registered Trustees (St. Joseph Mukasa Catholic Church Kahawa West) [2018] eKLR and Mureithi Charles & Daniel Kimutai Cheruiyot v Jacob Atina Nyagesuka [2022] KEHC 1805 (KLR).

Analysis and Determination Issue 18. Arising from the application, the responses and the submissions is: -a.Whether the court should adopt the report dated 10th October 2023 in place of an inspector's report under section 786 of the Companies Act.

19. Section 786 of the Companies Act, provides in part that: -“786. (1)The Court may appoint one or more competent inspectors to investigate the affairs of the company and to report on those affairs in such a manner as the Court directs-…”

20. After hearing an application by the applicant herein, the court, on 26th June 2023 ordered appointment of an inspector to inspect the affairs of the company-the 2nd respondent- and to report to the court on the matters listed in the order.

21. Such order is made when the court is satisfied there is ‘good reason for requiring the investigation’ of the affairs of the company.

22. The applicant engaged Grant Thornton- an accounting firm- which filed a final report dated 10th October 2023 which they seek the court to adopt in place of an inspector's report under section 786 of the Companies Act. The basis for the application is that the applicant has unsuccessfully pursued the appointment of an inspector through this court's Deputy Registrar, the Companies Registry and the Attorney General.

23. The applicant also argued that Grant Thornton, an accounting firm, was jointly engaged by the applicant, the 1st and 3rd respondents, submitted a final report on 10th October 2023 responding to the questions raised in the application dated 23rd May 2023.

24. The 1st and 3rd respondents denied the said firm was engaged jointly. The record shows that the respondents objected to the preliminary report by Grant Thronton of 17th April 2023. Although these objections were not considered by the court in its ruling of 26th June 2023, the objections are still on record. Thus, the claim that the said firm of accounting was engaged jointly is not clear at this stage.

25. The applicant only availed a letter from the DR dated 10th July 2023 to show its pursuit of the appointment of an inspector was unsuccessful.

26. Investigations on the affairs of a company is a serious undertaking and a judicial tool to ensure hygiene in the formation and running of a company. Borne out of the rubric of the law, investigations of the registration and affairs a company are aimed at;a)preventing and or unearthing formation of companies for unlawful of illegal purposes;b)unearthing or preventing fraud or misfeasance-and identifying the persons involved-to creditors and other persons, and take legal or administrative action;b)preventing oppressive conduct to members;c)obtaining information concealed by the company; andd)in public interest.It is not strange that corporate vehicle has been used to commit fraud, corruption, economic crimes, terrorism and arms financing and money-laundering, to mention a few.

27. The report herein is said to respond to the issues in these proceedings and the areas identified by the court for investigation. Is is legally permissible?

28. The applicant cited the decision in Fredrick Nthumo Maingi & another v Jones Makau Mutisya & 2 others [2017] eKLR, where the court while allowing an application for the appointment of an investigator, required the parties to present to the court names of two qualified and independent financial audit practitioners for their appointment showing that the investigators can be privately contracted.

29. It bears repeating that after finding that there is ‘good reason for requiring an investigation’ on the affairs of the company herein, the court on 26th June 2023, allowed the application dated 23rd May 2023 for the appointment of an inspector to interrogate and investigate the affairs of the 3rd respondent.

30. The applicant stated that, it has unsuccessfully pursued the appointment of an inspector through the Deputy Registrar (DR) of this court's, the Companies Registry and the Attorney General. Although only a single letter was presented to support this claim, of importance is that there have not been any particular person appointed and committed to inspect the affairs of the company.

31. The major objections to report by Grant Thornton, an accounting firm, were that; it was not jointly engaged by the applicant, the 1st and 3rd respondents; it is not a report by a duly appointed inspector; and is prejudicial to the 1st and 3rd respondent as it was done unilaterally. They claimed they were denied right to fair hearing under article 50(1) of the Constitution.

32. The report is on the affairs of the company. Also, it is not strange to appoint private person qualified to be appointed as inspectors under the companies Act. See Fredrick Nthumo Maingi & another v Jones Makau Mutisya & 2 others [2017] eKLR, where the court while allowing an application for the appointment of an investigator, required the parties to present to the court names of two qualified and independent financial audit practitioners for their appointment showing that the investigators can be privately contracted.

33. There is also no prohibition in the Companies Act on appointment of private investigators to investigate or audit a company’s affairs.

34. Similarly, the court has powers to give directions on and cut out the scope of the investigation as well as any particular documents to be inspected or examined which may include any internal or external audits or inspection reports on the affairs of the company.

35. The court has already found that there is ‘good reason for requiring the investigation’, and has made an order for appointment of an inspector on the affairs of the company herein.

36. The final report on 10th October 2023 responds to the questions raised in the application dated 23rd May 2023. The report therefore, forms the basis for interrogation of the issues in these proceedings. The report is adopted as one of the reports on the affairs of the company.

37. But, to avert any prejudice to the respondents, the court orders the respondents to submit, within 7 days, the name of a person qualified to be appointed as an inspector who shall carry out another investigation/audit of the affairs of the company-2nd defendant- in accordance with the order of the court made on 26. 6.2023. The person so appointed shall also submit a report of the investigation within 30 days of being formally appointed. He may also refer to or consider the report adopted herein. Once, both reports are filed, the court shall give appropriate directions, including but not limited to, whether there will be need for examination of the makers of the report or appropriate person who may speak to the report or any other relevant person.

38. In the upshot, the application dated 12th April 2024 is allowed in the specific terms above. Costs be in the cause.Orders accordingly.

DATED, SIGNED AND DELIVERED AT NAIROBI THROUGH MICROSOFT ONLINE APPLICATION THIS 27TH DAY OF FEBRUARY, 2025. ........................F. GIKONYO MJUDGEIn the presence of: -1. Otiende for the plaintiff/Applicant2. Orwenyo for the 4th defendant/Respondent3. Ms. Kinuthia for Official Receiver4. Walela for the 1st defendant/Respondent5. Walela for Muhuyu for the 2nd defendant/Respondent6. Walela for Makau for the 3rd defendant/Respondent7. CA - Kinyua