[2015] KEHC 6121 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT AT NAROBI

MILIMANI COMMERCIAL COURTS

CIVIL CASE NO.106 OF 2005

MWAURA KARUGA T/A LIMIT ENTERPRISES.................................................PLAINTIFF

VERSUS

KENYA BUS SERVICES LTD..................................................................................DEFENDANT

AND

KARANJA KABAGE…………...........................1ST APPPLICANT/DIRECTOR

SAMUEL KIMUCHU GICHURU…………........…...2ND APPLICAN/ DIRECTOR

EDWINS MUKABANA MASSIMBA………..........3RD APPLICANT/DIRECTOR

STANLEY MURAGE…………………………..........4TH APPLICANT/DIRECTOR

RULING

Lifting corporate veil; Directors personal liability

[1] I have before me the Motion dated 16th October 2014, which is made by the Directors of the Defendant Company. They are seeking stay of execution of the Deputy Registrar’s orders of 7th October 2014 and the Court’s Judgment and Decree of 27th June 2005 pending the hearing and determination of their Appeal. I will call it the Directors’ application for purposes of these proceedings. The Applicants referred the Court to their submissions on the earlier application which sought to hold them personally liable for the judgment against the Defendant on alleged fraud. They gave a brief background of their application as follows. The Defendant, Kenya Bus Services Ltd (“KBS”) was at all material times in the business of public transport. On 27th May 2005, the Plaintiff obtained Judgement against the Defendant (KBS) for Kshs. 2,619,292/=. On 29th July 2005, the Plaintiff through Whitestone Auctioneers (K) Ltd proclaimed the following five vehicles in execution of the Decree: - 1) KAH 764H 2) KAD 899Y 3) KAH 985K 4) KAH 879K and 5) KAN 822Z. The first three vehicles belongs Kenya Bus Services whilst the last two, to Bus Track Ltd.

[2] The Directors went further to state that; on 30th August 2005, parties reached a compromise on settlement of the decretal amount and this was reduced into writing which provided inter alia:-

The Decree-Holder would release the above five vehicles to facilitate generation of daily income for settlement of the Decretal sum.

The Defendant company which was experiencing liquidity problems at that time was to enlist the assistance of its sister company, M/s Bus Track Ltd, to provide cheques to cover the decretal amount.

The Defendant was to review the payment of the decretal sum if its liquidity improved.

(Exhibit EMM 2 / Appendix 2 is a copy of the Settlement Agreement dated 30th August 2005)

[4] The Directors stated further that, during examination of Mr Edwins Mukabanah on behalf of the Directors, he accounted for the five buses and its other buses it was operating. He also explained the cause and source of the Defendant's financial problems that made it unable to settle the Plaintiff's Decree. Below is part of the eplanations he offered:-

Account of the five Buses Initially proclaimed by the Plaintiff on 29th July 2005

Motor Vehicle registration number KAH 879K and KAN 822Z belonged to Bus Track Ltd, a distinct legal entity from the Defendant.

Motor Vehicle registration number KAH 985 K was re-taken and sold by Whitestone Auctioneer who was authorized by the Decree-holder to execute the Decree herein. The Decree-holder did not call any evidence to dispute this fact.

Motor Vehicle registration number KAH 764H and KAD 899Y were not returned by Whitestone Auctioneers following the proclamation of 29th June 2005. There was equally no evidence adduced by the Decree-holder to dispute this fact.

Account of other Buses Owned by the Defendant

The Directors gave a list of buses proclaimed in execution of various Decrees and those repossessed by financiers including ICDC, General Motors, Imperial Bank. In short its core assets were either attached in execution of various decrees against them or repossessed by their financiers.

The source and cause of the Defendant's financial problems that made it unable to settle the Plaintiff's Decree.

The Directors of the Defendant explained in graphic details the Origin and cause of the Defendant's financial problems. In a nutshell its problems arose from the heavy cost in implementing the transport safety rules popularly known as the Michuki Rules through Legal Notice No. 161 of 2003. The rules required the following:

Provision for seat belts.

They prohibited standing passengers.

They required uniforms for members of staff.

The staff could work for a maximum of 8 hours per day. This meant that we had to have two shifts to cover a normal day.

The Rules adverse effect was two-fold. First, the Defendant incurred substantial/massive expenditure in implementing them. Secondly, the Defendant incurred massive losses from reduced carrying capacity.

[5] The Directors submitted that the Defendant has filed case NumberHigh Court Civil Case Number 504 of 2008 seeking redress against the Government for the losses occasioned by Michuki Rules. The Directors underscored their commitment to settle the Decretal amount in this case should this suit against the Government succeed. Despite the Director’s demonstration of no fraud on their part, the Court in its Ruling of 7th October 2014 ordered the Directors of the Defendant to be personally liable for the Plaintiff’s Decree of 27th June 2005 against the Defendant. The Directors (Applicants herein) of the Defendant have filed an Appeal against the Court’s Order and Ruling of 7th October 2014 (ExhibitEMM 5/Appendix 3 is a copy of the Memorandum of Appeal). They are convinced that the Directors’ application dated 16th October 2014 which seeks for stay of execution of the Deputy Registrar’s orders of 7th October 2014 and the Court’s Judgment and Decree of 27th June 2005 pending the hearing and determination of their Appeal is merited. They cited the law. Under the law, appeal on the decision by the Deputy Registrar made under Order 22 Rule 35 of the Civil Procedure Rules (2010) pursuant to the provisions of Order 49 Rule 6(b)(x), lies to the Judge in Chambers. The Memorandum of Appeal is to be filed within seven days. The Ruling and Order appealed against was given on 7th October 2014 and the Appeal was filed on 14th October 2014. Therefore the Appeal was properly filed.

[6] They also submitted on stay of execution pending appeal and cited the case of Butt vs Rent Restriction Tribunal (1982) KLR 417cited with approval in High Court Nakuru, Civil Appeal 182 of 2005, Ngotho Commercial Agencies Limited Vs George Wanjuki Gethi (Appendix 5)where the court noted as follows:

“Although the parties herein argued on the merits or otherwise of the Appeal, at this stage of the proceedings, that is not the concern of this Court. This Court is only concerned with whether the Appellant has satisfied the conditions set out in Order XL1 Rule 4 (2) of the Civil Procedure Rules" (now Order 42 Rule 6).

Application filed without undue delay

[7] The first condition is that the application for stay should be filed without undue delay. They made this application on 17th October 2014 whereas the Ruling and Order appealed against was given on 7th October 2014. That is barely 10 days thereafter. Filing of this application for stay was therefore done without undue delay.

Substantial loss occurring

[8] The Directors argued that the decree herein is against the Defendant not the Directors. Unless stay of execution is granted, any execution against the Directors will, therefore, occasion substantial loss on them. See paragraph 4 and 16 of Mr Edwin Mukabanah’s affidavit. At paragraph 16 of Mr Mukabanah’s affidavit he states:

“the Plaintiff whose means are unknown and considering the Decree in the case is not against them (the Directors/Applicants) will proceed with execution against them which will cause substantial loss and render their Appeal nugatory”.

The Applicants’ fears are, therefore, founded on the fact that the Plaintiff may not be in a position to refund the decretal sum in the event execution proceeds and the Appeal succeeds. The Plaintiff has not allayed the Applicants’ fees by stating he has the ability to refund the decretal amount in the likely event the Appeal succeeds. Nowhere in the Replying Affidavit has the Plaintiff stated that he has the ability to refund the decretal amount in the likely success of the Appeal. See the case of Ann Wanjiru Waigwa and David Kinyua Muriuki versus Joseph Kiragu Kibarua, Civil Appeal Number 92 of 2009, High Court- Nyeri (Appendix 7),Justice M. S. A. Makhandia stated inter alia:-

“…. As a general proposition, an appeal arising out of a money decree would rarely be rendered nugatory. The applicant’s fears are however founded on the fact that the Respondent may not be in a position to refund the decretal sum in the event they are successful in the appeal. The fear is not really unfounded as the Respondent had no answer to this bold statement. Had he in this Replying Affidavit deposed that he was a man of means and would be in a position to refund the decretal sum in the event of an appeal succeeding, I would have perhaps looked at the application differently”

He proceeded to hold that

“Given the fact that the respondent has not come boldly to proclaim his ability to refund the amount in the event of the appeal succeeding, there can be no doubt that the applicants are likely to suffer substantial loss if execution of the decree is not stayed pending disposal of the appeal”

[9] The Directors are convinced that they have made a bold statement but the Respondent has not come out and “declared boldly” that ‘’I have means and capable of refunding the decretal amount in case the appeal succeeds’’His silence on this confirms the applicants' fears that it may be unable to refund the decretal amount in case the appeal ultimately succeeds therefore occasioning substantial loss to him. They emphasized that the decision by Justice Makhandia quoted Ogola J who defined substantial loss in the following terms:-

“…. Substantial loss does not represent any particular mathematical concept. It refers to loss, great or small, that is of real worth or value as distinguished from a loss without value or a loss that is merely nominal……”

Therefore, as the Judgement against the Defendant is for a substantial amount and it is not against the Directors/Applicants but against the Defendant, execution on the Applicants will only occasion substantial loss. They stated that they will fail to recover the amount once the Appeal succeeds.

Security for due performance of the Decree

[10] The Directors submitted that, in paragraph 20 of the Plaintiff’s Replying Affidavit, he avers as follows in respect of security for the decretal amount:

“the decretal sum be deposited in Court pending the outcome of the Appeal”.

In the case of Butt vs Rent Restriction Tribunal (1982) KLR 417 cited with approval in High Court Nakuru, Civil Appeal 182 of 2005, Ngotho Commercial Agencies Limited Vs George Wanjuki Gethi (Appendix 5 above), Madan JA held at page 419 as follows:-

“It is in the discretion of the Court to grant or refuse a stay but what has to be judged in every case is whether or not there are particular circumstances in the case to make an order staying execution”.

Whether a party is to provide and kind of security to be provided is to be considered on a case to case basis and the court has an unfettered discretion on this issue. The peculiar circumstances of this case are that Judgement was obtained against the Defendant but the Deputy Registrar has directed that the Directors of the Defendant (The Applicants herein) be held personally liable to settle the Decree/Judgement. An Appeal has been filed where the Directors of the Defendant have contested the Deputy Registrar’s finding on the grounds, inter alia, that it is against the principle of corporate personality of companies and there was no fraud on the part of the Directors or any circumstances to warrant personal liability of the Applicants for the debt of the Company. Due to the peculiar circumstances of this case, it is unsuitable to order for the Directors to deposit the decretal amount in Court pending the outcome of their Appeal as though the Decree of 27th June 2005 was against them. The Directors are appealing against the Order of 7th October 2014 and not the Decree of 27th June 2005. In the unlikely event that the Court orders the Directors to provide security for the decretal amount, we urge the Court to order the amount to be deposited into a joint interest earning account to be held in the parties’ advocates names instead of depositing it in court.

The Respondent opposed application

[11] The Respondent started by stating the undisputed facts, which are as follows:-

1) The Defendant herein acting through their directors recorded a consent judgement against themselves on 27th June 2005;

2) By the testimony of the Edwin Mukabannah during examination and through their filed statement, at the time of recording the consent judgement, the defendants/applicants had ceased business over one year before i.e. in 2004;

3) The debt arose out of business given to the Plaintiff/respondent during the period when the defendants/applicants by their own admission had ceased trading and were unable to meet their financial obligations to creditors.

4) Five buses were attached in execution of the decree and were released to the defendants/applicants on the strength of post-dated cheques and the agreement dated 39th August 2005;

5) The cheques issued to the Plaintiff/respondent were to an account that was frozen;

6) The two directors, who issued the cheques, were arrested, charged and convicted in criminal case number CM 2120 of 2006. They did not appeal against the decision;

7) The buses released to the defendants/applicants cannot to date be accounted for. They are not in the bundle of documents filed by the Directors showing the list of the buses attached by various auctioneers.

8) The Defendants/applicants agree that they are willing and ready to settle the decretal sum once the case they have filed against the state being HCCC 504 of 2008 is successful. They are very optimistic on its success.

9) The decree is over 9 years.

[12] From the above facts, the Respondent says that it is not correct for the Directors to state that the court was wrong in granting orders for the directors to be held personally liable for the decree as fraud was not proved.

The directors knowingly secured release of the attached buses by drawing an agreement they knew could not be honoured, issued cheques which they knew could not also not be honoured as the accounts were frozen, caused the buses so released to be untraceable to date and were convicted of the offence of issuing bad cheques contrary to section 316 A(1)(3) of the penal code. These things are conclusive evidence of fraud by the directors and an ideal situation for lifting corporate veil as the honourable court so rightly ruled. They have not properly accounted for the buses released to them. The argument thatbuses KAH 879K and KAN 822Z belonged to Bustract Ltd, a complete legal entity from themselves is a façade; the fact is that these buses according to the agreement of 30th August 2005, were released to them to generate daily income to satisfy the decree. This again is indicative of fraudulent act. They only allege without evidence filed that Bus registration number KAH 985K was re-taken by Whitestone and sold on instructions from the Plaintiff/respondent. The statement is untrue. They also stated that buses registration Number KAH 764H and KAD 899Y were never returned following the proclamation of 29th June 2005. Yet, above quoted agreement expressly states that the buses were to be released to them. They have never alleged this before or raised a complaint that the auctioneer never gave account of the alleged sale or stated they have partially satisfied the decree by virtue of this alleged sale. This again points to the dishonesty of these directors. It is clear that the directors of the defendants/applicants obtained release of the buses by fraud and with intent to defeat the Plaintiff’s /Respondent’s execution of the decree and can therefore not ask to hide behind the corporate veil.

[13] Michuki Rules came into effect in 2003, and the plaintiff/respondent’s services were retained in 2004. This begs the questions, why did they knowing that they could not pay, engage the services of the Plaintiff/respondent? Why did they record a consent judgment knowing they could not honour it? Why did they issue cheques against a frozen account? Again, this points to fraud on the part of the directors.

[14] There is no appeal on the decree, thus the issue of refund does not arise. The application should be dismissed. However, should stay be granted, then in condition that the sum due to be deposited in an interest earning account in the names of the advocates for the parties as security for satisfaction of the decree herein.

THE DETERMINATION

[15] The threshold of granting a stay of execution pending appeal is set out in Order 42 rule 6 of the Civil Procedure Rules. But as courts interpret and apply these prescriptions of the law, they must be guided by the principles of justice enshrined in article 159 of the Constitution and the overriding objective in sections 1A and 1B CPR. In essence, a much more broad approach depending on the peculiar circumstances of the case should, therefore, guide the exercise of discretion under Order 42 rule 6 of the CPR. But, in all, a sufficient cause must be shown before stay is granted in order to attain an almost symmetrical balancing of the competing rights of the parties in the matter; on one hand, there is the Respondent’s’ right to the fruits of his judgment, and on the other hand, the Applicant’s undisputed right of appeal which includes prospects of appeal which should not be rendered nugatory. In so doing, I should determine whether the applications was brought timeously; or whether substantial loss would be occasioned on the Applicant unless stay is granted; and if so, what would be sufficient security for the satisfaction of a decree which might ultimately become binding on the Respondent?

Is application timeous?

[16] The application for stay of execution herein was filed without undue delay. The application was filed on 17th October 2014 and the Ruling and Order appealed against was given on 7th October 2014. That is barely 10 days thereafter. It has passed the first test.

Will substantial loss occur?

[17] In law, substantial loss would occur if the appeal succeeds but the Applicant cannot recover the money he had paid over to the Respondent pursuant to the decree appealed from. Therefore, substantial loss lies in the inability of the Respondent to refund the decretal sum. Such an occurrence would render a successful Appellant a pious explorer in the judicial process. This is real time loss in law. It is the substantial loss which the law under Order 42 rule 6 of the Civil Procedure Rules seeks to avert. Substantial loss has been defined in broad terms- see a work of Ogola J in Tropical Commodity Suppliers Ltd that:-

“…Substantial loss does not represent any particular mathematical formula. Rather, it is a qualitative concept. it refers to any loss, great or small, that is of real worth or value as distinguished from a loss without value or a loss that is merely nominal…”

I will add a wok of the court in the case of Bungoma Hc Misc Application No 42 of 2011 James Wangalwa & Another vs. Agnes Naliaka Chesetothat:

‘’The applicant must establish other factors which show that the execution will create a state of affairs that will irreparably affect or negate the very essential core of the Applicant as the successful party in the appeal. This is what substantial loss would entail...’’

[18] But I need to state once again, that, in an application for stay of execution, it is not the business of the High Court under Order 42 rule 6 of the Civil Procedure Rules to gauge the prospects of the appeal as that is within the precincts of the Court of Appeal. The High Court is only supposed to be satisfied that substantial loss will occur unless stay of execution is granted; that is the cornerstone of the jurisdiction of the High Court. See a work of this court in Jason Ngumba [2014] eKLR on that point, that:

‘’...Here, it is not really a question of measuring the prospects of the appeal itself, but rather, whether by asking the Applicant to do what the judgment requires, he will become a pious explorer in the judicial process.

The Directors set out on a path which I think was akin to arguing the merits of their appeal. The arguments on the merits of the appeal by the Directors also tempted the Respondent to all engage in the assessment of the prospects of the appeal. From their arguments, the Directors have a strong conviction that the appeal has overwhelming chances of success, but on that basis proceeded under a delusion that it is enough to avail them an order of stay of execution. Substantial loss in the sense explained above is what really matters although to show you are not a frivolous litigant is not loathed. See Kenya Shell Limited Vs. Benjamin Karuga Kigibu & Ruth Wairimu Karuga (1982-1988) l KAR 1018 where the Court of Appeal explained this position that:

“It is usually a good rule to see if Order 41 Rule 4 of the Civil Procedure Rules can be substantiated. If there is no evidence of substantial loss to the applicant, it would be a rare case when an appeal would be rendered nugatory by some other event. Substantial loss in its various forms, is the cornerstone of both jurisdiction for granting stay”

[19] Before I determine whether substantial loss will occur unless stay is granted, I should say that, the submissions by the Directors seems to be reversing roles of parties and burden of proof in an application for stay of execution pending appeal. The burden of proof that substantial loss will occur lies with the Applicant. Invariably, and in law, the Applicant must prove that the Respondent cannot refund the decretal sum if it was paid to him and the appeal succeeds. It is not enough to make a bare statement that ‘’ I have boldly stated that the Respondent cannot be able to refund...’,without proof and expect the court to find that substantial loss would occur on you unless stay is granted. You must provide cogent evidence that the Respondent cannot refund the decretal sum given his or her financial status and position. This legal burden of proof never shifts from the Applicant. However, after such prima facie evidence has been placed before the court which shows clear financial limitation on the part of the Respondent, the Court will call upon the Respondent to file affidavit of means. It is at that point, when the Respondent will fail without further evidence, that evidential burden is raised on the Respondent. Therefore, a bold statement that the respondent cannot refund the decretal sum is one that is based on evidence showing financial inability or limitation of the Respondent to refund the decretal sum should it be paid to him and the appeal succeeds. But a bare statement like the one made by the Directors herein is not a bold statement in the sense of the law on stay of execution pending appeal. See the case of ABNAmro Bank N.V vs. Le Monde Foods Limitedwhere the Court stated that:

The bank in this case is required to pay over to the Respondent over Kshs. 30 million. An officer of the bank has sworn that they are not aware of any assets owned by the Respondent. They swear that they have checked the returns filed by the Respondent with the Registrar of Companies and they are unable to find in those returns what property, if any, the Respondent owns’’.

The Court of Appeal was categorical that the officer of the Bank who made the statement that the Applicant was not aware of any assets owned by the Respondent, checked the returns filed by the Respondent with the Registrar of Companies and they are unable to find in those returns what property, if any, the Respondent owns’’…And the Applicant swore, upon those reasonable grounds, that the Respondent will not be in a position to refund the decretal sum if it were paid over to him and the pending appeal was to succeed’’.

[20] On the basis of the above test, the Directors have merely stated that the Respondent cannot refund the decretal sum herein. in the process, they sort of shifted their burden to the Respondent. They did not discharge the onus by merely stating that they have made a bold statement that the Respondent cannot refund the decretal sum. They offered no proof yet they expected that on that bare statement, the Respondent should state what he owns as a way of showing he has means to refund the decretal sum. On the basis of the law, their application should fail. However, I note that both parties are not averse to the decretal sum together with the entire interest being deposited in a joint interest earning account. Accordingly, and purely in the interest of justice, I order that the Directors/Applicants shall within 30 days from the date hereof, deposit the entire decretal sum including interest on the decretal sum as awarded by the Court, in an interest earning account in the joint names of the advocates for the Directors/Applicants and the Respondent. It is so ordered.

Dated, signed and delivered in court at Nairobi this 19th day of March 2015

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F. GIKONYO

JUDGE