[2024] KEHC 11146 (KLR)

Kirima & another v Mungania (Commercial Case E401 of 2024) [2024] KEHC 11146 (KLR) (Commercial and Tax) (19 September 2024) (Ruling)

Neutral citation: [2024] KEHC 11146 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts)

Commercial and Tax

Commercial Case E401 of 2024

PM Mulwa, J

September 19, 2024

Between

Eric Kimathi Kirima

1st Plaintiff

Executive Super Rides Ltd

2nd Plaintiff

and

Justine Kendi Mungania

Defendant

Ruling

1. The defendant filed the Notice of Motion dated 24th July 2024, under Order 51 Rule 1 of The Civil Procedure Rules, Sections 1A, 1B, 3A and 75 of The Civil Procedure Act, seeking the setting aside of the ex-parte orders issued by this Court on the 23rd July 2024.

2. The application is premised on the grounds on its face, the supporting and further affidavit sworn by Justine Kendi Mungania on 24th July 2024 and 31st July 2024 respectively. The grounds are that the ex-parte orders have barred the defendant, the 75% shareholder, the Chief Executive Officer (CEO) and the Managing Director of the 2nd plaintiff company from engaging in all the affairs of the Company including ensuring that its loans are serviced. This has deprived her of the only source of livelihood by hampering the smooth running of the Company as it has active liabilities in form of loans and debentures secured by its assets. She pointed out that due to the orders, there is an impending auction of the Company’s assets on 7th August 2024 as a result of default on its obligations and her non-intervention to safeguard the Company’s assets.

3. The defendant contended that the ex-parte orders are irregular as they were obtained by the 1st plaintiff, a minority shareholder with a 25% stake in the Company, through material non-disclosure of the fact that they have experienced marital problems leading to the filing of Divorce Cause No. E849 of 2024 which is pending and the 1st plaintiff has made it impossible for her to run the Company’s business smoothly. She went on to state that on 12th July 2024, the 1st plaintiff locked her out of the business premises and deployed aggressive goons to keep her off.

4. The defendant argued that the ex-parte orders were irregular and the application by the 1st plaintiff was not brought in good faith and was not in the best interest of the Company. That the same was an abuse of the Court process and ought to be discontinued.

Response 5. In response, the 1st plaintiff put in a replying and further replying affidavits sworn on 30th July 2024 and 31st July 2024 respectively. He deposed that as the proprietor, shareholder and the brains behind the Company he filed the application dated 19th July 2024 seeking to restrain the defendant from withdrawing funds and interfering with the Company’s business. He asserted that the defendant’s application is frivolous, vexatious and an abuse of the Court process in that it has been filed to delay the hearing of his application and further that the same has been brought with malice as it is a scheme towards unjust enrichment. Allowing the said application, the 1st plaintiff asserts, would lead to more unsanctioned withdrawals by the defendant from the various Company accounts.

6. According to the 1st plaintiff, the defendant’s 75% shareholding is on the basis of being a trustee on behalf of the extended family which had contributed the start-up capital. He claimed that the defendant wants the order to be set aside for her gain as there is no guarantee that she would stop interfering with the affairs of the company.

7. According to the 1st plaintiff, the alleged impending auction is just but an excuse by the defendant to continue with her acts of wastage. That to-date, the defendant has not accounted for Kshs. 1,059,000. 00 withdrawn from the Company’s accounts which led to the crippling of its operations. While the defendant claims that the Company has liabilities and its assets are at a risk of being auctioned, there is no proof that any of the withdrawn amounts went towards offsetting any of the liabilities.

8. The 1st plaintiff argues that the interim orders have not placed the Company at risk of insolvency as he will continue to take care of its expenses and ensure its assets are preserved. He denied blocking the defendant from accessing the Company’s premises, pointing to the copies of photographs taken at the premises when the defendant visited and made away with the Company’s assets. He claimed that the assets, now in the custody of the Officer Commanding Station, Kilimani Police Station, are depreciating without proper accounting.

9. The 1st plaintiff averred that the defendant has other competing businesses and submitted that she is not deserving of the orders sought as she has not come to this Court with clean hands. And that the divorce case filed against him by the defendant is unrelated to this matter other than being proof that her application is actuated by ulterior motives.

10. Against this backdrop, the 1st plaintiff submitted that, unless restrained, there is risk defendant will continue with her acts of misuse and alienating and/or disposal of the Company’s assets to its detriment. And yet the Company has liabilities in terms of rents, security charges and remuneration of workers which need to be met.

11. The application was canvassed through oral submissions by the parties’ advocates on 1st August 2024.

Analysis and determination 12. I have considered the application, the parties’ rival affidavits and submissions. The issue for determination is whether the defendant has made a case for the setting aside of the ex parte orders issued on 23rd July 2024.

13. Order 12, Rule 7 of the Civil Procedure Rules, provides that:“Where under this Order judgment has been entered or the suit has been dismissed, the court, on application, may set aside or vary the judgment or order upon such terms as may be just.”

14. Order 51, Rule 15 of the Rules provides that the court may set aside an order made ex parte. Importantly, the Court’s power to set aside an ex parte order is discretionary and must be exercised judiciously, not capriciously. In Mureithi Charles & another v Jacob Atina Nyagesuka [2022] eKLR, the Court noted that:-“That the decision whether or not to set aside ex parte judgment is discretionary is not in doubt and that the discretion is intended so to be exercised to avoid injustice and hardship resulting from accident, inadvertence or excusable mistake or error, but is not designed to assist a person who has deliberately sought whether by evasion or otherwise to obstruct or delay the course of justice. (See Shah vs. Mbogo & Another [1967] EA 116).”

15. The import is that the Court is to consider the unique circumstances of a case and exercise its discretion in a manner that promotes justice.

16. The principles for consideration in determining whether to set aside ex parte orders were also captured by the Court in Alterfin CVBA v Timo & another (Civil Suit 447 of 2015) [2022] KEHC 11961 (KLR) (Commercial and Tax) (19 August 2022) (Ruling), as follows:“7. … The principles applicable in such an application are; the reason for non-attendance and the prejudice, if any, to be suffered by the opposite party. In addition, the application should be made expeditiously.”

17. In this case, the 1st plaintiff's case is that he and the defendant were directors of the 2nd plaintiff Company and in charge of its day-to-day operations. He claims that following a fallout in 2022, the defendant, in breach of her fiduciary duty and duty of care, made unsanctioned withdrawals totalling 1,059,000 from the Company's account for her personal use. He also claimed that on 12th July 2024, the defendant took several company assets which are currently in the custody of the OCS Kilimani Police Station.

18. From the background above, the 1st plaintiff filed an application dated 23rd July 2024 seeking leave to file a derivative suit. On 23rd July 2023, the Court issued interim orders restraining the defendant, her servants, agents and/or employees from withdrawing funds from the business accounts of the 2nd plaintiff, selling, alienating, transferring, charging, disposing, removing or in any way, manner whatsoever dealing with the assets of the 2nd plaintiff company pending the hearing of the application.

19. On her part, the defendant's case is that she is the majority shareholder with a 75% stake in the Company. The defendant produced the Memorandum and Articles of Association of the Company showing that she was a founding member and director. She also produced the Official Search - CR12 showing that she has a 75% stake.

20. In rebuttal, the 1st plaintiff contended that the defendant only holds the 75% stake in the Company as a trustee. He produced share transfer forms showing that 500 shares in the Company were transferred from Agnex Holding Corporation Limited to the defendant. The defendant however denied that she was a trustee, claiming that the Company does not operate in a manner as to hold her trustee, which falls under a separate regime.

21. The defendant submitted that the application was brought before the Court with material non-disclosure leading to blindsiding the Court on the situation obtaining. She highlighted that in 2022, she filed a similar case, HCCOMM/E307/2022 where the Court barred the 1st plaintiff (then defendant) from disposing of or transferring any of the company’s properties, shares or assets until further orders of the court. Commitments were made prior to compromising the suit but the conditions were not met leading to the present situation.

22. Regarding the claim of adverse withdrawals of Company funds, the defendant denied that she withdrew Kshs. 1,059,000. 00 and averred that any funds withdrawn were for settling the Company’s commitments. She also asserted that she is entitled to make such withdrawals to meet expenses related to the Company. And that equally the 1st plaintiff has made such withdrawals.

23. She explained that she took some of the office equipment for purposes of setting up an off-site working space after she had been blocked from accessing the Company’s offices. Regarding the other two companies that she operates, she indicated that they deal with event management and are not in competition with the 2nd plaintiff Company.

24. From the record, the defendant has demonstrated that she is the majority shareholder with a 75% stake in the Company. The 1st plaintiff merely produced share transfer forms showing that 500 shares in the Company were transferred from Agnex Holding Corporation Limited to the defendant, which is not evidence of a trust. Both sides have produced evidence that there were withdrawals from the Company’s accounts by either party into their personal accounts. Both sides also claimed that the Company is under threat of insolvency but neither party has shown evidence that the funds withdrawn by them were used to settle Company commitments.

25. It is also clear that the 1st plaintiff failed to disclose material facts relating to a previous suit which was compromised on certain conditions which have not been met. The 1st plaintiff also failed to disclose that he and the defendant are a married couple who are involved in a divorce cause.

26. On the duty of an applicant to make full and frank disclosure in an ex-parte application, the Court in Owners of the Motor Vessel “Lillian S” v Caltex Oil (K) Ltd [1989] eKLR quoted Gili Robert Golf L.F (as he then was) in the Adria (Vasso) 1 QB 477 AT 477, as follows:-“It is axiomatic that in ex-parte proceedings there should be full and frank disclosure to the court of facts known to the applicant, and that failure to make such disclosure may result in the discharge of any order made upon the ex-parte application, even though the facts were such that, with full disclosure, an order would have been justified.”

27. Taking the whole matter into consideration, I am of the view that the interim orders of 23rd July 2024 are prejudicial to the defendant who is entitled to the right to be heard.

Conclusion 28. In conclusion, the defendant’s application dated 24th July 2024 is found to be merited. The interim orders of 23rd July 2024 are set aside. The 1st plaintiff’s application dated 23rd July 2024 is to be set down for inter-partes hearing on a priority basis. Costs to be in the cause.

RULING DELIVERED VIRTUALLY, DATED AND SIGNED AT NAIROBI THIS 19TH DAY OF SEPTEMBER 2024. ......................P. MULWAJUDGEIn the presence of:Mr. Anyoka for plaintiffMr. Bosire & Mr. Muriithi h/b for Mr. Omwansa Ombati for defendantCourt Assistant: Carlos