[2022] KEHC 11992 (KLR)

Kemboi & another v Registrar of Companies & 2 others; Chigwell Holdings Limited (Interested Party) (Commercial Suit E578 of 2021) [2022] KEHC 11992 (KLR) (Commercial and Tax) (17 June 2022) (Ruling)

Neutral citation: [2022] KEHC 11992 (KLR)

Republic of Kenya

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

Commercial and Tax

Commercial Suit E578 of 2021

A Mshila, J

June 17, 2022

Between

Josephat Kiprotich Kemboi

1st Plaintiff

Heritage Capital Limited

2nd Plaintiff

and

Registrar of Companies

1st Defendant

Eric Cherop Koima

2nd Defendant

Ngugi Mwangi

3rd Defendant

and

Chigwell Holdings Limited

Interested Party

Ruling

1. The 1st Defendant raised a preliminary objection in limine to the entire suit on the following grounds that;a.The Court lacks the jurisdiction to preside over this matter in the first instance.b.The 1st Plaintiff and the 2nd Defendant have not exhausted the dispute resolution mechanisms envisaged in Article 31 of The Articles of Association of The 2nd Plaintiff company which is a binding and governing document for the Heritage Capital limited.

Applicant’s Case 2. The Plaintiff instituted the present suit in which it seeks orders of the Court on the face of the Plaint and the Application dated 12th April 2021. The Plaintiff alleged that he was fraudulently removed as a Director from the 2nd Plaintiff Company without his authority. The Plaintiff therefore sought an order compelling the Defendants to reinstate him as a director of the 2nd Plaintiff.

3. It was the 1st Defendant’s considered view that the matter is improperly before this Court as the court has no jurisdiction to handle the matter in the first instance as the circumstances in which the court can handle the matter in the first instance have not been fulfilled.

4. It was also the 1st Defendant’s submission that the Plaintiff’s suit is not properly before court for the following reasons;a)The suit is premature since he has failed to exhaust the stipulated primary dispute resolution mechanism pursuant to the arbitration clause in the 2nd Plaintiff’s articles of association.b)Secondly the Plaintiff has not proven any exceptional circumstances within which this court may hear matter in the first instance. It is the 1st Defendant’s considered submission that there are no exceptional circumstances to warrant the circumvention of the arbitral procedures and remedies set out in the articles of association.

5. The crux of the present dispute arises out of and revolves around matters within the ambit of the Companies Act. The 2nd Plaintiff’s Company is incorporated pursuant to provisions of that Act. The Plaintiff/Applicant is a director and shareholder to the second plaintiff. Section 11 of the Act provides that one or more persons who wish to form a company may:a.Subscribe their names to a memorandum & articles of association; andb.Comply with the requirements of sections 13 to 16 with respect to registration.

6. It was the Defendant’s considered opinion that the matter as filed is in flagrant disregard of the alternative dispute resolution mechanism on the face of Article 31 of the Articles of Association of the 3rd Defendant Company.

7. The law on the principles of jurisdiction has been well settled. In Samuel Kamau Macharia vs Kenya Commercial Bank Ltd & 2 Others [2012] eKLR had this to say; -“A court’s jurisdiction flows from either the Constitution or legislation or both. Thus a court of law can only exercise jurisdiction as conferred (to it) by the Constitution or other written law. It cannot abrogate to itself jurisdiction exceeding that which is conferred upon it by the law.”

8. The 1st Defendant submits and finds guidance on the fact that this court is bound by the provisions of Section 6 of the Arbitration Act. Further, a company’s articles of association are in the nature of contractual provisions that are binding between the members inter se as well as between the company and its members.

9. It was the Defendant’s position that this court has in a strikingly similar matter held that where there is an alternative dispute resolution mechanism, it must first be exhausted before the jurisdiction of the court is invoked. Republic v Resident Magistrate's Court at Kiambu Ex parte Geoffrey Kariuki Njuguna & 19 others [2017] eKLR.

10. The 1st Plaintiff/Applicant bears a similar duty under the articles of the 2nd Plaintiff. The 1st Plaintiff instituted this suit to enforce his rights as a shareholder. The Plaintiff by his own action, therefore, considers the articles binding on him. It would be unfair and against the interests of justice as well as sanctity of contract to sustain his claim when he has a countervailing duty to abide by the general duty under Article 31 of the 2nd Plaintiff’s Articles of Association. The Plaintiff’s suit is therefore premature and refer the same to arbitration as the court does not have jurisdiction to preside over this matter in the first instance and as such the court should down its tools and strike out this matter.

Respondents’ Case 11. The Respondents submitted that the issues raised are factual in nature and amount to criminal conduct by the persons who are concerned in orchestrating the illegalities. It was unfair for the alleged removal which occurred outside the realm of the legal framework and practice.

12. Further, the Respondents submitted that the complaint by the Plaintiff was registered in the 1st Defendant's office on 12th February, 2021 and a committee was formed to review the issue. A letter communicating the decision was actually sent to the Complainant. All parties were invited. Finally, it was established that the removal of the Plaintiff was indeed unfair. The director and shareholders stand to lose their shares out of the fraudulent transfer of shares.

13. The Respondents relied on the decision of the case of Laiser Communication & 6 others vs Safaricom Limited [2016] eKLR where the Court of Appeal held;“the cause of action as set out by the appellants involves large sums of money. If that clause is enforced, and the respondent is successful, it would be prejudicial. An arbitral clause that is oppressive or repugnant to justice is one that disadvantages one side. It is clear that the respondent herein would have the upper hand; it would amount to undue influence and an unfair bargaining power on the respondent's part. The arbitration clauses would therefore lead to an injustice. Arbitration ought to be a simple, straight forward and non- protracted process. In this case, there are vast differences and disagreements between the parties. For this reason, we find and hold that the learned judge fell into error when he ordered that the proceedings in court be stayed pending arbitration. In the result, we find that this appeal has merit. We therefore allow it as prayed, with each party bearing its own costs.

14. It was the Respondents submission that the Arbitration Clause no. 31 is unfair and oppressive. The AG shall suffer no prejudice if the case is handled before the Court. The Memorandum and Articles of Association are legal documents but when it comes to criminal and fraudulent conduct, then the courts have the mandate to give redress.

15. It was their position that in a matter where fraud is charged, the court will in general refuse to send the dispute to arbitration if the party charged with the fraud desires a public inquiry. But where the objection to arbitration is by the party charging the fraud, the Court will not necessarily accede to it and will never do so unless a prima facie case of fraud is proved.

Issues For Determination 16. The court has considered the Preliminary Objection raised by the 1st Defendant and the rival submissions and the main issue for determination is;a.Whether the Preliminary Objection should be upheld.

Analysis 17. The instant Preliminary Objection by the 1st Defendant raises only one issue, which is as to whether this Court has the Jurisdiction to hear this suit in view of the parties arbitration clause contained as part of the Articles of Association of the 3rd Defendant Company.

18. The essence of a preliminary objection was in Mukisa Biscuits Manufacturing Co Ltd Vs West End Distributors (1969) EA 696 where the court stated that:“The first matter relates to the increasing practice of raising points which should in normal manner, quite improperly be by way of preliminary objection. A preliminary Objection is in the nature of what used to be demurrer. It raises a pure point of law which is argued on assumption that all facts pleaded by the other side are correct. It cannot be raised if any fact has to be ascertained or if what is sought is the exercise of judicial discretion……………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.”

19. Section 6 of the Arbitration Act provides as follows: -“(1)A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than the time when that party enters appearance or otherwise acknowledges the claim against which the stay of proceedings is sought, stay the proceedings and refer the parties to arbitration.”

20. InLofty vs Bedouin Enterprises Ltd [2005] 2 EA, the Court of Appeal addressed the issue of Section 6(1) of the Arbitration Act. Thus: -“We respectfully agree with these views, so that even if the conditions set out in paragraphs (a) and (b) of Section 6 (1) are satisfied the Court would still be entitled to reject an application for stay of proceedings and referral thereof to Arbitration, if the application to do so is not made at the time of entering an appearance or if no appearance is entered, at the time of filing any pleadings or at the time of taking any step in the proceedings.”

21. The Preliminary Objection herein was the step taken by the 1st Defendant in response to the Plaintiff’s suit.

22. It is not in dispute that there exists an Arbitration Clause under Article 31 of the Articles of Association of the 3rd Defendant Company. It provides that:“Whenever any dispute arises between the company on the one hand and any of the members, their executors, administrators, or assigns on the one hand, touching the true intent of the construction, or the incidents, or consequences of those articles, or of the statutes touching any breach or alleged breach of these articles or claim on 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 such 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, of whom one shall be appointed by each of the parties in difference”

23. The Respondents also contend that the issues raised are factual in nature and amount to criminal conduct and thus should be handled by this Court and not referred to arbitration. It is the Court’s view that the above mentioned clause contemplates dealing with any dispute that affects the affairs of the company and as such the issue of fraud is not precluded from the issues to be dealt with in arbitration.

24. The Respondents acknowledged that the above-mentioned Arbitration Clause under Article 31 applies to this dispute but argued that this Clause 31 is unfair and oppressive.

25. Further, the case of Laiser Communication & 6 others vs Safaricom Limited [supra] relied on by the Respondent is not applicable to the instant case for the main reason that in the said case there was a specific clause limiting liability of the Respondent thus the clause was considered oppressive by the Court.

26. In the instant case, the plain reading of the Arbitration Clause does not bring out any element of unfairness or oppression. The Respondents also failed to support their allegation with regard to the unfairness or oppression of the said arbitration clause.

27. This court makes reference to Article 159 2(c) of the Constitution which encourages litigants to explore alternative forms of dispute resolution including mediation, arbitration and others.

Findings And Determination 28. From the afore-going reasons this court makes the following findings and determinations that;i.This court finds that the Preliminary Objection is merited and it is hereby upheld;ii.The parties are directed to proceed to arbitration for the settlement of their dispute;iii.Each party shall bear its/their own costs.

29Orders Accordingly.

DATED, SIGNED AND DELIVERED ELECTRONICALLYAT NAIROBI THIS 17THDAY OF JUNE, 2022. HON. A. MSHILAJUDGEIn the presence of;Miss Mbugua for the 2nd RespondentMiss Mwaniki for the interested partyNo appearance for the plaintiffsLucy-------------------Court Assistant