Wairiuko v Njue & 6 others [2023] KEHC 24643 (KLR)
Full Case Text
Wairiuko v Njue & 6 others (Commercial Case E266 of 2020) [2023] KEHC 24643 (KLR) (Commercial and Tax) (13 October 2023) (Ruling)
Neutral citation: [2023] KEHC 24643 (KLR)
Republic of Kenya
In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)
Commercial and Tax
Commercial Case E266 of 2020
MN Mwangi, J
October 13, 2023
Between
Eric Kanja Wairiuko
Plaintiff
and
Mary Muthoni Njue
1st Defendant
Epicenter Africa Limited
2nd Defendant
NCBA Bank Kenya PLC (Formerly NIC Bank Limited)
3rd Defendant
Kenya Commercial Bank Limited
4th Defendant
Martin Kahihia Gathumbi
5th Defendant
Epicenter Africa Limited (Uganda)
6th Defendant
Epicenter Africa Engineering Limited
7th Defendant
Ruling
1. The Plaintiff filed a Notice of Motion dated 27th July, 2020 brought under the provisions of Article 40 of the Constitution of Kenya, 2010, Sections 24, 141, 142, 143, 146, 238 & 239 of the Companies Act, 2015, Order 40 Rules 1, 3(2), (3), (4) & (8) and 10 of the Civil Procedure Rules, 2010, Sections 1A, 1B & 3A of the Civil Procedure Act, Cap 21 Laws of Kenya, Section 7 of the Arbitration Act and all other enabling provisions of the law. The plaintiff seeks the following orders -i.Spent;ii.That the applicant be granted leave to commence and/or continue with the suit as a derivative suit;iii.Spent;iv.That pending the hearing and determination of this application and the suit, the Honourable Court be pleased to issue an injunction restraining the 4th respondent bank either by themselves, their agents, servants, assignees or any other person from valuing, advertising, selling, encroaching, entering, disposing of or in any other way interfering with LR. No. 12715/2571, Maisonette 64 Sawada Villas, Machakos;v.Spent;vi.That pending the hearing and determination of this application and the suit, the Honourable Court be pleased to issue an injunction restraining the 1st, 3rd & 5th respondents from running, managing, operating, signing cheques, withdrawing or in any other way dealing with the 2nd respondent’s KES a/c 1001164127 and USD a/c 1001164135 held at NCBA BANK KENYA PLC (Formerly NIC Bank) which accounts had hitherto been dormant;vii.Spent;viii.Spent;ix.Spent;x.That pending the hearing and determination of the application and the suit, the Honourable Court be pleased to issue a mandatory injunction compelling the 1st, 2nd, 3rd and 5th respondents to make monthly instalment payments to the 4th respondent through accounts USD AC NO. 1143475275 and KES AC NO. 1128225492 held at KCB to amortize the outstanding facility;xi.Spent;xii.Spent;xiii.That the Honourable be pleased to compel the 1st, 3rd and 5th respondents to release all the financial records, accounts, statements or any other information relating to the 2nd respondent to the applicant and the Auditors appointed by Court for the fiscal years 1st July, 2018 to 30th June, 2020;xiv.That the Honourable Court be pleased to appoint a firm of Auditors to inspect and investigate the affairs of the 2nd respondent including all its banking transactions and the said Auditors to avail a report of their findings within 30 days;xv.That the Honourable Court be pleased to order an investigation of all dealings between the 2nd respondent and the 6th and 7th respondents and a report be filed within 30 days;xvi.That this Honourable Court to grant such other or further orders as it deems fit in the interest of justice; andxvii.That costs of this application be provided for.
2. The application is brought on the grounds on the face of the Motion and is supported by affidavits sworn on 27th July, 2020 and 2nd December, 2020 by Eric Kanja Wairiuko, the plaintiff herein. In opposition thereto, the 1st defendant, Mary Muthoni Njue, filed a replying affidavit sworn on 5th October, 2020, the 3rd defendant filed a replying affidavit and a further affidavit sworn on 5th November, 2020 and 8th June, 2021, respectively, by Stephen Atenya, the Senior Legal Counsel for the 3rd defendant. The 4th defendant filed a replying affidavit sworn on 7th June, 2021, by Elizabeth Ndethiu, the 4th defendant’s Branch Manager and the 5th defendant, Martin Kahihia Gathumbi, filed a replying affidavit sworn on 6th October, 2020.
3. The application herein was canvassed by way of written submissions. The plaintiff’s submissions were filed by the law firm of Rachier & Amollo Advocates on 26th March, 2021. The 1st and 5th defendants’ submissions were filed by the law firm of Ogembo & Associates Advocates on 4th June, 2021 and 8th June, 2021, respectively, the 3rd defendant’s submissions were filed on 8th June, 2021 by the law firm of Namasaka & Kariuki Advocates, and the 4th defendant’s submissions were filed by the law firm of Kamotho Maiyo & Mbatia Advocates on 8th June, 2021.
4. Mr. Munyua, learned Counsel for the plaintiff submitted that the 2nd defendant’s majority shareholder has appointed and retained strangers to the 2nd defendant as signatories to company accounts, has diverted banking of the company business from the main company bank account even when the company has a loan facility with their main bankers. He also claims that the said majority shareholder has unilaterally appointed Auditors and Company Secretaries to manipulate company accounts, has refused to share information with the minority shareholder even when specific information is requested for, and has incorporated other companies to compete with the core business of the 2nd defendant.
5. In submitting that the plaintiff has met the legal threshold required to be granted leave to institute and/or continue with this suit as a derivative suit, Counsel relied on the Black’s Law Dictionary, 9th Edition’s definition of a derivative action at page 509. He also relied on Part XI, Section 238 of the Companies Act and the case of Ghelani Metals Limited & 3 Others v Elesh Ghelani Natwarlal & another [2017] eKLR, He stated that the plaintiff is the minority shareholder holding 25% of the shareholding, whereas the 1st defendant is the majority shareholder with 75% shares individually, and is in connivance with the 3rd, 5th, 6th & 7th defendants.
6. Mr. Munyua contended that the 1st & 5th defendants incorporated the 6th & 7th defendants’ companies which are in direct competition with the business of the 2nd defendant company, in order to use them as a conduit to siphon and pilfer money from the 2nd defendant company. He stated that the 1st defendant has diverted in excess of Kshs. 15,000,000/= through NCBA Bank Kenya PLC (the 3rd defendant herein) to the 6th defendant, leaving the 2nd defendant reeling with an overdrawn overdraft facility with the 4th defendant for over ten (10) months. He further stated that for the said the 4th defendant is now in the process of recalling the entire facility thereby exposing the plaintiff to loss, since he provided collateral valued at Kshs. 16,000,000/= to secure the said facility. Counsel alleged that the 1st defendant has been transferring inventory through inter-company sales from the 2nd defendant to the 6th and 7th defendants at the rate of 10% instead of 35% in total disregard of company policy, and transfer pricing guidelines issued by the Kenya Revenue Authority thus exposing the 2nd defendant into all manner of tax compliance issues.
7. It was stated by Mr. Munyua that the 1st defendant is in direct conflict of interest by holding directorship positions and engaging in day to day management of the 6th & 7th defendants. That she has failed and/or refused to undertake financial audits of the 2nd defendant hence being in breach of the Companies Act and the company regulations, she has failed and/or refused to file tax returns and pay taxes with the Kenya Revenue Authority thus exposing the 2nd defendant, its employees and directors to sanctions by the Kenya Revenue Authority due to tax compliance issues. Counsel further stated that the 1st defendant has illegally appointed strangers as signatories to the 2nd defendant’s company accounts. That she has also appointed Auditors and Company Secretaries without the participation of the plaintiff in his capacity as a co-director and that she has engaged in several other facts that are not only illegal and unlawful, which actions are against the best interest of the 2nd defendant and there is no avenue for the plaintiff to resolve these injuries. Counsel explained that it is imperative for the plaintiff to be granted leave to continue with this suit as a derivative action so as to protect the 2nd defendant company from being run down.
8. Mr. Munyua relied on the case of Davis Ngugi Ngaari v Kenya Commercial Bank Limited [2015] eKLR, where the Court summarized the principles that govern grant of temporary injunctions. He also relied on the case of Mrao v First American Bank of Kenya Ltd & 2 others [2003] KLR 125, where the Court defined what constitutes a prima facie case. He submitted that the plaintiff has met the legal threshold to warrant being granted of the orders sought in the application herein. Counsel indicated that the suit property was charged to the 4th defendant to secure a loan facility on behalf of the 2nd defendant and it was a condition of the said loan facility that all banking business was to be channeled through the 4th defendant but sometime in August, 2019, the 1st defendant unilaterally diverted the 2nd defendant’s company banking to the 3rd defendant and that the 4th defendant had issued a notice to the sell the suit property by way of public auction. Counsel submitted that the plaintiff stands to suffer irreparable harm if his personal property is sold by auction to repay a financial facility given to the 2nd defendant, a company that he has been excluded from.
9. Counsel urged this Court to issue an order for an injunction restraining operation of KES A/C 1001164127 and USD A/C 1001164135 held at the 3rd defendant bank because the procedure of activating a dormant corporate account involves availing a stamped and sealed Board resolution signed by the signatories of the account as per the mandate and a recent copy of the company’s CR-12 but none of the said documents were presented to the 3rd defendant by either the 1st or 5th defendants at the time they issued the 3rd defendant with instructions to re-activate the 2nd company accounts held with them. Mr. Munyua stated that it was a term of the loan agreement between the 2nd and the 4th defendants dated 7th May, 2013 and renewed in 2016 that all business income belonging to the 2nd defendant would be consolidated and channeled through the account held at the 4th defendant bank.
10. Counsel contended that the 1st, 3rd and 5th defendants have since diverted all the 2nd defendant’s company banking business to the accounts held at the 3rd defendant bank without seeking approval from the 2nd defendant’s Board of Directors thus being in contravention of the terms of the aforementioned loan agreement. It was stated by Counsel that the 2nd defendant’s activated accounts held at the 3rd defendant are being operated by the 5th defendant who is a stranger to the 2nd defendant company since he was appointed by the 1st defendant vide an appointment letter backdated to 19th June, 2012 without any Board resolution.
11. Mr. Munyua cited the case of Rafique Ebrahim v William Ochanda T/A Ochanda & Company Advocates [2013] eKLR, where the Court summarized the principles that govern the grant of mandatory injunctions and stated that based on the said decision, the plaintiff herein has met the legal threshold to warrant being granted an order of a mandatory injunction.
12. Counsel was of the view that the plaintiff has made out a case for grant of an order for forensic audit being carried out on the 2nd defendant company so that the extent of the damage to the 2nd defendant can be determined. He referred to the case of Hickman v Kent/Romney March Sheepbreeders Association [1915] 1Ch 881 and submitted that the Memorandum and Articles of Association of a company is the supreme document that regulates the day to day running and management of the company and as such, a company may sue a member to restrain an imminent breach of the Articles of Association.
13. The plaintiff’s Counsel submitted that Clause 9 of the 2nd defendant’s Articles of Association provides for transfer of shares and the procedure to be followed in the event of such transfer. Further, that Clause 9(ii) gives the 2nd defendant’s existing members the right of pre-emption and a mandatory requirement to give such a member a notice in writing, but in total contravention of the said provisions, the 1st defendant now seeks to remove the plaintiff from being a director of the 2nd defendant company, which act is not only illegal but also ultra vires the 2nd defendant’s Memorandum and Articles of Association since there was no Board meeting held to deliberate on his removal as a director, and no valid resolution was made since there was neither a meeting of the Board of Directors nor a quorum of at least two members, among other reasons.
14. He further submitted that the plaintiff has severally requested for information relating to the finances of the 2nd defendant company from the 1st defendant to no avail. In addition, that the 2nd defendant’s financial statements for the fiscal year 2018/2019 were released to the public and the Kenya Revenue Authority before presentation of the said statements to the 2nd defendant’s Board of Directors for review and approval, yet the plaintiff had requested for additional information to scrutinize the said records, but he was denied access to them. Mr. Munyua referred to the case of Dr. Wallerstainer v Moir (No. 2) [1975] 1ALL ER 849 and contended that it is clear that the plaintiff herein has brought this action on behalf of the 2nd defendant company so as to protect it against the injustices being perpetrated against it, and to enforce the rights of the company. He stated that the plaintiff is entitled to the costs of the instant application and the main suit as well.
15. On behalf of the 1st defendant, Mr. Ogembo, learned Counsel for the 1st and 5th defendants submitted that the plaintiff has not made out a case to warrant being granted the mandatory orders he seeks in the application herein at an interlocutory stage. He relied on the provisions of Part XI, Section 238(1)(a) of the Companies Act, No. 17 of 2015, which provides the definition of a derivative action. He also relied on the case of Isaiah Waweru Ngumi & 82 others v Muturi Ndungu [2016] eKLR, where the Court discussed the principles to be considered in determining whether or not to grant leave to institute a derivative action. Counsel contended that the plaintiff has not met the criteria required to be granted permission to continue with the suit as a derivative action.
16. He contended that the plaintiff as a Director of the 2nd defendant and the Chairperson of its Board of Directors has equal voting rights with the 2nd defendant but has failed to participate in the affairs of the 2nd defendant out of the vendetta and malice he has as against the 1st defendant thus failing to demonstrate the futility requirement. Counsel stated that the plaintiff has refused to attend any meetings sought to be convened by the 1st defendant with a view of crippling the affairs of the 2nd defendant. Counsel asserted that the plaintiff holds controlling powers of the 2nd defendant by virtue of him being a Director of the 2nd defendant company, and he cannot consider himself as an aggrieved minority shareholder and purport to maintain a minority shareholder’s action, when he has majority of the powers in the Board of Directors by virtue of him being a Chairperson of the said Board. Counsel stated that in any event, the plaintiff has not demonstrated any hindrance he had in convening a Board of Directors’ meeting.
17. Mr. Ogembo stated that the plaintiff has no interest of the company at heart and he is only out to pursue his own personal vendetta against the 1st defendant. He referred to the provisions of Section 139 of the Companies Act and contended that a Director of any company may be removed through an ordinary resolution before the end of his term. He stated that the plaintiff herein was charged with failing to promote the success of the 2nd defendant’s business contrary to the provisions of Section 143 of the Companies Act and a notice of intention to propose the resolution to that effect as an ordinary resolution was duly served on the plaintiff. That thereafter, an Extra-Ordinary meeting was called for 17th June, 2020, and a notice of the said meeting was issued to the plaintiff but he failed to either attend the said meeting or defend himself of the allegations levelled against him. Counsel submitted that a director aggrieved by an attempt to remove him has a remedy under Section 141 of the Companies Act that is personal to him, and if the plaintiff had reservations in the manner the 2nd defendant set out to alter the Articles of Association, he had the right to bring an action against the 2nd defendant pursuant to the provisions of Sections 780 and 782 of the Companies Act.
18. Mr. Ogembo submitted that the claim herein is a personal claim that can be pursued independently through an ordinary suit against the 2nd defendant company without leave to file a derivative suit. He also submitted that the plaintiff actively participated in the formation and registration of the 6th defendant in the year 2017 and the only reason he is not included as a Director of the said company is because he wished not to be included as it could lead to a conflict of interest with his current employer, the Kenya Breweries Limited. Counsel indicated that the plaintiff and the 1st defendant also incorporated Epicenter Africa Ltd - South Sudan on 5th November, 2013, a company that engages in the same business as the 2nd defendant, but the plaintiff has not raised any issues in regard to the said company since he is a Director of the said company. Counsel contended that the allegations of conflict of interest have been brought in bad faith as the 1st defendant is neither the finance Director nor the Managing Director of the 6th defendant company which trades in the territory of the Republic of Uganda.
19. Counsel stated that the plaintiff has not tendered any evidence of the stock that he alleges was sold at 10% instead of 35%. He submitted that Rule 4 of the Income Tax (Transfer Pricing) Rules, 2006 requires a Tax Payer to choose a method to employ in determining the arm’s length price from among the methods set out in Rule 7, but the plaintiff did not produce evidence to show the actual method adopted by the 1st defendant and why 35% as opposed to 10% ought to be the adopted transfer pricing. Mr. Ogembo asserted that the 1st defendant has availed to this Court a tax clearance certificate issued by the Kenya Revenue Authority confirming that the 2nd defendant has fully paid all its taxes including any taxes arising from transfer pricing. Counsel urged this Court to make a finding that there exists an alternative remedy under the provisions of Section 780 of the Companies Act available to a party who alleges that there is breach of the provisions of the Income Tax (Transfer Pricing) Rules, 2006.
20. It was stated by Counsel that the banking and operation of the account with the 3rd defendant by the 2nd defendant is above board and within the business judgment rule. That the 2nd defendant’s Board of Directors issued a valid resolution which was signed by the plaintiff, creating Category “A” (plaintiff and the 1st defendant) and Category “B” signatories which included the 5th defendant, and that the 2nd defendant then issued the 3rd defendant with a directive to the effect that all banking correspondence and transactions be signed jointly by one category “A” signatory and one category “B” signatory. Counsel indicated that the said resolution is still active and has never been recanted or altered by the 2nd defendant at any time. He further stated that there exists no resolution passed by the 2nd defendant’s Board of Directors prohibiting banking activities in any, and all of the accounts opened and operated by the 2nd defendant. It was stated that the plaintiff as the Chairperson of the 2nd defendant’s Board of Directors has not summoned any meeting or issued any Notice of a meeting to change the instructions in regard to the banking details with the 3rd defendant bank.
21. Mr. Ogembo stated that the 5th defendant was offered the position of a Non-Executive Managing Director on 19th June, 2012, with the knowledge and concurrence of the plaintiff. That on 22nd May, 2014, the 2nd defendant entered into a collateral pledge and security agreement with the 5th defendant to allow the 3rd defendant to charge the 5th defendant’s property being L.R. No. 209/9902 for a banking facility in favour of the 2nd defendant and the said agreement which was also signed by the plaintiff indicated that the 5th defendant and his spouse would be added as mandatory signatories in the 2nd defendant’s bank accounts, where they would sign with either of the 2nd defendant’s directors.
22. On the issue of loan repayments with the 4th defendant, Counsel submitted that the 2nd defendant has made commitments with the 4th defendant to remit Kshs. 100,000/= weekly, for purposes of clearing the outstanding overdraft sum, yet the plaintiff accuses the 2nd defendant of exposing his property to sale by the 4th defendant by failing to effect repayments of an overdraft facility with the latter. Counsel submitted that even if that was the case, the said course of action is personal to the plaintiff, as the plaintiff’s property is separate from the 2nd defendant hence it can be pursued without unduly seeking to paralyze the 2nd defendant’s operations.
23. Counsel submitted that at the time of filing the suit herein, the 2nd defendant was in the process of being audited by EKV & Associates thus if the plaintiff has any reservations with the manner the 2nd defendant has set out to proceed with the audit, he can bring an action against the 2nd defendant pursuant to the provisions of Sections 780 and 782 of the Companies Act, 2015.
24. Mr. Ogembo referred to the provisions of Section 107 of the Evidence Act and contended that the allegations contained at paragraph 4 (n, o, p and q) of the grounds in support of the application herein and paragraph 5 (n, o, p and q) of the plaintiff’s supporting affidavit should be ignored as no evidence has been tendered in support of the said allegations. He relied on the case of Ghelani Metals Limited & 3 others v Elesh Ghelani Natwarlal & another [(supra) and submitted that since the plaintiff’s claim is based on the fact that the 2nd defendant company’s affairs have been conducted in a manner that is prejudicial to him, he can make an application to Court pursuant to the provisions of Section 780 of the Companies Act and thereafter, the Court can make an order in respect of the 2nd defendant as it may consider appropriate under the provisions of Section 782 of the Companies Act.
25. Counsel for the 1st defendant stated that the 2nd defendant’s account held with the 4th defendant has only two signatories, that is the plaintiff and the 1st defendant, with only one signatory required to sign for any bank transactions. He further stated that the 2nd defendant has over time made unilateral withdrawals from the said account into his personal account, an act which is detrimental to the 2nd defendant. Counsel further stated that the only reason why the plaintiff seeks to have the 2nd defendant’s funds channeled through the 4th defendant is to enable him service a mortgage of a house he currently lives in alone after divorce with the 1st defendant. Mr. Ogembo referred to the decisions in Auni Bhaiji & 4 others v Chief Magistrate, Milimani Law Courts & 2 others [2017] eKLR and Lucy Wangui Gachara v Minudi Okemba Lore [2015] eKLR and submitted that a prayer for grant of an order for a mandatory injunction at this stage of the proceedings can only be granted when the case is unusually strong or clear, which is not the case in this instance.
26. In submitting that granting prayer Nos. 13, 14 and 15 sought in the present application at this stage of the proceedings will have the effect of determining the dispute between the parties herein at an interlocutory stage since the said prayers are a replica of prayer Nos. 6, 7 and 8 of the plaint, Mr. Ogembo relied on the Court’s holding in the case of James Bundi Tengeya v Assistant Public Trustee Eldoret [2005] eKLR.
27. On behalf of the 5th defendant, Mr. Ogembo submitted that the plaintiff in clear breach of the existing resolution and collateral pledge agreement has continued to threaten, abuse and almost physically assault the 5th defendant in a bid to stop him from being a signatory to the 2nd defendant’s account with the 3rd defendant when there exists no prayer seeking to declare the said resolution and/or agreement between the 5th defendant, the plaintiff and the 1st defendant as either null, void or incapable of being performed in any manner. Counsel contended that in the absence of such a prayer, the plaintiff has not discharged his burden of proving that he has a prima facie case with high chances of success against the 5th defendant.
28. Mr. Ogembo further contended that there exists no evidence of any transaction in the 2nd defendant’s account held with the 3rd defendant that has personally benefited the 5th defendant or that is irregular and has been proved to have been done by the 5th defendant. Counsel asserted that the prayer to bar the 5th defendant from being a signatory of the 2nd defendant’s account held with the 3rd defendant and preventing him from exercising his rights as agreed by the 5th defendant, the plaintiff and the 1st defendant and/or to act in a manner to have the banking business channeled in a different account of the 2nd defendant, would have the effect of completely diverting the entire 2nd defendant’s bank operations from the 3rd defendant, where the 5th defendant has consideration, thus exposing the 5th defendant’s security to potential auction by the 3rd defendant. Counsel stated that in the absence of a clear undertaking of how the 2nd defendant intends to discharge the 5th defendant’s property offered in good faith as collateral to the 3rd defendant, any diversion of banking business as prayed would cause irreparable damage to the 5th defendant.
29. Mr. Aisi, learned Counsel for the 3rd defendant relied on the decisions made in Giella v Cassman Brown & Co. Ltd [1973] EA 358 and Mrao v First American Bank of Kenya Ltd & 2 others [2003] KLR 125 and submitted that the plaintiff herein has failed to demonstrate that he has a prima facie case with a probability of success as against the 3rd defendant, as he has not tendered any evidence to demonstrate what right has been infringed, that his rights if any, have been breached or threatened to be breached by the 3rd defendant’s actions so as to warrant being granted the orders sought in this application.
30. Counsel also submitted that the relationship between the 3rd defendant, the plaintiff and the 1st defendant is spelt out clearly in the 3rd defendant’s general terms and conditions which are binding among the said parties. He contended that in view of the fact that the 1st defendant approached the 3rd defendant with the intention of clearing the loan the 2nd defendant took from the 3rd defendant in the year 2016 and sought clearance from the Credit Reference Bureau, the 3rd defendant had no legal basis to reject the said offer. It was stated by Counsel that the accounts that the 2nd defendant has with the 3rd defendant have other signatories apart from the plaintiff, and as per the terms and conditions of opening an account, it was agreed that any two signatories could sign the mandate hence the 3rd defendant acted within the instructions from the signatories guided by the terms and conditions in place. To support the said argument, Counsel relied on the case of Shalimar Flowers Self Help Group v Kenya Commercial Bank [2016] eKLR.
31. Ms. Wangui, learned Counsel for the 4th defendant submitted that the plaintiff has admitted receiving loan facilities from the 4th defendant against the security of the suit property and that it is in default of its contractual obligations to repay the said facilities on their due dates. She stated that the plaintiff’s right to the equity of redemption over the suit property still subsists since the 4th defendant has not yet served the plaintiff with the requisite statutory notices. She further stated that the suit and the application herein has arisen due to administrative wrangles between the plaintiff and the 1st defendant as Directors of the 2nd defendant, to which the 4th defendant is not privy, thus this Court should not allow it to be used by the plaintiff as a means to avoid his accrued contractual obligations entered into knowingly and out of his own free volition.
32. Counsel relied on the case of Samuel Kamau Macharia & another v Kenya Commercial Bank Limited & 2 others [2012] eKLR, where the Supreme Court held that a Court of law can only exercise jurisdiction as conferred on it either by the Constitution or any other written law. Counsel cited the provisions of Section 104 of the Land Act, 2012 and contended that the plaintiff has violated and failed to meet the mandatory conditions stipulated thereunder, so as to invoke this Court’s jurisdiction hence he is disentitled to the orders sought in the application herein. Ms. Wangui cited the case of Webwaka Trade Ltd v Diamond Trust Bank Ltd [2016] eKLR and stated that the only recourse currently available to the plaintiff is for him to exercise his equitable right of redemption before the 4th defendant’s statutory power of sale over the suit property crystallizes.
33. Counsel for the 4th defendant submitted that the plaintiff is estopped from frustrating the 4th defendant’s exercise of its statutory power of sale when the same crystallizes since when he offered the suit property as security for the facility extended to the 2nd defendant by the 4th defendant, the suit property became a commodity for sale. She cited the case of Jim Kennedy Kiriro Njeru v Equity Bank (K) Limited [2019] eKLR, to support her submission in that regard. She also cited the case of Chimanlal Meghji Naya Shah & another v Oxford University Press (EA) Limited [2007] eKLR and stated that the 4th defendant herein has a duty to mitigate its loss by among others, exercising its statutory power of sale over the suit property when the same crystalizes in view of the continued default by the plaintiff and the 2nd defendant.
34. Ms. Wangui submitted that this Court has a duty to protect the 4th defendant from unscrupulous borrowers such as the plaintiff who is illegally seeking to deprive the 4th defendant of its security by continuing to be in default. She cited the case of Daima Bank Limited (in Liquidation) v David Musyimi Ndetei [2018] eKLR and stated that if the 4th defendant’s right to exercise its statutory power of sale is diminished by Courts, then the very concept of the 4th defendant accepting a charge as security is in serious jeopardy and access to its financing is limited.
Analysis And Determination. 35. I have considered the application filed herein, the grounds on the face of it and the affidavits filed in support thereof. I have also considered the replying affidavits filed by the 1st, 3rd, 4th & 5th defendants, the further affidavit filed by the 3rd defendant and the written submissions by Counsel for the parties. The issues that arise for determination are -i.Whether the plaintiff should be granted leave to prosecute this suit as a derivative action against the defendants;ii.Whether the plaintiff has satisfied the requisite conditions to warrant being granted an order for temporary injunction against the 1st, 3rd, 4th and 5th defendants;iii.Whether the plaintiff has made out a case to warrant this Court to make an order compelling the 1st, 2nd, 3rd and 5th defendants to make monthly instalment payments to the 4th defendant through accounts USD AC NO. 1143475275 and KES AC NO. 1128225492 held at KCB to amortize the outstanding facility;iv.Whether the plaintiff has made out a case to warrant this Court to compel the 1st, 3rd and 5th defendants to release all the financial records, accounts, statements or any other information relating to the 2nd defendant to the plaintiff;v.Whether this Court should appoint a firm of Auditors to inspect and investigate the affairs of the 2nd defendant; andvi.Whether this Court should make an order for investigation of all dealings between the 2nd, 6th and 7th defendants.
36. The plaintiff in his supporting affidavit deposed that he registered the 2nd defendant company together with the 1st defendant sometime in the year 2009 where he held 60% shareholding, whereas the 1st defendant held 40% of the shares but sometime in 2014, he ceded some of his shares to the 1st defendant such that the 1st defendant held majority shares with 75% shareholding, while he held 25% of the shares. He stated that the foregoing was done so as to enable the 2nd defendant to participate in preferential tendering wherein companies and businesses owned by the youth and women were given preferential treatment.
37. He averred that due to the 1st defendant’s majority shareholding, she has systematically, deliberately and consciously set out to harass, vilify, oppress and exclude him from the running, management and participation in the day to day activities of the 2nd defendant. That the 1st defendant has sought to eject him as a shareholder and a director of the 2nd defendant company vide a letter dated 26th May, 2020, and that she has made spurious and derogatory and unsubstantiated allegations against him as a minority shareholder.
38. The plaintiff further averred that the 1st defendant as the Managing Director and majority shareholder has breached her statutory duties towards the 2nd defendant by engaging in wanton and egregious conduct that is harmful, injurious and is meant to cripple the 2nd defendant company. He gave instances of the 1st defendant having incorporated the 6th and 7th defendant companies which are in direct competition with the business of the 2nd defendant, to use them as a conduit to siphon and pilfer money from the 2nd defendant company.
39. The plaintiff contended that the 1st defendant failed to provide audited financial statements for the fiscal year 2018/2019 thereby exposing company to compliance issues. That she connived with the 3rd and 4th defendants to re-activate hitherto dormant and abandoned accounts KES A/C 1001164127 and USD A/C 1001164135 operated by the 4th defendant, with the aim of diverting the 2nd defendant company’s funds through the said accounts.
40. He deposed that the 1st defendant has unilaterally and without following due process terminated the services of company employees and failed to pay their final dues and that she uses the company’s resources and staff to pursue her personal benefit and interest.
41. The plaintiff also deposed that the accounts the 2nd defendant held with the 3rd defendant remained dormant until August 2019 when they were unprocedurally activated by the 1st defendant and the 5th defendant, in collaboration with the 3rd defendant’s City Centre Branch Manager. That on 26th August, 2019, the 1st defendant unilaterally sent a memo to customers and suppliers informing them of new bank changes from the 4th defendant to the 3rd defendant before seeking approval from the 2nd defendant’s Board of Directors. The plaintiff further deposed that vide a letter dated 16th September, 2019, the 3rd defendant’s Legal Department admitted that the 2nd defendant’s accounts had been dormant but they were reactivated through a letter dated 29th August, 2019, signed by the 1st and 5th defendants using an outdated May 2014 banking mandate.
42. He stated that the NIC bank accounts were opened in early 2014 and a bank mandate updated through a Board resolution dated 21st May, 2014. That on 5th June, 2015, the Board introduced agents to operate the accounts as required by the company, which demonstrates that any changes or activities in the said bank accounts has to be sanctioned by the Board of Directors. He further stated that the illegal transactions with the 2nd defendant company’s accounts held with the 3rd defendant were sanctioned with the connivance and fraudulent collaboration of the 5th defendant who continues to approve payments despite being asked to stop doing so by the plaintiff.
43. The plaintiff contended that whereas the accounts held at the 4th defendant have been overdrawn, the illegally activated accounts at the 3rd defendant records healthy cash flows with huge amounts of unexplained cash withdrawals. In addition, that the 1st and 5th defendants have refused to regularize the 2nd defendant’s account with the 4th defendant, thus the 4th defendant is on the verge of selling his personal property that was used to secure the facility advanced to the 2nd defendant by the 4th defendant.
44. The 1st defendant in her replying affidavit deposed that the suit herein is not in the form of a derivative claim filed by a member on behalf of a company to redress wrongs allegedly done to a company as the plaintiff is the Chairperson of the Board of Directors of the 2nd defendant with equal voting rights in the said Board. She averred that she called for Board meetings for the period between June-August 2019 with a view of discussing matters related to the 2nd defendant but the plaintiff was not only non-responsive, but he also never attended the said meetings.
45. The 1st defendant further averred that the plaintiff’s change of attitude is as a result of the fact that she moved out of her matrimonial home and filed a children’s matter against him seeking upkeep of the minors. She deposed that prior to the aforementioned events, the plaintiff had been cordial and co-operative in conducting the affairs of the 2nd defendant and even congratulated the team for the outstanding work that they did in the financial year 2018/2019.
46. She stated that she resigned from her employment at Davis & Shirtliff Ltd in the year 2012 to start a business in water engineering since she is a trained Engineer. That it was agreed between the plaintiff and her, as they were a married couple at the time, that instead of registering a new company, she would use the already registered company Epicenter Trading Company Limited that they had registered in the year 2009 but was dormant; and they would apply for amendment of the shareholding to reflect actual ownership of the business since she used her entire pension contribution and savings to start the said business.
47. She deposed that the amendment to the 2nd defendant’s shareholding was successful in the year 2014, and the plaintiff held 25% shares, whereas she held 75% shares. She contended that despite the fact that the plaintiff was listed as a Director of the 2nd defendant, he only became one by virtue of the fact that he was married to her since he did not make any capital contribution to the said business.
48. The 1st defendant contended that the plaintiff has had little involvement in the running and operations of the 2nd defendant having been a full time employee in a large corporate organization holding large responsibilities. She stated that she has been running the 2nd defendant company fulltime as it is her only source of income having resigned from her job at Davis & Shirtliff Ltd.
49. It was stated by the 1st defendant that the plaintiff has countless times promised to destroy the 2nd defendant company and he has made good his threat by sweeping clean the company accounts whenever clients made payments or deposits for sales into the account held with the 4th defendant since he could singly transact on the said account. The 1st defendant asserted that she has never sought to eject the plaintiff as a shareholder of the 2nd defendant.
50. She deposed that a Board meeting was called to discuss and approve an ordinary resolution for the removal of the plaintiff as a Director of the 2nd defendant on 17th June, 2020, and as such, there exists no violation in the manner in which the notice of the Extra-Ordinary General Meeting was called and served upon him.
51. The 1st defendant also deposed that the plaintiff has had access to all the information required of him as a Director of the 2nd defendant, as the Board of Directors chaired by him is charged with the duty of calling for an Annual General Meeting. She further deposed that going by the concept that governed incorporation of the 2nd, 6th and 7th defendants and the memorandum as agreed by the shareholders and Directors, there is nothing that prevented the three companies from carrying out trade with each other, and in any event, any transactions between the said companies has been done with utmost transparency and in good faith. In addition, that all transactions from any of the accounts belonging to the 2nd defendant are accompanied by detailed transaction details which are all genuine and normal transaction/expenses of the 2nd defendant’s business.
52. She asserted that in as much as she is a Director in the 6th defendant company, she is not involved in the day to day management of the said company and that mere holding of multiple directorships is not prohibited by law. She stated that financial audits of the 2nd defendant are up to date and the said defendant is in possession of a Tax Compliance Certificate with tax obligations fully complied with.
53. The 1st defendant averred that once a bank account is opened by a resolution of the Directors of a company as is the case herein, and there exists no further restriction imposed on how the banking operations are undertaken, there is nothing illegal in advising customers to pay sums due to the company to the account in issue. She further averred that the proceedings herein have been brought to compel her and the 3rd defendant to pay a mortgage loan of a house she bought with the plaintiff.
54. She stated that the plaintiff participated in the registration of the 6th defendant and he even preferred a name for it after she had given him all the information required to open a Ugandan company. She averred that she has never sold stock to the 6th defendant at the rate mentioned by the plaintiff and if there exists any sale, the same was done at an arm’s length. Further, that the 7th defendant company is not in operation, it does not trade and it does not have any bank accounts opened in its name.
55. The 1st defendant deposed that the 2nd defendant has made a commitment to pay the sum of Kshs. 100,000/= weekly for purposes of clearing the outstanding overdraft sum with the 4th defendant, and on 6th May, 2020, a deposit of USD 1,000. 00 was made in the said account as promised. She further deposed that the audited financial statements for the year ending 2019 were provided to the plaintiff on 26th May, 2020 for his review, and all the information he requested for has so far been availed and his questions were addressed by the 2nd defendant’s Auditors.
56. She stated that there exists an Auditor by the name EKV & Associates duly appointed by the 2nd defendant with the consent of the plaintiff through a proper Board resolution, and that the said Auditor had already submitted audited accounts for the 2nd defendant for the period ending 30th June, 2019, which had been sent to the plaintiff awaiting signature, thus the prayer for appointment of an Auditor for the fiscal year 2018/2019 had not been made in good faith.
57. The 3rd defendant in its replying and further affidavits deposed that the plaintiff and the 1st defendant in their capacities as Directors in the 2nd defendant company opened two current accounts with the 3rd defendant being a KES Account No. 1001164127 and USD Account No. 1001164135. He averred that the said accounts are operated pursuant to a mandate which shall be in force and shall be acted upon by the bank until the said mandate has been revoked in writing by all the signatories and replaced by a new mandate from the partners. He stated that Clause 17 of the 2nd defendant’s Articles of Association provides that the Directors may exercise any powers of the company to borrow money and to mortgage and charge its undertaking and property.
58. That subsequently, the plaintiff and the 1st defendant obtained a facility from the 3rd defendant but they later failed to honour the repayment terms thus the 3rd defendant listed the 2nd defendant with the Credit Reference Bureau. That the negative listing was followed by a lengthy inactivity in the 2nd defendant’s accounts at the 3rd defendant bank.
59. The 3rd defendant stated that guided by its terms and conditions on operation of accounts, a dormant account cannot be closed or frozen on account of inactivity.
60. It was stated by the 3rd defendant that during the pendency of the 2nd defendant’s operations, there occurred a change in shareholding, and the said change was material to decision making in regard to bank mandates of the 2nd defendant’s accounts held by the 3rd defendant. The 3rd defendant averred that it froze activity on the 2nd defendant’s accounts due to a dispute as to the shareholding of the 2nd defendant and the resultant obligations of the parties.
61. It was deposed that in August 2019, the 2nd defendant’s account held by the 3rd defendant was re-activated after a meeting between the 1st defendant and the City Center Branch Manager with a view of addressing the issues regarding the change in shareholding and implications as concerns repayment of the facility obtained on 28th February, 2016. The 3rd defendant stated that the 1st defendant was then made a signatory of the KES Account No. 1001164127 and a sole signatory of the mandate in respect to USD Account No. 1001164135.
62. It was stated by the 3rd defendant that pursuant to a Board meeting held on 21st May, 2014, there was a change to the mandate, whereby Teresa Gathoni Kahihia Gathumbi and Martin Kahihia Gathumbi were to be introduced as signatories to the KES Account No. 1001164127 and USD Account No. 1001164135. The 3rd defendant further stated that the plaintiff is guilty of material non-disclosure having known how the accounts were opened and re-activated thus making him undeserving of the orders sought in the instant application
63. The 3rd defendant contended that all the dealings in the two accounts opened and run by the 2nd defendant have been handled in a diligent manner and without any sinister motive by Officers of the 3rd defendant. It averred that in filing the present application, the plaintiff seeks to have this Court re-write the agreement between the 2nd defendant company and the 3rd defendant bank contrary to known legal principles.
64. The 4th defendant in its replying affidavit deposed that by a facility letter dated 31st July, 2017, the 2nd defendant and the plaintiff applied to the 4th defendant for an overdraft facility of Kshs. 10,000,000/= on loan account No. 1128225492, which was to be secured by among others an existing first ranking legal charge of Kshs. 11,000,000/= in favour of the 4th defendant dated 10th July, 2013 and registered over the suit property No. L.R. 125152/4 and an existing further legal charge of Kshs.1,000,000/= in favour of the 4th defendant dated 28th July, 2015 and registered over the suit property No. L.R. 125152/5. She averred that it was an express term of the facility letter dated 31st July, 2017 that 100% of the 2nd defendant’s receivables would be channeled through the accounts held at the 4th defendant bank.
65. It was stated by the 4th defendant that by another facility letter dated 28th May, 2019, the 2nd defendant and the plaintiff applied to the 4th defendant for a credit facility of USD 19,114. 00 on the loan account No. 1143475275, which was to be secured by among others the existing first legal charge of Kshs.11,000,000/=, a further charge of Kshs.1,000,000/= and a debenture over the 2nd defendant’s assets for Kshs.11,000,000/=. That it was an express term of the facility letter dated 28th May, 2019, that at least 75% of the 2nd defendant’s receivables would be channeled through the accounts held at the 4th defendant.
66. The 4th defendant contended that the plaintiff, the 1st and 2nd defendants in breach of the express terms and conditions of the facility letters and the securities registered over the suit property had failed to channel their receivables through the loan accounts held with the 4th defendant and they had also failed to repay their secured obligations as and when they became due and payable.
67. It deposed that the plaintiff, the 1st and 2nd defendants continue to accrue arrears in unpaid monthly repayments and their total debt to the 4th defendant as at 31st March, 2021 stood at Kshs.11,238,806. 99 for loan account No. 1128225492 and USD 19,554. 23 for loan account No. 1143475275. The 4th defendant stated that by a letter dated 4th October, 2019 it served the 2nd defendant with a demand seeking payment of the overdrawn amounts within seven (7) days. That in response thereto, the 1st defendant in her capacity as the 2nd defendant’s Director by a letter dated 28th January, 2020, undertook to make a payment of Kshs.100,000/= per week to regularize the 2nd defendant’s account but she failed to honour the said undertaking.
68. It was stated by the 4th defendant that vide a letter dated 14th November, 2019, it served the 2nd defendant with a pre-listing notification informing it that in the event it continued defaulting in making its loan repayment, the 4th defendant would apply for it to be listed at the Credit Reference Bureau. The 4th defendant stated that the plaintiff, the 1st and 2nd defendants have however failed and/or refused to exercise their statutory right of redemption over the suit property despite service of the aforementioned demands.
69. The 4th defendant further stated that the plaintiff has expressly acknowledged in his affidavit in support of the application herein that they have defaulted in repaying the facilities advanced to them by the 4th defendant, therefore their only recourse is to exercise their equity of redemption before it is extinguished by the crystallization of the 4th defendant’s right to statutory power of sale over the suit property.
70. The 4th defendant asserted that the plaintiff, 1st and 2nd defendants’ default in repaying the outstanding secured obligations is denying the 4th defendant capital and undermining its business of providing financial facilities to other members of the public. It contended that it is a principle of law that this Court will not restrain a chargee in the exercise of its statutory power of sale against a defaulting chargor so as not to fetter it in its attempts to realize its security for repayment of the loan advanced. The 4th defendant deposed that it is against public policy for the plaintiff to benefit from an illegality in view of the fact that he is breach of the facility letters and legal charges they duly executed.
71. The 5th defendant in his replying affidavit deposed that he is a signatory to the 2nd defendant’s accounts held by the 3rd defendant but his powers are limited to the clear resolutions of the 2nd defendant. He averred that as a signatory to the 2nd defendant’s accounts held by the 3rd defendant means that he scrutinizes the expenditures in the said account. He further averred that he had not at any time authorized any withdrawals or transactions that had the effect of siphoning funds from the accounts of the 2nd defendant.
72. The 5th defendant denied ever verbally agreeing to stop discharging his mandate as per the valid resolutions of the 3rd defendant, and being a party to a scheme he is completely unaware of.
73. The plaintiff in his supplementary affidavit deposed that being a minority shareholder in the 2nd defendant company instituting a derivative claim is a legal avenue that he is entitled to utilize. He averred that he has brought this suit in the best interest of the 2nd defendant company and he does not seek to vindicate his private interests as a Director or personal vendetta.
74. It was stated by the plaintiff that the 2nd defendant company is run in accordance with its Memorandum and Articles of Association with the 1st defendant being the Managing Director. In addition, voting is on account of shares, the 1st defendant holds 75% of the shareholding and has constantly abused the position by excluding him as a minority shareholder. The plaintiff further stated that at the inception of the 2nd defendant, he invested Millions of shillings which range into Kshs. 40 Million.
75. The plaintiff contended that the 2nd defendant had a facility with the 3rd defendant bank secured by the 5th defendant’s property which required the 2nd defendant’s banking to be done through the 3rd defendant bank so as to allow discharge of the facility. However, the said facility has since been amortized and by the year 2016 no facility existed between the 2nd and 3rd defendants. He stated that he has never illegally and/or irregularly withdrawn monies from the 2nd defendant company’s account, and that from the year 2017 to January 2020, there was a loan facility with KWFT that was being serviced by the 2nd defendant thus the alleged drawings were made in regard to that loan facility.
76. The plaintiff deposed that the 5th defendant was not an official of the 2nd defendant company and his inclusion as a signatory in the year 2014 was purely on account of the fact that he had offered his property as security services which he has since been paid for.
77. In response to the 3rd defendant’s replying affidavit the plaintiff averred that from the resolution issued to the 3rd defendant by the 2nd defendant it was clear that valid resolutions would only be given by those Directors who actually opened the account. In addition, the operation of the accounts held by the 3rd defendant was to be by the said Directors unless otherwise instructed by the 2nd defendant through its Directors.
78. He averred that a banker-customer relationship is contractual and the bank owes a duty to the customer to honour the customer’s instructions. He also averred that any breach of this contractual duty entitles the injured party to damages for the loss suffered. He deposed that the 2nd defendant is operated in accordance with its Memorandum and Articles of Association and the 3rd defendant should therefore not have entertained any instructions from the 1st defendant without reference to the 2nd defendant company’s Constitution.
79. In response to the 5th defendant’s replying affidavit, the plaintiff deposed that as at July 2019 when the 1st and 5th defendants re-activated the 2nd defendant’s account held by the 3rd defendant, there were no obligations that the 2nd defendant owed to the 3rd defendant, thus there was no reason whatsoever for the 2nd defendant company to transact through the 3rd defendant. He averred that it is incumbent on the 5th defendant to discharge his property since the 2nd defendant has since paid its obligations to the 3rd defendant bank in full.
Whether the plaintiff should be granted leave to prosecute this suit as a derivative action against the defendants. 80. Derivative claims are provided for under Sections 238 to 241 of the Company’s Act, 2015. Section 238 defines a derivative claim as hereunder -“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; andb.seeking relief on behalf of the company.
2. A derivative claim may be brought only-a.under this Part; orb.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.”
81. In Ghelani Metals Limited & 3 others v Elesh Ghelani Natwarlal & another (supra) the Court made the following observation in regard to derivative suits -“Derivative actions are the pillars of corporate litigation. As I understand it, a derivative action is a mechanism which allows shareholder(s) to litigate on behalf of the corporation often against an insider (whether a director, majority shareholder or other officer) or a third party, whose action has allegedly injured the corporation. The action is designed as a tool of accountability to ensure redress is obtained against all wrongdoers, in the form of a representative suit filed by a shareholder on behalf of the corporation: see Wallersteiner v Moir (No.2) [1975] 1 All ER 849. 38. Until 2015, in Kenya, the common law guided derivative actions in Kenya.With the advent of the Act, the law fundamentally changed. The requirement to fall under the exceptions to the rule in Foss v Harbottle was replaced with judicial discretion to grant permission to continue a derivative action. Judicial approval of the action is what now counts and such approval is based on broad judicial discretion and sound judgment without limit but with statutory guidance”.
82. It is trite that pursuant to the provisions of Part XI of the Companies Act, 2015, this Court has the discretion to determine an application for leave to proceed with a suit as a derivative action. However, in dealing with such an application the Court must first satisfy itself that the applicant has established a prima facie case with high chances of success. In the case of Isaiah Waweru Ngumi & 2 others v Muturi Ndungu (supra) the Court set out some of the factors to be considered in such an application as hereunder -“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 effort 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 (W.D. 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 of 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 authorized or ratified by the company in the future; andg)Whether the cause of action contemplated is one that the Plaintiff could bring directly as opposed to a derivative action.”
83. From the record, it is evident that the instant application is grounded on the fact that the 1st defendant is in total and absolute control of the 2nd defendant thus the 2nd defendant cannot bring this suit on its own. It is not disputed that the plaintiff has a 25% shareholding in the 2nd defendant company, whereas the 1st defendant has a 75% shareholding in the said company. The 1st defendant is therefore the majority shareholder. In the case of Sultan Hasham Lalji and 2 others v Ahmed Hasham Lalji and 4 others [2014] eKLR, it was held that -“It is the minority shareholders that are availed to the protection by the exceptions since generally majority shareholders exercise powers of the Company and control its affairs.”
84. Further, in Altaf Abdulrasul Dadani v Amini Akberazi & 3 others, Nairobi (Milimani) HCCC No. 913 of 2002 [2004] 1 KLR 95, the Court made the following observation in regard to derivative actions -“By derivative suits, the minority shareholders(s) feeling that wrongs have been done to the company which cannot be rectified by the internal company mechanisms like meetings and resolutions, because the majority shareholders are in control of the company, come to court as agents of the ‘wronged’ company to seek reliefs or relief for the company itself, all the shareholders including the wrong doers, and not for the personal benefit of the suing minority shareholders (s)….. it is a cardinal principle in company law that it is for the company and not the individual shareholder to enforce rights and actions vested in the company to sue for the wrongs done to it and in the absence of illegality a shareholder cannot bring these proceedings in respect of irregularities in the conduct of the company’s internal affairs in circumstances where the majority are entitled to prevent the bringing of an action in relation to such matters…. However if due to an illegality a shareholder perceives that the company is put to loss and damage but cannot bring an action for relief in its own name, such shareholder can bring an action by way of derivative action… mere irregularity in internal running of a company cannot be a basis for one to bring a derivative suit for such can be rectified by a vote/resolution at the company’s meetings and if a shareholder contemplates using a personal claim of infringement of his rights then a derivative suit will not avail as the relief must be for the benefit of the company…’’
85. The plaintiff’s case is that the 1st defendant who is also the 2nd defendant’s majority shareholder has engaged in egregious conduct meant to cripple the 2nd defendant. He alleges that the 1st defendant has appointed and retained strangers such as the 5th defendant to the 2nd defendant company as signatories to company accounts, she has diverted banking of the company business from the main company bank account even when the company has a loan facility with its main bankers, she has unilaterally appointed Auditors and Company Secretaries to manipulate company accounts. That she has refused to share information with the minority shareholder, the plaintiff herein, even when specific information is requested for. That she has incorporated other companies to compete with the core business of the 2nd defendant. Other allegations are that she has sought to eject the plaintiff as a shareholder from the 2nd defendant company, she has failed to call for Annual General Meetings for the 2nd defendant company, she has diverted margins and profits from the 2nd defendant company to the 6th defendant and Epicenter Africa Limited (South Sudan) at 10% instead of 35%, that she has diverted money in excess of Kshs.15 Million from the 2nd defendant to the 6th defendant through the 3rd defendant, and she has failed and refused to file tax returns and pay taxes with the Kenya Revenue Authority just to mention some of the plaintiff’s allegations against the 1st defendant.
86. In response thereto, the 1st defendant submitted that the plaintiff is the one who chose not to participate in the affairs of the 2nd defendant. That since he is the Chairperson of the 2nd defendant’s Board of Directors and a Director of the 2nd defendant company, he had the capability to call for general and Board meetings of the 2nd defendant but has failed to do so. She stated that the plaintiff has not demonstrated the hindrance or impediment he had in convening such meetings. The 1st defendant attributed the filing of this suit to the fact that she has since moved out of her matrimonial home with the plaintiff, filed for divorce and filed a children’s case for maintenance of the minors since prior to the aforementioned events, the plaintiff had no issue in regard to the management of the 2nd defendant. That he had even congratulated the team for the outstanding work they did in the financial year ending 30th June, 2019.
87. This Court is satisfied that the 1st defendant has demonstrated in her replying affidavit that the 2nd defendant had held Annual General Meetings before, which the plaintiff attended, she had called for Board meetings which the plaintiff failed to attend and indicated that he was attending to a personal matter. The plaintiff has not denied that the 1st defendant has called for meetings, instead he states that the said meetings were management meetings which did not require his attendance since he is a Director. The plaintiff does not dispute having indicated that he would call for a meeting of the Board of Directors but there is no proof that he ever called one or that he attempted to call for a meeting and could not do so for one reason or another. For this reason, it is my finding that the allegations towards the 1st defendant are unsubstantiated thus unproved.
88. The 1st defendant averred that she has not attempted to eject the plaintiff as a shareholder from the 2nd defendant company as the Companies Act under Section 139 provides for the procedure to be followed when removing a Director from a company. She contended that the procedure provided for under Section 139 of the Companies Act was followed and if the plaintiff is not satisfied with the procedure followed by the 1st and 2nd defendants in removing him as a Director of the 2nd defendant, he can file a suit on his own behalf against the 2nd defendant since this injury is personal to him and not the 2nd defendant company. I agree with Counsel for the 1st defendant that removal of the plaintiff as a Director of the 2nd defendant does not give rise to a cause of action that a minority shareholder can pursue on behalf of a company. The provisions of Section 141 of the Companies Act, 2015 stipulate aDirector’s right to protest against removal and that gives rise to a cause of action that the plaintiff as a minority shareholder and Director of the 2nd defendant company can pursue on his own behalf.
89. On the issue of incorporation of the 6th & 7th defendant companies and Epicenter Africa Limited (South Sudan), which the plaintiff contends are conduits to siphon and pilfer money from the 2nd defendant as their core business is similar to that of the 2nd defendant, the 1st defendant averred that the said companies were incorporated jointly with the plaintiff so as to expand their leverage and that the plaintiff even agreed to be a Director of Epicenter Africa Limited (South Sudan) but declined to be a Director in the 6th defendant company as it may lead to a conflict of interest with his current employer. It is not disputed that Epicenter Africa Limited (South Sudan) was incorporated on 5th November, 2013 with the shareholders being the plaintiff, the 1st defendant and one Mr. Awongo Peter Lupai.
90. As to the incorporation of the 6th defendant and whether the plaintiff had knowledge of and/or agreed to its incorporation, it is noteworthy that the 1st defendant has not tendered any evidence in support of the fact that the said company was incorporated with the knowledge and concurrence of the plaintiff. The plaintiff however did not dispute the fact that the 6th defendant company was incorporated on 9th November, 2017. It therefore begs the question, why the plaintiff did not challenge incorporation of the said company in 2017 or raise his concerns to the formation of the said company at the meeting of the Board of Directors or the Annual General Meeting of the 2nd defendant as soon as he was aware of the existence of the 6th defendant. It is evident that the plaintiff waited for three (3) years to file this suit and to address the said issue. That in the eyes of this Court is an act of acquiescence in the incorporation of the 6th defendant. That leads this Court to conclude that the 6th defendant was incorporated with the knowledge and concurrence of the plaintiff. It is trite that he who alleges must prove. If at all the plaintiff wanted this Court to believe that the 6th defendant was incorporated without his participation, he would have tendered evidence to this Court demonstrating his efforts to address the issue as soon as he found out about its existence. The 1st defendant submitted that the 7th defendant company neither trades nor exists, in the absence of any evidence tendered by the plaintiff to the contrary, I am inclined to disagree with the plaintiff on the allegations as against the 7th defendant.
91. In response to the allegations that the 1st defendant has diverted margins and profits from the 2nd defendant company to the 6th defendant and Epicenter Africa Limited (South Sudan) at 10% instead of 35%, and that has diverted money in excess of Kshs.15 Million from the 2nd defendant to the 6th defendant through the 3rd defendant, the 1st defendant submitted that the plaintiff has not tendered any evidence in support of these allegations and in any event, the 2nd defendant was issued with a Tax Clearance Certificate valid up to 28th October, 2020, confirming that all taxes including any taxes arising from transfer pricing had been fully paid. The 1st defendant further submitted that the plaintiff ought to have produced evidence demonstrating why the 2nd defendant should have adopted 35% instead of 10% in transfer pricing for the Court to be in a better position to determine whether there has been a violation of the rules. I have perused the plaintiff’s supporting affidavit and found that in support of the said allegation, he has only produced copies of inter-company debt and the 2nd defendant company’s debt collection plan.
92. That on its own is not sufficient proof as a debt can arise from any other thing other than siphoning over Kshs.13,000,000/= in form of stocks sold at a margin of 10% instead of 35%. As correctly submitted by Counsel for the 1st defendant, Rule 4 of the Income Tax (Transfer Pricing) Rules, 2006 provides thata Tax Payer may choose a method to employ in determining the arm's length price from among the methods set out in Rule 7. This means that there is no set margin by the Rules to be applied in determining the arm’s length price. In order for this Court to make a determination that the 2nd defendant’s stocks ought to have been sold at a margin of 35% instead of 10%, the plaintiff has to demonstrate that the method adopted by the 1st defendant in arriving at the 10% margin was in violation of the Rules on transfer pricing which burden the plaintiff has not discharged.
93. It was stated by the plaintiff that the 1st, 3rd and 5th defendants connived to illegally and unlawfully re-activate the 2nd defendant’s accounts held by the 3rd defendant and gave notice to all the 2nd defendant’s clients to make/effect payment through the said accounts. The plaintiff contends that re-activation of the said accounts was done without a Board resolution thus the same was illegal and should not have been effected in the absence of the said Board Resolution. In response thereto, the 3rd defendant asserted that the 2nd defendant’s accounts held by the 3rd defendant were opened pursuant to a resolution of the Board of Directors meeting held on 14th March, 2013. On perusal of the said Board Resolution which has not been disowned either by the plaintiff or the 2nd defendant, it is evident that at clause 2 it was resolved that any two Directors and/or the Company Secretary were authorized to sign the facility documentation.
94. It was stated by the 3rd defendant that pursuant to the bank’s terms and conditions of opening and operating a partnership account, a mandate by the partners is to be acted upon by the bank until it is revoked in writing by all the signatories and replaced by a new mandate. It then follows that the mandate issued by the 2nd defendant pursuant to a resolution of the Board of Directors’ meeting held on 14th March, 2013, was revoked by a resolution of the Board of Directors’ meeting held on 21st May, 2014, where it was resolved that the 5th defendant and his wife would be introduced as signatories to the 2nd defendant’s accounts held by the 3rd defendant. The bank would then create two categories of signatories and any two directors and/or the Company Secretary were authorized to sign the facility documentation.
95. Further, vide a letter dated 21st May, 2014, addressed to the 3rd defendant’s City Centre Branch Manager by the 2nd defendant, the 3rd defendant was informed that all banking correspondence and transactions should henceforth be signed jointly by one category “A” signatory and one category “B” signatory. Category “A” comprising the plaintiff and the 1st defendant, whereas category “B” would comprise the 5th defendant and his wife. Inasmuch as the letter dated 21st May, 2014 was not signed by the plaintiff, in his supplementary affidavit he did not dispute the contents of the said letter, instead he admitted that indeed the 5th defendant was made a signatory to the 2nd defendant’s accounts held by the 3rd defendant.
96. The plaintiff’s contention that for the said accounts to be re-activated the 2nd defendant had to avail to the 3rd defendant a stamped and/or sealed Board resolution signed by the signatories of the account as per the mandate and a recent copy of the 2nd defendant’s CR-12 have not been supported by any documentation such as a sworn affidavit and/or a letter from the 3rd defendant’s Operations Assistant at the Village Market branch, therefore, the said allegations are of no probative value to the application before this Court. In light of the foregoing and the letter dated 16th September, 2019 written by the 3rd defendant and addressed to the plaintiff’s Counsel on record, this Court finds that the re-activation of the 2nd defendant’s accounts held by the 3rd defendant was done not only legally, but also procedurally.
97. The 1st defendant does not dispute that it issued notices to the 2nd defendant’s clients to effect the 2nd defendant’s payment to the accounts held by the 3rd defendant despite being fully aware that the said monies were being channeled through the 2nd defendant’s accounts held by the 4th defendant in compliance with the terms of the loan facility advanced to the plaintiff by the 4th defendant. She submitted that there exists no resolution passed by the Board of Directors of the 2nd defendant which has the effect of prohibiting banking activities in any and all of the accounts duly opened and operated by the 2nd defendant. It was stated by the 1st defendant that the 2nd defendant has made commitments to the 4th defendant to remit to it Kshs. 100,000/= weekly for purposes of clearing the outstanding overdraft sum.
98. Be that as it may, the 1st defendant was of the view that the consequences of failing to service the overdraft facility issued to the 2nd defendant by the 4th defendant and secured by the plaintiff’s suit property give rise to a cause of action that is personal to the plaintiff on one side and the 2nd defendant on the other side. In determining whether the 1st defendant’s actions and/or decision to channel the 2nd defendant’s funds through the 3rd defendant instead of the 4th defendant was detrimental to the 2nd defendant or in the 2nd defendant’s best interest, this Court has to look at the circumstances that led to the said decision by the 1st defendant. In this case, it is evident that the 2nd defendant has defaulted in its loan repayment obligations to the 3rd defendant which led to the 3rd defendant listing the 2nd defendant with the Credit Reference Bureau thereby exposing the 5th defendant’s property which was used to secure the facility to sale by public auction by the 3rd defendant.
99. The 4th defendant on the other hand submitted that in as much as the 2nd defendant is in default of its loan repayments of the facility advanced to it by the 4th defendant, and is also in breach of the terms of the said facility, the 2nd defendant’s right of redemption has not yet been extinguished hence the plaintiff and the 2nd defendant still have room to redeem the securities that secured the credit facility advanced by the 4th defendant. From the above, I am of the considered view that the 1st defendant’s actions and/or decision to channel the 2nd defendant’s funds through the 3rd defendant instead of the 4th defendant was in the best interest of the 2nd defendant which had been negatively listed by the 3rd defendant and not to further the 1st defendant’s own personal gains.
100. The plaintiff has accused the 1st defendant of failing to file tax returns and pay taxes to the Kenya Revenue Authority. The said allegation was however adequately responded to by the 2nd defendant by producing a Tax Compliance Certificate for the period ending 28th October, 2020 issued by the Kenya Revenue Authority to the 2nd defendant. The plaintiff also seeks an order for this Court to appoint a firm of Auditors to inspect and investigate the affairs of the 2nd defendant including all its banking transactions. It is not disputed that the 2nd defendant was in the process of being audited by EKV & Associates in respect to the fiscal year ending 30th June, 2019. The said audit was not completed owing to the plaintiff’s failure to sign the audit documents. This Court notes that in as much as the plaintiff wants this Court to appoint a firm of Auditors to inspect and investigate the affairs of the 2nd defendant, he has not offered any explanation as to why he is not comfortable with the audit done by EKV & Associates, a firm of Auditors duly appointed by the 2nd defendant through a proper Board Resolution.
101. It is this Court’s finding that it is not sufficient to ask the Court to appoint a different firm of Auditors to carry out an audit on the 2nd defendant without citing any reasons (if any) and offering a reasonable/satisfactory explanation as to why this Court should issue the said order. Further this Court finds that the 2nd defendant is not guilty of failing to undertake financial audits of the said company.
102. In totality, this Court makes a finding that all the allegations levelled against the 1st defendant, give rise to a cause of action between the plaintiff on his own behalf and the 2nd defendant since the pleaded facts do not demonstrate that the 1st defendant’s actions or omissions amount to a breach in her fiduciary duties and duty of care or loyalty as a Director, to the 2nd defendant. Further, I am of the considered view that the plaintiff’s grievances as against the defendants herein can be handled by the Court once it is approached under the correct provisions of the law.
103. It is trite that Court orders are not made in vain. Having found that the plaintiff has not made out a case to warrant being granted an order for leave to proceed with this suit as a derivative action, this Court shall not determine the other issues between the parties herein as that will be an academic exercise.
104. In the premise, I find that the application dated 27th July, 2020 is not merited. I hereby dismiss it with costs to the 1st, 3rd, 4th & 5th defendants.
It is so ordered.
DATED, SIGNED AND DELIVERED AT NAIROBI ON THIS 13TH DAY OF OCTOBER, 2023. RULING DELIVERED THROUGH MICROSOFT TEAMS ONLINE PLATFORM.NJOKI MWANGIJUDGE