[2022] KEHC 12051 (KLR)

Munene v Njagi & another (Civil Case E617 of 2021) [2022] KEHC 12051 (KLR) (Commercial and Tax) (21 July 2022) (Ruling)

Neutral citation: [2022] KEHC 12051 (KLR)

Republic of Kenya

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

Commercial and Tax

Civil Case E617 of 2021

WA Okwany, J

July 21, 2022

IN THE MATTER OF THE COMPANIES ACT, 2015

Between

Edgar Munene

Plaintiff

and

Jane Nyaboke Njagi

Defendant

and

Kipkai Enterprises Ltd

Affected Party

Ruling

1. The Plaintiff filed the Plaint dated May 31, 2021 as a derivative action on behalf of the Affected Party. Concurrently with the Plaint, the plaintiff also filed an Application dated June 8, 2021 seeking, inter alia, the leave of court to enable it continue with the derivative action.

2. Upon service with the Plaint and the Application, the defendant filed a Preliminary Objection dated June 28, 2021 (hereinafter the “PO”) challenging the jurisdiction of this Court to hear and determine the Application. The Preliminary Objection is premised on the grounds that:-a.The Plaintiff has failed to exhaust the internal mechanisms as contemplated in clauses 11, 12 and 31 of the Articles of Association …and in particular among others, the Applicant having by-passed the initial meeting, by all the directors, which was due for July, 2021 and/or subsequent arbitration, if need be and;b.it is filed and premised on a suit which is not properly before this Honourable court.

3. The court directed the parties to canvass the Preliminary Objection by way of written submissions.

4. The defendant submitted that the court lacks the jurisdiction to determine the case as the internal mechanisms of Dispute Resolution have not been exhausted as contemplated by clauses 11, 12 and 31 of the Articles and Memorandum of Association of the Affected party, Article 159(2) (c) of the Constitution and the Arbitration Act, among other relevant statutes.

5. The defendant submitted that the day to day business of the Affected party are governed by the Memorandum and Articles of Association which provides for arbitration as the first port of call in determining differences between the company and its members. In this regard, the defendant cited Clause 31 of the Company’s Articles of Association, Section 6 of the Arbitration Act, Article 159 of the Constitution and several decided cases on the subject of the court’s jurisdiction where there is an arbitral clause.

6. The defendant faulted the plaintiff for ignoring the dispute resolution process provided for in the Affected party's Memorandum and Articles of Association and added that the special procedure provided by the law must be strictly adhered to since there are good reasons for such special procedures unless declared, by a court or law, unconstitutional, null and void.

7. It was the defendant’s case that the allegations made by the plaintiff in the plaint can be effectively resolved, as provided in the Affected party's Memorandum and Articles of Association, through the general meeting and when not possible, through arbitration.

8. The defendant further submitted that the provisions of Section 238 and 239 of the Companies Act require that leave be obtained before the filing of derivative suit so as to enable the court, at the preliminary stage of the leave application, to screen the case and satisfy itself that there is a prima facie and meritorious case worthy of its leave/permission before the case can be filed.

9. The defendant observed that in the present case, the derivative suit was filed without the leave of the court as the application dated June 8, 2021 was not filed alongside the derivative suit. The defendant argued that the suit is therefore a non-starter as the application seeks to regularize a suit which is improperly and irregularly before the court.

10. On his part, the plaintiff submitted that the Preliminary Objection is misconceived and brought out of misapprehension of the Plaintiff’s Application and the suit. For this argument, the plaintiff cited the provisions of Section 238 of the Companies Act on the aspects of a ‘derivative claim’ and added that he has, in his application, tendered evidence to prove that the parties attempted to call for meetings to settle the dispute through negotiations and that the defendant as a majority shareholder, has frustrated all such attempts and negotiations.

11. The plaintiff contended that as a minority shareholder, it would be impossible for him to invoke the Arbitration clause since it requires a board resolution yet the defendant, who is the majority shareholder, has the veto power. The plaintiff emphasized that it goes without saying that his efforts to obtain the board resolution have not only been frustrated but would be unwelcome by the defendant.

12. The plaintiff reiterated that in the circumstances of this case, it would be a mockery of justice and against the whole essence of Sections 238 and 239 of the Companies Act 2015 and spirit of the Act thereof to refer the Applicant to an internal dispute resolution mechanisms controlled by the Respondent. For this argument, the plaintiff referred to the decision in Altaf Abdulrasul Dadani vs Amini Akberazi & 3 Others, Nairobi (Milimani) HCCC No 913 of 2002 [2004] 1 KLR 95,) where the court stated as follows: -“By derivative suits, the minority shareholders (s) feeling that wrongs have been done to the company which cannot be rectified by the internal company mechanisms like meetings and resolutions, because the majority shareholders are in control of the company”

13. The plaintiff further argued that he has raised other justiciable issues in the plaint that call for evidence and or rebuttal by the defendant and that cannot be determined in an arbitration proceedings called by the company as the Defendant, being the majority shareholder, would frustrate such a process. He highlighted the issues not subject for referral to Arbitration as follows: -i.Whether Defendant has engaged in criminal activities that has brought disrepute to the Affected Party’s name. (See paragraph 49 of the supporting affidavit);ii.Whether the affected party has suffered financial loss of Kshs 70,759,500/=iii.Whether the respondents have failed or neglected to convene Annual General Meetings as per Section 310 of the Companies Act;iv.Whether the respondents have failed to supply the Registrar of Companies with the annual audited financial statements and file returns for the Affected Party.

14. For the argument that some of the issues raised in the plaint cannot be referred to arbitration, the plaintiff cited the decision in Nanchang Foreign Engineering Company (K) Limited Easy Properties Kenya Limited [2014] eKLR where it was held that: -“The Defendant’s argument was really that since there was an arbitration clause, the matter should be referred to arbitration. Such referral is not automatic. As has been seen in Section 6 (1) (b) of the Arbitration Act, it is a condition precedent that there be a dispute capable of being referred to arbitration…”

15. It was further the plaintiff’s argument that the defendant has merely raised the Preliminary Objection as a sword, for winning a case otherwise destined to be resolved judicially, and on the merits of the intended suit. Reference was made to the decision in Independent Electoral & Boundaries Commission vs Jane Cheperenger & 2 Others[2015] eKLR where the court observed as follows: -“(21)The occasion to hear this matter accords us an opportunity to make certain observations regarding the recourse by litigants to Preliminary Objections…. It is distinctly improper for a party to resort to the Preliminary Objection as a sword, for winning a case otherwise destined to be resolved judicially, and on the merits.”

Analysis and Determination 16. I have carefully considered the parties’ respective submissions together with the authorities that they cited. I find that the main issue for determination in the Preliminary Objection is whether this court has the jurisdiction to hear and determine the application and by extension, the main suit.

17. What constitutes a Preliminary Objection was discussed in the celebrated case of Mukisa Biscuits Manufacturing Company Ltd vs West End Distributors (1969)EA 696 where it was held that: -“….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...”

18. Similarly, in Oraro vs Mbaja (2005) KLR 141 the court referred to the definition of a Preliminary Objection as stated in the Mukisa Biscuits case (supra) and went on to state that: -“A 'Preliminary Objection' correctly understood is now well defined as and declared to be a point of law which must not be blurred by factual details liable to be contested and in any event, to be proved through the process of evidence……Anything that purports to be a Preliminary Objection must not deal with disputed facts, and it must not itself derive its foundation from factual information which stands to be tested by normal rules of evidence.”

19. In the instant case, the Defendant’s Preliminary Objection is based on the claim that the Plaintiff has not exhausted internal mechanisms of dispute resolution and in particular among others, the Applicant having by passed the initial meeting, by all the directors, which was due for July, 2021. The defendant also contended that the application filed with the plaint was not properly before the court as it is premised on a suit which is not properly before the court as leave was not sought and obtained prior to the filing of the suit.

20. As I have already stated in this ruling, the application herein was filed contemporaneously or at the same time with the plaint. Section 239 (1) of the Actprovides that: -“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”.

21. A plain reading of the above provision indicates that a derivative claim ought to have been filed before the leave is sought. This, to my mind, means that a party cannot seek to continue with a case that does not exist.

22. Section 241 of the Actsets out the circumstances under which the court can refuse to grant leave and I note that failure to seek leave before filing the derivative claim is not one of them. In essence therefore, a party can choose to obtain leave before or after filing a derivative suit. This is the position that was taken in MISC APPL 273/2012 In The Matter of CMC Holdings where Musinga J. (as he then was) held that:“The fact that the plaint was filed in a different court file at a different time from the one where leave was granted could not invalidate the derivative suit because that was a procedural issue and Article 159(2)(d) of the Constitution empowers the court to dispense justice without undue regard to procedural technicalities”.

23. Similarly, in CA 101/2004 Amin Akberali Manji vs Hemanthi Kure & Al Taf Dadan, the Court of Appeal upheld the High Court’s decision to have an application for leave filed within the main suit and stated that:“I find that the fact of filing a miscellaneous application seeking leave to file a derivative suit cannot deny the applicants the right to leave. All they have to do is establish that they have a prima facie case sufficient for the court to grant them leave”.

24. Turning to the issue of whether this court has the jurisdiction to hear and determine the application and by extension, the main suit, I find that general rule is that jurisdiction is a point of law without which a court must down its tools. In the instant case however, the defendant states that this court’s jurisdiction to hear and determine the case is ousted by virtue of the existence of an arbitration clause in the Affected Parties’ Memorandum and Articles of Association.

25. It was not disputed that the Affected Party’s Memorandum and Articles of Association provides for arbitration clause at Clause 31 thereof as follows: -Whenever any difference arises between the Company on one hand and any of the members, their executors, administrators, or assigns on the other hand, touching the true intent or construction, or the incidents, or consequences of these Articles, or of the statutes, or touching anything then or thereafter done, executed, omitted, or suffered in pursuance of these Articles, or any touching any breach, or alleged breach, of these Articles, or any claim on account of any breach, or alleged breach, or otherwise relating to the premises, or to these Articles or to any statutes affecting the company, or any of the affairs of the Company, every such difference shall be referred to the decision of any arbitrator, to be appointed by the parties in difference, or if they cannot agreed upon a single arbitrator to the decision of two arbitrators, of whom one shall be appointed by each of the parties in difference.

26. Clauses 11 and 12 of the Affected Party's articles of association provide for proceedings at the general meetings which include resolving of any disputes a follows: -11. No business shall be transacted at any general meeting unless a quorum of members is present at the time when the meeting proceeds to business; save as herein otherwise provided, two members present in person shall be a quorum.

12. Subject to the provision of the Act, a resolution in writing signed by all members for the time being entitled to receive notice of and to attend and vote at any general meeting (or being corporations by the duly authorized representatives shall be as valid and effective as if the same had been passed at a general meeting of the company duly convened and held'

Section 6 of the Arbitration Act provides as follows: 6(1)A Court before which proceedings are brought in a matter which is the subject of 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 proceeding is sought, stay the proceedings and refer to the parties to arbitration unless it finds:a.That the arbitration agreement is null and void, inoperative or incapable of being performed; orb.that there is not in fact any dispute between the parties with the matters agreed to be referred to arbitration.

27. Article 159(2) (c) of the Constitution provides as follows on arbitration as an alternative form of dispute resolution: -Alternative forms of dispute resolution including reconciliation, mediation, arbitration and traditional dispute resolution mechanisms shall be promoted subject to clause (3)’

28. Courts have taken the position that where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. ( See Speaker of National Assembly vs Karume[1992] KLR21 and Geoffrey Muthiga Kabiru & 2 others vs Samuel Munga & 1756 others [2015] eKLR).

29. In the present case, the defendant argued that since Clause 31 specifically provides for a dispute resolution mechanism outside courts, the same should be exhausted before the jurisdiction of the jurisdiction of the Courts is invoked.

30. The plaintiff, on the other hand countered the defendant’s argument by stating that the instant suit is a derivative suit not capable of being determined through the Company’s dispute resolution mechanism where the defendant, as the majority shareholder, holds veto power as the majority would torpedo such a process.

31. Section 238 of the Act 2015 provides as follows on derivative suits: -(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; andb.seeking relief on behalf of the company.2. A derivative claim may be brought only- (a) under this Part; or 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.

32. Section 239 of theAct on the other hand stipulates that: -(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.a.If satisfied that the application and the evidence adduced b)' the applicant in support of it do not disclose a case for giving permission, the Court(g) shall dismiss the application; and(h)may make any consequential order it considers appropriate.b.If the application is not dismissed under subsection (2), the Court-i.may give directions as to the evidence to be provided by the company; andj.may adjourn the proceedings to enable the evidence to be obtained.c.On hearing the application, the Court may-(k)give permission to continue the claim on such terms as it considers appropriate; (l) refuse permission and dismiss the claim; or(m)Adjourn the proceedings on the application and give such directions as it considers appropriate. "

33. In Amin Akberali Manji & 2 Others vs Altaf Abdulrasul Dadani & Another[2015] eKLR it was held as follows:-“There is an exception to the rule where what has been done amounts to fraud and the wrongdoers are themselves in control of the company. In this case, the rule is relaxed in favor of the aggrieved minority, who are allowed to bring a minority shareholders action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves being in control, would not allow the company to sue.”

34. My finding is that, in the circumstances of this case and in light of the undisputed fact that the plaintiff is a minority shareholder in the company, one cannot in all honesty state that arbitration will be an avenue for the resolution of the dispute herein. Furthermore and from the very outset, a plain reading of the wordings of the Preliminary Objection itself reveals that it is founded on factual information relating to resolutions passed or to be passed at a meeting. It is instructive to note that the Plaintiff, in his affidavit, contests the claim that the said meeting took place in the manner suggested by the defendant. Clearly therefore, the averments by the parties already paint a scenario where the internal dispute resolution, pegged on a resolution by majority of the members at a meeting, will not be possible. There was also the uncontested issue of whether the issues raised in the suit are such that they can be dealt with through arbitration.

35. I further find that even though it is not in disputed that the company herein has an arbitration clause in its Memorandum and Articles of Association, the second limb of Section 6 (1) (a) of the Arbitration Act is applicable to exclude the applicability of the clause to this proceedings as it is apparent that arbitration will be incapable of being performed.

36. For the reasons that I have stated in this ruling, I am not satisfied that the Preliminary Objection is merited and I therefore strike it out with orders that costs shall abide the outcome of the suit.

DATED, SIGNED AND DELIVERED VIRTUALLY AT NAIROBI THIS 21STDAY OF JULY 2022. W. A. OKWANYJUDGEIn the presence of: -Ms Ngare for the PlaintiffNo appearance for the RespondentCourt Assistant- Sylvia