[2021] KEHC 350 (KLR)

Banja & another v AP Solutions OY & another (Miscellaneous Application E189 of 2021) [2021] KEHC 350 (KLR) (Commercial and Tax) (15 December 2021) (Ruling)

Neutral citation number: [2021] KEHC 350 (KLR)

Republic of Kenya

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

Miscellaneous Application E189 of 2021

DAS Majanja, J

December 15, 2021

Between

Fred Omondi Banja

1st Applicant

AP Solutions Kenya Limited

2nd Applicant

and

AP Solutions OY

1st Respondent

Alessandro Psenda

2nd Respondent

Ruling

Introduction and Background 1. The Applicants have filed a Notice of Motion dated 16th March 2021, inter alia, under sections 238, 239, 240, 241, 242 and 151 of the Companies Act, Act No. 17 of 2015 (“the Companies Act”) seeking the following orders:1. Spent*2. Spent*3. THAT the Honourable Court be pleased to grant leave for the Applicant herein to institute a derivative action for and on behalf of the 2nd Applicant company as against the 1st and 2nd Respondent.4. THAT the Honourable Court be pleased to issue an order lifting the caveat entered by the 1st and 2nd Respondents on Account No.01***********10 of the 2™ Applicant Company held at Sidian Bank pending interparty hearing and determination of this application.5. Repetition of Prayer 4*6. THAT pursuant to the above order the Honourable Court be pleased to grant an order for leave for the 1st and 2nd Applicants herein to be allowed to sign off as singular directors and shareholders in expending the day to day running expenses of the 2nd Applicant Company.7. THAT the Honorable Court be pleased to set aside any resolution passed and or imposed by the 1st and 2nd Respondents herein that are contrary to the duty of director in regards to conflict of interest and against the interests of the 2nd Applicant Company.8. THAT the Honourable Court be pleased to issue any other further orders it deems just and equitable.9. THAT costs for this application be provided for.

2. The application is supported by the affidavits of the 1st Applicant sworn on 16th March 2021 and 8th September 2021 respectively. It is opposed by the Respondents through the affidavits of Peter Okeyo, the 1st Respondent’s Head of Legal Operations in East Africa, sworn on 21st May 2021 and 3rd June 2021 respectively and the Grounds of Opposition dated 21st May 2021. Both parties have filed written submissions which their respective advocates highlighted briefly.

3. The facts giving rise to this application are common ground. The 1st Respondent (“AP OY”) is a company engaged in the production and marketing of connectivity solutions and cables for telecommunication and data networks globally. By a Representative and Distribution Agreement dated 28th April 2017 (“the Distribution Agreement”), the 2nd Applicant Company (“AP Kenya”) was established with the purpose of being a reseller and distributor of AP OY’s products in East Africa. The 1st Applicant is a director and minority shareholder of AP Kenya, the 2nd Respondent is a director of AP OY while AP OY is a director and majority shareholder of AP Kenya.

4. In substance, these are proceedings by the 1st Applicant for permission to institute a derivative suit on behalf of AP Kenya. At this stage it is important to note that AP Kenya has been joined as the 2nd Applicant yet it is the company which is subject of the 1st Applicant’s request for permission. It is also not disputed that the 1st Applicant is the minority shareholder hence he cannot appropriate the company’s name to file suit as a minority shareholder. It is for this reason that the 1st Applicant has to obtain permission to institute a derivative suit. In this respect, I uphold the objection by the Respondents that AP Kenya is improperly joined as an applicant to the cause. It is therefore struck out. I shall therefore refer to the 1st Applicant as the Applicant for ease of reference.A derivative action

5. Whether the court should grant permission to the Applicant to institute a derivative suit is governed by sections 238 and 239 of the Companies Act which provides as follows:238 (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; and(b)seeking relief on behalf of the company.(2)A derivative claim may be brought only—(a)under this Part; or(b)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.(4)A derivative claim may be brought against the director or another person, or both.(5)It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.(6)For the purposes of this Part—(a)"director" includes a former director;(b)a reference to a member of a company includes a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.239. Application for permission to continue derivative claim(1)in order to continue a derivative claim brought under this Part by a member, the member has to apply to the Court for permission to continue it.(2)If satisfied that the application and the evidence adduced by the applicant in support of it do not disclose a case for giving permission, the Court—(a)shall dismiss the application; and(b)may make any consequential order it considers appropriate,(3)If the application is not dismissed under subsection (2), the Court—(a)may give directions as to the evidence to be provided by the company; and(b)may adjourn the proceedings to enable the evidence to be obtained.(4)On hearing the application, the Court may—(a)give permission to continue the claim on such terms as it considers appropriate;(b)refuse permission and dismiss the claim; or(c)adjourn the proceedings on the application and give such directions as it considers appropriate. [Emphasis mine]

6. The aforesaid provisions provide the framework for instituting claims by members of the Company on behalf of the Company. Prior to the enactment of the Companies Act, such suits were governed by the rule in Foss v Harbottle [1843] 67 ER 189 which established the general principal that a wrong alleged to have been done to a company, can only be remedied by an action by the company itself (see Ghelani Metals Limited and 3 Others v Elesh Ghelani Natwarlal and AnotherML HCCC No. 102 of 2017 [2017] eKLR and Amin Akberali Manji and 2 others v Altaf Abdulrasul Dadani and Another [2015] eKLR).

7. In considering whether to grant permission, the court is also guided by section 241 of the Companies Act which sets out circumstances under which the court shall refuse permission and the considerations the court shall take into account when granting permission to the applicant to continue the suit as a derivative suit. The section provides as follows:241. (1)If a member of a company applies for permission under section 239 or 240, the Court shall refuse permission if satisfied—(a)that a person acting in accordance with section144 would not seek to continue the claim;(b)if the cause of action arises from an act or omission that is yet to occur-that the act or omission has been authorized by the company;(c)if the cause of action arises from an act or omission that has already occurred — that the act or omission—(i)was authorised by the company before it occurred; or(ii)has been ratified by the company since it occurred.(2)In considering whether to give permission, the Court shall take into account the following considerations:(a)whether the member is acting in good faith in seeking to continue the claim;(b)the importance that a person acting in accordance with section 143 would attach to continuing it;(c)if the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be—(i)authorised by the company before it occurs; or(ii)ratified by the company after it occurs;(d)if the cause of action arises from an act or omission that has already occurred-whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company(e)whether the company has decided not to pursue the claim;(f)whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in the member's own right rather than on behalf of the company.(3)In deciding whether to give permission, the Court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest (direct or indirect) in the matter. [Emphasis mine]

8. In Isaiah Waweru Njumi & 2 Others v Muturi Ndungu KBU HCCC No. 6 of 2016 [2016] eKLR, Ngugi J., summarised some of the factors to be considered in granting permission to commence or continue a derivative action as follows:[21]…Among other things, the Court considers the following factors:(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 efforts 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 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 authorised or ratified by the company in the future; and(g)Whether the cause of action contemplated is one that the Plaintiff could bring as a direct as opposed to a derivative action.

9. From the onset and based on the above provisions, the Applicant being a member and director of AP Kenya, is entitled apply for relief from this court to commence proceedings on behalf of the company as a derivative suit and he does not require approval or ratification by the company to do so. I now turn to consider the substance of the application.Applicant’s Case

10. The Applicant contends that the Respondents have placed a caveat on the accounts of AP Kenya at Sidian Bank Account No. 01**********10 (“the Sidian Bank Account”) stopping any and all transactions and that before this, AP OY, through the 2nd Respondent had without any notice and prior confirmation from the other directors of AP Kenya moved sums for the day to day running of AP Kenya from the account held at Stanbic Bank to the Sidian Bank Account. The Applicants accuse the Respondents of illegally, unlawfully and improperly imposing a competitor and former consultant of AP Kenya as an agent for AP Kenya thus curtailing its business and diverting it to the competitor.

11. The Applicant accuses the Respondents of taking over the running of the day to day operations of AP Kenya, after he refused to carry out illegal instructions including illegally firing AP Kenya employees, backdating their firing to September 2020, illegally signing an agreement to give fraudulent advantage to AP OY as against all the other creditors and ceasing any and all payments of salaries, rent, supplies creditors and all other legal obligations of AP Kenya. He states that the Respondents are creditors and suppliers to AP Kenya and that since its registration, it has benefited by receiving payments amounting to over KES 20,000,000. 00 for delivery of goods. He accuses the Respondents of making unfounded demands for payment based on their majority shareholding status and despite evidence to the contrary.

12. The Applicant complains that the Distribution Agreement was unfair, entered into without his involvement and is not in the best interests of AP Kenya as it was solely signed by the 2nd Respondent acting as the sole signatory for the two companies and giving the Respondents liberty to set prices as they deem fit against the interests of AP Kenya. He complains that AP OY has contravened several clauses in the Distribution Agreement to the detriment of AP Kenya.

13. The Applicant avers that the shareholders of AP Kenya have never held a meeting where they have waived the Respondents’ conflict of interest. He states that AP Kenya has always paid for the goods supplied AP OY until the payments were affected by the COVID 19 pandemic which resulted in slow intake of goods and supplies. He accuses the Respondents of acting in bad faith and against the interests of AP Kenya during the pandemic as they proceeded order the Applicants to fire all its employees and back date their firing to September 2020, suspend all its activities yet the company was still receiving orders and covering daily expenses and changing the rules for operating the KES and USD accounts of AP Kenya in the Stanbic Bank account.

14. The Applicant states that he refused to accede to these directions as they would be contrary to Government regulations and the illegalities would cost the company a fortune. He states that the Respondents also demanded that the he execute an agreement in which AP Kenya could pay AP OY its debts as a first charge against all other creditors yet the AP Kenya is a going concern which is able to pay its debts as and when the fall due except during this pandemic period. The Applicant also accuses the Respondents of spreading falsehoods that AP Kenya is not allowed to trade under the AP Kenya’s logo with the intention of taking over its business in the Kenyan market. He states that the Respondents have been writing to various clients attacking AP Kenya and against its interests.

15. The Applicant takes the view that the Respondent have been involved in conflict of interest and breaches of directors’ duties contrary to section 151 of the Companies Act and the Articles of Association. He contends that the Respondents have threatened to sell their shares to another multinational and yet they have never paid for the shares of AP Kenya neither do they have a share certificates for those shares.

16. The Applicant submits that unless the Court allows the application, the Respondents will continue to infringe on AP Kenya’s property rights and will continue to breach various contractual obligations and clauses to the detriment of AP Kenya. He maintains that the caveat over AP Kenya’s Sidian Bank Account has disabled the company from paying its debts and it may be declared insolvent due to the Respondents’ illegal and unconscionable actions.Respondent’s Case

17. The Respondents’ case is that Applicant has failed to demonstrate any actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by the Respondents to warrant a derivative action. That he has not shown the manner in which the decisions taken by AP Kenya were detrimental or likely to be detrimental to AP Kenya or how the said decisions were wrongful and/or illegal. They submit that the order seeking permission to sign off on Bank Accounts as singular director and shareholder for purposes of conducting the day to day running of expenses is contrary to the resolution made by AP Kenya on 11th January 2021.

18. The Respondents urge that the court must refuse permission on the ground that the purported cause of action arises from acts that have already occurred and which were authorized by AP Kenya before they occurred and ratified by AP Kenya since they occurred. They add that the Applicant is entitled to pursue in his own rights rather than on behalf of the AP Kenya.

19. In opposing the application, the Respondents explain that the nature of AP OY and AP Kenya’s mutual business relationship is the supply and distribution of cables, with AP OY manufacturing and supplying cables to AP Kenya, and AP Kenya marketing and supplying the same to the East African market. The Respondents therefore submit that it is misleading for the Applicant to state that AP OY has never made any capital contribution in AP Kenya since the relationship between the parties is in itself meant to be mutually beneficial. Further, that in their business arrangement, the Applicant and AP Kenya are the representatives of the Respondents in Kenya and have both a contractual, business and moral obligation to represent and market AP OY and its products, and manage the day-to-day business of AP Kenya in East Africa including the payment of bills, utilities and salaries. They further explain that under the arrangement, AP OY provided start-up capital amounting to USD. 100,000. 00 and logistical support in setting the business in Kenya and thereafter supplying its products for distribution and resale by AP Kenya in the market.

20. The Respondents also gave an account of the events leading up to the resolutions leading to the Applicant filing this application. They state that in December 2020, the Respondents noted that AP Kenya was grossly underperforming despite the financial projections and market indicators for the year 2020. In particular, despite making sales, AP Kenya was unable to pay for the supplies it had received from AP OY, and AP OY as the parent company received supplier complaints.The Respondents observed from a preliminary study of AP Kenya’s Management Reports as at 30th November 2020 that at least two invoices from a supplier, INFOSIS, had not been included in the Report. In addition, it was also noted whereas purchases were supposed to be made or received by AP Kenya, various purchases were in fact being made by Yield Holdings Limited, a company associated with the AP OY, and without any notice to the Respondents. The Respondents discovered that AP Kenya had opened a secret business account with Sidian Bank Kenya Limited without the involvement of or mandates by the Respondents or a resolution of the AP Kenya board of directors (“the Board”). When they inquired about these facts, the Applicant failed to submit all invoices in respect of AP Kenya to AP OY, provide a proper account of the financial position of AP Kenya, and give a satisfactory explanation as to why a secret business and transactional account was opened by AP Kenya without the involvement of AP OY.

21. As a result of these developments, the Respondents state that they had reason to believe that the Applicant was withholding or hiding certain financial information. They also doubted the authenticity of AP Kenya’s monthly financial reports. The 2nd Respondent demanded that an independent forensic audit be commissioned to audit AP Kenya’s financial undertakings and a report be issued to AP OY but this was not done. The Respondents state that as majority shareholder and director, they resolved to suspend all unilateral transactions in respect of AP Kenya’s bank accounts and in this regard, AP OY wrote to Sidian Bank informing it that the accounts had been opened without any involvement of AP OY, as the majority shareholder of AP Kenya, or a resolution of its Board. As a result of this information provided by AP Kenya, Sidian Bank resolved to suspend any unilateral transactions on AP Kenya’s accounts held with it, without the involvement of AP OY.

22. The Respondents further aver that the AP Kenya Board subsequently resolved that all payments made from AP Kenya’s Bank accounts would require the written approval of its Board and due to the discovery of mismanagement by the Applicant, AP OY as majority shareholder resolved to be more involved in day-to-day dealings of AP Kenya and in this regard, decided to suspend all activities and payments including the payment of salaries and compensation to staff and directors unless authorized by the resolution of the Board. It resolved to take over the management of the commercial, sales and purchasing, corporate accounting and treasury supervision of AP Kenya; define the roles and responsibilities of AP Kenya’s Directors and establish new rules for operating the Stanbic Bank Accounts. All these resolutions were firmed up in a meeting of the Board of Directors held on 11th January 2021. The Respondents submit that these resolutions were not detrimental to the AP Kenya and were in the best interests of the company and were intended as safeguards that would boost structures for corporate governance and prevent financial pilferage and embezzlement by the Applicant.

23. In response to the allegation by the Applicant that he was forced to lay off workers, the Respondents submit that the Applicant has not furnished this Court with any employment contract of any employee of AP Kenya, or proof that AP Kenya has violated any provisionof any employment contract with any employee of AP Kenya. They contend that most employment contracts in Kenya have provisions for separation and the law permits the termination of employment contracts and separation in compliance with the procedures provided under the said contracts and in employment law.

24. As regards the allegation that AP Kenya halted payments to its suppliers, the Respondent contend that the since the Applicant in his duties as a Director, AP Kenya and AP OY simply required the prior approval of the AP Kenya Board before any payments are made for purposes of accountability. The Respondents deny the allegation of micromanagement and contends that the Applicant simply does not want to be accountable contrary to the wishes of the majority shareholders.

25. The Respondents admit that they have been sending letters to AP Kenya’s clients informing them that they have taken over the management of AP Kenya but that this was done to inform them that AP OY will now be directly involved in the day to day running of the AP Kenya including, the delivery of goods and services, the collection of payments and the management of office operations.

26. The Respondents aver that the opening of the Stanbic Bank account and hiring of a consultant to chase AP Kenya’s debts was above board and that the funds transferred from the Sidian Bank account to the Stanbic Bank account was a transaction which involved AP OY and was done with the intention of putting funds into an account which was opened and accessible to all parties. Further, any supplier who is owed any money by AP Kenya can equally be paid from the funds deposited into the Stanbic Bank account without any prejudice to the Company.

27. In sum, the Respondents urge that the Applicant has not set up a case for leave to institute a derivative action on behalf of AP Kenya and in the disclosed circumstances, this application has been made in bad faith and is not in the best interest of the company, therefore, it ought to be dismissed with costs.Determination

28. I now turn to consider the facts set out in light of the principles I had outlined earlier in this ruling. The substantive issue is whether the court should grant the Applicant permission to commence a derivative action against AP Kenya, lift a caveat in the Sidian Bank Account, sign off the accounts as singular director and shareholder in expending the day to day running expenses of AP Kenya and set aside any resolution passed and or imposed by the Respondents on AP Kenya that are contrary to the duties imposed on a director in regard to conflict of interest and which are against the interest of AP Kenya.

29. It is not in dispute that the actions or omissions complained of by the Applicants have since taken place and that the company’s Board authorized the said actions before they occurred and ratified the same after they occurred as evidenced by AP Kenya’s Board meetings that took place on 11th January 2021 and 30th April 2021. This is sufficient ground to refuse permission under section 241(1)(c) of the Companies Act.

30. I have also considered the totality of the allegations levelled by the Applicant against the Respondents and I do not find any cause of action that would sustain a suit against them for a number of reasons. For instance, and first, I do not find any evidence of an illegality or coercion of AP Kenya by AP OY as alleged in consummating the Distribution Agreement. Second, it is not illegal for AP Kenya to terminate the employment of its employees and there is no evidence to support this allegation and the allegation that the Applicant was coerced to do so. I would also point out that any aggrieved employee has a right of action against the company. Third, there is nothing illegal or unlawful if the majority decision of AP Kenya’s Board ceases any and all payments of salaries, rent, supplies creditors and all other legal obligations of the company in the circumstances. In any case, I find that the Board did not entirely halt these payments but resolved that such payments could only be made with the Board’s approval, which is within the realm of the Board powers.

31. In sum, I fail to find any 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 AP Kenya as demanded by section 238(3) of the Companies Act. The actions taken by AP Kenya are ordinary decisions taken by a company’s board of directors and it is not for this court to micromanage or second guess the company on how it is to conduct its affairs. Further, the fact that the Applicant’s opinions differ from those of the other majority director/shareholder AP OY does not necessarily mean that AP OY was acting against the interests of AP Kenya. In absence of such fraud, negligence, default or breach of duty, the majority decisions of a board must be allowed to prevail.

32. It is for the same reasons I have set out above, that the prayer for lifting of the ‘caveat’ on the Sidian Bank Account cannot be granted as the court cannot issue an adverse order against such a decision made in compliance Board’s request to the Bank. The court cannot also grant the prayer of allowing the Applicant to sign off as a singular director/ shareholders in expending the day to day running expenses of AP Kenya as this will be akin to micromanaging the affairs of the company and would undermine the valid resolution of the company.Disposition

33. I find and hold that the Applicant has failed to substantiate his claim under sections 238, 239 and 241 of the Companies Act. I dismiss the application dated 16th March 2021 with costs to the Respondents.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF DECEMBER 2021. D. S. MAJANJAJUDGECourt Assistant: Mr M. OnyangoMr Omwanza instructed by Omwanza and Areba Associates Advocates for the 1st Applicant.Mr Akhaabi with him Ms Oeri instructed by A. N. Oeri and Company Advocates for the Respondents.