[2022] KEHC 9869 (KLR)

Mbuu & another v Mbuu & 2 others (Civil Case E198 of 2022) [2022] KEHC 9869 (KLR) (Commercial and Tax) (8 July 2022) (Ruling)

Neutral citation: [2022] KEHC 9869 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Law Courts)

Commercial and Tax

Civil Case E198 of 2022

DAS Majanja, J

July 8, 2022

Between

Belinda Mbuu

1st Plaintiff

Mumbu Holdings Limited

2nd Plaintiff

and

John Kariuki Mbuu

1st Defendant

Stella Njambi Mbuu

2nd Defendant

Spire Bank Limited

3rd Defendant

Ruling

1. Before the court for determination is the Plaintiffs’ Notice of Motion dated 2nd June 2022 made, inter alia, under sections 238 and 239 of the Companies Act, 2015 and Order 40 Rule 2 of the Civil Procedure Rules seeking the following orders:1. Spent*2. That the 1st Plaintiff/Applicant be granted permission to continue the Derivative Claim seeking relief on behalf of Mumbu Holdings Ltd the herein (sic) 2nd Plaintiff being acts of fraud, misrepresentation, breach of duty and breach of trust against 2nd Plaintiff by the 1st and 2nd Defendants.3. Spent*4. That pending the hearing and determination of this suit an Injunction be issued restraining the Defendants, their servants, agents and/or employees from auctioning, selling, alienating, transferring, charging, disposing, removing or inany way manner whatsoever dealing with the assets of the 2nd Plaintiff company namely being Title Number I.R. 55347 (L.R. No. 7158/312)5. That the costs of the Application be provided for.

2. The application is supported by the 1st Plaintiff’s affidavit sworn on 2nd June 2022. It is opposed by the 3rd Defendant (“the Bank”) through the replying affidavit of its Senior Legal Officer, John Wageche, sworn on 7th June 2022. In addition to their pleadings and in further support of their positions, the Plaintiffs and the Bank have filed written submissions. The 2nd and 3rd Defendants did not respond to the application.

3. The facts giving rise to this application can be gleaned from the plaint and the parties’ depositions. The 1st Plaintiff and the 1st and 2nd Defendants are family members where the 1st Defendant is the father and together, they are directors and shareholders in the 2nd Plaintiff (“the Company”). The 1st Plaintiff holds 713,066 ordinary shares, the 1st Defendant holds 1,147,735 ordinary shares and the 2nd Defendant holds 713,067 ordinary shares. The 1st Defendant’s two children and siblings of the 1st Plaintiff and the 2nd Defendant are also directors and shareholders of the Company and currently reside in the United States of America.

4. Sometime in July 2015, a company, Mbukabu Limited resolved to, inter alia, apply for a loan of KES. 90,000,000. 00 from the Bank for the purchase of a property; LR 209/2054 situated along Muthithi Road, Nairobi. The Bank, in a facility letter dated 1st December 2016 agreed to advance the said loan to Mbukabu Limited which loan was to be secured by, inter alia, a charge over LR 7158/312, Spring Valley, registered in the name of the Company (“the suit property”) and a Corporate Guarantee by the Company for KES. 90,000,000. 00.

5. The Plaintiffs’ case is that the decision by the 1st and 2nd Defendants to obtain the facility from the Bank and charge the suit property was done without any authorization from the other directors, that the purchase of the property LR 209/2054, Muthithi Road, Nairobi is mired in fraud and misrepresentation as the seller therein is not the owner of this property, that the Company never received any benefit or consideration from the monies advanced from the Bank to Mbukabu Limited and that the action of the 1st and 2nd Defendants was done without the consent of the Company expressed by a resolution of all its Board of Directors.

6. As a result of the fraudulent acts, the Plaintiffs pray for an injunction restraining the Defendants from selling or in any way manner whatsoever dealing with the assets of the Company, a declaration that the Charge and Guarantee made by the Company to the Bank be rescinded and or set aside as having been procured by misrepresentation by the 1st and 2nd Defendants, that the Charge created over the suit property be declared null and void and that damages be awarded in favour of the Company from the 1st and 2nd Defendants.

7. Following default in loan repayments by Mbukabu Limited, the Bank commenced the process of recovery of the outstanding amount by issuing demand notices to the said company. As the company had failed to regularize its account, the Bank took steps to exercise its statutory power of sale over the suit property. It advertised the suit property for sale thus precipitating this suit by the Plaintiffs to forestall the sale. They also seek permission to file a derivative suit under the provisions of Part XI of the Companies Act, 2015

The Application 8. The Plaintiffs’ application is grounded along the lines I have highlighted above. The Plaintiffs add that the 1st Defendant did not disclose to the 1st Plaintiff that he was a beneficiary of the money advanced to Mbukabu Limited contrary to the provisions of section 151(1)(a) of the Companies Act, 2015. They aver that the Company is limited in its actions by its Memorandum of Objects and Articles of Association and that the act of the 1st and 2nd Defendants committing the Company to give a corporate guarantee to the Bank was an arbitrary act. They contend that the Company stands to lose the suit property as a result of the 1st and 2nd Defendants’ arbitrary act which is in complete contravention of the Company’s rights allowed under the provisions of Article 40(2)(a) of the Constitution which protects the right to property.

9. The Plaintiffs contend that they have a reasonable cause of action against the 1st and 2nd Defendants for the negligence, fraud and misrepresentation committed by the 1st and 2nd Defendants which will cause the Company to suffer a great loss and damage unless restrained by the Court. They submit that the 1st and 2nd Defendants owe a duty of care and loyalty and a statutory duty to the Company to ensure that their actions do not adversely affect it. That in this instance the 1st Defendant chose to enrich another company in which he is a director of at the expense of the Company.

10. The Plaintiffs pleads that unless restrained by the Court, the Company will suffer loss and damage if the Bank is allowed to sell the suit property. The 1st Plaintiff states that she fairly and adequately represents the interests of the other shareholders similarly situated and that of the Company. She states that she does not have a personal vendetta against the 1st and 2nd Defendants but is acting in good faith and is intent to promote the success of the Company.

11. The Plaintiffs further aver that unless the injunction is issued, the Company will not have any recourse against the 1st and 2nd Defendants and/or Mbukabu Limited as the Company would have acted under its statutory rights. The 1st Plaintiff depones that she did not know of the events leading to the sale and the nefarious acts of the 1st and 2nd Defendant as she was outside the country and only discovered the acts after she returned and conducted investigations.

12. The Plaintiffs urge that the cause of action of this suit is a derivative claim against the 1st and 2nd Defendants which is to protect the minority shareholders against oppressive actions and decisions by the majority. In the foregoing, the Plaintiffs pray that the court grants the orders sought in their application.

The Bank’s Reply 13. The Bank opposes the application and denies all the allegations of fraud against it. It avers that the Plaintiffs have not made out a case for the grant of orders sought. It points out the Plaintiffs are forum shopping having filed various applications before different courts on the subject matter. That the Company filed suit in Mumbu Holdings Ltd v Spire Bank Ltd & 5 others (Commercial Civil Suit E336 of 2020) [2021] KEHC 15 (KLR) (Commercial and Tax) (14 September 2021) (Ruling), seeking injunctive orders restraining the Bank from selling the suit property on grounds that the sale on was marred with fraud. Mativo J., heard the application and dismissed it on 26th February 2021. The Court of Appeal dismissed the Company’s application for an injunction pending appeal in Civil Application No. E068 of 2021. The Bank states that the Company filed another application for an injunction clothed as a review, which application is pending determination.

14. The Bank states the Company also filed Mumbu Holdings Limited v Spire Limited & 6 others NRB ELC No. E175 of 2021 [2021] eKLR seeking injunctive orders restraining the Bank from selling the suit property. It objected to the suit on the ground that the court lacked jurisdiction and that the suit was res judicata. The court struck out the suit by a ruling dated 11th November 2021. Based on the previous determinations aforesaid, the Bank avers that the application and this suit are res judicata as the issues raised have been heard and been determined by courts of competent jurisdiction.

15. As regards the substance of the application, the Bank depones that during the loan application process, Mbukabu Limited forwarded a company profile belonging to the Company which clearly indicated that Mbukabu Limited was a subsidiary of the Company. The Bank states that it is aware that the Company’s directors held a meeting on 19th January 2017 and approved the Corporate Guarantee issued on 30th January 2017 by the Company.

16. The Bank contends that when the Company defaulted in its repayment of obligations, the Company, in a letter signed by the 1st Plaintiff, wrote to the Bank on 2nd April 2020 seeking a waiver of interest and extension of the repayment of the loan owingto the COVID- 19 pandemic. The Bank therefore contends that the allegations fraud, misrepresentation or breach of trust against the Company and the 1st and 2nd Defendants are made in bad faith. The Bank accuses the Company of feigning ignorance of the process leading to the grant of the facility as it was involved from the beginning and as demonstrated in a Bank Statements showing the Company making payments on behalf of Mbukabu Limited. The Bank contends that the two companies have a corporate and commercial relationship and rely on each other for financial and technical assistance and support.

17. The Bank further states that when the auction of the suit property was scheduled for the 16th March 2021, the Company approached the Bank with a settlement proposal pursuant to which it deposited KES. 2,000,000. 00 on account of the outstanding amount. Thereafter the parties were to enter into a deed of settlement but the Company frustrated all efforts resulting in the Bank advertising the suit property for sale on 25th May 2021.

18. The Bank submits that the court should not permit the derivative action as the 1st Plaintiff was aware of the transactions leading to the sale of the suit property and that she has, on numerous occasions, negotiated with the Bank on settling the outstanding amount.

Analysis and Determination 19. Before determining the substance of the application, which is whether the court should issue an injunction restraining the Bank from exercising its statutory power of sale, the court must determine whether the suit should proceed by allowing the 1st Plaintiff to proceed with the suit as a derivative action.

20. Whether the court should grant permission to the 1st Plaintiff to proceed with this suit as a derivative suit is governed by sections 238 and 239 of the Companies Act which provides as follows:238 (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.(4)A derivative claim may be brought against the director or another person, or both.(5)It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.(6)For the purposes of this Part—(a)"director" includes a former director;(b)a reference to a member of a company includes a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.239. Application for permission to continue derivative claim(1)in order to continue a derivative claim brought under this Part by a member, the member has to apply to the Court for permission to continue it.(2)If satisfied that the application and the evidence adduced by the applicant in support of it do not disclose a case for giving permission, the Court—(a)shall dismiss the application; and(b)may make any consequential order it considers appropriate,(3)If the application is not dismissed under subsection (2), the Court—(a)may give directions as to the evidence to be provided by the company; and(b)may adjourn the proceedings to enable the evidence to be obtained.(4)On hearing the application, the Court may—(a)give permission to continue the claim on such terms as it considers appropriate;(b)refuse permission and dismiss the claim; or(c)adjourn the proceedings on the application and give such directions as it considers appropriate.

21. In considering whether to grant permission, the court is also guided by section 241 of the Companies Act which sets out circumstances under which the court shall refuse the application and the considerations the court shall take into account when granting permission to the applicant to continue the suit as a derivative suit. The section provides as follows:241(1)If a member of a company applies for permission under section 239 or 240, the Court shall refuse permission if satisfied—(a)that a person acting in accordance with section144 would not seek to continue the claim;(b)if the cause of action arises from an act or omission that is yet to occur-that the act or omission has been authorized by the company;(c)if the cause of action arises from an act or omission that has already occurred — that the act or omission—(i)was authorised by the company before it occurred; or(ii)has been ratified by the company since it occurred.(2)In considering whether to give permission, the Court shall take into account the following considerations:(a)whether the member is acting in good faith in seeking to continue the claim;(b)the importance that a person acting in accordance with section 143 would attach to continuing it;(c)if the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be—(i)authorised by the company before it occurs; or(ii)ratified by the company after it occurs;(d)if the cause of action arises from an act or omission that has already occurred-whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company(e)whether the company has decided not to pursue the claim;(f)whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in the member's own right rather than on behalf of the company.(3)In deciding whether to give permission, the Court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest (direct or indirect) in the matter.

22. In this case, the 1st Plaintiff seeks to exercise the right of the Company to invalidate the charge and corporate guarantee which the Company issued in favour of the Bank in order to secure advances to Mbukabu Limited. This is not a case where the Company has refused to take action to invalidate the security issued in favour of the Bank hence the Bank’s plea that this matter is res judicata.

23. In Hcomm No. E336 of 2022, the Company sued the Bank, Mbukabu Limited, the advocates who prepared the charge, the Ministry of Lands and the Attorney General seeking, inter alia, a declaration that the charge document issued in favour of the Bank is null and void as it is tainted with illegality and fraud and an order directing the Bank to discharge the charge. In that case, the Company accused the Bank of participating in commission of fraud against it and benefitting from the said fraud. It accused the Bank and its advocates of committing and facilitating fraud and an illegality to the Company’s detriment. In that case, the court concluded that the Company had not established a prima facie case to warrant the grant of an injunction. Undeterred, the Company filed the other suit, NRB ELC No. E175 of 2021 seeking to invalidate the same charge issued in favour of the Bank. The suit was struck out on the ground that it was res judicata.

24. What the two suits show is that the Company has always been willing to prosecute the Bank for the alleged fraudulent charge and if the suit is ultimately successful, the Company will be awarded damages for the suit property sold by the Bank. The suit by the Company against the Bank is still pending hearing and determination hence the court cannot grant permission to proceed with the suit when the Company is still litigating on the same matter.

25. Apart from the fact that the Company is still pursuing proceedings, the 1st Plaintiff, who seeks leave, and was at the material time the Executive Director wrote to the Bank a letter dated 2nd April 2020 referenced, “Mbukabu Loan Account No. 0406 ****01’’ seeking a waiver of interest and extension of time for repayment of instalments. In my view, this letter shows that the 1st Plaintiff was well aware of the facilities and was actively involved in affairs of the Company. The intention to file this suit in light of the previous and pending litigation by the Company against the Bank and others lead to the conclusion that the permission is not sought in good faith. I hold that that the 1st Plaintiff’s intention is to circumvent the orders the court has already issued denying the Company an injunction to restrain the Bank from exercising its statutory power of sale.

26. I accept that the 1st Plaintiff is, on her own, a minority shareholder but in conjunction with the other shareholders, Eric Victor Mbuu and Brian Alexander Njogu Mbuu, she could muster a majority and prosecute the Bank and the two shareholders; John Kariuki Mbuu and Stella Njambi Mbuu. This matter that ought to be put to the members of the Company to make a decision whether to withdraw the pending case and proceed with a fresh case against its own shareholders and the Bank. The 1st Plaintiff has not demonstrated in its deposition that the complaints she has against the 1st and 2nd Defendants have been put to the Company to resolve.

27. Finally, under section 241(c) of the Companies Act, the act complained of, that is the authorization of the charge and guarantee issued in favour of the Bank to secure advances to Mbukabu Limited, is an act the Company authorized and has already taken place hence the court will not grant permission. In any case, it has been demonstrated that the Company has taken steps to avoid the charge by filing several suits.

Disposition 28. For the reasons I have set out, I decline to grant the 1st Plaintiff permission to proceed with this suit on behalf of the 2nd Plaintiff against the Defendants. Having declined to grant such permission, the only relief I can grant is to strike out the suit with costs.

29. The interim orders in force are now discharged and the KES. 600,000. 00 paid to court shall be released to the 3rd Defendant or its advocate on record on account of costs of this suit, the application and costs of stopping the sale of the suit property.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF JULY 2022. D. S. MAJANJAJUDGECourt of Assistant: Mr M. OnyangoDr Khaminwa instructed by Khaminwa and Khaminwa Advocates for the PlaintiffsMs Karanu instructed by Karanu Kanai and Company for the 3rd Defendant.