[2023] KEHC 25451 (KLR)

Kebenei v African Grain Care Equipment Limited & 2 others (Miscellaneous Civil Application E183 of 2022) [2023] KEHC 25451 (KLR) (17 November 2023) (Ruling)

Neutral citation: [2023] KEHC 25451 (KLR)

Republic of Kenya

In the High Court at Eldoret

Miscellaneous Civil Application E183 of 2022

JRA Wananda, J

November 17, 2023

IN THE MATTER OF SECTION 238 OF THE COMPANIES ACT NO. 17 OF 2015 LAWS OF KENYA

Between

Michael Kibet Kebenei

Applicant

and

African Grain Care Equipment Limited

1st Respondent

Willie Kibet Maindio

2nd Respondent

The Registrar Of Companies

3rd Respondent

Ruling

1. Before the Court for determination is a Preliminary Objection.

2. This action was commenced vide the Application brought by way of the Notice of Motion dated 15/12/2022 and filed on 16/12/2022 through Messrs Ngethe & Co. Advocates. In the action, the Applicant, claiming as a director of the 1st Respondent company, basically sought grant of leave to prosecute this action as a derivative suit. His ground is that the 2nd Respondent, his co-director, is in breach of his fiduciary duty owed to the 1st Respondent and that, among others, his actions are aimed at sabotaging and crippling the company.

3. In response, on 22/12/2022, the 2nd Respondent, through Messrs Mwakio & Co. Advocates filed a Notice of Preliminary Objection of the same date, premised on the following grounds:a.That the Application is incompetent, frivolous and/or vexatious the same having been commenced in a procedure unknown in law.b.That the Application and the suit as filed is fatally defective having offended the mandatory provisions of the law.c.That the Application is otherwise an abuse of the due process of court.d.That the Applicants Application should be struck out or dismissed with costs to the 2nd Respondent.

4. In support of his Preliminary Objection, the 2nd Respondent filed his Submissions on 29/12/2022. On his part, the Applicant did not file any specific Submissions on the Preliminary Objection. His Counsel stated that she would rely on her Submissions filed earlier in response to the substantive Motion but which, from my perusal, did not address the Preliminary Objection.

2nd Respondents’ Submissions 5. Counsel for the 2nd Respondent submitted that the Objection is premised under Section 19 of the Civil Procedure Act and Order 3 Rule 1 of the Civil Procedure Rules 2010, and cited the case of Mukisa Biscuits Manufacturing Ltd vs West End Distributors (1969) EA 696. He added that Order 3 Rule 1 aforesaid clearly states that suits may only be instituted in a way that the Rules prescribe.

6. He submitted further that the suit herein seeks substantive orders, inter alia, removal of a director, change of bank signatories, allegations of abuse of office and fiduciary duties, among others, but the same is disguised as an Application seeking leave to commence a derivative suit, Part XI particularly Sections 238-241 of the Companies Act having no clear provisions on how the suit is to be instituted, the guiding light remains to be Order 3 rule 1 of the Civil Procedure Rules. He cited the case of Dorcas Njoki Mugo v Crispin Kienyu Kang’ethe & another [2021] eKLR.

7. Counsel submitted further that although he is alive to the provisions of Article 159 of the Constitution which cautions the Court to administer justice without undue regard to technicalities of procedure, nevertheless, the Court should follow the decision in Joseph Kibowen Chemjor vs William C. Kisera [2013] eKLR. He urged that the facts as pleaded, the issues before Court and orders sought are substantive in nature and will require interrogation of evidence through a trial process and that can only be archived through a substantive suit and not a miscellaneous Application, any attempt by the Applicant to invoke Article 159 or the inherent jurisdiction of the Court therefore fails, rights of parties and more specifically those of the 2nd Respondent as the key director and shareholder of the company are in issue, in the circumstances, the suit cannot be instituted by way of a miscellaneous Application because it seeks orders which the rights between the parties are to be determined, this is against the rule that miscellaneous Application can only be instituted to seek orders for which rights of the parties are not determined and that in the present scenario the orders sought do not merit such conditions.

8. Counsel contended further that the Applicant seeks removal a director which is a substantive order and cannot be granted unless evidence presented is interrogated in a trial process, the suit as presented does not give room for interrogation of whatever evidence presented by both parties and as such ought to be struck out with costs. He cited the case of Isaiah Waweru Njumi & 2 Others -v- Muturi Ndungu [2016] eKLR and stated that the Applicant has not met the threshold set out in that case for grant of leave to file a derivative action. In conclusion, Counsel reiterated that the orders sought are substantive in nature and will require examination of evidence through a trial process and as such the Application is not merited.

Analysis & Determination 9. The issue herein is “whether this action is properly instituted by way of a Miscellaneous Application” and therefore. whether the Preliminary Objection is merited.

10. The law pertaining to Preliminary Objections was well set out in the locus classicus case of Mukisa Biscuit Manufacturing Co. Ltd vs West End Distributors ltd(1969) EA 696, in which the Court of Appeal for Eastern Africa, stated (Law JA) as follows:''So far as I’m aware, a Preliminary Objection consists of a point of law which has been pleaded, or which arises by clear implication out of pleadings, and which if argued as a preliminary point may dispose of the suit. Examples are an objection to the jurisdiction of the court, or a plea of limitation or a submission that the parties are bound by the contract giving rise to the suit to refer the dispute to arbitration.”

11. In the same case, Sir Charles Newbold, President of the Court added as follows:“a Preliminary Objection cannot be said to be such if any fact has to be ascertained or if what is sought is the exercise of judicial discretion.”

12. Considering the above tests, I find the matters raised to constitute a proper Preliminary Objection. I will therefore proceed to determine the Objection.

13. The Notice of Motion which initiated this action is expressed to be brought under Sections 238 and 239 of the Companies’ Act, Order 51, Sections 1A, 1B and 3A of the Civil Procedure Act 2010 and “all other enabling provisions of the law”. It then seeks orders as follows:i.[………..] Spent.ii.That the Honourable Court do issue and Order directing the 3rd Respondent to effect the removal of the 2nd Respondent as a director of the 1st Respondent in adherence to the resolutions passed at the company director’s meeting held on 19/08/2022 wherein the directors/shareholders voluntarily resolved that the 2nd Respondent ceased to be a company director/shareholder effective 16/07/2022. iii.That the Honourable Court do issue an Order directing that the 2nd Respondent grants the 1st Respondent the financial autonomy to operate by ceasing to be a bank signatory to the 1st Respondent’s bank accounts effective 16th July 2022. iv.That the Honourable Court do issue an Order directing that the 2nd Respondent submit its valuation report of the company completed by its independent valuer within 14 days to determine his entitlements in the company for settlement.v.That the Honourable Court direct that the 2nd Respondent shall cater for the continued accrued interest from the facilities held by the 1st Respondent as a result of his inordinate delay to facilitate the shareholder separation process.vi.That Honourable Court do issue an Order directing the 3rd Respondent to effect the changes agreed upon by the Directors of the 1st Respondent during the Special General Meeting held on the 19th August, 2022 subject to settlement of the 2nd Respondent’s entitlements in the 1st Respondent by the Applicant.vii.That the Court do issue such Directions as may be necessary to facilitate the accessing of the 1st Respondent’s Company Accounts held and do direct the notation of the Applicant as the sole signatory of the said accounts so as to allow optimal operation of the activities of the 1st Respondent;viii.That the Honourable Court do issue a restraining order as against the 2nd Respondent and/or his agents, servants and assigns from contacting the 1st Respondent’s employees, suppliers, bankers and any other individuals regarding the 1st Respondent’s affairs and operations effective 16th July 2022. ix.That further to and consequent to the grant of prayers (1). and (2). And as a result of the urgency involved herein this Honourable Court be pleased to grant leave/permission to the Applicant to commence and prosecute the present action as a Derivative Action.x.That further to the foregoing and so as not to render this Action nugatory the Honourable Court do issue such further, ancillary or consequential orders as the Court may deem just and expedient and to give effect to the orders sought herein.

14. It is the 2nd Respondent’s contention that the Application is incompetent for having being instituted by way of Miscellaneous Application instead of a Plaint. It is true that as a general rule, a suit is to be instituted by way of a Plaint unless the rules prescribe any other manner. This is as provided under Order 3 Rule 1 of the Civil Procedure Rules which stipulates that:“Every suit shall be instituted by presenting a plaint to the court, or in such other manner as may be prescribed.” 15. On its part, Section 19 of the Civil Procedure Act provides that:

“Every suit shall be instituted in such manner as may be prescribed by rules.”

16. However, there are various instances where it is agreed and accepted that an action can validly be commenced by way of Miscellaneous Application. In relation thereto, in the case of Joseph Kibowen Chemjor vs William C. Kasera (2013) eKLR , Munyao J. held as follows:“It means therefore that where a person is commencing a civil suit ( in this instance to enforce a civil action), he needs to follow prescribed rules. There are times when all that a person wants is an order of court where the rights of the parties are not going to be determined. There is no “action” being enforced or being tried. In many such instances, it is the discretion of the court being sought or a procedural issue sought to be endorsed. The court in such a case is not being asked to determine any rights of the parties. Now, the Civil Procedure Rules do not specifically provide for the procedure to be followed where there is no “action”. In such instances, I think it is permissible for such person to file a miscellaneous application because the court is not asked to determine any issues between the parties. This is common and permissible where all that the party wants is a mere order from the court which does not settle any rights or obligations of the parties. This for instance can cover applications for leave to institute suit out of time or for leave to commence judicial review proceedings”.

17. In Kenya, derivative claims now have foundation in statute under Sections 238-241 of the Companies Act, 2015. Section 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.

18. The import of Section 238(3) is that the Court must first satisfy itself that there is a prima facie case on any of the causes of action set out under Section 238(3) of the Act. If the evidence adduced in support of the Application does not disclose a case for the giving of permission, then the Application is for dismissal. The importance of judicial approval under the Act is therefore to screen out frivolous claims. The Court will therefore only allow meritorious claims to be litigated as derivative suits.

19. Looking at the prayers made in the Motion as set out hereinabove, it is clear that the main substantive one is prayer (ix) which seeks leave to “commence and prosecute the present action as a derivative action”. The rest of the prayers, save for perhaps one or two which may appear to be about substantive rights, and although the Applicant’s Advocates may also have been a little bit too enthusiastic in drafting some of them, appear to basically be interim in nature or constitute incidental or ancillary reliefs meant to act as preservatory or restraining orders or those meant to ensure smooth operations and running of the company pending, final determination of the matters in dispute herein.

20. In the circumstances, I am willing to give the Applicant the benefit of doubt and wait for substantive hearing of the full Motion before making final determinations on whether the prayers made can properly be heard and determined in this Miscellaneous Cause. I therefore find that on the facts of this case and its circumstances, it is premature to shut out the Applicant at this stage before considering the Affidavits.

Final Orders 21. In the premises, I order as follows:i.The 2nd Respondent’s Preliminary Objection dated 22/12/2022 is dismissed.ii.The parties shall now expeditiously proceed to prosecute and canvass the substantive Motion.iii.Costs shall be in the Cause.

DELIVERED, DATED AND SIGNED AT ELDORET THIS 17TH DAY OF NOVEMBER, 2023. .....................JOHN R. ANURO WANANDAJUDGE