[2024] KEHC 11119 (KLR)

Mustek East Africa Limited v Mtawa Technologies Limited & 3 others (Civil Case E476 of 2022) [2024] KEHC 11119 (KLR) (Commercial and Tax) (20 September 2024) (Judgment)

Neutral citation: [2024] KEHC 11119 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts)

Commercial and Tax

Civil Case E476 of 2022

FG Mugambi, J

September 20, 2024

Between

Mustek East Africa Limited

Plaintiff

and

Mtawa Technologies Limited

1st Defendant

Felix Omondi Owira

2nd Defendant

Maureen Owira

3rd Defendant

Albert Ngunyi Kimita

4th Defendant

Judgment

1. The plaintiff commenced this suit through a plaint dated 25/11/2021, seeking judgment against the defendants, jointly and severally. The 2nd and 3rd defendants are sued in their capacities as directors and shareholders of the 1st defendant company. The 4th defendant is a former employee of the plaintiff company.

2. The plaintiff's claim against the defendants is based on an alleged fraudulent scheme in which the 4th defendant is accused of colluding with the other defendants to approve dealership credit facilities for the 1st defendant, totaling Kshs. 9,535,245. 68. These credit facilities were intended for the purchase of computers, desktops, printers, laptops, and other accessories.

3. The plaintiff argues that the credit facility was obtained without any due diligence being conducted on the 1st defendant. To facilitate the fraud, the 4th defendant arranged for delivery of equipment to the 1st defendant who had no intention of paying for it. Meanwhile, the cheques issued by the 1st defendant were dishonoured, causing further financial loss to the plaintiff.

4. The plaintiff also asserts that attempts to locate the 1st defendant and recover the items have been unsuccessful, as the 1st defendant has closed its offices, and the 2nd and 3rd directors have relocated to an unknown location. Consequently, the plaintiff seeks the following remedies against the defendants:i.A declaration that the 1st defendant was incorporated and used for unlawful and fraudulent dealing/trading purpose by the 2nd and 3rd defendants to shield the latter from liability arising from the said unlawful and fraudulent purpose or business including but not limited to colluding with the 4th defendant to defraud the plaintiffs its goods without intent to pay the value thereof;ii.An Order be and is hereby granted lifting and or piercing the veil of the 1st defendant and holding the 2nd and 3rd defendants together with any promoters, directors and shareholders of the 1st defendant between the years 2015 to 2017 liable for payment to the plaintiff of KES. 9,535,245. 68 being the value of the plaintiff’s goods ordered and delivered to the 1st defendant by the plaintiff;iii.Kshs. 9,535,245. 68;iv.General damages for fraud;v.Interest on (iii) at 3% per month from 6th September 2016 and on (iv) above at court rates from the date of filing suit until payment in full for both of the items;vi.Costs of the suit.

5. The defendants failed to enter an appearance or file a defense within the required timelines. Consequently, on 5/07/2023, this court entered an interlocutory judgment against the defendants for the liquidated claim and directed that the matter be set down for a formal proof hearing.

6. This hearing took place on 13/05/2024, during which the plaintiff presented its witness, Come Combrink, as PW1. The witness’s testimony is as reflected in his witness statement dated 25/11/2022, which he adopted as his evidence-in-chief and produced a bundle of documents on behalf of the plaintiff.

7. Given that judgment has already been entered in the matter, the issues for determination are:i.Whether the Plaintiff is entitled to the general damages for fraud;ii.Whether the plaintiff is entitled to the interest of 3% per month from 6/09/2016 on the principal sum of Kshs. 9,535,245. 68 and on the general damages awarded;iii.Whether the court should lift and pierce the corporate veil of the 1st defendant and hold the 2nd and 3rd defendants together with any promoters, directors and shareholders of the 1st defendant between the years 2015 and 2017 liable for payment of the decretal sum.

The claim for general damages: 8. The first issue is whether the plaintiff is entitled to general damages for fraud. In order to succeed in a claim of fraud the plaintiff must prove the existence of:“…some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury. As distinguished from negligence, it is always positive, intentional. As applied to contracts, it is the cause of an error bearing on a material part of the contract, created or continued by artifice, with design to obtain some unjust advantage to the one party, or to cause an inconvenience or loss to the other. Fraud, in the sense of a court of equity, properly includes all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust, or confidence justly reposed, and are injurious to another, or by which an undue and unconscientious advantage is taken of another.”

9. This definition of fraud is captured in the Black’s Law Dictionary, and was referred to by the Court of Appeal in Arthi Highway Developers Ltd V West End Butchery Limited & 6 Others, NRB Civil Appeal No. 246 of 2013 [2015] eKLR.

10. The court further emphasized that an allegation of fraud must be proved to a standard higher than the balance of probabilities but not as high as beyond a reasonable doubt. Establishing fraud, therefore, is fundamentally a matter of evidence.

11. After thoroughly examining the evidence presented by the plaintiff, it is clear that the 4th defendant was employed by the plaintiff as a Credit Controller, reporting directly to the Chief Accountant. The job description for the 4th defendant is not attached to the letter of offer, which he had signed in acceptance. Despite this omission from the documents, a circular dated 21/1/2013 found on page 157 of the plaintiff’s documents, details the procedure for credit and cash sales and release of goods.

12. This circular, notably signed by the 4th defendant among others, assigns the overall responsibility for authorizing the release of goods without accompanying payment to the Chief Accountant or Head of Finance, and not to the Credit Controller.

13. This distinction is crucial in assessing the 4th defendant’s potential involvement in the fraud alleged by the plaintiff. The approvals necessary for such transactions were beyond the scope of the 4th defendant’s authority. Whether the fraud was perpetrated by any other of the plaintiff’s employees is not a matter before this court.

14. What is evident, however, is that established procedures for cash sales, account sales, and the delivery of goods were blatantly disregarded in transactions involving the 1st defendant. Upon reviewing the evidence, I observed that the 1st defendant did in fact place orders for certain goods, through Local Purchase Orders (LPOs) some of which were signed and approved while others were incomplete.

15. The irregularities extend further, with some Local Purchase Orders being raised, prepared, and approved without specifying critical details such as the goods' unit costs. The documents raise questions which only the 1st defendant would have answers to.

16. The plaintiff also produced corresponding Sales Orders signifying confirmation of the orders by the plaintiff. The Sales Orders were however left unsigned and undated - likely to obscure the evidence of these deliveries but leaving questions as to how else the 2 sets of documents would have been initiated unless there was communication between the plaintiff and the 1st defendant.

17. I must add that in all these documents, there is no evidence of approval or signature by the 4th defendant on behalf of the plaintiff for the release of the goods.

18. Concerning the credit application form submitted by the 1st defendant, it is important to note that the application acknowledges the 2nd and 3rd defendants as directors and proprietors of the 1st defendant. However, it is striking that these forms were not executed by the plaintiff. Therefore, the plaintiff’s assertion that the 4th defendant authorized the application on behalf of the company is inaccurate and unsupported by the evidence.

19. Although a valid credit agreement between the parties may not have existed, and no evidence has been presented to the contrary, the evidence strongly indicates that the 1st to 3rd defendants did take delivery of various goods without making the necessary payments. This would explain the issuance of cheques by the 1st defendant, even though it remains unclear why these cheques were not processed by the responsible agent.

20. It is explicit that a party seeking the court's consideration of evidence must substantiate their claims. Once the plaintiffs had done this to the required standard, the burden moved to the 1st defendant to disprove the assertions by the plaintiff. Section 112 of the Evidence Act which provides that:“In civil proceedings, when any fact is especially within the knowledge of any party to those proceedings, the burden of proving or disproving that fact is upon him.”

21. Consequently, it was incumbent upon the defendants to provide evidence disproving the deliveries as per the LPOs, or to show that payment had been made and that there was no intention not to pay for the goods. Notably, the defendants did not present any defense, leaving the allegations and evidence of fraud unchallenged.

22. Furthermore, they chose not to participate in the formal proof hearing, thereby allowing the plaintiff’s claims to stand uncontested. Although the plaintiff holds an interlocutory default judgment, this does not prevent the defendants from participating in the trial by formal proof.

23. The defendants, despite waiving their right to present evidence, retained the right to challenge the credibility of the plaintiff’s evidence through cross-examination. Their failure to do so suggests they lacked a credible defense. This further strengthens the credibility of the evidence presented by the plaintiff.

24. Based on the evidence and analysis, I am however not convinced that the 4th defendant was involved in the fraud perpetrated by the 1st to 3rd defendants.

25. As to whether the evidence of fraud entitles the plaintiff to general damages, I refer to the decision in Dharamshi V Karsan, [1974] EA 41. In that case, the Court of Appeal for East Africa affirmed the principle that general damages for breach of contract are not awarded in addition to quantified or special damages. The court stated:“As a general principle, the purpose of damages for breach of contract is, subject to mitigation of loss, to put the claimant as far as possible in the same position they would have been in if the breach had not occurred. The measure of damages follows the rule established in Hadley V Baxendale, (1854) 9 Exch. 341, which stipulates that damages are those which may be fairly and reasonably considered as arising naturally from the breach itself or as reasonably contemplated by the parties at the time the contract was made as a probable result of the breach. Such damages are not 'at large' or general damages but are in the nature of special damages and must be specifically pleaded and proved.”

26. From this, it is clear that the court will not award general damages for a breach of contract but will instead award special damages, which must be precisely calculated and substantiated. According to Halsbury’s Laws of England, Volume 12(1), paragraph 1018, damages for breach of contract are meant to compensate the innocent party’s loss and to restore them, as much as possible through financial means, to the position they would have been in had the contract been performed as agreed.

27. General damages, on the other hand, are awarded for non-quantifiable losses such as pain and suffering, emotional distress, or loss of reputation. In cases of fraud, general damages may be considered if the plaintiff can demonstrate that the fraud resulted in non-quantifiable harm beyond the specific financial losses covered by special damages. Halsbury’s Laws of England, Volume 12(1), paragraph 880, acknowledges that:“General damages do not need to be specifically proved. However, the plaintiff must plead the material facts giving rise to the claim for general damages and provide the necessary evidence to support such a claim.”

28. In the present case, the plaintiff seeks to be restored to the financial position they would have been in if the defendants had not breached their contractual obligations by failing to pay for goods delivered. The court, in its interlocutory judgment, already awarded the plaintiff special damages, which are intended to cover the specific financial losses incurred due to the defendants' breach of contract.

29. Since the plaintiff’s losses are purely financial and directly linked to the breach, and noting that no material facts have been pleaded by the plaintiff giving rise to the claim, I find no basis for an award of general damages.

30. In my view the special damages awarded have adequately compensated the plaintiff for the financial loss, fulfilling the legal requirement to restore the plaintiff to their rightful position under the contract.

On Interest Payable: 31. The court's discretion to award interest is governed by section 26 of the Civil Procedure Act, which provides that in cases where a decree involves the payment of money, the court may, at its discretion, order interest to be paid on the principal sum from the date of the suit to the date of the decree.

32. Furthermore, the court may also order interest on the aggregate sum from the date of the decree to the date of payment. If a decree is silent on this matter, the court is deemed to have ordered interest at a rate of 6% per annum from the date of the decree to the date of payment.

33. The body of jurisprudence available on the award of interest reveals three key principles:a.Discretionary Power: The rate of interest and the period over which it is payable are at the court’s discretion.b.Relevant Periods: Interest may be awarded for two distinct periods: from the date of filing the suit to the date of judgment, and from the date of judgment until full payment or an earlier date set by the court.c.Pre-Suit Interest: For interest to be awarded for any period prior to the date of the suit, there must be a justification based on contractual obligations, mercantile practice, or statutory provisions.

34. In the case of Jane Wanjiku Wambu V Anthony Kigamba Hato & 3 Others, [2018] eKLR, the court reinforced these principles, emphasizing that interest prior to the filing of a suit requires specific justification either arising from contractual obligation, mercantile practice or statutory power to do so. Similarly, the decision in Alba Petroleum Limited V Total Marketing Kenya Limited, [2019] eKLR supports the argument that interest on debt is generally payable at court rates from the date of filing the suit unless there is an agreement or trade custom dictating otherwise.

35. Further, the Court of Appeal in Shariff Salim & Another V Malundu Kikava, [1989] eKLR reflected on the earlier decision in Mukisa Biscuit Manufacturing Company Limited V West End Distributors Limited, [1970] EA 469. The principle established in this case is that when damages must be assessed by the court, interest should be awarded only from the date of judgment, as the right to those damages does not arise until they are assessed. The court distinguished the discretion to award interest as applicable in liquidated and general damages as follows:“The principle that emerges is that where a person is entitled to a liquidated amount or to specific goods and has been deprived of them through the wrongful act of another person, he should be awarded interests from the date of filing suit. Where, however, damages have to be assessed by the Court, the right to those damages does not arise until they are assessed and therefore interest is only given from the date of the judgment.”

36. In the case at hand, the claim is for liquidated damages. The defendants ordered and took possession of goods which they failed to pay for, in essence breaching the agreement with the plaintiff.

37. The plaintiff contends that it is entitled to interest from 6/09/2016 until payment in full but gives no justification for this. In my view, considering the nature of the claim as liquidated, I find that interest is justifiably payable from the date of filing the suit. This aligns with the principle that when a party is entitled to a liquidated amount or specific goods and is deprived of them through another’s wrongful act, interest should accrue from the date of filing.

38. The plaintiff further prays for interest at 3%, per month, the equivalent of 12% p.a. On the strength of section 26 of the Civil Procedure Act, it is my finding that interest on the principle amount ought to be paid at court rates.On piercing the corporate veil:

39. While the benefits of incorporation are significant, they are not without limits. A company, although recognized as a separate legal entity, may, under certain circumstances, require the court to look beyond its corporate personality and “lift the veil of incorporation”. This typically occurs when there is a need to address fraudulent activities either by the company itself or its agents.

40. According to Halsbury’s Laws of England, 4th Edition, paragraph 90:“Notwithstanding the effect of a company’s incorporation, in some cases, the court will ‘pierce the corporate veil’ to ensure justice by treating a company, for the purpose of litigation, as indistinguishable from the individuals who control it. This will occur not only in cases of fraud or improper conduct but also when the nature of the company or the individuals controlling it is relevant. In such instances, the court will disregard the company’s separate legal identity to hold those individuals accountable. However, absent these circumstances, the corporate veil will remain intact, even if a person’s association with the company subjects a transaction to strict scrutiny.”

41. This principle was reaffirmed in Kolaba Enterprise Ltd V Shamsudin Hussein Varvani & Another, [2014] eKLR, where the court held that:“... the separate legal personality of a company cannot be disregarded except where the law expressly provides for the lifting or piercing of the corporate veil, such as when directors or members use the company as a vehicle for fraud or other criminal activities.”

42. The plaintiff argues that the 1st defendant’s issuance of post-dated cheques is not only an acknowledgment of the debt but also prima facie evidence that the directors fraudulently misled the plaintiff into believing the cheques would be honored. The plaintiff contends that the 1st defendant was used in collusion with the 4th defendant to perpetrate a fraudulent scheme and evade legal accountability.

43. The evidence presented shows that the 1st defendant issued post-dated cheques totaling Kshs. 2,400,000/=, which were subsequently dishonored by the bank upon presentation by the plaintiff. This suggests that the cheques were intended to cover payment for goods or services, yet the payments never materialized. Moreover, instead of settling the debt, the 1st defendant closed its office and relocated to an undisclosed location.

44. This unchallenged evidence strongly indicates fraudulent intent. Given these circumstances and the court's findings on the issue of fraud, I am convinced that there is a compelling case for lifting the veil of incorporation to hold the responsible individuals accountable.

Disposition 45. Accordingly, and for the reasons already stated:i.A declaration is hereby issued that the 1st defendant was incorporated and used for unlawful and fraudulent dealing/trading purpose by the 2nd and 3rd defendants to shield the latter from liability arising from the said unlawful and fraudulent purpose or business, intended to defraud the plaintiffs its goods without intent to pay the value thereof.ii.The case against the 4th defendant is dismissed with costs.iii.An Order be and is hereby granted lifting and or piercing the veil of the 1st defendant and holding the 2nd and 3rd defendants together with any promoters, directors and shareholders of the 1st defendant between the years 2015 to 2017 liable for payment to the plaintiff of Kshs. 9,535,245. 68 being the value of the plaintiff’s goods ordered and delivered to the 1st defendant by the plaintiff.iv.The claim for general damages for fraud is not successful.v.Interest shall be payable on the Kshs. 9,535,245. 68 at court rates from the date of filing suit until payment in full.vi.The plaintiff shall have the costs of the suit.

DATED, SIGNED AND DELIVERED IN NAIROBI THIS 20TH DAY OF SEPTEMBER 2024. F. MUGAMBIJUDGE