[2022] KEHC 10564 (KLR)

Kairanya v Kairanya & another; Kairanya Investments Limited (Affected Party) (Civil Suit E007 of 2021) [2022] KEHC 10564 (KLR) (17 June 2022) (Ruling)

Neutral citation: [2022] KEHC 10564 (KLR)

Republic of Kenya

In the High Court at Meru

Civil Suit E007 of 2021

PJO Otieno, J

June 17, 2022

Between

Martin Kairanya

Plaintiff

and

Jeremiah Kamathi Kairanya

1st Defendant

Mwenda Jacob Kairanya

2nd Defendant

and

Kairanya Investments Limited

Affected Party

Ruling

1. The court is called upon to determine a Notice of Motion under certificate of urgency dated 14/4/2021 by the plaintiff, Martin Kairanya, brought under Section 238, 239 & 1004 of the Companies Act No 17 of 2015, The Companies(General) Regulations 2015, Order 40 Rules 1 & 2 and Order 51 Rule 1 of the Civil Procedure Rules. In it, the plaintiff seeks inter alia that; the plaintiff be granted leave to continue with the suit as a Derivative action on behalf of Kairanya Investments Limited; pending the hearing and determination of the suit, a mandatory order of injunction be issued compelling all tenants of Kairanya Investments Limited renting premises in Lr Nos Meru Municipality Block 11/9, 128,197,202, Lr No 2890/62 (timau Market), Lr No2890/119, Plot No 50 Gakoromone and Plot No82 Meru to deposit all rent into A/C No 01120021379000 Co-operative Bank Ltd, Meru Branch; pending the hearing and determination of the suit, a temporary order of injunction be issued restraining the defendants, their agents, contractors, assigns and successors in title from interfering with the rental income payable to Kairanya Investments Ltd or from diverting any rental income payable to Kairanya Investments Ltd or from withdrawing or in any manner whatsoever from interfering with the rental money deposited into A/C No 01120021379000 Co-operative Bank Ltd, Meru Branch; the dispute between the plaintiff and the defendants over the running and management of the affairs of Kairanya Investments Limited, be referred to Arbitration as per the Articles of Association of the Company.

2. The grounds upon which the application is premised are set out in the body of the application and supporting affidavit of the plaintiff sworn on even date. The applicant contends that he is a director of Kairanya Investments Limited (hereinafter referred to as the company). In 2001, the company became the owner of very prime commercial properties pursuant to a certificate of confirmation of grant issued in Nairobi Succ. Cause No 1356/1999 (now HC Succ No 2/2020). He contends that those properties are developed and earn a monthly rent of over Ksh1,000,000. In 2010, the company acquired 4 properties namely Lr Nos Laikipia Daiga Ethi Block 2/1459, 1463, 1476 & 1477. He avers that other than himself and the defendants, the other directors namely Luke Mwiti Kairanya, Esther Mukiri Kairanya and John Kirimi Kairanya have since died. He avers that the defendants have ganged up and have been running the affairs of the company as if it were their personal business. He accuses the defendants of hiding the affairs of the company, forging company resolutions, collecting rent from the properties belonging to the company and using the same for their personal gain, borrowing loans without proper authorization by a resolution of the company, failing to pay taxes to the Government, failing to make annual returns to the registrar of companies and stealing of company properties. He contends that the defendants have casually, regularly and willfully breached their fiduciary duty as directors of the company and have also breached their duty of care towards the company. He avers that the company is unable to protect itself because the defendants are now the majority shareholders of the company and cannot agree to have themselves scrutinized. In 2012, the defendants, without the directors’ authorization, allowed cooperative bank to pay Ksh1,283,640 from the company’s Account No01120021379000 towards the settling of a loan not taken by the company but by a third party. It is therefore, to the applicant, necessary to protect the company and its properties, including rental income from being wasted and misappropriated by the defendants. It is also imperative the all disputes bedeviling the company be subjected to Arbitration as per the Articles of Association of Kairanya Investments Limited. He contends that unless the orders of injunction sought are granted, the defendants will continue to collect and appropriate the company’s rental income for their own use. He contends that his advocates’ efforts to get documents from Cooperative Bank concerning the money deposited into the company’s account bore no fruits. He urges the court to allow the application, because the affairs of the company are shrouded into secrecy.

3. The 1st defendant opposed the application through his replying affidavit sworn on 19/5/2021 in which he accuses the plaintiff of acting in bad faith at the interest of 3rd parties contrary to Section 241(2) of the Companies Act, and not at the interest of the company as alleged. He contends that the company was registered for purposes of continuing with the ownership and management of the prime properties which could not be shared among the heirs or sold. He avers that due to good leadership and professional management, the company developed the said properties and acquired more which are fully developed and others under construction. He contends that the company entered into private contracts with different institutions for financing its development projects and agreed to have rent payments offset the loan facilities. Due to the above contractual allegation, rent payments cannot be deposited as proposed by the plaintiff, because it will jeopardize the interests of the company with dire consequences for breach of contractual obligations. He frowns upon the plaintiff’s insistence on filing bounteous similar applications and avers that the closure of the accounts will be detrimental to the company. He contends that the company is managed by qualified professionals who regularly file and pay statutory fees and taxes and therefore the closure of accounts will negatively affect the company’s day to day operations. He contends that the medical bills for the plaintiff’s mental health are met by the company. He avers that the company, being a private limited company, is not obligated to publish its books of accounts on the dailies, as alleged by the plaintiff. He contends that the company acquired the said properties over 20 years ago and the plaintiff has no right or direct control of a particular property of the company such as rent income. He contends that all the company meetings are held in the company offices and all the resolutions properly executed as legally required by the Company Act contrary to the allegations by the plaintiff. He avers that no criminal complaint has been made by the relevant authorities for forgery of any document against the company or its officers on their individual capacities. He contends that the company resolved to offset a loan facility it had acquired, to save its property from being auctioned, contrary to the wild and false allegations by the plaintiff. He avers that the application is a mere afterthought, vexatious, frivolous, a violation of the doctrine of ripeness and an abuse of the court process. He avers that the application and the suit are merely speculative, generalized hypothetical hence they offend the principles of pleadings with precision as stipulated in Anarita Karimi Njeru v R[1978]KLR. He avers that no evidence was adduced of violation of the relevant laws in the management of the company to warrant grant of the orders sought.

4. The plaintiff in his supplementary affidavit sworn on 26/5/2021 contends that although he has some health challenges, he is mentally stable and in a proper mental state to pursue these proceedings. He denies being used by any third party as alleged by the defendants and maintains that he filed the suit out of his own volition. He faults the defendants for failing to adduce any documentary proof that the affairs of the company are run transparently as well as the bank statement of the account into which rent is paid. He contends that the issues of fraud and illegalities need to be probed by way of arbitration, because the defendants are the majority shareholders.

5. The 1st defendant in his further replying affidavit sworn on 29/6/2021 avers that it is impossible for the company to operate a bank account without resolutions as prescribed by the Companies Act and Banking laws. He avers that the claim by the plaintiff is based on personal interest to alienate the properties of the company. He avers that the company constructed for the plaintiff a bungalow in his own land. He avers that the application is unmerited and it ought to be dismissed.

6. The application was directed to be canvassed by way of written submissions which were respectively filed on 27/5/2021 and 13/7/2021. On the prayer for leave to continue with the suit as a derivative action, the plaintiff submitted that he has established a prima facie case against the defendants, directors of the company, who are guilty of omissions, negligence, breach of duty, breach of trust and stealing of the company’s rental income. In support of that prayer, he cited Mohamed Muyonga v Nicholas Oyen Atukei & anor[2016]eKLR, John Wairimiri & 7 others v Francesco Lepri & anor [2015] eKLR, Udali Group Limited v Umberto Rtccardo Dellavale & 3 others[2017]eKLR and James Peter Mbiyu Wambui & anor v Waweru Kuria[2018]eKLR, on when a derivative action can be commenced and the requirement for leave. He submitted that he ought to be allowed to continue with the derivative suit on behalf of the company. On the prayer for mandatory injunction to compel the tenants to pay rent into the company’s bank account, he submitted that it was only reasonable and legal to have all the rent collected channeled to the company’s account because that was its property. He cited Kenya Breweries Limited & anor v Washington O. Okeyo [2002]eKLR andLaser Eyer Center Limited v PBM Nominees Ltd[2020] eKLR on the grant of mandatory injunctions on interlocutory applications and the principles governing the same. He submitted that he had established a prima facie case with a probability of success and the company would suffer irreparably unless it is allowed to collect and keep its own rental income. He urged the court to protect the property of the company through an order of temporary injunction restraining the defendants from interfering with rental income of the company. He submitted that the only way to resolve the differences between the directors is to submit to arbitration in line with the memorandum and Articles of Association of the company. He submitted that the defendants had not rebutted the allegations of fraud, negligence, omission, breach of trust and duty against them, and therefore the prayers sought ought to be granted.

7. The defendants and the affected party cited the provisions of Section 241(2) and (3) of the Companies Act on the considerations to be met before a court can give permission to pursue a derivative claim. They also citedGhelani Metals Limited & 3 others v Elesh Ghelani Natwarlal & anor(2017)eKLR, on the need to establish a prima facie case on any of the causes of action noted under Section 138(3) and 239(2) of the Companies Act and the consideration of the statutory provisions. They faulted the plaintiff for failing to produce any evidence of any wrong doing on their part and how the company has been negatively affected by the alleged action and/or omission. They accused the plaintiff of acting in bad faith and for personal interest rather than the best interest of the company as provided under Section 241(2)(a) of the Companies Act. They submitted that the plaintiff has not met the threshold set in Giella v Cassman Brown & Co. Ltd (1973)E.A 358 to warrant grant of the orders sought. They submitted that the orders sought are aimed at making it difficult for the defendants to discharge and perform their functions as directors of the company.

Analysis and Determination 8. This is an application by the plaintiff for permission to continue a derivative suit. In Ghelani Metals Limited & 3 others v Elesh Ghelani Natwarlal & another[2017] eKLR, the court explained: -“Derivative actions are the pillars of corporate litigation. As I understand it, a derivative action is a mechanism which allows shareholder(s) to litigate on behalf of the corporation often against an insider (whether a director, majority shareholder or other officer) or a third party, whose action has allegedly injured the corporation. The action is designed as a tool of accountability to ensure redress is obtained against all wrongdoers, in the form of a representative suit filed by a shareholder on behalf of the corporation.”

9. But the it is not a carte blanch and free for all avenue and has parameters of application as explained in Dadani v Manji & 3 Others[2004]KLR that:“It is a cardinal principle in Company Law that it is for the company and not an individual shareholder to enforce right of actions vested in the company and to sue for wrongs done to it. It is also cardinal that in the absence of illegality, a shareholder cannot bring proceedings in respect of irregularities in the conduct of the company’s internal affairs in circumstances where majority are entitled to present the bringing of an action in relation to such matter (see Foss v Harbottle (1843) 2 Hake 461). All this is in deference to the self-regulation the law allows corporations and thus limits the interference by the courts in the running of such bodies on their own. However, if due to an illegality a shareholder perceives that the company is put to loss and damage but cannot bring an action for relief in its own name, such a shareholder can bring an action by way of a derivative suit.”

10. These principles have now found their rightful place in the Companies Act 2015in which Sections 238 provides as follows: -“1)In this Part, "derivative claim" means proceedings by a member of a company—(a)in respect of a cause of action vested in the company; and(b)seeking relief on behalf of the company.(2)A derivative claim may be brought only—(a)under this Part; or(b)in accordance with an order of the Court in proceedings for protection of members against unfair prejudice brought under this Act.(3)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.”

11. InIsaiah Waweru Njumi & 2 Others v Muturi Ndungu[2016] eKLR, the court in interpreting and applying the various provisions of the Act on derivative suits and consideration for grant of leave set out some of the factors to be considered in applications for leave in this kind of claims. The court rendered itself thus: -“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 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.”

12. The plaintiff is obligated to establish through evidence that there is a prima facie case on any of the causes of action set out under section 238(3) of the Act. Here, the plaintiff and the defendants are shareholders and directors of the company. Whereas the defendants contend that loans taken were for the benefit of the company, the plaintiff contends that such loans were not taken by the company. I have looked at the letter dated 10/9/2012 by the Company authorizing Cooperative Bank to offset the loan of Ksh1,263,040 advanced to Lawrence Kairanya. I note that the said loan was not advanced to the company but to an individual and it has not been explained why some of the directors of the company would approve its repayment from the company funds.

13. The plaintiff accuses the defendants, who are the majority shareholders, of fraud, negligence and breach of their duty of care towards the company. These allegations have not been meaningfully controverted yet they are particularized and if proved, could lead to findings against the defendants for the benefit the company. To that extent, I find that a prima facie case has been established to merit leave being granted so that there is a judicial determination on the complaints by the plaintiff.

14. The next issue is whether the orders of mandatory and temporary injunctions sought should issue. The conditions for the grant of an interlocutory prohibitory injunction remain well settled since Giella v Cassman Brown and co Ltd 1973 EA 360 to be that, ‘an applicant must establish a prima facie case with a probability of success, that unless injunctive orders are granted he will suffer irreparable harm which would not be adequately compensated for by damages and that if the court is doubt, it will decide the matter on a balance of convenience.’

15. Having found that a prima facie case has been established, I will now consider whether the plaintiff will suffer any irreparable harm if an injunction is not issued. Irreparable harm, has been defined in Halsbury’s Laws of England, 3rd Edition volume 21, paragraph 739 page 352 as follows: “Injury which is substantial and could never be adequately remedied or atoned for by damages, not injury which cannot possibly be repaired and the fact that the plaintiff may have a right to recover damages is no objection to the exercise of the jurisdiction by grant of injunction, if his rights cannot be adequately protected or vindicated by damages. Even where the injury is capable of compensation in damages, an injunction may be granted, if the injury in respect of which relief is sought is likely to destroy the subject matter in question.”

16. The plaintiff contends that if the injunctive orders sought are not granted, the defendants will continue to collect, waste and misappropriate the company’s properties including rental income. That kind of damage in my view may not be adequately compensated by an award of damages.

17. The plaintiff is a minority shareholder who is at a greater disadvantage as compared to the defendants. The defendants have been running the company without the input of the plaintiff. To my mind, that is improper in corporate governance, demonstrates a wrong to the plaintiff and presents weight enough to tilt the balance of convenience in granting the orders sought. It so tilts because, the property even if registered in the name of the company, is reckoned to have belonged to the estate of a deceased person. That would connote that the shares held by individual shareholders are so held in trust for the larger family and not as of right and therefore optimal accountability must be called for and encouraged.

18. On the prayer for interlocutory mandatory injunction, the plaintiff is by law obligated to proof existence of special circumstances. In Kenya Breweries Ltd & Another v Washington O Okeya [2002] eKLR, the Court of Appeal stated as follows on mandatory injunctions:“A mandatory injunction ought not to be granted on an interlocutory application in the absence or special circumstances, and then only in clear cases either where the court thought that the matter ought to be decided at once or where the injunction was directed at a simple and summary act which could be easily remedied or where the defendant had attempted to steal a march on the plaintiff. Moreover, before granting a mandatory interlocutory injunction, the court had to feel a higher degree of assurance that at the trial it would appear that the injunction had rightly been granted, that being a different and higher standard than was required for a prohibitory injunction.”

19. Similarly in Nation Media Group & 2 Others v John HarunMwau [2014] eKLR, the court of appeal said:“It is trite law that for an interlocutory mandatory injunction to issue, an applicant must demonstrate existence of special circumstances… A different standard higher than that in prohibitory injunction is required before an interlocutory mandatory injunction is granted. Besides existence of exceptional and special circumstances must be demonstrate as we have stated a temporary injunction can only be granted in exceptional and in the clearest of cases.”

20. In this matter, I see the dire need to put the management of the suit property as an estate property as a special circumstance that have been demonstrated by the plaintiff to warrant grant of this prayer. The court considers that it is in the interests of justice and I see no prejudice if all the rents are banked intact into a particular account controlled by all shareholders.

21. Lastly, is the quest for alternative dispute resolution by arbitration sought by the plaintiff applicant. It is clear that the Articles of association of the interested party obligates that all and every dispute of any nature be referred for resolution by arbitration. Such clause gives no discretion to the court but is a compulsion that the court differs to the choice of forum by the parties. That prayer is equally allowed as prayed.

22. Accordingly, the application dated April 14, 2021 is allowed in terms of prayers 2, 3, 4 and 5 with costs being in the cause.

23. For purposes of case management, matter is stood over to the 28. 7.2022 for the parties to report on compliance with the orders issued in this decision.

DATED, SIGNED AND DELIVERED AT KAKAMEGA, ONLINE, THIS 17TH DAY OF JUNE 2022. PATRICK J. O. OTIENOJUDGEIn the presence of:Mr. Karanja for the ApplicantNo appearance for the RespondentCourt Assistant: Mwenda