[2023] KEHC 19578 (KLR)

Kamau v Kenya Fire Appliances Limited (Insolvency Petition E034 of 2020) [2023] KEHC 19578 (KLR) (Commercial and Tax) (23 June 2023) (Judgment)

Neutral citation: [2023] KEHC 19578 (KLR)

Republic of Kenya

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

Commercial and Tax

Insolvency Petition E034 of 2020

EC Mwita, J

June 23, 2023

Between

Victor Louis Kamau

Petitioner

and

Kenya Fire Appliances Limited

Respondent

Judgment

1. Victor Louis Kamau (Mr. Kamau), a minority shareholder in Kenya Fire Appliances Limited, (the company), filed this petition, seeking several reliefs. These were; a declaration that the Francis Mbugua Kimari (Mr. Kimari) was conducting affairs of the company in an oppressive manner to minority shareholders; a declaration that his removal as a director of the Company on 20th April 2005 was contrary to law and that he be reinstated; and an order for auditing of company books of account and making enquiries necessary for determining the company's position.

2. Other reliefs were; valuation of the company's assets from May 2005 to date; an order for payment of all just debts of the company and an order for sale company assets for this purpose under the supervision of appointed liquidator; and order that upon taking of accounts, the company do purchase his shares at such a price per share as the court shall determine.

3. Mr. Kamau sought an alternative reliefs pursuant to section 219 of the Companies Act (now repealed), that the Company be liquidated and/or wound up by the Court; the Court appoint the Official Receiver as the provisional liquidator and that costs of the petition to be paid out of the Company's assets.

4. The petition is based on Mr. Kamau’s affidavit and written submissions. Mr. Kamau asserted that he was one of the founding members of the company when it was incorporated in November 1967. The company was to engage in, among other objectives, fire-fighting equipment.

5. The nominal share capital of the company was Kshs. 21,000 divided into 1050 shares of Kshs. 20 each. Each of the seven members held one share in the company then.

6. According to Mr. Kamau, he was a director of the company from 1967 and also served as the managing director from 1974 to 1993. Thereafter, he was a director up to 20th April 2005 when he was illegally removed from office. Mr. Kimari has been the managing director of the company since 20th April 2005 to date.

7. At the point when Mr. Kamiri became the managing director, shareholding the company was as follows: Mr. Kimari 473 shares; Mr. Kamau 217 shares; R. J. Tilbury 202 shares and Ayub Mugo Waitara 1 share. (Totalling to 637 shares.

8. Mr. Kamau stated that later (by 2020), subscribers of the company had changed without the board’s resolution as follows; Mr. Kimari 473 shares; Mr. Kamau 217 shares; Mr. Tilbury 210 shares; W. G. Ngiru, (deceased), C. M. Waweru and W. Kanyeki (deceased) 30 shares jointly; Dr. E. M. Gakuo (deceased)- no share indicated); James Maina Elisha Mogwanja (deceased) 30 shares; Evans M. Gitau (deceased) 15 shares; Maloba Akatsa 15 shares and Mrs. Loise Njoroge 30 shares (totalling to 1050 shares).

9. In or around May 2005, the relationship between Mr. Kamau and Mr. Kimari deteriorated leading to a stalemate in the running of the company. This lead to the company’s failure to hold annual general meetings or board meetings. Mr. Kamari has also been acting contrary to the provisions of the companies Act, 2015, and conducted affairs of the company in a manner oppressive to minority shareholders.

10. Mr. Kamau argued that since the fall-out, he has not been invited to statutory meetings of the company, and he believes that the company has not been holding statutory meetings or board meetings in accordance with the law.

11. Mr. Kamau blamed Mr. Kimari for conducting company affairs in oppressive manner to minority shareholders; excluding minority shareholders from the affairs of company and not giving them an equal opportunity to bid for the purchase of un allotted shares. Mr. Kimari was also accused of mismanaging the company leading to erosion of the company’s profitability; trying to dilute the minority shareholding; wasting, misusing, converting, alienating and irregularly disposing of company assets.

12. Mr. Kamau posited that Mr. Kimari had been prohibiting minority shareholders from participating in asset verification and stock taking exercises; accessing company account records and failing to account for company revenue since May 2005. Mr. Kimari was further blamed for appointing Antony Gabriel Munene (Mr. Munene) as a signatory to company accounts in March 2005 without approval of the board or shareholders; securing loan facilities without the board’s consent and utilizing company funds to purchase and insure a motor vehicle (KAQ 088R) and had it registered it in his name in April 2003.

13. Due to irreconcilable differences with Mr. Kimari, Mr. Kamau offered to sell his shares in the company to Mr. Kimari at Kshs. 28 million based on the 2005 valuation of the company’s assets. However, Mr. Kimari declined and Kshs. 6. 5 million, which Mr. Kamau rejected.

14. Mr. Kamau stated that although the company held a special general meeting on 29th July 2020 to review the company’s financial status and agree on the way forward, Mr. Kimari did not attend but sent a proxy without communicating the proxy’s appointment to the company within the time frame allowed under the Act.

15. Overall, Mr. Kamau relied on HR Harmer Ltd [1958] 3 All ER 6; S. P. Jain v Kalinga Tubes Limited [1965] AR 1535, [1965] SCR (2) 720 and Tatu City Limited & Kofinaf Company Limited [2013] eKLR, on what amounts to minority oppression.

16. Mr. Kamau again relied on O’neil & another v Phillips [1999] 1 WLR 1092 to support the prayers for either winding up of the company or for determination of the market value of his shares through an independent valuer appointed by the Court.

Response 17. The company opposed the petition through a replying affidavit and written submissions. The company argued that the petition did not fall under the purview of sections 780 and 782 of the Companies Act; that Mr. Kamau had not demonstrated incidents of oppression against minority shareholders and how his interests as a shareholder were prejudiced and that the petition is fatally defective and an abuse of the court process.

18. It is the company’s case that Mr. Kamau was not a director of company; that the resolution produced by Mr. Kamau related to Safety Systems Limited, a subsidiary of the company and was not proof of his directorship in the company. The company argued, therefore, that the change of the company’s subscribers without Mr. Kamau’s input was done in accordance with clause 5 of the company’s articles.

19. The company asserted that although the relationship between Mr. Kamau and Mr. Kimari may have deteriorated, this did not lead to a stalemate in the management of the company’s affairs. The company’s general meetings and Board meetings were being held regularly and in accordance with the law.

20. The company argued that Mr. Kamau had a right to request directors to convene an extraordinary meeting under section 132 of the Companies Act and clause 19 of the company’s articles of association but had not done so for more than fifteen years before filing this petition. The company further argued that Mr. Kamau did not raise any grievances at the extraordinary meeting convened and held on 29th July 2020 in his house if indeed there were any grievances.

20. The company maintained that loans were taken with the board’s approval and were not for anyone’s personal use but that of the company. According to the company, although NCBA Bank Kenya Ltd issued a statutory notice, the debt had already been settled. The company pointed out that motor vehicle registration No. KAQ 088R, is Kimari’s personal property and was not purchased using company funds.

21. The company argued, therefore, that the issues Mr. Kamau raised concerned internal management of the company thus, the court should not interfere. In the view of the company, Mr. Kamau had not adduced sufficient evidence to call for the court’s intervention.

22. The company relied on Naftali Wachira Njoroge & 7 others v Hezy John Limited & 5 others [2014] eKLR and Murri v Murri & “K” Boat Services Ltd [2000] eKLR to support its position.

23. The company again relied on Foss v Harbottle [1843] 2 Hare 26, that courts will only interfere with internal affairs or management of a company where the act complained of is ultra vires, is fraudulent or is not rectifiable by an ordinary resolution.

24. The company asserted that Mr. Kamau had not made out a case to warrant an order for winding up on just and equitable grounds under section 219 (f) of the Companies Act. Reliance was placed on the matter of Leisure Lodge Limited ML WC No. 29 of 2006 (UR), that there are alternative remedies to the issues raised by Mr. Kamau, thus he is not entitled to a winding up order.

25. Regarding appointment of Mr. Munene, the company argued that the appointment was done in accordance with articles of the company (clause 34). The company also maintained that Mr. Kamau had failed to prove that he was a director; that books of account were not audited annually thus, there is no need for an order for an audit.

26. The company took the position that the petition is an abuse of the court process and Mr. Kamau’s allegations of oppression by the majority shareholders were intended to frustrate the company’s operations. The company urged that the petition be dismissed with costs.

Determination 27. This insolvency petition, as I understand it, sought primarily, a finding that the company was being managed in a manner that was oppressive to minority shareholders and that Mr. Kamau had been unlawfully removed as a director. Other orders sought included an audit, payment of just debts and or that the company be wound up.

Whether removal as a director was unlawful 28. Mr. Kamau argued that his removal as a director in 2005 was unlawful and wanted a declaration to that effect. The company asserted that Mr. Kamau was not a director of the company but of a subsidiary company called Safety Systems Limited and, therefore, his removed from directorship of the subsidiary company had nothing to do with this company.

29. Whether or not Mr. Kamau was unlawfully removed as a director of the company is a question of fact to be proved by evidence. First and foremost, the alleged removal took place in 2005 when the old company law regime was in force and fifteen years to the filing of this petition. Mr. Kamau did not contest that removal in court then and did not explained why he did not.

30. Second, Mr. Kamau did not lead evidence to show that he was actually a director of the company and was unlawfully removed. The company’s position is that Mr. Kamau was not a director. The company attached a letter dated 18th April 2005 addressed to the directors of Safety Systems Limited containing a resolution removing Mr. Kamau as a director of Safety Systems Limited.

31. Mr. Kamau did not deny that he was a director of Safety Systems Ltd and not the company. Even if he was a director of the company, Mr. Kamau did not pointed out the provisions of the repealed Companies Act that were undermined when he was allegedly removed. Having not tendered evidence that he was a director, and having not challenged that action, Mr. Kamau acquiesced to the removal, if any, and moved on. He could not be heard to complain fifteen years after the act and call on the court to find that such a removal was unlawful at this stage. This complaint fails.

Oppression of minority shareholders 32. The other issue in this petition is that the company was being managed in an oppressive manner to minority shareholders. Mr. Kamau’s case is that he was a founder member when the company was incorporated in November 1967. However, in 2005, his relationship Mr. Kimari took a turn for the worse. He had since not been invited to company and board meetings and the company’s meetings were not being held as required by law. All these allegations were, however, denied by the company.

33. Mr. Kamau further enumerated what he said were other instances of oppressive conduct by Mr. Kimari, as the managing director. These included, being prohibited from participating in the purchase of un allotted shares; dilution of the company’s profits; misuse of company funds and assets and not paying debts of the company, among others. The company denied all these allegations.

34. Shareholder oppression exists where majority shareholders commit acts and abuses of power to unfairly prejudice minority shareholders. That is; minority oppression will occur where majority shareholders act in a way that goes against the best interests of the minority.

35. Oppression of minority shareholder is a question of fact to be demonstrated to have really existed but not to be merely inferred. In this respect, Mr. Kamau’s allegation of oppression was not clear. The argument that company affairs were not being properly conducted was not demonstrated to have been the case. The concern that the company’s profitability was being diluted was not proved. Further, the claim that debts were incurred or were not being paid was not also not proved. The company stated that debts had been paid and no evidence was lead to the contrary.

36. The law is clear that he who alleges must prove. (See sections 107, 108 and 109 of the Evidence Act.) In that respect, Mr. Kamau did not adduced credible evidence to prove that the board had not been holding meetings. What he stated remained an unproven allegation which, in any case, the company denied.

37. Mr. Kamau also seemed to contradict himself that the company was not holding statutory meeting. This was because he stated that the company held an extra ordinary meeting on 29th July 2020. The fact that the company held the meeting of 29th July 2020 was also confirmed by a notice of “Emergency General Meeting” for 29th July 2020 at Mr. Kamau’s house. The notice was signed by Mr. Tilbury, a director and shareholder and Gene Fondaumiere, a representative of Mr. Kimuri. Minutes for that meeting were signed by Mr. Kamau on 12th August 2020 and were attached to this petition. This confirmed that the company held meetings in one way or another.

38. In any case, the law allowed a shareholder to requisition directors to call for an extraordinary general meeting of the company (s. 132 of the repealed Companies Act). Section 132(3) stated:If the directors do not within twenty-one days from the date of the deposit of the requisition proceed duly to convene a meeting, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a meeting, but any meeting so convened shall not be held after the expiration of three months from the said date.

39. Clause 19 of the company’s articles of association also adopted section 132 and permitted shareholders of at least one-tenth of the issued capital of the company to write to the directors requesting for an extraordinary general meeting of the company and the directors “shall…proceed to convene an Extraordinary General meeting.” Mr. Kamau or any other minority shareholders did not exercise the right accorded by law.

40. I also noted that the petition was dated 16th September 2020 while the meeting was held on 29th July 2020 and which Mr. Kamau attended. I, therefore, find no merit in this complaint.

41. Mr. Kamau again asserted that minority shareholders were being prohibited from participating in the affairs of the company; including biding to purchase un allotted shares in the company, yet again without leading evidence to prove this allegation. In any case, clause 5 of the company’s articles of association gives directors discretion to deal with shares in the company. The clause states that “...shares shall be under the control of the Directors, who may allot or otherwise dispose of the same to such persons and on such terms and conditions as they think fit.”

42. Similarly, Mr. Kamau merely stated without evidence, that minority shareholders were denied opportunity to inspect books of account. The argument that Mr. Kimari was mismanaging the company leading to erosion of profitability; dilution of minority shareholding; wasting, misusing, converting, alienating and irregularly disposing of company assets, Mr. Kamau did not again adduce any credible evidence to demonstrate that this had been the case.

43. Mr. Kamau did not shown that he had complained and demanded to inspect books of account and, if so, when. Mr. Kamau did not also show that he demanded that directors correct the anomalies complained of but they did not. This is another case of alleging without proof.

44. Regarding the alleged illegal or irregular appointment of Mr. Munene as a signatory to the company bank accounts, Mr. Kamau did not show how the appointment violated the law. In any case, clause 34 of the company’s articles of association places management of the company in the directors. Directors have powers “to do all such acts and things as the company by its Memorandum of Association or otherwise authorized to exercise…” These complaints have no basis.

45. The other complaint, in the petition, is that Mr. Kamau wanted to exit the company as a shareholder and offered to sell his shares to Mr. Kimari at Kshs. 28 million but Mr. Kimari offered Kshs. 6. 8 million instead, which Mr. Kamau also declined.

46. The company argued that the share price mentioned by Mr. Kamau was based on alleged independent valuation which had put the price of a share at Kshs. 130, 028. 30. According to the company auditors, the value of a share was Kshs. 37, 824, translating to Kshs. 6. 5 million Mr. Kimari had offered.

47. The valuation of the company’s assets in the letter of offer dated 11th May 2005 to Mr. Kimari put the value of each share at Kshs. 130,028. 50. It is not clear how Mr. Kamau arrived at that per share value. Mr. Kamau’s offer to sell shares was only communicated to Mr. Kimari, the majority shareholder. After Mr. Kimari declined and counter offered to purchase the shares at Kshs. 6. 5 million, the issue ended there. Mr. Kamau did not offer to sell the shares to any other shareholder in the company.

48. The issue of selling shares arose in 2005 and there was no evidence that the issue arose in the years that followed to bring the claim of the offer to buy shares at a lower price as an oppressive act by the majority shareholder. Mr. Kamau could not demand to sell the shares at his price and once Mr. Kimari declined, he could not be branded an oppressive majority shareholder.

49. A careful reading of the record and evaluation of the evidence, reveals that there was no evidence that Mr. Kimari (majority shareholder) had a plan to force Mr. Kamau (minority shareholder) to sell his interest in the company at an unfairly low price. In the same vein, there was no evidence that Mr. Kimari wanted to deprive Mr. Kamau of any of his rights or benefits as a shareholder. I am unable to agree with Mr. Kamau that declining to purchase his shares at Kshs. 28 million was an oppressive conduct on the part of Mr. Kimari, as majority shareholder.

Alterative relief 50. Mr. Kamau sought some alternative relief; namely liquidation of the company and appointment of liquidator. Liquidation of a company should come as a last resort and on sound grounds. Under section 219(f) of the repealed Act, the court could order winding up if it was of the opinion that it was just and equitable.

51. Under the current legal regime, (section 424(1)(e) of the Insolvency Act), a company may be liquidated if it is unable to pay its debts. Section 2 of the Act defines “debt” to mean the obligation or liability of a person to pay money or money’s worth, which includes liability under a written law, a contract/bailment or arising from an obligation to make restitution, among others.

52. Section 384 of the same Act further states that a company is unable to pay debts where a creditor to whom the company is indebted for hundred thousand or more, has served a 21 days written demand requiring the company to pay the debt, but the company fails to pay or take necessary steps towards payment to the satisfaction of the creditor, or execution or other process issued on a judgment, decree, order of any court in favour of the creditor is returned unsatisfied in whole or part.

53. The law requires that there be a legitimate debt and the company must have failed to pay the debt after service of the notice as required by sections 384 and 424 of the Act, before one can petition to liquidate the company.

54. The test for determining whether a company should be wound up was stated in Re: The India Electric Works v Uknown AIR 1970 Cal 398, citing Re Cine Industries and Recording Co. Ltd, AIR 1942 Bom 231, thus:The test for determining whether a company should be wound up is whether the company is commercially insolvent at the date of the petition for winding-up. The expression ‘commercially solvent’ means that the existing assets and the liabilities of the company are such as to make it reasonably certain that the existing and probable assets would be sufficient to meet the existing liabilities.The other test is whether at the date of the presentation of the winding-up petition, there was any reasonable hope that the object of trading at a profit with a view to which a company was formed would be attained.

55. It was Mr. Kamau’s obligation to demonstrate that indeed the company was commercially insolvent and had no reasonable hope of trading at a profit for which it was formed.

56. In Mohammed Amin Brothers Ltd v Dominion of India & others AIR 1952 Cal 323, 54 COWN 514, Harris, C. J. observed as follows:A winding up petition is perfectly proper remedy for enforcing payment of a just debt. It is the mode of execution which the court gives to a creditor against a company unable to pay its debts…A winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bonafide disputed by the company. A petition presented ostensibly for winding up order to exercise pressure will be dismissed and under circumstances may be stigmatized as a scandalous abuse of the process of the court. (emphasis) (See also Matic General Contractors Limited v Kenya Power and Lighting Company Limited [2001] LLR 4837; Re M. Weiss Ltd [1992] eKLR.)

57. In this petition, Mr. Kamau did not demonstrated that there existed compelling grounds for liquidating the company. The company stated that it was economically sound and was trading at a profit. A liquidation order should not be issued merely because a party has prayed for it. The party must prove to the satisfaction of the court that the company is unable to pay its legitimate debts and cannot be resuscitated, thus calling for a liquidation order as the only remedy. The urge to liquidate the company must fail.

Conclusion 58. Having considered this insolvency petition, the response and submissions by parties, the conclusion I come to, is that Mr. Kamau did not prove that he was a director of the company and was unlawfully removed. There was also no evidence that Mr. Kimari had conducted the affairs of the company in a manner oppressive to minority shareholders.

59. There is no reason to order auditing of the company as no ground was made to justify such a course. Similarly, there is no basis for granting the alternative order liquidating the company.

Disposal 60. The petition is declined and dismissed. Costs being discretionary, and this being a dispute between a shareholder and the company, I make no order on costs.

DATED, SIGNED AND DELIVERED AT NAIROBI THIS 23RD DAY OF JUNE 2023E C MWITAJUDGE