[2016] KEHC 3032 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA

AT KIAMBU

HIGH COURT CIVIL CASE NO. 6 OF 2016

1. ISAIAH WAWERU NGUMI

2. EVANSON J M JOMO.................................PLAINTIFFS

3. DANIEL NG’ANG’A JOEL

VERSUS

MUTURI NDUNG’U...........................................DEFENDANT

RULING

INTRODUCTION

1. The Applicants here filed a derivative action under section 238 of the Companies Act on 25/07/2016 on behalf of the Original Sigona Enterprises Limited (OSEL). In the suit, they styled themselves as the Plaintiffs and named Mr. Muturi Ndung’u, the Chairman of the Board of Directors of OSEL as the Defendant. They also named the Board of Directors of OSEL, and James Mwando, the Company Secretary of OSEL as Interested Parties. Simultaneously with the Plaint, the Applicants filed a Notice of Motion Application (“Application”) asking for certain interlocutory reliefs pending the hearing and determination of the main suit.

2. As the Application was filed under a Certificate of Urgency, I gave initial directions that the Applicants serve the Defendant and Interested Parties before inter partes hearing. The Inter Partes hearing was eventually heard on 02/08/2016.

3. The interlocutory reliefs prayed for are far-reaching. They include the following orders:

a. That there be an order prohibiting Mr. Muturi Ndung’u (hereinafter “Respondent”) from continue to serve as the Chairman and Director of OSEL during the pendency of the suit;

b. That the 2nd Interested Party (hereinafter “Company Secretary”) be compelled to provide the Applicants with the minutes of the Annual General Meeting of OSEL held on 18/06/2016 together with the list of persons who attended the meeting;

c. That OSEL be injuncted from holding an Extra Ordinary General Meeting scheduled for 06/08/2016 or any other future date until this suit is heard and determined;

d. That the Court quashes the adoption of the 2017 budget of OSEL as adopted by the AGM of OSEL on 18/06/2016 untill the financial accounts of OSEL for the year ending 31/12/2015 are audited and adopted by a General Meeting of OSEL;

e. That the Court issues orders restraining the Board of Directors from intimidating the Applicants during the General Meetings of OSEL; and

f. That the Court orders the Board of Directors to record the proceedings of the General Meetings of OSEL using all possible means – both visually and orally.

g.

4. When the parties appeared for inter partes hearing, the bulk of the time was taken up arguing some preliminary points raised by Mr. Githinji from the firm of Nyingi Wanjiru & Co. Advocates who had come on record for the Respondent and the Interested Parties jointly. Indeed, Mr. Githinji would have preferred that the Court disposes the preliminary objections first before considering the Application. He considered the issues raised in the Preliminary Objection as capable of disposing the entire suit. While I did not disagree with the potential of the Preliminary issues to dispose the suit, in due consideration of judicial economy and the urgency of the issues involved, I directed the parties to address both the Preliminary Objection and the Application simultaneously. The present ruling covers both aspects.

PARTIES RESPECTIVE SUBMISSIONS

5. Mr. Arum appeared for the Applicants. Having been served with the Notice of Preliminary Objection and list of authorities by the Defendant/Interested Parties, he began by addressing the issue of leave in derivative actions such as this one. Mr. Githinji’s primary point was that the entire suit ought to be dismissed because it was commenced without the leave of the Court contrary to section 239 of the Companies Act. Mr. Arum countered in two arguments.

6. First, Mr. Arum argued that the wording of section 239 is clear that leave can be obtained at any time during the trial. To this extent, he orally applied for leave to continue with the proceedings. Second, Mr. Arum argued that the requirement for leave is a technical requirement which the Court should interpret in light of Article 159 of the Constitution which exhorts the Courts to endeavour to do substantive justice not adhere to technical requirements. In this case, Mr. Arum argued, the case is meritorious enough for the Court to consider and grant leave at this stage vide the informal application he made at the inter partes hearing.

7. Naturally, Mr. Githinji disagreed on both points. First, he argued that the wording and context of section 239 of the Companies Act suggested that any suit commenced without the leave of the Court was fatally defective and had no legs to stand on. Mr. Githinji argued that the reason leave is needed is so that the Court can consider if the case is frivolous or raises substantive issues.

8. Second, Mr. Githinji argued that the requirement for leave is not a technical one; but a substantive one. He urged that it would be wrong for a Court of law to label a substantive statutory requirement as “technical”. The drafters of the Companies Act were explicit enough that leave was needed.

9. Third, Mr. Githinji argued that even if leave were to be considered at this stage, it should be denied anyway because the suit raises no meritorious issues requiring the Court to entertain it. Indeed, Mr. Githinji combined this with his second Preliminary Objection which is that the suit is frivolous and is an abuse of the process of the court. To aid in his argument, Mr. Githinji informed the Court that the Applicants had, before filing the current suit, filed a Judicial Review application at the High Court in Milimani in (Judicial Review Application No. 260 of 2016) but that the Application was dismissed at the leave stage because the Judge found that it raised no prima facie case. The prayers in that Judicial Review Application are substantially the same as the prayers here. Therefore, Mr. Githinji argued, if there was no prima facie case in the Judicial Review Application, a fortiori, leave must be denied here.

10. Mr. Githinji argued that Justice Odunga had found that the Applicants had no prima facie case in part because he required them to lodge their complaints through the mechanisms provided by the Company for the resolution of intra-company disputes. However, even before attempting that solution, the Applicants filed the current suit. In his view, this was a clear abuse of the process of the Court. It was worsened, he argued, by the fact that the Applicants are, in essence trying to thwart the will of the majority in running the corporate affairs of the company: only three Applicants appear hell-bent on stopping the course of action the company has taken while the company has more than three hundred shareholders who appear happy with the management of the company. Mr. Githinji, and the Defendant and Interested Parties felt that the Applicants are trying to use the Court process to frustrate the will of the majority in running the affairs of the company.

11. With respect to the prayers for interlocutory relief especially the injunctive relief sought, the parties, predictably differed on their comprehension of the issues and context. The Applicants feel that the interim reliefs sought are necessary for them to maintain their claims and that, in particular the Extra-Ordinary General Meeting should not take place because it will amount to a waste of corporate resources. This would be because, the Applicants maintain, the auditors have not yet verified the Accounts for the Financial Year ending in December, 2015 as per the resolutions of the AGM held on 18/06/2016. It is, therefore, unfathomable that there will be enough time for the financials to be finalized and dispatched to the shareholders in sufficient time for them to be properly informed for the scheduled Extraordinary General Meeting. The Applicants see the Extraordinary General Meeting as fitting the pattern of mismanagement of corporate affairs coupled with manipulation of shareholders.

12. Mr. Arum had a final shot in favour of the Applicants. In this one, he was compelled to change colours and tactics – from those extolling the virtues of substantive justice to those exhorting the due importance of procedural due process in the administration of justice. Here, Mr. Arum wanted the Court to expunge the affidavit by the Respondent because it did not exhibit as an annexture a board resolution confirming that the Board of Directors had authorized him (the Respondent) to depone that affidavit on its behalf. Mr. Arum argued that our jurisprudence is clear that where no such board resolution is annexed to an affidavit, the affidavit is null and void. He could not remember with precision the cases that enunciated this view – but he did mention a certain decision by Lady Justice Nambuye when she sat at the High Court.

13. Respecting this last line of attack, quite predictably, Mr. Githinji adopted the substantive justice track: it would be against the ethos of the Constitution and the overriding principles of justice required by the Civil Procedure Act for the Court to take the drastic step of expunging the affidavit only for the reason that a Board Resolution was not exhibited.

ISSUES FOR DETERMINATION

14. From the outline of submissions provided above, there were five issues that emerged for determination. Re-arranged for logic in terms of sequencing the analysis, the five issues are:

a. First, was the suit, as filed, fatally defective for lack of the leave of the Court? Related, if the leave could be obtained subsequent to the filing of the case, could the same be applied for informally and orally as the Applicants’ lawyer attempted to do here?

b. Second, if leave could be obtained at this stage, should one be granted in the circumstances of this particular case? Differently put, have the Applicants established a prima facie case sufficient to be given leave to bring a derivative suit?

c. Third, if the suit survived the “leave deficit”, is it an abuse of the process of the Court given the findings and ruling of Justice Odunga in the related case of Judicial Review Application no. 260 of 2016?

d. Fourth, should the affidavit sworn by the Respondent (Mr. Muturi Ndung’u) be expunged because it was filed without exhibiting a Board Resolution authorizing him to sign the affidavit on behalf of the Board? This issue recommends itself as the third issue because its determination shapes the factual issues which can be considered in determining the fourth and fifth issues below.

e. Fifth, assuming the suit survives the three preliminary challenges above, have the Applicants established a prima facie case to entitle them to interlocutory reliefs sought?

ANALYSIS

IS THE SUIT DEFECTIVE FOR FAILURE TO OBTAIN LEAVE?

15. Section 239 of the Companies Act provides:

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.

16. Does the fact that the Applicants herein file the suit without leave of the Court render the suit fatally defective? I would think that the answer is in the negative. That answer is provided both by a plain reading of the statute as well as our jurisprudence on the matter – including, ironically, the two authorities cited to me by the Respondent and Interested Parties.

17. First, the statute uses the word “continue” not “commence” in section 239. Mr. Githinji attempted to argue that in this particular instance “continue” means “commence”. We see no reason, under any known canon or method of statutory interpretation to come to that conclusion. We believe that what the legislature wanted to ensure is that derivative actions are not brought flimsily such that they interfere with the quotidian management of companies. The legislature most certainly did not intend to create a technical dragnet to ensnare the technocratically naïve shareholders with genuine concerns. The purpose of the leave requirement is so that the Court can, prima facie, balance between invading the discretionary field of the management of a corporation and the need to hold faithless directors accountable for actions or omissions which fall outside the ambit of the protection of the business judgment rule. While derivative actions can provide effective remedies against faithless officers and directors as well as third parties who may have injured the corporation and whom the corporate managers have refused to pursue, they also run the risk of needlessly diverting the attention and energies of corporate officers and directors from their primary role of managing the business to deal with litigation. The requirement for leave strikes the balance between the two. If this is the policy objective of the rule, there is no reason to dogmatically require that the leave must be obtained at the point of commencement rather than at any point before the suit goes for hearing on its merits.

18. Second, our case law comports with this reading of the statute. Even considering that the cases were decided before the Companies Act, 2015 became effective, they were interpreting similar provisions of the previous statute. Hence, in both Altaf Abdulrasul Dadani & Another v Amin Akeberali Manji & 3 others[2004] Eklrand Kuldeep Singh Sehra & Another v Bullion Bank Ltd & 2 Others[2014] eKLR, the High Court decided that leave of the court can be granted after a derivative action has already been commenced. Indeed, both cases, which, interestingly were cited to me by the Respondent and Interested Parties, treated the time of request for leave as a technical question not a substantive one. In the former case(Altaf Abdulrasul Dadani & Another), Mwera J. (as he then was) directed that the proper procedure for a derivative action is to file suit and then seek the leave of the Court. I agree and I find it unnecessary to belabour the point.

19. The only question that I need to answer next is whether the leave needed can be sought informally or whether it must be sought through a formal application. Counsel cited no authority for the proposition that the application must be “formal”. I assume that by “formal” Counsel means a Notice of Motion praying for leave. While it is certainly salutary practice for important steps like this to be embodied in a formal motion, I see no prohibition against considering an application made informally and orally. Of course, it would be an unwise and reckless for attorneys to rely on the assumption that they can orally apply for leave in court as a rule of practice rather than make formal applications.

HAVE THE APPLICANTS SATISFIED THE STANDARD FOR GRANTING LEAVE AND IS THE SUIT OTHERWISE AN ABUSE OF THE PROCESS OF THE COURT?

20. The next question is a substantive one and follows logically from the first one. Now that the Applicants have survived a motion to strike out the suit on account of lack of leave before commencing action, we must determine whether leave should be granted. Have the Applicants met the threshold to be permitted to maintain a derivative suit?

21. Counsel for the Respondent and Interested Parties suggested that the test is the substantive one whether the Applicants have made out a prima facie case. That test intuitively makes sense given the policy objectives of the requirement for leave I posited above. In making that determination, the Court is guided by the considerations stipulated in section 241(2) of the Companies Act. 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 of Recchion 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.

22. Considering these factors, have the plaintiff established sufficient ground to qualify for leave to bring this derivative action? The Respondent and Interested Parties argue that we should adopt the finding by Justice Odunga in the Judicial Review matter in finding that the Plaintiffs have no colourable claim and that, therefore, permission should be denied. I decline to do so because the inquiry and test before Justice Odunga was different: Justice Odunga determined that there was no good reason for the case to move forward as a Judicial Review matter in the face of clearly established mechanisms under corporate law including the Companies Act for resolving the issues the Applicants had pleaded before him. In other words, Justice Odunga ruled that the forum and the form of dispute adopted by the Applicants in the case before him did not fit the fuss.

23. In bringing the present action, the Plaintiffs have demonstrated, prima facie, that they have fastidiously raised the issues they would like addressed in this derivative suit with the directors and management and that they have failed to have them resolved. On its face, the Plaint seems to raise at least four particularized claims – two against third parties and two against the directors. These are:

a. Claims of waste of corporate assets and finances through meaningless and stage-managed shareholder meetings as well as irregular disposition of corporate assets;

b. Frustration of corporate democracy through stage-managing shareholder meetings, heckling and intimidating minority shareholders;

c. Egregious corporate mismanagement – including actions or omissions leading to the suspension of permits necessary for the core business of the company due to contravention of health regulations; and

d. Failure or refusal to recover monies owed to the corporation by at least two individuals despite resolutions by shareholders that the recovery commences.

24. These are well particularized claims and if proved, could lead to findings against the Defendant and Interested Parties and benefit the corporation. That is a different way of stating that the claims could plausibly succeed if not rebutted or demonstrated to be false. In other words, they raise a prima facie case at least warranting for the case to proceed to trial. They disclose a plausible cause of action.

25. I would also hold, despite, animated arguments to the contrary by the Respondent and the Interested Parties, that the circumstances do not reveal any of the “negativing” factors which would lead to the disqualification of the Plaintiffs as either as acting in bad faith or as pursuing private claims and filing this suit merely for its nuisance value. The Respondent and Interested Party invited the Court to take judicial notice of the fact that we are dealing with 3 Plaintiffs in a Company that has more than 300 shareholders. The test, however, is not the number of complaining shareholders vis-à-vis the total number of shareholders; the test is the representativeness of the claims to other similarly situated shareholders or the corporation itself. Indeed, derivative actions are a form of remedy for minority shareholders against oppression – so the sheer fact of minority cannot be a ground for disqualifying a would-be derivative action plaintiff.

26. In the totality of circumstances, then, it is my finding that the Plaintiffs have pleaded sufficient material to permit the derivative suit to proceed. Leave is, therefore, hereby granted. For this same reason, and based on this analysis and arguments, I also hold that the suit filed herein is not an abuse of the process of the Court and is not frivolous. It raises sufficient and substantial issues to be permitted to proceed to trial.

SHOULD THE AFFIDAVIT OF MR. MUTURI NDUNG’U BE EXPUNGED?

27. Before delving into the final question, it is necessary to determine the issue raised by Mr. Arum to wit that the affidavit of Mr. Muturi Ndung’u should be expunged to the extent that it was filed on behalf of the Board of Directors. Mr. Arum vaguely argued that there are number of Kenyan cases that have held that failure to annex a board resolution authorizing a party to swear an affidavit on behalf of the board renders the affidavit null and void.

28. Mr. Arum was most likely referring to the provisions of Order 4 Rule 1(4) which provides that:

Where the Plaintiff is a corporation, the verifying affidavit shall be sworn by an officer of the company duly authorised under the seal of the company to do so.

4. Our Courts have, admittedly, differed on the implications for this rule. On the one hand, there is a legion of cases inspired by the famous Ugandan Case, Bugerere Coffee Growers Ltd v Seraduka & Anor. (1970) EA 147where the Court held, in dismissing the suit:

When companies authorise the commencement of legal proceedings, a resolution or resolutions have to be passed either at a company or Board of Directors’ meeting and recorded in the minutes, but no resolution had been passed authorising the proceedings in this case. The Court held further that where an advocate has brought legal proceedings without authority of the purported plaintiff the applicant becomes personally liable to the defendants for the costs of the action.

29. The reasoning in this case has found favour in our jurisprudence by various courts in their interpretation of Order 4, Rule 1(4) of the Civil Procedure Rules. Examples include: Kenya Commercial Bank Limited v Stage Coach Management Ltd[2014] eKLR; HCCC No. 609 of 2004 Kariuki Njoroge & Ors v Stephen Mugo Mutothori & Ors, Impak Holdings Co. Ltd. v Come-cons Africa Ltd & Anor. HCCC No. 605 of 2012and Affordable Homes Africa Ltd v Ian Henderson & 2 Ors HCCC No. 524 of 2004.

30. On the other hand, there are cases such as Leo Investments Ltd v Trident Insurance Company Ltd (2014) EklrandRepublic v Registrar General & 13 Ors (2005) eKLR. Both these cases took the moderate view that the mere failure to file the resolution of the Corporation together with the Plaint did not invalidate the suit provided that such a resolution of the Board Directors of a company is filed at any time before the suit is fixed for hearing.

31. In an appropriate case, I may be inclined more towards the latter attitude. However, I do not believe that is the issue presented here and so the allusion by Mr. Arum to this line of cases is misguided. First, these line of cases deal with cases where the company is the plaintiff initiating a suit. It makes sense to be more robust in requiring demonstration of authorization by the Board to initiate suit in such cases. The situation is surely different where the company has been sued and immediate action is needed to defend the corporate interests – sometimes on very short notice. Second, here, this is not a suit by or against the corporation per se. This is a derivative lawsuit brought on behalf of the corporation by three shareholders. In their wisdom, they have chosen to name the Board of Directors as “Interested Parties” in the suit. The Respondent then swore an affidavit – as a director and the Chair – on both is own behalf and on behalf of the other Board Members – but not necessarily on behalf of the Company – in whose name the suit is brought in the first place. It seems absurd, therefore, for the very persons who sued the “Board of Directors” – a legally unrecognisable entity for which no complaint has been raised – to raise a technical argument that the body they have purported to sue has sworn an affidavit in an imperfect form.

32. For these reasons, therefore, the application to expunge the affidavit by Mr. Muturi Ndung’u is declined. I will now consider the final issue for determination.

HAVE THE PLAINTIFFS SATISFIED THE CONDITIONS NECESSARY FOR THE GRANT OF THE PRELIMINARY RELIEFS SOUGHT?

33. It is important, at this point, to summarise where we are with the procedural posture of the suit. The suit has survived both preliminary challenges to its continuity: I have held that leave can be granted after commencement of derivative suits and that leave need not be applied for formally. I have also made a finding that the oral application for leave was, in the specific circumstances of this case, sufficient. Acting on that application, I also made a finding that there was a prima facie case made out entitling the Plaintiffs to proceed to trial on the derivative law suit. On the same reasoning, I also made a finding that this suit did not constitute an abuse of the process of the Court. On the other hand, I have also held that there are no legal grounds for expunging the affidavit filed by Mr. Muturi Ndung’u.

34. The final question, then, is whether the Plaintiffs have met the conditions for entitlement of the preliminary reliefs sought. To reiterate, the Applicants made the following prayers:

a. That there be an order prohibiting Mr. Muturi Ndung’u (hereinafter “Respondent”) from continue to serve as the Chairman and Director of OSEL during the pendency of the suit;

b. That the 2nd Interested Party (hereinafter “Company Secretary”) be compelled to provide the Applicants with the minutes of the Annual General Meeting of OSEL held on 18/06/2016 together with the list of persons who attended the meeting;

c. That OSEL be injuncted from holding an Extra Ordinary General Meeting scheduled for 06/08/2016 or any other future date until this suit is heard and determined;

d. That the Court quashes the adoption of the 2017 budget of OSEL as adopted by the AGM of OSEL on 18/06/2016 untill the financial accounts of OSEL for the year ending 31/12/2015 are audited and adopted by a General Meeting of OSEL;

e. That the Court issues orders restraining the Board of Directors from intimidating the Applicants during the General Meetings of OSEL; and

f. That the Court orders the Board of Directors to record the proceedings of the General Meetings of OSEL using all possible means – both visually and orally.

g.

35. Prayers (a) and (f) as paraphrased above are extra-ordinary requests. In my view, they are not sufficiently justified at this point. Indeed, the prayer to disqualify the Respondent from continue to act as Chairman of the company is a direct invitation to paralyze the affairs of the corporation in the guise of a derivative lawsuit. It is a permanent remedy clothed as an interim one – and one that needlessly pre-judges the outcome of the derivative lawsuit.

36. During the oral hearing, the Applicants’ lawyer spent most of his time on prayer (c). It is fair to say that this is the most prized request by the Applicants. They are persuaded that the Extra-ordinary General Meeting should not take place. As stated before, they believe that the EGM is premature because authority to nominate a new auditor was given by the shareholders during the AGM held on 18/06/2016 and that, therefore, it would have been impossible to advertise for a vacancy of the auditor, shortlist candidates, interview them and recruit a suitable candidate who would have done meaningful audit within the short period of time between the conclusion of the AGM and now. The Applicants, therefore, are apprehensive that, at best, the EGM is a monumental waste of corporate resources since no properly audited financial statements are likely to be ready for adoption anyway. At worst, the Applicants are afraid that the EGM is a ploy to manipulate the shareholders to adopt financial statements without being properly informed. They are also apprehensive that the EGM will thwart corporate democracy by facilitating the re-election of the current members of the Board through “dirty tricks” such as intimidation and heckling of those opposed to them.

37. A request to injunct a company from holding a General Meeting otherwise validly called by the Board of Directors is an extraordinary remedy. This is because the Board of Directors is given the authority to conduct the affairs of the company including convening a General Meeting. To use the familiar test of Giella v Cassman Brown, in order to succeed on the quest to restrain a validly elected Board of Directors from convening a General Meeting of the Company, a Plaintiff will have to show some plausible evidence that some illegality is afoot or the company is on the precipice of some disaster which would be inexorably unleashed if the meeting proceeded. This high standard is, in my view, not satisfied here.

38. In any event, the Plaintiffs seek to bring a derivative suit. If they are successful, they will be able to demonstrate that the Defendants wasted corporate resources – including for holding the Extra-Ordinary General Meeting – and that they should be surcharged with them. Finally, the balance of convenience hardly favours minority of shareholders who seek to stop the most democratic expression of shareholder preference: through direct meeting of the shareholders.

39. In the end, therefore, I am not persuaded that the Plaintiffs/Applicants have placed sufficient material before the Court for it to issue any of the preliminary orders sought.

DISPOSITION AND ORDERS

40. The orders and directions, then, shall be as follows:

a. Leave is granted to the Applicants/Plaintiffs to continue the derivative action as filed;

b. The Notice of Motion dated 25/07/2016 is dismissed. The costs shall be in the cause.

41. Orders accordingly

Dated and delivered at Kiambu this 5th day of August, 2016.

......................

JOEL NGUGI

JUDGE