[2022] KEHC 15597 (KLR)

Wenjun v Cong & 4 others (Commercial Case E044 of 2022) [2022] KEHC 15597 (KLR) (Commercial and Tax) (14 November 2022) (Ruling)

Neutral citation: [2022] KEHC 15597 (KLR)

Republic of Kenya

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

Commercial and Tax

Commercial Case E044 of 2022

DO Chepkwony, J

November 14, 2022

Between

Li Wenjun

Plaintiff

and

Chen Cong Cong

1st Defendant

Chen Fuxin

2nd Defendant

Martin Nkari Kagendo

3rd Defendant

Zacharia Muriithi Kibui

4th Defendant

Chen Junchai

5th Defendant

Ruling

1. Before this court for determination is the 1st, 2nd, 3rd, 4th, and 5th Defendants’ Notice of Preliminary Objection dated April 14, 2022, in response to the suit vide a Plaint dated February 9, 2022 filed by the Plaintiff as against them. In the Plaint, the Plaintiff prays for orders that:-a.An order of declaration by the court that the defendants acquisition of the 220 ordinary shares in Eaf Galaxy Entertainment Limited belonging to the Plaintiff was by illegal, unlawful and fraudulent means and therefore the said acquisition is null and void;b.An order to cancel the 220 ordinary shares held by the Defendants in EAF Galaxy Entertainment Limited and return the same to the Plaintiff;c.A declaration that the Defendants jointly and severally committed an act of forgery in transferring the Plaintiff’s 220 ordinary shares in Eaf Galaxy Entertainment Limited to themselves or third parties;d.Costs of the suit.

2. In response thereto, the Defendants filed a Preliminary Objection on grounds that:-a.The suit as canvassed before court is incompetent, fatally defective in law, incurable and cannot stand in law and therefore should be struck out;b.The suit offends section 238 of the Companies Act, 2015;c.This suit should be addressed as a derivative action as it has been initiated by a shareholder against fellow shareholders of EAF Galaxy Entertainment Limited;d.The suit as canvassed cannot stand and should be dismissed with costs.

3. On June 2, 2022, the parties were directed to canvass the Preliminary Objection by way of written submissions which are filed on June 14, 2022 and July 7, 2022 respectively.

4. According to the Defendants’ submissions, the suit filed by the Plaintiff is a derivative suit by virtue of the prayers he has sought in the Plaint hence the same is incompetent, fatally defective and offends the provisions of Section 238 of the Companies Act.

5. The Plaintiff on the other hand has submitted that the Preliminary Objection is a misconception of the law as the claim filed is not vested in the Company and does not seek relief on behalf of the Company. The reliefs sought by the Plaintiff in the Plaint are of personal nature so that the provision of Section 238(1) of the Companies Act, 2015 do not apply.

6. In considering the Preliminary Objection, I have carefully read through the Plaint, grounds in the Preliminary Objection, respective submissions by either party and the cited statute and case law. I find that the issues for determination are:-a.Whether the Defendant’s Preliminary Objection dated April 14, 2022 is merited, and if so,b.Whether the Plaintiff’s suit should be struck out with costs to the Defendants.

7. With regard to whether the Notice of Preliminary Objection is merited or not, it is important to understand what a Preliminary Objection is. In the celebrated case of Mukisa Biscuit Company –vs- West End Distributors Limited [1969] EA 696, the court analysed the definition of a preliminary objection in the following manner:-'A Preliminary Objection is in the nature of what used to be a demurrer. It raises a pure point of law which is argued on the assumption that all the facts pleaded by the other side are correct. It cannot be raised in any fact that has to be ascertained or if what is sought is the exercise of judicial discretion.'

8. According to the Defendant the suit filed by the Plaintiff is fatally defective in law, incurable and cannot stand in law as it offends the provisions of Section 238 of the Companies Act, 2015, which express that:'(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.'

9. In the Canadian case of Goldex Mines Ltd –vs- Revill et al., 1974 CanLII 433 (ON CA), it was stated:-'In one sense every injury to a company is indirectly an injury to its shareholders. On the other hand, if one applies the test:'Is this wrongful act one in respect of which the company could sue?', a shareholder who is personally and directly injured must surely be entitled to say, as a matter of logic, 'the company cannot sue for my injury; it can only sue for its own.'

10. A reading of Section 238(1) of the Companies Act, determined whether this instant suit is a derivative claim or not. A derivative suit has been defined to mean proceedings by a member of a company in respect of a cause of action vested in the Company and seeking relief on behalf of the Ccompany.

11. From the reading and perusal of the Plaint and prayers therein, it is deduced that the cause of action is the alleged illegal transfer of the Plaintiff’s 220 ordinary shares to the Defendants. The Plaintiff is seeking a declaration that this transfer was unlawful and that the Defendants should be directed to reverse the transfer and revert the shares back to the Plaintiff. Clearly, this is not a claim on behalf or for the benefit of the Company but the Plaintiff, hence of personal nature and the provisions of Section 238(1) of the Companies Act do not apply in this case.

12. Owing to the above finding, it is my considered view that the Notice of Preliminary Objection dated April 14, 2022 is indeed a misapprehension of the law. As such it is lacking in merit and the same is dismissed with costs to the Plaintiff.

It is so ordered.

RULING DELIVERED VIRTUALLY, DATED AND SIGNED AT NAIROBI THIS 14TH__ DAY OFNOVEMBER__ , 2022. D. O. CHEPKWONYJUDGEIn the presence of:M/S Wayua holding brief for Mr. Uvyu counsel for PlaintiffM/S Wamega counsel for DefendantCourt Assistant - GodfreyHCCOMM. NO.E044 OF 2022 RULING - Page 7 of 7