[2023] KEHC 24992 (KLR)

Consteel Limited & another v Parmar & 2 others (Miscellaneous Civil Application 43 of 2023) [2023] KEHC 24992 (KLR) (6 November 2023) (Ruling)

Neutral citation: [2023] KEHC 24992 (KLR)

Republic of Kenya

In the High Court at Mombasa

Miscellaneous Civil Application 43 of 2023

DKN Magare, J

November 6, 2023

Between

Consteel Limited

1st Applicant

Somchand Mulji Shah

2nd Applicant

and

Purshottam Govind Parmar

1st Respondent

Bhavesh Vinaychandra Doshi

2nd Respondent

Bimal Bharmal Shah

3rd Respondent

Ruling

1. The applicant filed this Application dated February 13, 2023 on February 14, 2023 seeking the following reliefs:1. Spent2. That the Court be pleased to grant the 2nd applicant leave to prosecute a suit as derivative action on behalf of Consteel Limited the 1st applicant.3. That this Court be pleased to grant the 2nd Applicant Authority to prosecute a derivative suit for and on behalf of the 1st applicant in respect to the omissions by the respondents involving breach of duty and breach of trust as Directors of the 1st applicant.4. That this Court be pleased to make an order that the 1st and 2nd respondents issue an indemnity to the applicant for all the costs and expenses reasonably incurred in prosecuting the application and suit thereto.

2. The application was supported by the Affidavit of Somchand Mulji Shah and was based on the grounds inter alia that:a.The Application was brought pursuant to section 238, 239 and 240 of the Companies Act, 2015 to file a derivative suit before the Environment and Land Court seeking orders for the dispensation of the production of the original title deed by the respondents herein for the transfer and registration of the new purchaser.b.The 1st applicant was incorporated for the purpose of purchasing and developing all that parcel of land known as LR No MN/I/6xxx measuring 0. 1599 together with the residential Maisonnettes A,B and C thereon.c.The respondents have possession of the Title Deed for the suit property which is required for production before the sale of the property but who have adamantly refused to surrender to enable the transfer of the property and also declined to give consent to sale as required under the Sectional Properties Act.d.The respondents have breached their duty and trust by refusing to release the original title deed and declining to issue the requisite consent.e.The original director Mansuklal Bhoja Shah bestowed the Title to the 1st respondent so as to facilitate sale and transfer of Maisonnette C and the same was never surrendered to the 2nd applicant who was the custodian of the original title.f.The applicants stand to suffer losses due to restriction in disposing off the property.

3. The 2nd respondent filed a Replying Affidavit opposition the Application on the grounds inter alia thati.The Application raises no cause of action against, the 2nd Respondent and no prima facie caseii.Each of the 2nd applicant and the 1st and 3rd Respondents subleased the suit premises and were issued with separate Title Deeds for their portions.iii.Section 23 of the Sectional Properties Act does not apply to the Application.iv.The as director of the 1st applicant, he would be ready to give consent of requested because the same cannot be unreasonably withheld.v.He was not given the mother title to enable him transfer Maisonette.

4. The 2nd applicant filed a Supplementary Affidavit in which it was averred that the Directors of the 1st applicant had refused to avail the original copy of the title to the suit premises to enable compliance under section 54 (5) of the Land Registration Act, which required the original title to be submitted to the Land Registrar to enable issuance of a converted title deed.

5. Further, that the respondents had declined to issue the requisite consent to enable the transfer.

Submissions 6. The applicant filed Written Submissions dated April 28, 2023 and submitted that a derivative action may be brought in respect of a cause of action arising from proposed or actual act of negligence, breach of trust or duty by a director as provided under section 238 of the Companies Act.

7. Counsel relied on the case of Ghelanin Metals Limited and 3 others v Elish Ghelan Natwaral & another, (2017) eKLR, to argue that the 2nd -applicant was a bona fide shareholder with locus standi to sue in the manner he approached this court.

8. It was further submitted that the applicant had established a prima facie case for the derivative action as it had demonstrated breach of trust and malice on the part of the respondents. Reliance was placed on sections 138(1)(a) and 139(2) of the Companies Act.

9. On jurisdiction, Counsel submitted that the court was well clothed with jurisdiction pursuant to sections 238-41 of the Companies Act.

10. I have to be satisfied that I have jurisdiction to handle this matter before proceeding. This is informed by the decision of Nyarangi JA, as he was then in the locus classicus case of the Owners of the Motor Vessel “Lillian S” v Caltex Oil (Kenya) Ltd [1989] eKLR, in which he pronounced himself as doth: -“Jurisdiction is everything. Without it, a court has no power to make one more step. Where a court has no jurisdiction, there would be no basis for a continuation of proceedings pending other evidence. A court of law down tools in respect of the matter before it the moment it holds the opinion that it is without jurisdiction. Before I part with this aspect of the appeal, I refer to the following passage which will show that what I have already said is consistent with authority:“By jurisdiction is meant the authority which a court as to decide matters that are litigated before it or to take cognizance of matters presented in a formal way for its decision. The limits of this authority are imposed by the statute, charter, or commission under which the court is constituted, and may be extended or restricted by the like means. If no restriction or limit is imposed the jurisdiction is said to be unlimited. A limitation may be either as to the kind and nature of the actions and matters of which the particular court has cognizance, or as to the area over which the jurisdiction shall extend, or it may partake of both these characteristics. If the jurisdiction of an inferior court or tribunal (including an arbitrator) depends on the existence of a particular state of facts, the court or tribunal must inquire into the existence of the facts in order to decide whether it has jurisdiction; but, except where the court or tribunal has been given power to determine conclusively whether the facts exist. Where a court takes it upon itself to exercise a jurisdiction which it does not possess, its decision amounts to nothing. Jurisdiction must be acquired before judgement is given.

11. Section 238 of the Companies Act protects minority shareholders and this Court has jurisdiction to grant leave to the 2nd applicant to enforce its rights in the company through a derivative action.

12. On the part of the 2nd respondent, reliance was placed on the submissions dated July 3, 2023. It was submitted that the applicant had not met the threshold for grant of permission for derivative action.

13. Counsel also relied on Ghelani Case (supra) and section 238-42 to submit that the applicant had not demonstrated a prima facie case.

14. Reliance was further placed on the case of Isaiah Waweru &others v Muturi Ndungu (2016) eKLR to demonstrate that the Applicant’s case was frivolous and no effort to solve the dispute was shown before filing the Applicant.

15. The 2nd respondent also filed supplementary submissions which I have considered.

Analysis 16. The Court has considered the Application and the responses thereto as well as the Written Submissions in support and opposition of the Application.

17. I note that the applicant seeks leave to institute derivative action against the Respondents.

18. It is not in dispute that the applicant is a shareholder and the respondents are directors to the Consteel Limited, a company.

19. In the case of Wilmot Mwadilo, Edwin Mwakaya, Amos Nyatta & Patrick Mbinga v Eliud Timothy Mwamunga & Sagalla Ranchers Limited [2017] eKLR, the Court stated as follows:“For a party to succeed in an action for derivation action, he or she must demonstrate the following: -a.He or she must be a member of the company and includes a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law;b.The proceedings must be in respect of a cause of action vested in the company;c.The proceedings must be seeking relief on behalf of the company;d.The proceedings must be for protection of members against unfair prejudice brought under the Companies Act.e.The proceedings are 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;

20. It is not uncommon for the minority shareholders to seek to enforce their rights in a company through a derivative suit. The minority shareholders often have peripheral rights which can be suppressed by the majority shareholders and when there is a dispute that often leads to irretrievable breakdown of the working relationship between the majority and minority shareholders, the latter have to apply for leave to enforce their rights. In Nilkunj Ratilal Dodhia v Shashikant Mepa Shah & 5others [2018] eKLR, the court held: -“19. Part XI of the Companies Act is dedicated to provisions on derivative actions. It mainstreams the concept of a Derivative Claim into Statute. An enduring feature of a Derivative Claim is that it can only be commenced or continued with the express sanction of the court.”

21. A cursory perusal of the title deed to the suit premises reveals that the registered proprietors of the suit premises were initially one Mansuklal Bhoja Shah and Somchand Bhoja Shah. There is also a conveyance dated October 16, 1992 to Consteel Limited the Applicant Company.

22. The applicant contents that the property was subleased among the 2nd applicant, the 1st respondent and the 3rd respondent. The 2nd respondent’s case is that upon such sublease, each of the parties were issued with a lease. However, no new lease is produced in Court. What the Applicants produced was a deed plan. Similarity the 2nd respondent only produced the sublease document.

23. Registration of the transfer will out of doubt require the presentation of the original title and which it is not disputed is in the hands of the majority shareholders.

24. Under section 238 of the Companies Act it is stated as follows: -“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.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.”

25. Whereas the 2nd respondent’s case is that the Application is premature, he is willing to give consent to transfer and that the applicants have not at any time demanded for the consent and original title, the 2nd respondent’s contentious response to this Application including a prayer that the Application be dismissed which shows that there is, out of doubt, a dispute between this parties.

26. As the applicant has approached Court, the respondents would have moved to comply with the applicant’s plea instead of defending the Application and this court infers lack of bona fides on the part of the respondents. I say so because the matter involves insiders of the company and good faith and trust is required in their operation of the company.

27. The 2nd applicant has statutory recourse and which he has demonstrated. I am persuaded by the reasoning in Ghelani Metals Limited & 3others v Elesh Ghelani Natwarlal &another [2017] eKLR where Onguto J. held: -“44. Statutory procedure is now the exclusive method of pursuing derivative claims. The Act sets out what sorts of company claims may be pursued and is also explicit that derivative claims may be pursued under the Act.

28. The Applicants have thus proved a prima facie case. In Mrao Ltd v First American Bank of Kenya Ltd& 2 others [2003] eKLR, the court noted, though for injunction purposes, that a prima facie case is: -“So what is a prima facie case? I would say that in civil cases it is a case in which on the material presented to the Court a tribunal properly directing itself will conclude that there exists a right which has apparently been infringed by the opposite party as to call for an explanation or rebuttal from the latter.”

29. The case does not need necessarily to succeed. Without this court’s intervention to grant the desired leave, there is no likelihood that the respondents will assist the 2nd Applicant to yield his interest in the suit premises through registration. I therefore allow the 2nd applicant to institute a derivative suit as against the respondents.

30. Although the applicant also sought the respondents to issue indemnity for all the costs and expenses reasonably incurred in prosecuting the Application and the suit. The case shall be deemed as case for and on behalf of the company. The company shall bear the costs related to the suit unless the trial court finds, that the intended action, once filed is vexatious.

31. Therefore, I allow the Application to institute a derivative action.

Determination 32. In the circumstances, I order as follows:a.Leave be and is hereby granted to the 2nd applicant to prosecute a suit as derivative action on behalf of Consteel Limited, Limited only to the dispute over as LR No MN/I/6xxx measuring 0. 1599 together with the residential Maisonnettes A, B and C thereon.b.The expenses shall be borne by the company unless the trial court finds that the resulting suit is frivolous and vexatious.c.Each party should bear their own costs.

DELIVERED, DATED and SIGNED at MOMBASA on this 6th day of November, 2023. Ruling delivered through Microsoft Teams Online Platform.KIZITO MAGAREJUDGEIn the presence of:Miss Wasike for 2nd RespondentNo appearance for 1st RespondentNo appearance for ApplicantCourt Assistant - Brian