[2021] KEHC 6077 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA

AT MERU

MISCELLANEOUS CIVIL CASE NO. 122 OF 2019

HONESTY KANYUA MANYARA AND KIOGORA MUTAI....APPLICANTS

VERSUS

GILBERT M. KITHEMBU........................................................RESPONDENT

RULING

1. The sole question in this application is whether or not the applicants have demonstrated an entitlement to an order for leave to bring derivative action on behalf of the two companies as against the respondent as a co-shareholder with the deceased whose estate the two applicant are the administrators.

2. It is contended by the applicants, and not disputed by the respondent, that prior to 11/01/2018, when the deceased died, him and the respondent were co-shareholders of the two companies (affected parties) each holding 50% shares. The dispute disclosed emerges to be that upon the death of the deceased, the respondent has excluded the deceased estate from the affairs of the two affected parties and has engaged in promoting competition against the affected parties by opening and operating a business on the same line, just one street away , from the business premises of the 1st affected party and has opened and operated secret accounts with the sole aim to spirit away the property of the affected party so that they lose out and the deceased shares are dissipated. The applicants view the respondent to be up to no good to the affected parties yet he controls them but cannot act to protect them against himself and that unless the orders sought are granted the respondent would have been given a go-ahead to collapse the affected parties to the detriment of the estate of the deceased.

3. The application then exhibited the limited grant and litem as well as grant of letter of administration intestate, the memorandum and articles of association of the affected parties to demonstrate that the deceased was a shareholder holding 50%, equal with the respondent, as well as demands for disclosure of the affairs of the affected parties among other correspondence between the parties.

4. The application was resisted by the respondent who deponed in the replying affidavit sworn on the 12/2/2020 that the applicants were guilty of the concealment of material facts regarding the pendency of Meru Hccc No. 24 of 2018, the on-going negotiations as disclosed resolutions towards an amicable settlement as disclosed by the minutes exhibited (sic) and that the application was riddled with falsehood, half-truths and concocted facts designed to hoodwink the court to grant the leave sought. The deponent then delves into the history of the 1st affected party from a humble beginning as a partnership to the time it was incorporated and highlighted its core business lines. He stressed the fact that he was at all times the face and engine of the two affected parties with full authority as managing director because the deceased was largely a dormant shareholder and director having been a full time employee of the Kenya Tea Development Authority and later as Chairman of Imenti Tea factory.

5. He then denied having secretly opened bank account nor operated parallel business by TAAI AGRO limited and asserted that that company was in operation even during the lifetime of the deceased and with his full knowledge and has never been used to the detriment of the affected parties.

6. He also denied keeping the estate of the deceased in the dark regarding the affairs of the affected parties while stressing the fact that he has made efforts to meet them, indeed met the two applicants and one Norah Mutai at slopes Hotel Meru, on 17/2/2018, when it was resolved that other members of the family be included in the meetings to make the same consensual. He added that a second meeting was convened at the home of the deceased and attended with others from outside the two families but nothing fruitful emerges as it turned out to be a shouting contest owing to wrangles within the family of the deceased yet it emerged that the family wanted him out of the company while vowing that they would chock the company to death unless we yielded to leave.

7. As a consequence of the aborted meeting, he sought advice from the Company Registry and was directed to notify the registry of the demise of the deceased and offered advice that it was possible to have a company by one director provided there be a resolution to adopt the companies Act, 2015. Upon such advice, he avers that he effected the necessary notifications and had the name of the deceased removed as a director a development that bestowed upon him the sole directorship with the shareholding of the deceased being retained by the registrar of companies pending the confirmation of the grant and that he was aware that an objection was made to the grant being made to the two applicants. He reiterated his innocence and transparency with the applicant’s family, confirmed having showed them the audited accounts of 2018 and undertook to share those of 2019 when ready. He exhibited to court the pleadings and ruling in Hcc No. 74/2018 by which the court evaluated the action by the current applicants to have been improperly commenced otherwise than by way of a derivative action.

8. There was also reference to various minutes and correspondence but no minutes were exhibited only the correspondence being exhibited. I note that the correspondence are the same once exhibited by the applicants. It is thus not possible to discern what the minutes contain save for the extracts which say the deceased had ceased being a director with effect from 1/2/2018 as a result of death. Audited accounts of 2018 as well as the pleadings in the succession cause were equally exhibited.

9. By Order of 27/2/2020 the application was directed to be canvassed by way of written submissions, pursuant to which order, the applicants filed submissions on 4/9/2020 while the respondent did so on 8/12/2020 after which both counsel highlighted the submissions orally in court on the 12/5/2021.

10. The submissions by the applicants are to the effect that the extract of minutes alleging that the deceased ceased being a director on 01/11/2018 was erroneous and untrue as the deceased only died on 11/01/2018. It was equally asserted that the pendency of HCC No. 24 of 2018 was untrue as the same was withdrawn on 19/11/2018. He urged the court to take cognizance of the fact that at the stage of leave, the merits of the intended claim cannot be delved into and that the obligation of the applicants is to merely demonstrate capacity to bring the action and show that the respondent is acting at the detriment of the affected parties. The decisions in Nairobi Hcc comm c No. 102/2017 Checani & 3 others Vs Elish GHELANI NATWARA (2017) EKLR and ARTHI highway developers’ ltd vs west end butchery ltd (2015) eklr were cited on when leave would be granted and the pertinent considerations. He urged that the application be allowed. I have however read the court of appeal decision and find no help it offers to the applicants’ case

11. For the respondent, it was submitted that there is no automatic right to the leave sought and the provisions of section 238 of the companies Act, 2015, was cited. He then added that the invocation of Civil Procedure Rules is improper as the Companies Act is exhaustive. He cited to court the decision in Dadani Vs Manji (2004) eklr for the restriction upon shareholders from suing the company and fellow shareholders.

12. He added that for the court to ascertain that the threshold has been met, it is important that a suit be filed and leave sought within that suit while pointing out that here it was not possible to carry out such evaluation because no plaint had been filed.

13. On pendency of HCC No. 24/2018 counsel reiterated that there was material non- disclosure and added that even though there had been a notice of withdrawal, it was done unilaterally without involvement of the other parties and that a notice of withdrawal is not enough without its endorsement as an order of the court. He stressed that the essence of section 238 is to encourage internal dispute resolution by the company. He said parties were still engaging in negotiations and that no illegality had been demonstrated to warrant leave being granted and that to grant leave would be for the court to micro manage the company.

14. In his rejoinder, Mr. Gichunge submitted that a reading of section 238 reveal not that there is a requirement that a plaint be filed before leave is sought and that no evidence was availed of ongoing negotiations.

15. He cited to court the provisions of section 238 and 239 of the Act and the decision in Meghji Shah Vs Jewel Holdings Ltd (2017) Ekl Dadani Vs Manyi (2004) Eklr, Edward Vs Halliwell (1950) All ER 1064 as well as Ghelani Metals Limited (supra) on when leave should be granted and the procedure thereof. He urged that the application be dismissed.

Discussion and Determination

16. I have had the advantage to read the papers filed and the oral submissions offered to highlight the written submission. All boil down to ask the court to determine whether or not a case has been established for grant of leave to bring a derivative action on behalf of the affected parties, the companies.

17. I am not in doubt that the materials availed show that since the death of the deceased, one Stephen Mutai M’Imanyara, on 11/01/2018, there has not been a meeting of shareholders and the respondent confirms that having tried to agree with the family on the way forward and failed, he sought advice and had the register corrected to show that the deceased ceased being a director upon death.

18. Even though I consider that the date shown in the register is erroneous, because by 1st January 2018, the deceased was alive, I do consider that the claim is not being maintained on the basis of directorship but rather on shareholding by the deceased. I consider the shareholding in the company as unaffected by directorship. While directorship is appointive, shareholding is proprietorship. In so far as it is proprietorship, interference therewith cannot be done otherwise by consent of the shareholder. Not even a resolution at a general meeting can divest the shareholder of its rights unless otherwise permitted by the articles and in a way that compensates the value thereof. This is basic constitutional requirement that a property right cannot be deprived in an arbitrary manner.

19. In this matter, therefore, that the deceased ceased being a director upon death did not divest his estate of the property in the company shares due to his credit. The estate remained the beneficial shareholder and in terms of Article 9(viii) of the Articles of association of the 1st affected party. That Article retains the property rights even upon death and in spirit upholds the law that the property of a deceased devolves unto his executions or administrators. In the instant case, the two applicants before me have been granted letters of administration. It matter least to me that there is an objection to confirmation of grant to the two. It however matters that the grant issued obligates the two to faithfully administer the estate according to law and to render true and just account as by law required.

20. In their administration, I do consider that the two have an obligation to not only know how the property in the shares is fairing on but also to ensure that it is preserved for the ultimate distribution of the end of administration. I understand the duty of the two administrators to demand that they participate in the governance of the company by attending the annual general meeting, even though they shall only have one vote, and to vote for any resolution to be passed. It is only by being kept abreast that they can answer to their duty as administrator hence when excluded, even if all is done in the best of good faith, they are disabled in their duty as administrators.

21. To the extent that there has not been a denial that the applicants have not been notified to attend the annual general meetings or to participate in the decision to declare dividends and there being no pronouncement on how the surplus has been dealt with since January 2018, I do agree with the applicants that they have been kept in the dark and they have a bona fide grievance to be canvased by a derivative suit.

22. In my view therefore the threshold required under section 238 and 239 of the Act have been made in that just one genuine grievance is enough to entitle an applicant to leave.

23. If I was to, however, seek a second reason, I note that the assertion that TAAI AGRO Limited was incorporated and overtly operated during the lifetime and with the full knowledge of the deceased, was made but without any supporting documents. To this court a copy of certificate of incorporation or trade license issued during the life of the deceased would have been sufficient to prove such an important fact to the application. No effort was made towards that end and I do I find this to be a second reason to justify the grant of leave.

24. However, the Act, under sections 238 and 239 gives to the court a very wide latitude in an application for leave and the overriding consideration is that all actions be done for the benefit of the company and its shareholders. It is therefore not always in the best interest of the company to encourage litigation. As submitted by Mr. Mutuma shareholding in a company must take the stature of an association of the willing. There has to be a common purpose, the need to invest in and do business through the company by all directors so that wrangles are avoided. I see that in the Articles of 1st affected party at articles 9(i) – (vii). I consider those provisions to highly regard the need of comity in the membership of the company.

25. Indeed, that document, the Memorandum and Articles of Association, remain the regulating treatise for the company until otherwise amended on its terms and in accordance with the law. To this court, the repeal of companies Act, Cap 486 by the enactment of companies Act 2015 did not render it otiose.

26. For the sake of comity as aforesaid, and the dictate of the articles at, article 31, and the dictates of article 159 (2) c of the constitution, and even though I have said that the application for leave is well merited, I will withhold the decision on leave, in terms of section 239(2)b and (3)c of the Act to give parties an opportunity to have the matter determined by arbitration pursuant to Article 31 Of the 1st Affected party’s MEMARTS.

27. I invoke Article 31 of the companies MEMARTS and direct that an arbitrator be mutually appointed by the two sides within 30 days from today and in default to be appointed by the President of the Chartered Institute of Arbitration, Kenya Chapter, within 30 days from the date the orders extracted pursuant to this ruling shall have been extracted and served upon the said president.

28. In this decision, I have made no reference to the MEMARTS of the 2nd affected party because the copy annexed and filed with the application is not signed and bears no evidence of having been registered. I am hesitant to give it any probative value.

29. Having preferred alternative dispute resolution to litigation in the first instance, and being minded that the relationship between the parties need to be natured for the best interest of the company, having withheld my determination on whether or not to grant leave, I direct that costs of the application shall abide the outcome of arbitration or if there shall not have been award, it shall abide my final determination in the matter.

30. For purposes of Case Management thus matter shall be mention in court on 29/ 9/2021 for parties to report on the progress made.

DATED SIGNED AND DELIVERED AT MERU VIRTUALLY BY MS TEAMS THIS 14TH DAY OF JUNE 2021

In presence of

ASHABA FOR MUTUMA FOR RESPONDENT

MS KAUNYANGI FOR GICHUNGE FOR APPLICANT

PATRICK J O OTIENO

JUDGE