[2022] KEHC 16031 (KLR)

Grewal & another v Long (Miscellaneous Application E565 of 2021) [2022] KEHC 16031 (KLR) (Commercial and Tax) (2 December 2022) (Ruling)

Neutral citation: [2022] KEHC 16031 (KLR)

Republic of Kenya

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

Commercial and Tax

Miscellaneous Application E565 of 2021

A Mabeya, J

December 2, 2022

Between

Ravinder Singh Grewal

1st Applicant

Kas Kazi Property Services Limited

2nd Applicant

and

Linda Mein Long

Respondent

Ruling

1. Before Court is the applicants’ Motion dated 28/7/2021. The same was brought under Articles 48, 50 and 159 (2) (d) of the Constitution of Kenya 2010, sections 238, 239 and 240 of the Companies Act 2015 and sections 1A, 1B, 3, 3A, 63(e) of the Civil Procedure Act.

2. The applicants sought leave to commence a derivative suit on their own behalf as against the respondent; an order, pending the determination of the derivative suit, to bar the respondent from carrying out any transactions or entering into any contract on behalf of the 2nd applicant and/or its shareholders.

3. Further, the applicants sought to have the respondent compelled to pay for damages caused as a result of her actions and unjust interferences in the running of the 2nd applicant.

4. The grounds for the application are that the 1st applicant and the respondent are both directors and shareholders of the 2nd applicant. The 2nd applicant is a private limited company with a nominal share capital of Ksh.100,000/= divided into 1000 shares of Ksh.100 each with the 1st applicant having 500 shares, the respondent having 260 shares and Harminder Singh Grewal having 240 shares.

5. That on 9/9/2019, the 1st applicant procured a search of the status of the 2nd applicant and was shocked to discover that the records at the Companies Registry had been fraudulently changed and an unknown party known as Micah Vincent Mbevi had been added as a director. That upon investigations, it was discovered that the respondent had fraudulently facilitated the change of directorship and ownership structure.

6. The 1st applicant contended that legal redress was sought in the office of Attorney General that act was reversed. That consequently, the applicants have suffered great prejudice in accrued legal fees while seeking the rectification of the company details at the Registrar of Companies.

7. Further, that on 21/9/2019, the respondent defamed and slandered the other directors/shareholders prompting them to institute a civil suit, High Court Civil Cause No. E055 of 2021 Ravinder Singh Grewal & another v. Linda Mein Long. That the interference by the respondent on the affairs of the 2nd applicant, without involving the other directors has led to losses in income and revenues. It was further alleged that the respondent has refused to attend an AGM and/or be updated on the affairs of the 2nd applicant. That this has provoked the present application and proceedings.

8. The respondent did not respond to the application despite proof of substituted service through the affidavit of service of Malela Basil sworn on 7/3/2022.

9. The first issue for determination is whether applicants have fulfilled the established test for an application for leave to institute a derivative suit as against the respondent.

10. Under section 238(1) of the Companies Act 2015 (the Act), a derivative claim means 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.

11. Section 238(2) of the Act provides: -“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.”

12. Section 238(4) of the Act provides for the various reliefs that the court may grant on such an application. These include granting the permission to continue the claim, refusing the same or adjourning the proceeding with appropriate directions.

13. InMohamedin Mohamed & another v Ibrahim Ismail Isaak & another [2021] eKLR, the court held: -“It is clear from the Act that the Court must first satisfy itself that there is a prima facie case on any of the causes of action set out under section 238(3) of the Act. If the evidence adduced in support of the application does not disclose a case for the giving of permission, the application is for dismissal. The importance of judicial approval under the Act, is therefore to screen out frivolous claims. The court will only allow meritorious claims to be litigated as derivative suits. In this regard, an applicant needs to establish, through evidence, that he has a prima facie case without the need to show that it will succeed.”

14. Further, under paragraph 20 of the said authority, the court relied on the case of Isaiah Waweru Njumi & 2 Others –v- Muturi Ndungu [2016] eKLR to establish the broad principles that ought to be considered in applications for permission. These were set out to be: -“(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 effort 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 of 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 authorized or ratified by the company in the future; and(g)Whether the cause of action contemplated is one that the Plaintiff could bring directly as opposed to a derivative action.”

15. In the present case, the claims against the respondent are that she fraudulently facilitated the change of directorship of the 2nd applicant without a resolution of the company. That she had made defamatory statements against the directors of the company which has negatively impacted the business of the company leading to financial losses.

16. The annexure marked as “RSG-1” in the supporting affidavit is the company’s certificate of incorporation and list of shareholders and directors as of 19/8/2020. It indicates clearly that the company was incorporated on 28/9/2004 and that its shareholders/directors were the 1st applicant, the respondent and one Harminder Singh.

17. Annexure “RSG-4” is a letter dated 22/10/2019 from the Office of the Attorney General expunging the changes made to the directorship and shareholding of the company which had indicated that one Micah Vincent Mbevi had been appointed a shareholder of the company.

18. The said letter indicates that there had been some fraudulent activity involved in the changing the shareholding of company. This is what prompted the Attorney General’s office to reverse the said changes. The allegation that the respondent was involved in the said fraudulent act was not rebutted.

19. The further claim that the defamatory statements against the directors and shareholders of the company, published by the respondent, had led to loss of income on the part of the company was also not rebutted.

20. The Court finds that the plaintiff has pleaded particularized facts which possibly reveal a cause of action against the respondent who is a director and shareholder of the 2nd applicant. It would be in the interest of justice to grant leave to the applicant to institute a derivative action on behalf of the company, the 2nd applicant.

21. The next issue is whether the interim injunctive orders ought to be granted as sought. The principles applicable for granting such orders were settled in the case of Giella v Cassman Brown and co ltd 1973 E.A 360.

22. The first condition for the grant of an interim injunction is the establishment of a prima facie case. I have found that the applicants have established plausible cause of action against the respondent. Thus a prima facie case has been established.

23. Secondly, the applicants must establish that irreparable damage would be caused if the injunction is not granted. The respondent’s actions have affected the running of the company business negatively. Having granted leave for a derivative claim to commence, I find that it would be in the company’s interest to halt any further unsanctioned actions by the respondent that may affect the day to day running of the business.

24. As the court is not in doubt, there is no need to consider where the balance of convenience lies.

25. The last issue for determination is whether the respondent ought to be compelled to pay for damages caused due to her actions.

26. This is an application for leave to institute a derivative claim as stipulated under section 238(4) of the Act. That prayer is premature at this stage and is declined.

27. Accordingly, the application is merited and the Court grants prayer nos. 2, 3 and 5 but dismisses prayer no. 4.

28. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF DECEMBER, 2022. A. MABEYA, FCIArbJUDGE