[2025] KEHC 6418 (KLR)

Kagau & another v Nyaga & another; Kangerwe Holding Company Limited (Interested Party) (Commercial Case E003 of 2024) [2025] KEHC 6418 (KLR) (21 May 2025) (Ruling)

Neutral citation: [2025] KEHC 6418 (KLR)

Republic of Kenya

In the High Court at Embu

Commercial Case E003 of 2024

RM Mwongo, J

May 21, 2025

Between

Johny Nyaga Kagau

1st Plaintiff

Joseph Njagi Kagau

2nd Plaintiff

and

Moffat Kagau Nyaga

1st Defendant

Dickson Kagau Njeru

2nd Defendant

and

Kangerwe Holding Company Limited

Interested Party

Ruling

1. The applicant has filed notice of motion dated 30th October 2024 seeking the following orders:1. Spent;2. That the 1st and 2nd plaintiff/applicants, being members of the interested party herein, be granted permission to commence and continue this derivative claim;3. That pending hearing and determination of the application a temporary injunction do issue restraining the respondents, their servants, agents and/or employees from letting, selling, collecting any rent, transferring, charging disposing, removing or in any manner whatsoever, dealing with the assets of the company/interested party;4. That the Honourable court be pleased to order the respondents herein to sign the extract of the minutes of a meeting of the board of directors of the interested party convened, constituted and held at the registered office of the company on 22nd June 2024 for purposes of increase of the nominal capital, namely;a.Extract of minutes;b.Form CR19, special resolution; andc.Notice of increase of nominal capital.5. That the Honourable court be pleased to order the respondents herein to sign the following for purposes of allocation of shares:a.Form CR8 Notice of residential address;b.Form CR19 Notice of special resolution;c.Form 6 Notice of appointment of directors;d.Form CR 29 Annual Returns;e.Extract of Minutes; andf.Form CR20 allotment of shares.6. That the Honourable court be pleased to order the respondents herein to execute the allotment of shares in favour of:a.Catherine Muthoni Kagau;b.Roseline Wambeti Ngure;c.Rose Betty Gichugu;d.Pamella Njoki Kagau; ande.Florence Marigu Kagau.7. The costs of this application be provided for.

2. The application is premised on the grounds set out on its face and in the applicant’s supporting affidavit. The applicants stated that the interested party (the company) was incorporated for the purpose of management of the estate of Eustace Kagau Kangerwe (deceased). That it was resolved that every member of the family be added as a shareholder in the company, including all the daughters of the deceased. At the same time, it was resolved that the company’s shareholding be increased so that the new shareholders of the company are allotted shares.

3. Despite this resolution, it is averred, the respondents have refused to execute the necessary documents to increase the company’s share capital and add the named daughters of the deceased as shareholders of the company. The applicants accuse the respondents of neglecting their fiduciary duty to the rest of the family to preserve the estate on their behalf.

Background 4. According to the grant attached to the Supporting Affidavit, the deceased died in 2005 and a grant of letters of administration was issued to the 1st applicant and the 1st respondent. In 2006, the interested party was incorporated. From the minutes of the meeting held on 22nd June, 2024 the members present are clearly family members, and include most of those who subscribed to the Memorandum and Articles of the Interested Party exhibited to the application.

5. The company has a total of 800 shares which are allotted equally amongst the existing directors and director/shareholders. At what the respondents call a family meeting, it was purportedly resolved to increase the shareholding and add the 5 beneficiaries who were not in the company.

6. At the same time, the meeting purportedly intended to restructure the company by appointing new directors who would also be signatories to the company’s accounts. This process has not been successful because the respondents have refused to sign the required documents. This application was filed alongside a plaint of even date. Through the plaint, the plaintiff/applicants seek judgment against the respondents in the manner detailed therein.

Replying Affidavit 7. In his replying affidavit, the 1st respondent deposed that the application lacks merit since the orders sought are incapable of being granted, and if they are granted, they cannot be executed. That the application fails to disclose the assets of the company which he should be restrained from dealing with. He denied there having been any meeting on 22nd June 2024, that resulted in a company resolution. He stated that the meeting held on the said date was not one of the board of directors of the company but it included some other people who were not directors. Besides, that no notice for a board meeting was issued to the members in accordance with the Companies Act.

8. The agenda at the said meeting was not notified to the directors and that the issues discussed had nothing to do with the company. The said meeting was held at the home of the deceased and not at the company’s offices. He deposed that the meeting was for the beneficiaries of the estate of the deceased and not the interested parties, these being 2 distinct entities. He stated that the contents of the said minutes are not true. He urged the court to dismiss the application in its entirety.

Supplementary Affidavit 9. Through their supplementary affidavit, the applicants have deposed that they have sufficiently demonstrated that they deserve leave to procced with the derivative claim. They reiterated that the interested party was incorporated for purposes of management of the estate of the deceased and a bank account was opened in its name for the same purpose. In the affidavit, they listed 7 properties which are still in the name of the deceased and which are now being managed by the interested party. Part of this management is collection of rent and the respondents are not being truthful when they say that the property does not bring any rental income.

10. They stated that the issue of rent collection was discussed at the meeting dated on 22nd June 2024 which was attended by all the beneficiaries of the estate. That it was pointed out that the directors of the company are mismanaging the assets and finances of the company, to the disadvantage of the rest of the beneficiaries. These circumstances necessitated passing of the resolution to increase the company’s share capital and to add the 5 named beneficiaries as shareholders, which resolution the respondents refused to sign. They also refused to sign the necessary company forms to enable the changes, despite being approached even by the advocate.

11. The Applicants deposed that the company’s registered office is at the home of the deceased and that is where the meeting was held since it is a family-owned company. According to Clause 11 of the Articles of Association, quorum for such a meeting is 3 members and these 3 members were present and they signed the minutes, thereby affirming the correctness of the agenda at the meeting. They stated that the beneficiaries who were yet to the appointed as shareholders also attended the meeting, rightly so, and, in any event, they are beneficiaries of the estate of the deceased.

12. It was their case that the respondents are refusing to act in the best interest of the company or the estate of the deceased, yet the company was incorporated for the sole purpose of managing the said estate. Given the behavior of the respondents, the orders prayed are necessary so as to stop them from mismanaging the company’s assets and finances. The orders will also enable the applicants, as shareholders to proceed with the derivative claim.

Parties’ Submissions 13. The application was disposed of by way of written submissions.

14. The applicants submitted that following the death of the deceased 13 beneficiaries were named to his estate. Out of these beneficiaries, only 8 of them formed part of the interested party, the company incorporated to manage the estate. Issues arose as to the management of the company; thus, a meeting was called on 22nd June 2024 which was attended by all the 13 beneficiaries.

15. The respondents refused to sign the resolution to increase the shareholding and add the other beneficiaries to the company as shareholders. The applicants relied on the cases of Patel (Suing as the legal administrator of the Estate of the Narshibhail Patel Fulabhai - Shareholder) v Patel & another; Kenya Flexogravure Limited (Affected Party) [2022] KEHC 15080 (KLR) and Isaiah Waweru Ngumi & 2 others v Muturi Ndung’u [2016] KEHC 3032 (KLR) in support of their prayer for leave to proceed with the derivative claim according to section 238 of the Companies Act.

16. The respondents relied on the case of Ghelani Metals Limited & 3 others v Elesh Ghelani Natwarlal & another [2017] KEHC 4629 (KLR) and argued that the prerequisites for filing a derivative claim have not been met. That a prima facie case has not been established and they relied on the case of Mrao Ltd v First American Bank of Kenya Ltd & 2 others [2003] KECA 175 (KLR). They also relied on section 238(3) of the Companies Act. They argued that whatever meeting was held was not about the interested party’s business but it was a family meeting. That the directors of the company were not notified of a meeting and no resolution was passed. They urged the court to dismiss the application.

Issue for Determination 17. From the foregoing, the issue for determination is whether the court is competent to entertain the application.

Analysis and Determination 18. The 1st applicant is a shareholder while the 2nd applicant, 1st respondent and 2nd respondent are all directors/shareholders in the Company. The application and the substantive suit herein have raised differences between the competing parties as members of the company. It appears, from the pleadings, that the applicants are representing their interests and those of 5 others who are asserted to be beneficiaries of the estate of Eustace Kagau Kangwere (deceased). In fact, all the applicants and the respondents are purportedly beneficiaries of that same estate, which, allegedly, was to be administered through the interested party, Company.

19. The grant that was attached for the Estate of Eustace Kagau Kangwere is found in Nairobi HC Succession Cause No. 65 of 2008. Neither the proceedings or confirmed grant therein were exhibited in the application. Thus, in these proceedings, the purpose for the formation of the Company, even though it bears the deceased’s name, is not clear to this Court. The suit herein has been instituted as a commercial one, hence, the court can only consider it as such. It means that the court must consider the issues herein strictly from the standpoint of the Companies Act. In that case, the applicants have annexed to their application, a copy of the Company’s Memorandum and Articles of Association and a CR12 dated 14th November 2024.

20. Section 92 of the Companies Act provides for company members. There is no doubt that all the parties herein are members of the interested party. Members of a company subscribe to its Memorandum and Articles of Association. The Articles of Association of a company dictate how its members interact with each other and the Company in its day-to-day operations.

21. Article 31 of the interested party Company’s Articles of Association provide for dispute resolution as follows:“Whenever any differences arise between the company on the hand and any of the members, their executors, administrators, or assigns on the hand, touching the true intent or the incidents, or consequences of these Articles, or of the statutes, or touching anything then or thereafter done, executed, committed or suffered in pursuance of these Articles, or any claim or account of any such breach, or alleged breach or otherwise relating to the premises, or to these Articles or to any statutes affecting the Company or to any of the affairs of the Company, every difference shall be referred to the decision of an arbitrator to be appointed by the parties in difference, or if they cannot agree upon a single arbitrator to the decision of two arbitrators, or whom one shall be appointed by each of the parties in difference.”

22. One of the issues raised in the application is the structure of the company, where the applicants propose restructuring. They have also cited impropriety on the respondents’ part, which impropriety goes to the root of the company, a matter that is not clear before the commercial court.

23. The contending parties herein, being directors and shareholders of the interested party, are obligated by the Articles of Association, to pursue arbitration in the first instance. However, there is no indication that this was done in this case. Moreover, the application herein is not brought under any provisions of the Arbitration Act, for instance, for stay orders for appointment on an arbitrator.

24. This means that the applicants’ application is not properly before the court since, as members of the Company, they have failed to comply with Article 31 of the Articles of Association of the Company.

25. In addition, Article 159 (2) (d) of the Constitution requires the Judiciary to promote alternative dispute resolution mechanism, including arbitration. Further, the legal doctrine of exhaustion also requires that the Courts should not seize jurisdiction in respect of matters where an alternative remedy platform ought to have been pursued by the parties.

26. In the result, the court cannot determine the application, and by extension, the substantive suit because presently it lacks jurisdiction to do so. The parties should pursue Arbitration as prescribed under Article 31 of the Articles of Association which are binding on the applicants and the respondents.

27. The application is therefore dismissed. Costs will be in the cause.

28. Orders accordingly.

DELIVERED, DATED AND SIGNED AT EMBU HIGH COURT THIS 21ST DAY OF MAY, 2025. R. MWONGOJUDGEDelivered in the presence of:1. Okwaro for Respondent.2. Wangari holding brief for Kamunde for Applicant.3. Francis Munyao - Court Assistant.