[2022] KEHC 10122 (KLR)

Gichana v Chairperson, Tombe Tea Factory Co. Limited & 3 others; Institute of Certified Public Accountants of Kenya (Interested Party) (Civil Case E001 of 2022) [2022] KEHC 10122 (KLR) (7 July 2022) (Ruling)

Neutral citation: [2022] KEHC 10122 (KLR)

Republic of Kenya

In the High Court at Nyamira

Civil Case E001 of 2022

FA Ochieng, J

July 7, 2022

Between

Caleb Gichana

Plaintiff

and

Chairperson, Tombe Tea Factory Co. Limited

1st Defendant

Company Secretary, Tombe Tea Factory Co. Limited

2nd Defendant

Factory Unit Manager, Tea Factory Co. Limited

3rd Defendant

Tombe Tea Factory Limited

4th Defendant

and

Institute of Certified Public Accountants of Kenya

Interested Party

Ruling

1. The application dated 3rd February 2022 sought a temporary injunction to restrain the four Defendants from allowing, contracting or in anyone (sic!) whatsoever from dealing with the firm of Mosoti Onyancha & Associates, or from purporting to contract if to perform any audit duties for Tombe Tea Factory Company Limited.

2. The Applicant also sought a temporary order directing the four Defendants to immediately allocate B P Ombuki & Associatesoffice space, office facilities and all books of accounts, to enable them perform the services which the farmers assigned to them, during the Annual General Meeting on 8th November 2011.

3. Thirdly, the Applicant sought an order to compel the 1st, 2nd and 3rd Defendants to comply with Section 721 (4) (a) of the Companies Act.

4. The Applicant also asked the court to order the Institute of Certified Public Accountants Of Kenya(the “Interested Party”) to take disciplinary action against the outgoing Auditor, for violating the ICPAK Act, the Code of Ethics for Professional Accountants, the Companies Act, and the Leadership and Integrity Act.

5. In particular, the Applicant wanted the Court to order ICPAK to give its recommendation to an appropriate body to institute criminal proceedings against the outgoing Auditor.

6. It was the Plaintiff’s further prayer that Tombe Tea Factory Company Limited, as well as each of its Directors, together with the Unit Manager and Company Secretary be fined for contravention of Farmers Resolution made on 8th November 2021.

7. The Plaintiff asked the Court to order that the firm of J. M. Onyancha& Associatesbe deregistered because of gross professional misconduct; non-compliance with professional standards; abuse of fundamental principles of integrity, objectivity; professional competence; and due care confidentiality and professional behaviour.

8. According to the Plaintiff, J. M. Onyancha & Associates had not been appointed as the Auditor, on 8th November 2021. The firm had, allegedly, been sneaked into office by the Chairman and all the Directors of Tombe Tea Factory Company Limited.

9. Furthermore, M/s J. M. Onyancha & Associates were alleged to have performed the task of auditing at a level which was below average.

10. As the Annual General Meeting had resolved to appoint B. P. Ombuki& Associatesas the Auditor, it was the Plaintiff’s case that the Board of Directors had no authority to substitute that firm.

11. The Plaintiff urged the Court to impose a fine of Kshs. 20,000/= on the Company, the Directors and other officers of Tombe Tea Factory, for every day when they failed to allow B. P.Ombuki&Associatesto take up their role as Auditors.

12. When canvassing the application, the Plaintiff pointed out that the firm of Ombuki & Associates had been appointed as the External Auditors for the year ending 30th June 2022.

Locus Standi 13. The Plaintiff is a Tea Farmer, and a member of the Tombe Tea Factory Company Limited. He asserted that he had brought the suit on his own behalf and also on behalf of all the farmers/members of the Company.

14. In effect the Plaintiff had instituted a derivative action. He has asserted that the Board of Directors had taken an unlawful action, by passing a Board Resolution, to keep the outgoing audit firm in office, contrary to the wishes of members of the Company.

15. He has further asserted that the actions of both the Directors and the outgoing Auditor, had caused the Company to suffer substantial financial loss.

16. If the Plaintiff were to prove his allegations, it would imply that the action he had taken, by instituting these proceedings, was in the interests of the Company.

17. However, the Plaintiff has not demonstrated to the Court that he sought and obtained the consent of the members of the Company, to institute the proceedings.

18. Pursuant to Section 239 of the Companies Act, the Plaintiff ought to have sought leave of the Court to institute a derivative suit.

19. n this case the Plaintiff did not obtain leave from the Court before he brought these proceedings. Nonetheless, the failure to obtain leave before commencing action did not necessarily render the proceedings fatally defective.

20. In the case of Amin Akberali Manji & 2 others v Altaf Abdulrasul Dadani & another [2015] eKLR, the Court of Appeal held as follows: -“……Leave of court shall be obtained before filing a derivative suit, but may also be obtained to continue with the suit once filed.………..……......‘…….after the claim form has been issued, the claimant is required to make an application – which must be supported by written evidence – for permission to continue the claim.’It is our view that at whatever stage leave is sought, the crucial requirement is for the applicant to establish a prima facie case demonstrative, that he has locus standi to institute such action, the company is entitled to the intended relief and the action falls within any of the exceptions in the rule in Foss vs Harbottle.”

21. The Plaintiff has not sought leave to continue the action. Therefore, I find that these proceedings must be stayed, for now.

22. In effect, as the institution of the suit and the continuation thereof have not been sanctioned through leave of the Court, the Plaintiff ought not to be permitted to canvass it. I therefore refrain from making a determination on the substantive issues raised.

23. However, if I were to determine the said issues, I would have held as follows: -a.The Directors have no mandate to countermand a resolution which was passed by members at the Annual General Meeting.b.An order directing the Defendants to facilitate M/s B. P. Ombuki & Associations to carry on their work, would be the actualization of the resolution through which they were appointed.c.The Court cannot, in these proceedings, order ICPAK to take disciplinary action against J. M. Onyancha & Associates, for allegedly violating the ICPAK Act or any other statute.d.The Court has not been given material that could enable it determine whether or not criminal proceedings ought to be instituted against J. M. Onyancha & Associates.In any event, such a decision should, ordinarily, be made by a body other than the Judiciary.e.The mandate to determine whether or not J. M. Onyancha should be deregistered, because the firm were guilty of gross professional misconduct, is not bestowed on the Court.

24. Finally, I note that the period when B. P. Ombuki & Associates were to carry out the tasks which the members had bestowed upon them, has basically lapsed. Therefore, I cannot compel the Company to take them on board as Auditors beyond the duration when they could have served.

25. In my humble view, if the members still have confidence in that firm, they may well choose to pass another resolution, to have it appointed.

26. The application dated 3rd February 2022 is rejected. However, the Respondents are not deserving of costs, because their actions were inconsistent with the members’ resolution. Accordingly, each party will meet his or her own costs of the application.

DATED, SIGNED AND DELIVERED AT NYAMIRATHIS 7TH DAY OF JULY 2022. FRED A. OCHIENGJUDGE