https://new.kenyalaw.org/akn/ke/judgment/kehc/2026/11953

 **REPUBLIC OF KENYA** **IN THE HIGH COURT OF KENYA AT NAIROBI** **MILIMANI HIGH COURT** **COMMERCIAL AND TAX DIVISION** **CASE NO. HCCOMMMISC/E313/2024** **WESTMINSTER LIMITED…………………………...…………….………1ST APPLICANT** **JOHN PAUL MUHOHO…………………………………………………….2ND APPLICANT** **-VERSUS-** **JEFFREY MWAURA KIBORO……………………..…………..………. 1ST RESPONDENT** **DONALD KIBORO MWAURA…………………………………………2ND RESPONDENT** **JENNIFER NYAWIRA KIBORO……………………………………….3RD RESPONDENT** **AND** **KIRATHE LIMITED…………………………………………………..INTERESTED PARTY** **RULING** **INTRODUCTION AND BACKGROUND** 1. This Ruling relates to an application by way of a Notice of Motion dated 11th April 2024 brought under Articles 50 and 159 of the Constitution of Kenya, 2010, Sections 1A, 1B and 3A of the Civil Procedure Act, Sections 238 and 239 of the Companies Act, 2015, Order 51 Rule 1 of the Civil Procedure Rules, 2010, and all other enabling provisions of the law. The Application sought the following orders: - 2. *Spent.* 3. *That the Honourable Court be pleased to grant leave to the 2nd Applicant to commence and continue a derivative action vesting in and on behalf of the 1st Applicant.* 4. *That pending the hearing and determination of the Application, this Honourable Court be pleased to issue an injunction prohibiting the Respondents from diverting the proceeds, benefits and any other income accruing from the sale of L.R. No. Kajiado/Kitengela/70661 in any manner other than as shall be ordered by the Court.* 5. *That pending the hearing and determination of the suit, this Honourable Court be pleased to compel the Respondents to deposit the proceeds of the sale of L.R. No. Kajiado/Kitengela/70661 into a joint account in the names of Counsel for the Applicants and the Respondents.* 6. *That pending the hearing and determination of the suit, this Honourable Court be pleased to issue an injunction prohibiting the Respondents from diverting the proceeds, benefits and any other income accruing from the sale of L.R. No. Kajiado/Kitengela/70661 in any manner other than as shall be ordered by the Court.* 7. *That this Honourable Court be pleased to make such other orders and/or directions as it may deem fit for the ends of justice.* 8. *That the costs of the Application be provided for.* 9. The Application is supported by the affidavit of John Paul Muhoho sworn on 11th April 2024 and is premised on the grounds that the 2nd Applicant seeks leave to institute a derivative action on behalf of the 1st Applicant Company against the Respondents for alleged breach of directors' duties, breach of contract, wilful default and deceit. 10. The Applicants aver that the 1st Applicant Company obtained various banking facilities which were restructured by NCBA Bank, and that, pursuant to a Payment Plan Proposal dated 13th April 2023, the Respondents undertook to facilitate the sale of L.R. No. Kajiado/Kitengela/70661 and apply the proceeds towards settlement of the Company's outstanding loan obligations. 11. The Applicants contend that despite this undertaking, the Respondents have failed and neglected to complete the sale or remit the proceeds to the Bank, thereby exposing the Company to the risk of default, enforcement of its loan facilities, and substantial financial loss. 12. They further aver that the Respondents' actions constitute breaches of their fiduciary and contractual obligations, threaten the financial stability and reputation of the Company, and necessitate the commencement of a derivative action to safeguard the Company's interests. 13. The Applicants in addition contend that unless the interim injunctive reliefs and leave sought are granted, the Company stands to suffer irreparable prejudice through enforcement of the outstanding debt and continued dissipation of the proceeds of the intended sale. 14. There was no Replying Affidavit on file or under CTS for the Respondents. **APPLICANT’S SUBMISSIONS** 1. The Applicants raises two issues for determination: whether the Court should grant leave to institute a derivative suit and whether the interim injunctive orders sought should issue. 2. On the first issue, the Applicants submitted that a derivative suit is the proper remedy where those in control of a company are the alleged wrongdoers and are unwilling to institute proceedings on behalf of the company. 3. They relied on **Kuldeep Singh Sehra & another v Bullion Bank Ltd & 2 others [2014] eKLR**, **Amin Akberali Manji & 2 others v Altaf Abdulrasul Dadani & another [2015] eKLR** and Section 239 of the Companies Act to submit that leave should be granted where directors have acted in breach of their fiduciary duties. 4. Citing **Isaiah Waweru Ngumi & 2 others v Muturi Ndung'u [2016] eKLR**, they argued that they had satisfied the statutory threshold by demonstrating a plausible cause of action arising from the Respondents' failure to facilitate the sale of L.R. No. Kajiado/Kitengela/70661 and remit the proceeds towards the Company's indebtedness, thereby exposing the Company to financial loss. 5. They further contended that the intended suit was brought in good faith for the benefit of the Company and that, owing to the 50:50 shareholding between the 2nd Applicant and the 1st Respondent, internal remedies were unavailable. In that regard, they relied on **David Langat v St. Lukes Orthopaedic & Trauma Hospital Ltd & 2 Others [2013] eKLR** and **Kuldeep Singh Sehra** (supra). 6. Regarding the interim orders, the Applicants submitted that they had met the principles for the grant of an interlocutory injunction as set out in **Yellow Horse Inns Limited v Nduachi Company Limited & 2 others [2017] eKLR.** They argued that they had established a prima facie case within the meaning of **Mrao Ltd v First American Bank of Kenya Ltd & 2 others [2003] eKLR**, since the Respondents' conduct constituted a breach of fiduciary duty and placed the Company's interests at risk. 7. They further submitted that unless the orders were granted, the Company faced irreparable harm through immediate exposure to repayment of over Kshs. 400 million, realization of securities, and reputational damage incapable of compensation by damages, relying on **Paul Gitonga Wanjau v Gathuthi Tea Factory Company Ltd & 2 others [2016] eKLR**. 8. Lastly, they argued that the balance of convenience favoured preservation of the sale proceeds pending determination of the suit, relying on **Amir Suleiman v Amboseli Resort Limited [2004] eKLR**, and urged the Court to allow the Application with costs. **RESPONDENT’S SUBMISSIONS** 1. Despite being accorded several avenues and time to file their submissions, the Respondents have at the date of this Ruling not complied. They also did not highlight their submissions when the matter came up for this specific purpose on 16th June, 2026. **ISSUES FOR DETERMINATION** 1. Having considered the Notice of Motion dated 11th April 2024, the Supporting Affidavit, the Applicants' written submissions and the applicable law, the issues arising for determination are: 2. Whether the 2nd Applicant has satisfied the threshold for grant of leave to commence and continue a derivative action on behalf of the 1st Applicant Company. 3. Whether the Applicants have met the requirements for the grant of the interlocutory injunctive orders sought pending the hearing and determination of the application. 4. Who should bear the costs of the Application. **ANALYSIS AND DETERMINATION** **(i) Whether the 2nd Applicant has satisfied the threshold for grant of leave to commence and continue a derivative action on behalf of the 1st Applicant Company** 1. Derivative proceedings are governed by Sections 238 and 239 of the Companies Act, 2015. Section 238 interprets a derivative claim as inter alia: - ***(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.*** 1. The statutory derivative action under Sections 238 and 239 of the Companies Act is rooted in the common law rule in **Foss v Harbottle (1843) 2 Hare 461**, which established that where a wrong is done to a company, the company itself is the proper claimant. The rule was succinctly explained by Jenkins LJ in **Edwards v Halliwell [1950] 2 All ER 1064** as follows: - ***“The rule in Foss-v-Harbottle, as I understand it, comes to no more than this. First, the proper Plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio; or if the simple majority challenges the transaction, there is no valid reason why the company should not sue.”*** 1. It is important to note that the rule in **Foss v Harbottle** (supra) is not absolute. One of the well-established exceptions permits a shareholder to institute a derivative action on behalf of the company where the alleged wrongdoers are themselves in control of the company, thereby preventing the company from taking action to enforce its own rights. It is this exception that has now been codified under Sections 238 and 239 of the Companies Act, 2015. 2. This principle was expounded by the court in **Rai and others v. Rai and others [2002] 2 EA 537** which stated inter alia: - ***“…….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 favour 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.”*** 1. The present application falls within the recognized exception to the rule in *Foss v Harbottle*, since the alleged wrong is said to have been committed by persons in control of the Company, thereby rendering it impracticable for the Company itself to institute proceedings and necessitating a derivative action to vindicate the Company's rights. 2. The Company, being the 1st Applicant, has only two shareholders, namely the 2nd Applicant and the 1st Respondent, each holding a 50% shareholding. The equal shareholding has resulted in a deadlock, rendering it impracticable for the Company to authorise the institution of proceedings against the Respondents through its internal decision-making mechanisms. 3. This was a similar situation in **Amin Akberali Manji & 2 others v Altaf Abdulrasul Dadani & another [2015] KECA 356 (KLR)** wherein the court found that: - ***“…..on the question whether the suit was a derivative one, we find it was. The company was in the peculiar and unique position of having only two members who were equal in power and glory in relation to the company. There was no majority or minority shareholder. The two shareholders/directors had reached a stalemate….”*** 1. Section 239 further provides that a member may only continue a derivative claim with the leave of the Court. At the leave stage, the Court is not called upon to determine the merits of the intended suit but only whether the Applicant has established a prima facie case warranting the continuation of the proceedings. 2. In **Isaiah Waweru Ngumi & 2 Others v Muturi Ndung'u [2016] KEHC 3032 eKLR**, the Court, while setting out the considerations applicable at the leave stage, stated: ***"The Court is guided by the considerations stipulated in section 241(2) of the Companies Act. Among other things, the Court considers the following factors:*** 1. ***Whether the Plaintiff has pleaded particularized facts which plausibly reveal a cause of action against the proposed defendants. If the pleaded cause of action is against the directors, the pleaded facts must be sufficiently particularized to create a reasonable doubt whether the board of directors' challenged actions or omissions deserve protection under the business judgment rule in determining whether they breached their duty of care or loyalty;*** 2. ***Whether the Plaintiff has made any efforts to bring about the action the Plaintiff desires from the directors or from the shareholders. Our Courts have developed this into a demand or futility requirement where a Plaintiff is required to either demonstrate that they made a demand on the board of directors or such a demand is excused;*** 3. ***Whether the Plaintiff fairly and adequately represents the interests of the shareholders similarly situated or the corporation. Hence, a shareholder seeking to bring a derivative suit in order to pursue a personal vendetta or private claim should not be granted leave;*** 4. ***Whether the Plaintiff is acting in good faith;*** 5. ***Whether the action taken by the Plaintiff is consistent with one a faithful director acting in adherence to the duty to promote the success of the company would take;*** 6. ***The extent to which the action complained against—if the complaint is one of lack of authority by the shareholders or the company—is likely to be authorised or ratified by the company in the future; and*** 7. ***Whether the cause of action contemplated is one that the Plaintiff could bring as a direct as opposed to a derivative action."*** 8. Similarly, in **Amin Akberali Manji** (supra) the Court emphasized that the leave stage is intended to filter out frivolous claims while permitting genuine claims aimed at protecting the company's interests. 9. The evidence before Court shows that the 2nd Applicant is a shareholder of the 1st Applicant Company. It is alleged that the 1st Respondent, being a director of the 1st Applicant Company, together with the other Respondents, undertook under a Payment Plan Proposal dated 13th April 2023 to facilitate the sale of L.R. No. Kajiado/Kitengela/70661 and apply the proceeds thereof towards settlement of the Company's indebtedness to NCBA Bank. 10. As noted earlier, the Applicants contended that whereas there was an undertaking, the Respondents failed to complete the transaction or remit the proceeds to the Bank, thereby exposing the Company to enforcement of loan facilities exceeding Kshs. 400 million. Those allegations raise arguable questions concerning the Respondents' compliance with their fiduciary obligations and whether their conduct amounts to breach of duty owed to the Company. Such causes of action properly belong to the Company itself and therefore fall squarely within the scope of Sections 238 and 239 of the Companies Act. 11. The court observed in **Wanjala v Kiprop & another (Civil Case E006 of 2025) [2026] KEHC 602 (KLR)**: - ***“the gist of the plaintiff’s claim is based on a breach of fiduciary duty by the named defendants who are shareholders. The reliefs sought clearly are aimed at protecting the interest of the company. The suit herein therefore for all practical purposes is a derivative action.”*** 1. The Court further notes that the Respondents neither filed a Replying Affidavit nor any evidence controverting the factual depositions contained in the Supporting Affidavit. While the Applicants continue to bear the legal burden of proof, the absence of any rebuttal means that the material placed before Court remains unchallenged. 2. The Court is therefore satisfied that the Applicants have demonstrated a prima facie case disclosing alleged breaches of directors' duties affecting the Company and that the intended proceedings are brought for the benefit of the Company rather than for a collateral purpose. 3. Consequently, the statutory threshold under Sections 238 and 239 of the Companies Act has been met. Accordingly, this issue is determined in favour of the Applicants. **(ii) Whether the Applicants have met the requirements for grant of the interlocutory injunctive orders sought** 1. The applicable principles for grant of interlocutory injunctions are well settled in the celebrated case of **Giella v Cassman Brown & Co. Ltd [1973] EA 358,** where it was stated as follows: - ***“The conditions for the grant of an interlocutory injunction are now, I think, well settled in East Africa. First, an applicant must show a prima facie case with a probability of success. Secondly, an interlocutory injunction will not normally be granted unless the applicant might otherwise suffer irreparable injury, which would not adequately be compensated by an award of damages. Thirdly, if the court is in doubt, it will decide an application on the balance of convenience.”*** 1. The principles were restated by the Court of Appeal in **Nguruman Limited v Jan Bonde Nielsen & 2 Others [2014] eKLR**. 2. A prima facie case was defined in **Mrao Ltd v First American Bank of Kenya Ltd & 2 Others [2003] KLR 125** as: ***"A prima facie case in a civil application includes but is not confined to a genuine and arguable case. It is a case which, on the material presented to the court, a tribunal properly directing itself will conclude that there exists a right which has apparently been infringed by the opposite party as to call for an explanation or rebuttal."*** 1. As already found, the Applicants have established an arguable claim that the Respondents failed to apply the proceeds of the intended sale of the Company's property in accordance with the Payment Plan Proposal, thereby exposing the Company to enforcement proceedings by its lender. That material establishes a prima facie case. 2. On irreparable harm, the Applicants contend that unless the Respondents are restrained from diverting the proceeds arising from the sale of L.R. No. Kajiado/Kitengela/70661 and are compelled to account for the same pending determination of the suit, the Company remains exposed to enforcement of its indebtedness exceeding Kshs. 400 million. 3. They further contend that the Respondents had undertaken, under the Payment Plan Proposal dated 13th April 2023, to apply the said proceeds towards settlement of the Company's loan obligations, but have failed to honour that undertaking. 4. Consequently, there exists a real apprehension that the proceeds may be dealt with in a manner inconsistent with the Company's interests before the substantive dispute is determined. In **Nguruman Limited** (supra), the Court of Appeal held that: - ***"The equitable remedy of temporary injunction is issued solely to prevent grave and irreparable injury; that is injury that is actual, substantial and demonstrable; injury that cannot adequately be compensated by an award of damages. An injury is irreparable where there is no standard by which its amount can be measured with reasonable accuracy or the injury or harm is such a nature that monetary compensation, of whatever amount, will never be adequate remedy."*** 1. In the present case, the Applicants' complaint extends beyond the mere recovery of money. The gravamen of their claim is that the Respondents' alleged conduct exposes the Company to the realization of its securities and frustrates the application of specifically identified sale proceeds towards the discharge of its indebtedness. If the proceeds are diverted before the Court determines the dispute, the Company stands to suffer a substantial impairment of its financial position and the efficacy of the intended derivative action may be significantly undermined. 2. I am therefore satisfied, on a prima facie basis, that the Applicants have established the likelihood of irreparable harm. 3. On the balance of convenience, I find that it tilts in favour of the Applicants. The purpose of an interlocutory injunction is to preserve the status quo pending the hearing and determination of the dispute to safeguard the subject matter of the litigation as was held in **Nguruman Limited** (supra). 4. Likewise, in **Suleiman v Amboseli Resort Limited [2004] 2 KLR 589**, Ojwang J. observed that: - ***"the Court, in responding to prayers for interlocutory injunctive relief, should always opt for the lower rather than the higher risk of injustice if it should turn out to have been wrong."*** 1. Applying those principles to the present case, the lower risk of injustice lies in maintaining the status quo by restraining the Respondents from dealing with the proceeds arising from the sale of L.R. No. Kajiado/Kitengela/70661 pending the determination of the substantive suit. 2. Such an order merely preserves the proceeds without determining the parties' respective rights. Conversely, declining the injunction carries the risk that the proceeds may be diverted or otherwise dealt with in a manner prejudicial to the Company's interests, thereby undermining the effectiveness of the intended derivative proceedings. On the other hand, the Respondents stand to suffer no undue prejudice if the proceeds remain subject to the Court's directions until the dispute is finally determined. 3. The Court is therefore satisfied that the Applicants have met the threshold for grant of interlocutory injunctive relief pending hearing and determination of the suit. This issue is likewise determined in favour of the Applicants. **(iii) Who should bear the costs of the Application** 1. The general principle governing costs is set out under Section 27(1) of the Civil Procedure Act, which provides that costs follow the event unless the Court, for good reason, orders otherwise. The provision vests the Court with discretion in awarding costs, but such discretion must be exercised judicially and not capriciously. 2. In **Jasbir Singh Rai & 3 Others v Tarlochan Singh Rai & 4 Others [2014] eKLR**, the Supreme Court observed: ***"It emerges that the award of costs would normally be guided by the principle that 'costs follow the event'... However, the vital factor in setting the preference is the judiciously exercised discretion of the Court, accommodating the special circumstances of the case, while being guided by ends of justice."*** 1. Similarly, in **Party of Independent Candidate of Kenya & Another v Mutula Kilonzo & 2 Others [2013] eKLR**, the Court of Appeal stated: ***"The award of costs is at the discretion of the Court. That discretion, however, must be exercised judicially and not capriciously or whimsically."*** 1. In the present case, the Applicants have substantially succeeded in the Notice of Motion, and no exceptional circumstances have been shown to warrant a departure from the general rule. Nonetheless, considering that the orders granted merely facilitate the prosecution of the substantive derivative action and do not finally determine the parties' rights, I find it appropriate to order that the costs of the Application shall abide the outcome of the suit. **DISPOSITION AND ORDERS** 1. In the result, the Notice of Motion dated 11th April 2024 is meritorious and is hereby allowed on the following terms: 2. *Leave is hereby granted to the 2nd Applicant to commence and continue a derivative action on behalf of the 1st Applicant Company against the Respondents pursuant to Sections 238 and 239 of the Companies Act, 2015.* 3. *Pending the hearing and determination of the derivative suit, an injunction is hereby issued restraining the Respondents, whether by themselves, their agents or servants, from diverting, transferring, dissipating or otherwise dealing with the proceeds arising from the sale of L.R. No. Kajiado/Kitengela/70661 except as may be authorized by this Court.* 4. *Pending the hearing and determination of the derivative suit, the Respondents shall deposit any proceeds received from the sale of L.R. No. Kajiado/Kitengela/70661 into an interest-bearing joint account in the names of the advocates for the Applicants and the Respondents within fourteen (14) days of this Ruling, or within such further period as the Court may direct.* 5. *The costs of the Notice of Motion shall abide the outcome of the derivative suit.* **DATED, SIGNED AND DELIVERED AT NAIROBI THIS 30th DAY OF JULY 2026.** **MURUNGA, J** *Delivered on virtual platform in the presence of:* *Brian Okoth h/b Ochieng Oduol SC for the Applicant* *Guga h/b for Atukunda for the Interested Party* *Kevin Babu - Court Assistant*