https://new.kenyalaw.org/akn/ke/judgment/kehc/2026/11952

 **REPUBLIC OF KENYA** **IN THE HIGH COURT OF KENYA AT NAIROBI** **MILIMANI TAX AND COMMERCIAL COURT** **MISCELLANEOUS APPLICATION NO. E702 OF 2024** EVANS BOGE 1ST APPLICANT KIESTA INDUSTRIAL TECHNICAL SERVICES LIMITED 2ND APPLICANT **VERSUS** KIESTA INDUSTRIAL TECHNICAL SERVICES LIMITED 1ST RESPONDENT SILAS ABED ALEMBI 2ND RESPONDENT JOHNSON KARANI MAINGI 3RD RESPONDENT PROTUS NAIRA TENDETI 4TH RESPONDENT ALEX MUNANA NGARUIYA 5TH RESPONDENT **RULING** **Introduction and Procedural Background** 1. By a Notice of Motion dated 30th August 2024, brought under sections 3A, 3B, 1A and 1B of the Civil Procedure Act and sections 238, 239 and 240 of Part XI of the Companies Act, 2015, the 1st Applicant, a shareholder and director of the 2nd Applicant company, seeks, principally, leave of this Court to bring a derivative suit on behalf of the 2nd Applicant against the 2nd, 3rd, 4th and 5th Respondents, together with temporary restraining orders against the Respondents in respect of two identified bank accounts and an order permanently staying “the proceedings in this matter.” 2. The application is supported by the 1st Applicant’s Affidavit sworn on 30th August 2024 3. The 2nd Applicant, Kiesta Industrial Technical Services Limited (Company No. C.53200), is a private company incorporated in Kenya in 1993, carrying on an engineering and fabrication business from premises on L.R. No. 209/11521 in the Industrial Area, Nairobi, held under a 99 year Government lease. Its membership, as at the material time, extends well beyond the parties named in this application to include, among others, Joseph Mburu Kamau, Ibrahim Maurice Ochieng, Rogas Mwanzia Ngotya, Joseph Igogo Chege, David Wambua Ngii and James Wainaina Muiruri. 4. The 1st Applicant was, until his removal said to have taken effect on 17th April 2023 (evidenced by a Form CR9 Notice of Cessation of Office of Directors lodged by the 4th Respondent), a director of the company; he remains, on the material before the Court, a registered shareholder. 5. Other than the aforestated Notice of Motion dated 30th August 2024, a further Notice of Motion dated 16th December 2024, supported by a further Affidavit of the 1st Applicant sworn on the same day, sought conservatory orders pending the hearing and determination of the first application. 6. The two applications were, by directions of the Court, canvassed together; the 1st Applicant was granted leave to file a further Affidavit in amplification of his case and thereafter to file the written submissions. The other parties were equally invited to file written submissions. 7. The 2nd Respondent swore a Replying Affidavit on 4th February 2025 in opposition to both applications, on his own behalf and, he deponed further on behalf of the 1st, 3rd, 4th and 5th Respondents. 8. The 1st Applicant’s written submissions were filed on 17th April 2025. No written submissions were filed on behalf of any Respondent. **The Applicants’ Case** 1. The 1st Applicant’s Supporting Affidavit of 30th August 2024 avers, in summary, that the company has for some years been beset by poor corporate governance: mismanagement, nepotism, sale of company property without resolutions, falsification of the shareholders’ register, embezzlement, and his own “purported removal” from the Board, matters he says are documented in a meeting minute of 18th March 2023, a complaint he lodged with the Business Registration Service on 11th April 2023, and a demand for unpaid dues issued through his advocates on 16th December 2023, which was ignored. 2. He avers that notices of general meetings held on 19th December 2022 and 17th February 2023 were issued without proper agenda or the involvement of all shareholders, and that the company has for five years defaulted on its statutory filing obligations, exposing it to threats of insolvency from creditors. 3. In a Further Affidavit filed with leave of the Court, the 1st Applicant particularizes several of the allegations. Of these, two merit particular note. First, he deposes that the 3rd and 4th Respondents own and operate, respectively, Funtech Engineering and Fabrication (Business No. BN/2011/137918) and Output Mechanical Engineering (Business No. BN/2012/1729260), businesses which he says compete with and divert opportunities from the company, an allegation he supports by reference to a letter dated 2nd March 2021 in which the 2nd Respondent himself informed the Registrar of Companies of that very ownership structure. 4. Second, he deposes to the company’s non-remittance of taxes to the Kenya Revenue Authority (KRA) and in particular Pay As You Earn (PAYE) and Value Added Tax (VAT). These were quantified at Kshs 167,742 and Kshs 928,389 respectively. He points to a resolution of 21st March 2021 by which certain directors purported to authorise disposal of company machinery to offset a KRA enforcement demand of Kshs 1,096,131.22. 5. He further avers, that an allotment of shares recorded in board minutes of 13th March 2024, and an earlier increase in shareholding to 900 shares, were procured through a forged signature purporting to be his own. 6. In written submissions, counsel for the 1st Applicant frames the test for leave as a two-stage inquiry: first, whether a prima facie case is disclosed, and second, consideration of statutory factors, relying on the holding in *Nextgen Office Suites Ltd & another v Netcom Investments Ltd & another; Shah Minakshi Navinchandra (Interested Party)* [2021] eKLR (HCC No. E473 of 2020), and, “in some of the issues,” on *Jasbir Singh Rai & 3 others v Tarlochan Singh Rai & 13 others* [2002] eKLR (Civil Appeal No. 63 of 2001). 7. It is submitted that the Supporting Affidavit demonstrates that the intervention of the Court “is long overdue” and that leave is merited to avert the “total collapse of the Company.” **The Respondents’ Case** 1. The 2nd Respondent’s Replying Affidavit admits the descriptive averments at paragraphs 1 and 2 of the supporting affidavit but denies the balance. 2. He avers that the 1st Applicant has not specified which resolution he takes issue with, nor demonstrated that he was excluded from any Annual General Meeting; that the rule of the majority is fundamental to corporate law and binds a shareholder even where a lawful majority decision adversely affects him; that the wrong said to have been suffered is not shown to be a wrong to the 2nd Applicant as opposed to the 1st Applicant personally; that no notice was served on the Respondents to remedy the alleged breaches, nor was notice given of an intention to bring this application; and that the application, brought in the 1st Applicant’s personal interest, discloses no reasonable cause of action, is prima facie unmeritorious, and amounts to an abuse of the process of the Court. 3. He prays that it be dismissed with costs. **Issues for Determination** 1. From the pleadings filed and the written submissions read, the following issues arise for determination: 2. ***whether the 1st Applicant has locus standi to seek leave;*** 3. ***whether the material before the Court discloses a prima facie case in respect of a cause of action falling within section 238(3) of the Companies Act, 2015;*** 4. ***whether, that threshold aside, the considerations prescribed by section 241 of the Act permit the grant of permission;*** 5. ***whether the conservatory orders sought in prayer 3 of the Notice of Motion are merited; and*** 6. ***what order should be made as to costs.*** **Analysis** 1. Derivative claims are governed exclusively by Part XI (sections 238 to 242) of the Companies Act, 2015. Section 238(1) defines a derivative claim as proceedings by a member of a company ***“in respect of a cause of action vested in the company”* and *“seeking relief on behalf of the company,”* which, by section 238(3), 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.”*** 2. Section 239(1) requires a member to apply for the Court’s permission to continue such a claim, and section 239(2) directs that the Court *“shall dismiss the application”* if satisfied that neither the application nor the evidence adduced in its support *“disclose a case”* for giving permission. 3. This statutory scheme has displaced, for claims brought after its commencement, the common law derivative action grounded in the exceptions to the rule in ***Foss v Harbottle (1843) 2 Hare 461***, a rule which, as the Court of Appeal confirmed in ***Jasbir Singh Rai & 3 others v Tarlochan Singh Rai & 13 others*** [2002] KECA 42 (KLR)***,*** *“the rule in Foss v Harbottle still stands good in Kenya,”* and which at common law could be displaced only upon proof of a case of fraud on the minority, at a standard the Court of Appeal there described as higher than the ordinary civil burden. 4. The 2015 Act simplifies that threshold to a prima facie case on any of the causes of action specified in section 238(3), without the need to establish fraud, but, as will become apparent, it does not dispense with rigour; it relocates it into the composite inquiry prescribed by sections 239 and 241. 5. There is a healthy nutrition of judicial precedents that steer the approach that ought to be taken and this Court will pick out the legal diet from it whilst balancing the interests of the litigants in this matter with their deserved justice. 6. The applicable approach was authoritatively set out in ***Ghelani Metals Limited & 3 others v Elesh Ghelani Natwarlal & another*** [2017] KEHC 4629 (KLR)*,* where Onguto J held that there exists a two-stage process: the Court must first satisfy itself that a prima facie case is disclosed on the pleaded causes of action, since section 239(2) directs dismissal where the evidence adduced does not disclose a case for giving permission; the second stage then entails consideration of the statutory factors bearing on the exercise of the Court’s discretion. 7. That formulation, expressly adopted in ***Nextgen Office Suites Ltd & another v Netcom Investments Ltd & another*** [2021] KEHC 13357 (KLR), is the one this Court applies below. 8. On the issue of locus standi, the 1st Applicant is shown, by the Companies Registry extract annexed to his supporting affidavit, to be a registered director and shareholder of the 2nd Applicant, and this is not seriously contested; indeed, the 2nd Respondent’s affidavit admits the descriptive averments to that effect. He is accordingly a “member” within the meaning of section 238(1) and competent to apply for permission. 9. The threshold for a prima facie case, though modest, is not nominal. In ***Mrao Ltd v First American Bank of Kenya Ltd & 2 others*** [2003] KECA 175 (KLR)**,** the Court of Appeal explained that such a case includes, but is not confined to, *“a genuine and arguable case”*, one which, on the material presented, would lead a tribunal properly directing itself to conclude that a right has apparently been infringed, calling for an explanation from the opposite party. 10. The Court also bears in mind the observation in **Tash Goel Vedprakash v Moses Wambua Mutua and Rabbit Republic Limited** [2014] KEHC 3438 (KLR) that at this stage there is no requirement of full proof; *“what is needed is prima facie evidence.”* Judged against that standard, and mindful that this Court is not, at this stage, conducting a trial of disputed fact but having regard to both the agreed and the disputed material before it, two of the grounds advanced meet the threshold. 11. First, the allegation that the 3rd and 4th Respondents have, through Funtech Engineering and Fabrication and Output Mechanical Engineering respectively, diverted business opportunities properly belonging to the company is not a bare assertion: it is corroborated by a letter of the 2nd Respondent’s own authorship, addressed to the Registrar of Companies, confirming precisely that ownership structure. 12. A director’s duty to avoid conflicts of interest and not to exploit for personal gain opportunities or information properly belonging to the company he serves is among the most elementary incidents of the fiduciary office, and an allegation to that effect, corroborated as it is here by a document emanating from within the company’s own management, discloses an arguable case of breach of duty within section 238(3). 13. Second, the averments concerning non-remittance of PAYE and VAT, and the resolution of 21st March 2021 authorising disposal of company machinery to meet KRA enforcement demands, are specific, quantified, and supported by documentary reference. Whether the underlying conduct ultimately amounts to a breach of the duty of care and skill owed by the Respondent directors is a matter for trial, but on the material presented an explanation is called for. 14. The remaining grounds are less securely founded at this stage. The allegations of forgery touching the share allotments of 13th March 2024 and the earlier increase to 900 shares are serious, but rest substantially on the 1st Applicant’s own assertion, and the underlying board minutes, which on their face record his own attendance as a director as late as March 2024, leave room for more than one reading; this is a matter better resolved after both sides have had the opportunity to test the evidence, not conclusively determined on affidavit. 15. The complaints concerning the conduct of general meetings in December 2022 and February/March 2023 are, as the 2nd Respondent’s affidavit points out, not tied to any specific resolution said to be invalid or to particularised evidence of exclusion, and remain at the level of generality that the leave stage is designed to screen out. 16. Section 239(2) requires the Court to be satisfied that the application and the evidence, taken together, disclose a case for giving permission, a composite inquiry that section 241 elaborates. 17. Under section 241(1), permission must be refused if, among other things, the act or omission complained of *“was authorised by the company before it occurred”* or *“has been ratified by the company since it occurred”*; and under section 241(2), the Court must, in exercising its discretion, have regard to the member’s good faith, the importance a director acting under section 143 of the Act would attach to continuing the claim, the prospect of ratification, whether the company has decided not to pursue the claim, and whether the cause of action is one the member could as easily pursue in his own right. 18. Section 241(3) further requires the Court to have particular regard to the views of members with no personal interest in the matter. 19. Three difficulties, examined in turn, persuade the Court that permission cannot presently be given. 20. First, notice. It is well established, and was so held in *Nextgen (supra),* where the Court observed that a member premising a derivative claim on an alleged failure by the directors to remedy a wrong must demonstrate that he served an appropriate notice to the directors or shareholders to remedy the situation, including *“a notice of intention to lodge the application detailing the reasons.”* 21. Nothing in the 1st Applicant’s affidavits establishes such notice as regards the conduct now most centrally in issue: his removal from the Board, the general meetings of December 2022 and February/March 2023, and the share allotment of March 2024. The letters he relies upon either predate these events or were addressed to a third party, the Registrar of Companies, rather than to the Respondents themselves. This gap mirrors, almost precisely, the objection raised in the 2nd Respondent’s own affidavit, and the Court is not persuaded it has been answered. 22. Second, would be what I call the ‘ratifiability’ coupled with the views of disinterested members. The record shows a shareholding considerably wider than the parties before the Court. None of those other members’ views on the conduct complained of, whether they consider it should be ratified, or pursued, or left alone, has been placed before the Court, and there is no evidence that the 1st Applicant ever requisitioned a general meeting to put these grievances to the wider membership before resorting to litigation. 23. This is materially indistinguishable from the position in **Samuel Mburu Gitere & another v Kenneth Kimari Gitere & 5 others, HCC Civil Case No. 119 of 2016** [2021] KEHC 12594 (KLR)**,** where Majanja J declined permission in comparable circumstances, holding that the company’s other shareholders *“have a right to be given an opportunity to weigh in on the allegations”* before a derivative claim is permitted to proceed in their name. The same reasoning applies with full force here. 24. Third, the entanglement of personal and corporate grievances. A derivative claim may be brought only in respect of a cause of action vested in the company; as was underscored in **Charles Meto v Amos Kosgey & 3 Others** [2014] KEHC 8717 (KLR), permission will be refused unless the applicant demonstrates a wrong suffered by the company itself, not merely by him personally. Justice Ochieng stated that; *“Jenkins LJ elaborated on the two elements of that rule, when he made the following pronouncement in****EDWARDS VS HALLIWELL******[1950] 2 ALL E.R 1064****, at page 1066:* “First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter, for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then ‘cadit quaestio’. *That legal position was recognized by Mwera J. (as he then was), as being applicable in Kenya. This is what the learned Judge said in****ALTAF ABDULRASUL DADANI VS AMINI AKBERAZA & 3 OTHERS, MILIMANI HCCC NO. 913 OF 2002;*** “By derivative suits, the minority shareholder (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, can 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 individual shareholder (s). …It is a cardinal principle in company law that it is the company and not the individual shareholder to enforce rights and action vested in the company and to sue for the wrongs done to it, and in the absence of illegality a shareholder cannot bring proceedings…” *Therefore, there can be no doubt that where a individual shareholder holds or minority shareholders hold the view that a wrong had been done to the company, the said shareholder may bring a derivative action as an agent of the company.”* 1. The 1st Applicant’s removal from the Board, and his advocates’ demand of 16th December 2023 for Kshs 34,520,472 in personal dues, which notably includes a claim of Kshs 20,000,000 for “safeguarding the shareholders” and “contribution to the growth of the company,” an unusual and unparticularised head of claim, are, on their face, personal to him and would, if pursued, be pursued in his own right, not derivatively. 2. Section 241(2)(f) directs the Court to have regard to precisely this consideration. Their prominence within the same application as the corporate complaints invites the inference the 2nd Respondent draws, that personal interest, rather than the company’s, may be the animating concern, and the Court notes, without making any finding of dishonesty, that the 1st Applicant’s own signature appears among the requisitionists of a 2012 notice calling a meeting to sell the very company land he now says, in Ground 6 of the Notice of Motion, is “in danger of being sold to the detriment of the shareholders.” 3. These matters do not establish bad faith, but they do nothing to dispel the Respondents’ objection, and the burden of showing good faith lies with the applicant. 4. It is against this background that the principle underlying the rule of majority governance retains its force. A shareholder undertakes, in terms recognised in ***Sammel v President Brand Gold Mining Co Ltd 1969 (3) SA 629*** and adopted in Nextgen, to accept the lawful decisions of the majority even where these adversely affect his own position, a principle the 2nd Respondent’s affidavit invokes, evidently independently of counsel, in almost identical terms. 5. The derivative claim is the narrow exception to that principle, reserved for cases where wrongdoers in control of the company would otherwise escape accountability precisely because they control it. Where, as with the share allotment and meeting conduct grounds here, the impugned conduct remains capable of ratification by a wider and largely disinterested membership that has not been heard, the exception has not been made out. 6. The Court accordingly finds that, notwithstanding an arguable case on two specific limbs, the application as framed and supported does not disclose a case for the grant of permission within the meaning of section 239(2), read with section 241, of the Companies Act, 2015. 7. Permission to bring the derivative suit being declined, the conservatory orders sought in prayer 3, framed expressly as ancillary relief pending determination of an application for leave, cannot survive independently of it. 8. In any event, even applying the ordinary principles governing interlocutory relief, prayer 3 as framed, restraining the Respondents generally “from acting, dealing and or performing any duties in their capacity as directors,” including all transactions through two named bank accounts, is not confined to any specific threatened harm; it would, if granted, incapacitate the ordinary management of a trading company with employees, clients and creditors. No case is made for harm of that scope, and the balance of convenience does not favour an order that risks inflicting on the company the very collapse the application professes to avert. 9. Prayer 4, seeking an order “permanently staying the proceedings in this matter,” is incompetent on its face: no other proceedings, before this or any other court, are identified to which such an order could attach. **Disposition** 1. For the foregoing reasons, the Court makes the following orders: 1. The Notice of Motion dated 30th August 2024, and the further application dated 16th December 2024, are both hereby dismissed. 2. Given that this dispute is between shareholders of a small, closely-held company, each party shall bear its own costs of both applications. Orders accordingly. **DATED, SIGNED AND DELIVERED AT NAIROBI THIS 28th DAY OF JULY 2026.** **MURUNGA, J** *Delivered on virtual platform in the presence of:* *Ms Mutuli instructed by Muhatia Pala for the Applicant* *Wangalwa Oundo instructed for the Respondent (N/A)* *Kevin Babu - Court Assistant*