[2023] KEHC 24756 (KLR)

Bajrang Construction Limited v Vasisht & another; Administrators, Thika School of Medical and Health Sciences Limited (Interested Party) (Civil Case E005 of 2022) [2023] KEHC 24756 (KLR) (2 November 2023) (Judgment)

Neutral citation: [2023] KEHC 24756 (KLR)

Republic of Kenya

In the High Court at Kiambu

Civil Case E005 of 2022

PM Mulwa, J

November 2, 2023

Between

Bajrang Construction Limited

Plaintiff

and

Barham Dev Vasisht

1st Defendant

Sangeeta Barham Vasisht

2nd Defendant

and

Administrators, Thika School of Medical and Health Sciences Limited

Interested Party

Judgment

1. Bajrang Construction Limited (hereinafter ‘the Company’) is the Plaintiff herein brings this claim against Dr. Barham and Sangeeta Barham as Defendants and the Administrators of Thika School of Medical and Health Sciences Limited as the Interested Party. He prays that the corporate veil of the interested party be lifted and judgment be entered against the Defendants jointly and severally for the sum of Kshs 256,845,079 together with costs and interest at commercial rates from 31st January 2022 until payment in full.

2. The plaintiff sets out its claim in the plaint dated 21st March 2022. At all material times to the suit, the Company was incorporated under the Company’s Act with its registered offices in Thika and carrying out its business within the Republic of Kenya.

3. By an agreement dated 23rd July 2013, the Thika School of Medical and Health Sciences Limited contracted the Plaintiff as a contractor to carry out and complete the development of Thika Medical School on the parcel of land known as LR 9/631. The agreement was executed by the Defendants in their capacity as directors.

4. It was the Plaintiff’s that there was massive fraud, with Thika School of Medical Sciences Limited being used as a shield. The following particulars of fraud are set out;i.Directors taking up loans from financial institutions in the school’s name to develop their personal property making no distinction between their property and that of the school.ii.Directors contracted the Plaintiff to carry out construction work on LR 9/631 which was property owned by the directors and not the school.iii.Loans taken for construction were diverted to other personal use by the directors and the plaintiff was not paid.iv.Failing to pay the plaintiff despite numerous promises.v.The failure to explain how the school became insolvent.

5. The plaintiff’s case is that the total debt due and owing from the Defendants as per the interim payment certificate No. 27 issued on 27th August 2019 by the Quantity Surveyor is Kshs. 43,011,152/=. On 22nd November 2021, the school was placed under administration and joint administrators were appointed to run its operations. They caused a notice to be placed in the daily newspaper inviting members of the public who had a claim against the school to submit the same by 15th December 2021. The directors challenged the appointment of the joint administrators and an injunction was issued on 29th November 2021 restraining the administrators from continuing with their mandate.

6. A final certificate No. 28 was issued on 31st January 2022 for the sum of Kshs. 213, 833,927 inclusive of 16% VAT in favour of the Company and the total outstanding balance now stood at Kshs. 256, 845,079/=. The said amounts remain unpaid despite admissions and numerous proposals to pay by the directors of the school.

7. The 1st and 2nd defendants filed a joint statement of defence denying the allegations in the plaint. They aver the defendants were not, in their individual capacity, parties to the agreement dated 23rd July 2013 and are therefore not subject to the provisions thereof.

8. According to the Defendants the loans obtained by the school were obtained by a body corporate and were properly secured by the property as collateral. They stated that Plaintiff has no claim or cause of action against the Defendants. The alleged communication was between the Plaintiff and Thika School of Medical and Health Sciences Limited. The defendant’s claim is that there exists in court HCCC No. E20 of 2021 Bajrang Construction Ltd versus Thika School of Medical Sciences Limited which emanates from Certificate No. 27 for a Claim of Kshs. 50,107,992/= which Plaintiff has failed to disclose to this court.

9. The defendants state the claim is scandalous, frivolous and vexatious, an abuse of the court process and urged the court to dismiss the same.

10. At the hearing of the suit only the plaintiff witnesses testified. The interested party entered appearance, called no witnesses and filed its submissions.

11. Pw1 Harshad Hirani testified that he is a contractor in the Plaintiff’s company and one of the directors. He adopted his statement dated 21st March 2022 which reiterates the averments of the plaint.

12. In cross-examination he maintained that he sued the defendants in their personal capacity as they were directors of Thika School of Medical Sciences Limited who conducted fraudulent activities that made the plaintiff incur the sum of Kshs. 256,845,079/=

13. Pw2 Chani Lall testified he is an architect in the firm of Chani Lall Partnership. He testified as an expert witness. He confirmed he prepared the certificates for the sums due and owing to the Plaintiff.

Plaintiff’s submissions 14. The Plaintiff raised 4 main issues for determination as follows:i.The consequences of a party’s failure to adduce evidenceii.The consequences of inclusion of the interested party to the suitiii.Whether the corporate veil should be liftediv.Whether the debt of Kshs. 50,107,992 is due and owed to the Plaintiff

15. The first issue was on the consequence of a party’s failure to adduce evidence. It was submitted the matter came for a mention 5 times but the Defendants failed to file their statements. The failure to adduce evidence means the evidence adduced by the plaintiff against the defendants remained uncontroverted. The case cited was Trust Bank Limited vs Paramount Universal Bank Limited & 2 Others NRB HCCS No. 1243 of 2001.

16. On consequences of the inclusion of the interested party, it was submitted the interested party has a legal interest and duty in the proceedings as they took the administration of Thika School of Medical and Health Sciences Limited, thus adverse orders to be made by the court will remotely affect the interested parties.

17. On whether the corporate veil should be lifted, it was submitted that since the allegations of fraud were not controverted by the Defendants it was necessary for the court to pierce the veil of incorporation. The case relied was De Ruiters Roses East Africa Limited vs Alora Flowers Limited (2006) eKLR where the court held “the veil may be lifted in certain cases for an instant where it is shown that the company was incorporated with or was carrying on business as no more than a mask or a device for enabling the directors to hide themselves from the eyes of equity.”

18. It was stated that there was impropriety and the use of corporate structure to avoid or conceal liability by the Directors.

19. On whether the debt of Kshs. 50, 107, 992 plus interest is due to the Plaintiff, counsel submitted the valuation for interim payment certificate No. 27 was issued on 7th August 2019 by the quantity surveyor and the architect certificate on 13th August 2021. The amounts certified were Kshs. 43,011,152 while the amount due and owing as per the final certificate issued on 31st January 2022 was Kshs. 213,833,927/=. The debt of Kshs. 50, 107,992 was acknowledged and admitted by the defendants who gave a proposal on payment of the same.

20. It was submitted that clause 34 of the contract provided that where a certificate remains unpaid beyond the period of honouring the same, the Defendant would pay simple interest on the unpaid amount at commercial bank lending rates.

Interested Party’s submissions 21. Counsel submitted that the interested party was wrongly brought into the proceedings as they were not parties to the agreement. Order 1 of the Civil Procedure Rules does not envision interested parties as parties to a suit. He stated there is no claim against the interested party and no reliefs have been sought against the interested party.

22. He stated there is no provision in the Insolvency Act that provides that administrators can be joined to proceedings in their personal capacity in place of the company they are managing. That a company subject to administration still retains its legal status and it can still sue and be sued in its own name, and the only limitation is consent must be sought from the court or administrators as per Section 560(d) of the Insolvency Act.

23. In conclusion, counsel averred that the school is not a party to the proceedings and thus administrators are not necessary parties in the proceedings.

Analysis and determination 24. I have considered the pleadings, the responses, the submissions and the evidence adduced by the parties. The main issues for determination are:i.Whether the plaintiff proved its case against the defendants on a balance of probabilitiesii.Whether this court should pierce the corporate veil of Thika School of Medical and Health Sciences Limited.

Whether the plaintiff proved its case against the defendants on a balance of probabilities 25. It is not disputed that the plaintiff and the Thika School of Medical and Health Sciences entered into an agreement for the plaintiff to construct and develop LR 9/632. From the Quantity Surveyor certificate and the Architect certificate issued herein, it is clear that the Plaintiff carried out its work as required by the contract and a sum of Kshs. 256,845,079/= is due and owing emanating from the said construction, which the plaintiff seeks the intervention of this court to have the same paid.

26. I have perused the contract dated 29th July 2013 entered between Thika School of Medical and Health Sciences and Bajrang Construction Limited. It was a term of the contract that the Thika School of Medical and Health Sciences would pay for the amount due as per the certificate issued by the architect, however, this provision was not complied with as the School under the directorship of the Defendants failed to honour the certificates submitted by the Plaintiff.

27. From the record is a letter dated 3rd December 2020 signed by Dr. Barham Dev Vasisht bearing the reference commitment to pay outstanding to contractors and subcontractors and resumption of work at Thika towers. Being one of the directors of Thika School of Medical and Health Sciences, he committed to pay the outstanding bills for the works already done and all pending works by the 15th of January 2021.

28. In the second letter dated 23rd April 2021 with the reference schedule of payments to the main contractor, sub-contractors and consultants the letter reads in paragraph 2 “We propose to be making payments of Kshs. 15 million per month effective May 2021 to cater for the amount of the outstanding bill required for any works to be done for the completion of the project. With these payments we will be in a position to clear the sub-contractors due first then rank the payments for main contractors, consultants and extra work done to completion” the letter is signed by B.D. Vasisht one of the Managing Directors of the school.

29. The above correspondence discloses clear and concise admission of debt by Defendants, the directors of Thika School of Medical and Health Sciences Limited. I find no difficulty in holding that there was a default in payment, the letters attached by the Plaintiff are elaborate on the debt owed by the School. I thus find that the contract dated 29th July 2013 was breached.

Whether this court should pierce the corporate veil of Thika School of Medical and Health Sciences Limited 30. From the evidence adduced it is clear the Defendants misled the Plaintiff into thinking that the School would make the payments to the extent of ordering them to return to work and consequently failed to honour their part of the bargain. According to the Plaintiff the Defendants herein used the school to develop their personal interests making no distinction between their land and that of the school. The Plaintiff averred that the land LR 9/163 belonged to the directors and not the school and the school was used as a cover up.

31. Paragraph 90 of Halsbury’s Laws of England 4th Edition Vol 7 (1) deals with the lifting the veil of incorporation and states as follows:“90. Piercing the corporate veil. Notwithstanding the effect of a company’s incorporation, in some cases the court will ‘pierce the corporate veil’ in order to enable it to do justice by treating a particular company, for the purpose of the litigation before it, as identical with the person or persons who control that company. This will be done not only where there is fraud or improper conduct but, in all cases, where the character of the company, or the nature of the persons who control it, is a relevant feature. In such case the court will go behind the mere status of the company as a separate legal entity distinct from its shareholders, and will consider who are the persons, as shareholders or even as agents, directing and controlling the activities of the company. However, where this is not the position, even though an individual’s connection with a company may cause a transaction with that company to be subjected to strict scrutiny, the corporate veil will not be pierced”.

32. Further in the case of Multichoice Kenya Ltd vs Mainkam Ltd & Anor (2013) eKLR Mabeya. J. detailed: “I agree that directors are generally not personally liable on contracts purporting to bind their company. If the directors have authority to make a contract, then only the company is liable on it. To my mind, there is no doubt that ever since the famous case of Salomon v Salomon (1897) A.C. 22 Courts have applied the principle of corporate personality strictly. But exceptions to the principle have also been made where it is too flagrantly opposed to justice or convenience. Other instances include when a fraudulent and improper design by scheming directors or shareholders is imputed. In such exceptional cases, the law either goes behind the corporate personality to the individual members or regards the subsidiary and its holding company as one entity.”

33. Whereas the directors of a company enjoy a distinct legal entity with the company as per the Salomon vs Salomon case, it is evident from the pleadings that the Defendants herein acted in a deceitful manner and misrepresented the Plaintiff in thinking that the school would pay the amount due from the contract while they knew the school was under administration. It is further evident there was a back-and-forth between the Defendants and the administrators of the school.

34. In Githunguri Dairy Farmers Co-operative Society vs Ernie Campbell & Co. Ltd & another [2018] eKLR, the Court of Appeal held: - “In the present instance, Mr. Baiya claimed that the liabilities accrued by the 2nd respondent including the decretal sum and the costs of suit, were to be paid from the 2nd respondent’s account. Why would Mr. Baiya, a director in the 2nd respondent and who definitely had full knowledge of its affairs (that it had no attachable assets or financial means to satisfy the decree) insist that the decree be settled by it? We draw the same inference as the 1st respondent that the same was meant to defeat the satisfaction of the decree, an improper purpose warranting the court to go behind the veil of incorporation. This is especially since the benefit of the works carried on by the 1st respondent was realized and continues to be enjoyed by the appellant. Surely in the circumstances of this case, the appellant did not expect a court of equity to shut its eyes to the 1st respondent’s plight and leave it without a remedy. The appellant incorporated the 2nd respondent and then had it enter into an agreement with the 1st respondent knowing well that it had no financial means or assets to meet the obligations related with the contract. In the absence of any reasonable excuse or justification from the appellant for its conduct, then we find it safe to draw an improper and fraudulent purpose necessitating lifting the 2nd respondent’s veil of incorporation for purposes of ensuring justice to both parties.”

35. In the circumstances, I am persuaded the plaintiff resumed work due to the honest belief that their dues would be paid, as promised by the directors of the school. The deceit and misrepresentation by the defendants as alleged by the Plaintiff was not controverted in evidence and therefore the claim by the Plaintiff remains unchallenged. In the result thereof, it will be a travesty of justice for a court of equity to close its eyes where it is clear that a person incorporates a company, enters into agreements through it, derives benefits therefrom and leaves the parties to such agreements licking financial wounds while he continues to enjoy the benefits therefrom.

36. I find the Defendants herein Dr. Barham Dev Vasisht and Sangeeta Barham Dev Vasisht should be personally held liable for their actions and pay the amount due and owing to the Plaintiffs.

37. For the Interested Parties though they are necessary parties to the suit I find no liability to be apportioned to them.

38. In the upshot, therefore, this court makes the following findings:a.That the Plaintiff has proved its case on a balance of probability and I accordingly enter judgment in favour of the Plaintiff against the Defendants jointly and severally for the sum of Kshs. 256,845,079/=.b.The said sum shall attract interest at commercial rates from the date of filing of the suit until payment in full.c.The Defendants to pay the Plaintiff the costs of this suit plus interest on costs at court rates until payment in full.It is so ordered.

JUDGMENT DELIVERED VIRTUALLY, DATED AND SIGNED AT KIAMBU THIS 2ND DAY OF NOVEMBER 2023. ………………………………………P.M. MULWAJUDGEIn the presence of:Mr. Miano h/b for Mr. Waigwa - for PlaintiffN/A - for DefendantsMr. Ondati - for the Interested PartyDuale – court assistant