[2017] KEHC 4629 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA

MILIMANI LAW COURTS-NAIROBI

COMMERCIAL & TAX DIVISION

CIVIL SUIT NO. 102 OF 2017

GHELANI METALS LIMITED……….........................................1ST PLAINTIFF

GHELANI ENTERPRISES LIMITED…………...….………….2ND PLAINTIFF

TONONOKA FIREWORKS LIMITED…………………....…...3RD PLAINTIFF

JAYSHREE SUCHAK SANJIV……………….……………….4TH PLAINTIFF

VERSUS

ELESH GHELANI NATWARLAL………………..…………….DEFENDANT

AND

THE REGISTRAR OF COMPANIES…………..……..INTERESTED PARTY

RULING

Introduction

1. The suit is filed for derivative action by the 4th Plaintiff as a shareholder in the 2nd and 3rd Plaintiffs. The shareholding structures involving the Plaintiffs (and the Defendant) as borne from the pleadings and the arguments advanced during the course of hearing reveal a co-relation.

2. The 4th Plaintiff has also filed an intermediary Motion.

3. The 4th Plaintiff seeks to have the dispute referred to arbitration and in the meantime also asks for various intermediary reliefs by her Motion dated 9 March 2017.

4. The 4th Plaintiff’s grievance, in brief, is that the Defendant has obtained 900 unissued ordinary shares fraudulently, unlawfully and irregularly. The shares were obtained through an allotment. According to the 4th Plaintiff, 2nd Plaintiff was also unaware of the allotment. The Plaintiff asks that the allotment of the 900 ordinary shares in the 1st Plaintiff to the Defendant be voided. The Plaintiff (perhaps, in the alternative) also asks that the instant dispute be referred to arbitration pursuant to the provisions of clause 32 of the Articles of Association of the 1st Plaintiff.

5. In the meantime, she seeks an interim measure of protection. It is her position that the Defendant will put to waste the assets of the Plaintiff companies unless the court intervenes and issues interlocutory measures of protection.

Background

6. It is perhaps necessary to lay a brief background in context and for a better understanding of the ruling.

7. The 1st Plaintiff (“GML”), the 2nd Plaintiff (“GEL”) and the 3rd Plaintiff (“TFL”) are private corporate entities registered in accordance with the laws of Kenya. GML was incorporated on 6 March 2003 while GEL and TFL were registered on 10 February 2003 and 20 July 2000 respectively. The Memorandum and Articles of Association of the three companies reveal that they were all general merchant companies with almost identical objects.

8. Both the 4th Plaintiff and the Defendant claim to have promoted the three companies. Their interests at one point in time ran across the companies. GML also owns real property. There is no controversy that both Land Reference No. 209/8536/5 (erroneously referred to in the Plaint as 209/8530/5) and Land Reference No. 209/7794 are registered in favour of GML.

9. The shareholding structures in the three companies seem to have changed over time. The controversy centres on GML when it is stated that the Defendant recently acquired 900 ordinary shares. It is the acquisition of the 900 shares which generated the dispute herein, according to the 4th Plaintiff.

The 4th Plaintiff’s case

10. The claim may be retrieved from Plaint and the affidavits filed in support of the Motion, the subject of this ruling.

11. The 4th Plaintiff claims to litigate on behalf of GML, GEL and TFL.

12. to the 4th Plaintiff she got alarmed when in early October 2016, the Defendant through counsel formally offered the 4th Plaintiff legal ownership of Land Reference No. 209/8536/5 in consideration of the 4th Plaintiff’s shares in GEL and TFL. The Defendant also sought the 4th Plaintiff’s resignation as a member of the board of directors of GEL and TFL as well as the transfer of the 4th Plaintiff’s shares in the TFL. The shares were to be transferred to GML. Effectively, the result of the transactions was to see the Defendant control GML, GEL and TFL. The 4th Plaintiff contends that the offer was laced with an emotive threat to evict the 4th Plaintiff from her residence. The 4th Plaintiff occupies House No 11 on LR No 209/8536/5 which is owned by GML.

13. The 4th Plaintiff further contended that the Defendant had convened an extraordinary meeting of GML on 10 July 2016 attended by the Defendant only and purportedly ratified the allotment of the shares to himself. The 4th Plaintiff also complained that the Defendant replaced the appointed company secretary, all with a view to controlling GML. The result according to the 4th Plaintiff is that the Defendant now controls GML and such control was unlawfully, fraudulently and irregularly obtained, hence the need to undo the process.

14. In the 4th Plaintiff’s view, as the Defendant controls GML, GEL and TFL, it is not possible for any of the companies to initiate any action against the Defendant as the Defendant was unlikely to approve of any action by the companies which seeks to undo the shares allotment.

The Defendant’s case

15. The Defendant’s case may be reprised from the prolix affidavit of the Defendant filed on 3 April 2017.

16. Whilst asserting that he is the chairperson of GML, GEL and TFL, the Defendant contends that he conceptualized and promoted the three companies. The Defendant’s case is further that he is a shareholder of all the three companies whilst the 4th Plaintiff is not.

17. With regard to GML the Defendant asserts that he holds 909 shares and that the contentions allotment of 900 ordinary shares was made in 2012 but formal ratification took place in 2016 after the Defendant discovered that the previous company secretary had never formalized the process at the companies registry. According to the Defendant, the members of GML are only the GEL and the Defendant, with the latter holding the controlling majority.

18. With regard to GEL, the Defendant states that both the 4th Plaintiff and the Defendant hold 50 shares each, but GEL is a dormant company. Additionally, the Defendant states that the 4th Plaintiff has never paid for her shares in GEL.

19. As far as TFL is concerned, the Defendant states that the 4th Plaintiff holds 5000 shares yet to be paid for as well while the Defendant controls the majority shareholding with 45000 ordinary shares.

20. For her shares in both GEL and TFL, the 4th Plaintiff has never been issued with a share certificate and it is contended that she cannot exercise any voting rights by virtue of the relevant provisions of the Memorandum and Articles of Association. In consequence, the Defendant contended that he has solely built and singularly seen to the success of GML, GEL and TFL with the 4th Plaintiff merely ‘watching’. The Defendant however stated that the 4th Plaintiff is remunerated monthly and is indeed housed in the GML’s property known as House No 11 on LR. No. 209/8536/5.

21. Further, it is the Defendant’s contention that there was no irregularity or illegality or fraud in the allotment of 900 shares to the Defendant in GML. Whilst stating that he has held the said shares since 2012, the Defendant’s stand is that the 4th Plaintiff has always been aware of this share structure and that in 2012 as well as 2013 there were even negotiations to transfer half of these shares to the 4th Plaintiff.

22. Further, the Defendant faulted the 4th Plaintiff for not disclosing the 2012/2013 negotiations. The Defendant also accused the 4th Plaintiff of not disclosing that in December 2013 the 4th Plaintiff had voluntarily resigned from the directorships of GML and TFL. The Defendant availed an email trail of such resignation, which resignation had been conditionally accepted. The Defendant also accused the 4th Plaintiff of not disclosing a fact the Defendant deemed material: that the 4th Plaintiff had incorporated a company- Jay Pyrotechnics Ltd- which was GML’s and TFL’s business competitor.

23. It was thus the Defendant’s contention that the 4th Plaintiff did not have any interest in the success of GML, GEL and TFL and thus a derivative action could not stand.

24. For completeness, the Defendant contended that the application for leave to proceed with the derivative action was not merited as the 4th Plaintiff was not a member of the GML and that there was no relief sought on behalf of GEL and TFL. The 4th Plaintiff it was also contended had resigned as director and member of TFL.

25. Finally, the Defendant contended that the reliefs sought are not for the benefit of any of the three companies but are rather for the personal benefit of the 4th Plaintiff.

26. On the prayers for interim measures of protection, the Defendant contended that there is no enforceable arbitration agreement binding on all the parties. Secondly, the Defendant averred that the 4th Plaintiff has not shown that the subject matter may dissipate prior to the arbitration, if any, being concluded.

Discussion and Determination

27. Only two issues turn for determination in the matter. Is the 4th Plaintiff entitled to permission to continue the derivative action and, if so, on what terms? Secondly, is the 4th Plaintiff (on behalf of the other Plaintiffs) entitled to an interim measure of protection pending reference of the dispute between the parties to arbitration for disposal?

28. I must allude briefly to the submissions of the parties before proceeding with any analysis.

29. Mr. Victor Mailu, who appeared for the Plaintiffs, urged the court to allow the derivative suit and in the meantime grant the interim measure of protection as the Defendant who now controlled GML was likely to dispose of the properties to the detriment of GML and all other shareholders ( read the 4th Plaintiff). Counsel stressed that the parties were bound by the Memorandum and Articles of Association and the dispute which concerned the transfer of shares ought to be resolved through arbitration.

30. Counsel insisted that the 4th Plaintiff was acting in good faith and that all the evidence of previous negotiations ought not be an influencing factor as the 4th Plaintiff was a member of both the GEL and TFL who in turn held shares in GML.

31. Ms. Desma Nungo attorned for the Defendant.

32. Ms Nungo was very emphatic that the claim did not merit a derivative suit status. Placing reliance on the cases of Nurcombe vNurcombe [1984] All E R 65and Isaiah Waweru Ngumi & 2 Others vMuturi Ndungu [2016]eKLR, counsel submitted that the 4th Plaintiff was not acting in good faith and in the interest of GML, GEL and TFL. Further, Ms. Nungo submitted that the 4th Plaintiff’s lack of candour and disinterest in the success and affairs of GML and TFL were quite telling.

33. On whether the matter could be referred to arbitration, Ms Nungo contended that the dispute was between members and there was no provision in such a case for reference to arbitration. According to counsel, the relevant article in the Article of association of GML limited arbitrable disputes to those involving the company and members.

34. Counsel then stressed that the interim measures of protection sought were to do with the real property and bank accounts owned by the three companies, which were not the subject matter of the dispute. The subject matter of the dispute was the 900 shares in GML allegedly allotted to the Defendant in an irregular manner.

35. Ms Nungo urged the court not to allow a non deriving suit as a derivative claim.

Derivative actions: something old, something new and something borrowed

36. It may be apposite to spare a few paragraphs on derivative actions in view of the fact that the flight path for such actions was diverted with the advent of the Companies Act, No 17 of 2015 ( “ the Act”).

37. 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. Ordinarily under common law , one had to fall under the exceptions to the rule in Foss –v- Harbottle [1843] 2 Hare 461that “a company is a separate legal personality and the company alone is the proper Plaintiff to sue on a wrong suffered by it” :see also Hawes v Oakland 104 U.S 450 [1881]. The exceptions to the rule in Foss v Harbottlewere mainly where there was fraud on a minority caused by majority shareholder(s). The action to be commenced had also to be in the best interest of the company and without any ulterior motive: see Nurcombe v Nurcombe [1985] 1 All ER 65.

39. The rule in Foss v Harbottlealong with its exceptions held sway locally as well: see Rai & Others v Rai & Others [2002] 2 EA 537. A party seeking to ‘by-pass’ the company had, in limine, to show that he fell within the exceptions to the rule: see Murii v Murii & Another [1999] 1 EA 212.

40. With the advent of the Act, the law fundamentally changed. The requirement to fall under the exceptions to the rule in Foss v Harbottlewas 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.

41. Part XI of the Act (ss. 238-241) deserves close reading. The Act stipulates as follows :

238.

Interpretation: Part XI

(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.

42.

240.

Application to Court for permission to continue claim as a derivative claim: how disposed of

(1) If—

(a) a company has brought a claim; and

(b) the cause of action on which the claim is based could be pursued as a derivative clain under this Part, a member of the company may apply to the Court for permission to continue the claim as a derivative claim on the ground specified in subsection(2).

(2) The ground is that—

(a) the manner in which the company commenced or continued the claim amounts to an abuse of the process of the Court;

(b) the company has failed to prosecute the claim diligently; and

(c) it is appropriate for the member to continue the claim as a derivative claim.

(3)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 that it considers appropriate.

(4) If the application is not dismissed under subsection (3), 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.

(5)On hearing the application, the Court may—

(a) give permission to continue the claim as a derivative claim on such terms as it considers appropriate;

(b) refuse permission and dismiss the application; or

(c) adjourn the proceedings on the application and give such directions as it considers appropriate.

241.

Application for permission to continue claim as a derivative action

(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.

43.

242.

Application for permission to continue derivative claim brought by another member

(1) If a derivative claim—

(a) has been brought by a member of a company;

(a) Was brought by a company and is continued by a member of the company as a derivative claim; or

(c) has been continued by a member of the company as a derivative claim, another member of the company may apply to the Court for permission to continue a derivative claim to which this section applies on the ground specified in subsection (2).

(2), The ground is that—

(a) the manner in which the proceedings have been commenced or continued by the claimant amounts to an abuse of the process of the Court;

(b) the claimant has failed to prosecute the claim diligently; and

(c) it is appropriate for the applicant to continue the claim as a derivative claim.

(3)If it appears to the Court that the application and the evidence provided by the applicant in support of it does not disclose a case for giving permission or leave, the Court—

(a) shall dismiss the application; and

(b) may make any consequential order that it considers approptiate

(4) If the application is not dismissed under subsection (3), 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.

(5)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 application; and

(c) adjourn the proceedings on the application and give such directions as it considers appropriate.

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 only be pursued under the Act. The question must only be the factors the court ought to consider before approving a derivative claim.

45. There appears, in my view, to exist a two stage process. The court must first satisfy itself that there is a prima facie case on any of the causes of action noted under s.238(3). S.239(2) of the Act provides that the application for permission will be dismissed if the evidence adduced in support “do not disclose a case” for giving of permission. The essence of judicial approval under the Act is to screen out frivolous claims. The court is only to allow meritorious claims. All that the applicant needs to establish, through evidence, is a prima facie case without the need to show that it will succeed.

46. The second stage entails a consideration of statutory provisions and factors which ordinarily guide judicial discretion albeit in the realm of derivative action.

47. I must point out that the exercise of discretion in the circumstances would be more than adjudication, in view of the rather clear provisions of Part XI of the Act. I also observe that it is not feasible for the legislature to draw an exhaustive list of factors to be considered in the exercise of judicial discretion. In these respects, there must be something new through statute, something old through factors which guided common law exceptions to the rule in Foss v Harbottleand something borrowed from various decisions in the United Kingdom which have interpreted and applied the Companies Act 2006 (UK) especially ss. 260-264 which are pari materia ss. 238-242 of the Act, 2015.

48. The statutory provisions to be met include the requirement under s. 238(3) of the Companies Act that the derivative action be commenced only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty, breach of trust by a director of the company. It is also necessary to establish that the claimant is a member of the company.

49. The court then has the onus of determining whether the permission ought to be granted and on what terms.

50. The court in Isaiah Waweru Njumi & 2 Others –v- Muturi Ndungu [2016]eKLR, captured some of the factors to be considered 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 ofRecchion v Kirby637 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.

51. I would agree with the factors indexed in Isaiah Waweru Njumi & 2 Others v Muturi Ndungu (supra) . They reflect factors outlined under s. 241(2) of the Act. They also capture the exceptions to the rule in Foss vHarbottle as well as other relevant comparative principles.

52. Perhaps, I may add three factors.

53. Firstly, the court should always also consider the seriousness of the alleged wrong-doing by conducting a cost-benefit analysis of the intended action. The court ought to satisfy itself that the litigation will not disrupt the company business and additionally that the cost of the intended litigation is not burden-some to the company. Likewise the court ought to reflect on the reputational damage, if any, the company is likely to suffer in the event the claim fails.

54. Secondly, I would hasten to add that of critical import is also the factor that the derivative suit ought to be allowed if it is in best interest of the company. This factor should be of the highest concern especially when ss. 143 & 144 of the Act are read into context. Both sections advocate the duty of the director to act in a way as to promote the success of the company for the benefit of its members.

55. Finally, the existence of alternative remedies and the view of independent members of the company where the court has invited such evidence pursuant to s.239 (4) & (5) of the Act ought to also be considered before granting or disallowing an application for permission to continue a derivative suit: see also s. 241(3) of the Act.

56. In sum, the broadened statutory procedure for bringing a derivative action now appears exclusive. The causes of action listed under s. 238(3) must be deemed the only ones. A director, including a former director, as well as a third party may be sued by a member, who may himself not have been a member when the cause of action accrued. The factors to be considered are infinite. There will however be compulsory refusal of permission where the suit is not in the interest of or of benefit to the company. Permission will also be denied where the proposed act has been authorized by the company or the impugned act has been ratified by the company. The court, in my view, must however not be reluctant to intervene in the company’s decision making process as wrong doing on the part of directors must be checked if only to promote corporate governance.

The Illegally allotted shares in GML

57. In Casu, the 4th Plaintiff’s complaint focuses on some 900 shares in GML allotted to the Defendant. The 4th Plaintiff would wish to have the issue of allotment addressed in the derivative claim. The Plaintiffs, it is stated would wish to have the allegedly irregular, fraudulent and unlawful allotment of shares interrogated and investigated. The 4th Plaintiff has leveled accusations against the Defendant who is a director of the GML and also shareholder.

58. I have no doubt that until disposed of through an authorized allotment, shares form part of the assets of a company. There is no doubt that directors of private companies not only control the process of share transfers but also have the power to deal with and allot unissued shares.

59. The allotment must however not be whimsical but pursuant to legal provisions and also the Memorandum and Articles of Association (“MemArt”) of the company. Where an allotment of shares is undertaken contrary to the provisions of the law or the MemArt of the company, the directors would actually be in breach of duty.

60. I take the view that the 4th Plaintiff has established a prima facie case when she questions how the unissued shares in GML were allotted to the Defendant. I must however at this stage not hold a mini-trial to ascertain which of the two parties should be vindicated as has been urged by the Defendant when he contends that the allotment was above board and the 4th Plaintiff was always aware.

61. S.241(1)(i) of the Act, calls for compulsory refusal of permission to continue a derivative claim where act or omission complained of has been ratified by the company. Ms. Nungo, for the Defendant, submitted that in the instant case the alleged irregular allotment took place in 2012 and further that the allotment had been ratified by the company on 4 July 2016. Accordingly, it was contended that the allotment could not be the subject of a challenge by a member or by the company.

62. Two questions arise though. Could GML ratify the act of allotment? If so, was it regularly and properly ratified?

63. As to the first question, the answer must be in the positive. Shareholders of a company at a general meeting may ratify acts or omissions by directors including an unauthorized allotment of shares. The meeting ratifying the act or omission must however be a properly convened meeting attended by the shareholders.

64. On the affidavit evidence before me, I am not satisfied that there was a properly convened meeting on 4 July 2016 which ratified the allotment of 900 shares in GML to the Defendant. The Defendant has not availed the notice which convened the special meeting with a clear agenda in tow. The attendees were also brought to question and this was not contested by the Defendant. I am not satisfied in the circumstances, that the acts complained of were properly ratified to bring them within the ambit of Section 241(1)(c) of the Act.

65. The Defendant also contested the 4th Plaintiff’s standing on the basis that the 4th Plaintiff is not a member of GML and further that the Plaintiff is not a fully paid up member of GEL and TFL to allow him to bring the derivative claim.

66. The Defendant appears in my view to impose an unnecessarily strict interpretation to the requirement that the claimant in a derivative claim must be a member. My view is that a person effectively need not be a registered member of the company to bring a derivative action. His name need not be reflected in the register. He need not be holding a share certificate for that matter. It is sufficient if it is shown that he is beneficially entitled to any shares. This view comports well with s.238(6)(b) of the Act which is relatively clear that for purposes of derivative claims, a ‘member’ includes a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of the law.

67. 4th Plaintiff is a member of the 2nd and 3rd Plaintiffs. She would most definitely be entitled to bring a derivative action qua member. Her interest in the 1st Plaintiff should also not be in doubt but she is not a member of GML.

68. The Defendant did also raise two important issues. It was contended that the 4th Plaintiff is not interested in promoting the success of the company and additionally that the claim has not been brought in good faith.

69. While I have not been able to identify evidence of mala fides on the part of the 4th Plaintiff there is a pointer that the action herein may not have been engineered for the success of GML but rather for the personal success of the 4th Plaintiff. The shares have been allotted, a reversal may, in the circumstances of this case, not benefit GML. Instead it would simply entail involving the GML in litigation. The 4th Plaintiff, in my view, appears to be a distant disgruntled beneficial shareholder who is not happy with the way GML, GEL and TFL are being managed.

70. I would also state that the derivative action does not appear to be in the best interest of GML. The cost of litigation and the prospect of success appear to override the simple right to commence and continue the derivative suit. Even if the suit is ultimately successful there is a practical likelihood that the same scenario will be repeated with the Defendant again causing albeit lawfully and regularly the allotment of the shares in question.

71. It brings me to the question of the existence of alternative remedies.

72. It is clearly the 4th Plaintiff’s intention to secure her personal interest in GML which obtains through GEL. There can evidently be laid a genuine complaint in the manner the Defendant has conducted the business of the three companies GML, GEL and TFL. Meetings have been held without clear notifications and pertinent decisions made.

73. The 4th Plaintiff is certainly within her rights to complain that the Defendant is acting oppressively. It may be stated that the Defendant’s acts are unfairly prejudicial to the members of GML,GEL and TFL, including the 4th Plaintiff who legitimately expects to be treated better. She would be entitled to seek relief and also intervene on behalf of GEL where she is a shareholder and which in turn is a member of GML. The 4th Plaintiff has a remedy under statute, in my view, in the circumstances of this case. Such remedy would also be personal to her.

74. It may be appropriate if the 4th Plaintiff lodged an application under Section 780 of the Act, if the 4th Plaintiff is of the view that there has been oppressive as well as unfairly prejudicial conduct on the part of the Defendant. This would constitute an alternate efficacious remedy in the circumstances of this case. It would give the court the leeway to direct and fashion appropriate reliefs: see Thomas vDawson [2015]EWCA 706. The remedies may include allowing the 4th Plaintiff to sue on behalf of GEL and TFL as well as an order for re-valuation of shares allotted to the Defendant.

Conclusion and disposal

75. I come to the conclusion that the application for derivative suit is not merited. The orders sought by the Plaintiffs relate more to the way the three companies are ran and managed. The suit should be discontinued.

76. I would consequently deem it unnecessary to venture into the questions as to whether the dispute ought to be referred to arbitration suffice to point out that, in the circumstances of this case, I would not have been prepared to hold that a derivative action may be taken by way of initiating an arbitration. I need not also answer the question whether the 4th Plaintiff is entitled to any interim reliefs or measures of protection.

77. I decline to grant the 4th Plaintiff the permission to continue the derivative claim with the consequence that the application dated 9 March 2017 fails with costs to the Defendant. I also consequently strike out the suit with costs to the Defendant to be paid by the 4th Plaintiff.

Dated, signed and delivered at Nairobi this 9th day of June, 2017.

J.L.ONGUTO

JUDGE

Advocates

Victor Mailu instructed by Anjarwalla & Khanna Advocates for the Plaintiffs

Desma Nungo instructed by NOW Advocates LLP for the Defendant