Shah & 7 Others V Mombasa Bricks & Tiles Limited & 5 Others (Petition 18 (E020) Of 2022)  KESC 106 (KLR) (28 December 2023) (Judgment)
|Petition 18 (E020) of 2022
|28 Dec 2023
Isaac Lenaola, William Ouko, Philomena Mbete Mwilu, Smokin Charles Wanjala, Njoki Susanna Ndungu
Supreme Court of Kenya
Shah & 7 others v Mombasa Bricks & Tiles Limited & 5 others
Shah & 7 others v Mombasa Bricks & Tiles Limited & 5 others (Petition 18 (E020) of 2022)  KESC 106 (KLR) (28 December 2023) (Judgment)
A constructive trust can be imported into a land sale agreement to defeat a registered title.
Sometime in May, 2005, the respondents experienced financial challenges as a result of debts incurred by the 1st respondent, and secured by the suit land that was registered in the name of the 1st respondent. The suit property was however threatened with sale by the financier, Standard Chartered Bank Ltd, to recover the monies secured by it.
In an effort to save the suit property, the 2nd and 3rd respondents, at the time tasked with the running of the 1st respondent, sought the assistance of the 1st appellant. The 1st appellant recommended the restructuring of the 1st respondent. The respondents acted upon the 1st appellants recommendations. To forestall the looming auction, the 1st appellant approached Standard Chartered Bank Kenya Ltd with the resolution, the sale agreement and a proposed settlement of the outstanding debt upon registration of title to the suit property in favour of the 8th appellant or its nominee.
Standard Chartered Bank accepted the proposal on condition that 10% of the purchase price, being Kshs 2,700,000/-, be paid upfront as a non-refundable deposit and a guarantee for payment of the balance thereof be given by a reputable bank. As a consequence, the 10% deposit and a bank guarantee by Giro Commercial Bank were released to Standard Chartered Bank who in turn released the title of the suit property to the advocates acting for both the 8th appellant and Giro Commercial Bank. A discharge of the charge in favour of Standard Chartered Bank was subsequently registered. The incorporation of the 4th to the 7th appellants were concluded with the shareholding comprising the 1st appellant, 4th respondent and the 3rd appellant each holding 20, 490 and 490 shares, respectively. The directors of the 4th to the 7th appellants were the 3rd respondent and 1st appellant. Subsequently, the 8th appellant nominated the 4th appellant to be registered as proprietor of the suit property. The brick making plant and maize milling factory on the suit property were assigned to the 5th, 6th and 7th appellants.
Thereafter, the 4th appellant applied for a loan and an overdraft facility of Kshs 50,000,000/- from Giro Commercial Bank to finance the purchase of the suit property and its working capital. The financing was approved on August 11, 2005. A fresh charge over the suit property was registered in favour of Giro Commercial Bank and the balance of the outstanding loan released to offset the loan at Standard Chartered Bank.
At the High Court several suits were filed that sought to stay a declaration by the High Court that 4th, 5th, 6th and 7th appellants held the suit property in trust for the respondents; and to stay an order of injunction that compelled the transfer of the suit property to the 1st respondent. The High Court found that the respondents voluntarily made a resolution to sell the suit property and received an agreement for sale, had it executed properly in accordance with the law; there was no coercion or undue influence in the signing of the sale agreement; and that the Memoranda and Articles of Associations of the companies incorporated for the purpose of salvaging the suit property were freely negotiated, agreed and executed. The court further held that, the sale agreement dated August 31, 2005 was valid, lawful and binding and it did convey and confer to the purchaser a valid and good title to the land purchased.
The Court of Appeal found that the 1st and 3rd appellants held the shareholding in the 4th to the 7th appellant companies in trust for the 1st respondent or its nominees, and the 4th appellant held the suit land in trust for the 1st respondent. Whereas the 4th appellants title was registered under section 23 of the Registration of Titles Act (repealed), the Court of Appeal found it impeachable. Thus, it nullified the sale agreement and the transfer of the suit property to the 4th appellant.
Aggrieved the appellants filed the instant case where they contended that the Court of Appeal erred in holding that the agreement for sale between the 8th appellant and the 1st respondent did not represent the will of the parties and that the same had been procured through undue influence and unconscionable bargains. It was their case that the finding was contrary to the facts pleaded by the respondents that the agreement was a product of negotiations.
The 3rd and 4th respondents filed a preliminary objection premised on the grounds that the notice of appeal; was not in compliance with rule 10 of the Court of Appeal Rules as the same was not signed and endorsed with the stamp of the Deputy Registrar; that the paragraphs of the notice of appeal were not properly numbered, and that the record of appeal was not complete as various documents that had been filed in the Supreme Court below had not been filed before the Supreme Court. They sought for the notice of appeal to be struck out.
The respondents also urged the court that a constructive trust overrode the registered title where a party had exerted undue influence when obtaining and retaining the property transferred to him, as was the circumstances in the instant case.
- Whether the failure to have a notice of appeal to the Supreme Court stamped/endorsed by the Court of Appeal was fatal to the appeal.
- Whether appellants before the Supreme Court on question of general public importance were under an obligation to file on the record documents that they filed in the superior courts below including documents that would be useful for a determination of facts.
- Whether the failure of an appellant before the Supreme Court to mark every tenth line of the document was to the appeal was not fatal.
- Whether the Supreme Court had the jurisdiction to determine at its own discretion, other points of law raised in appeal other than the point of law that was certified as a matter of general public importance.
- What were the circumstances in which a constructive trust was created?
- Whether the doctrine of constructive trust was applicable to land sale transactions and if so, whether it could be imported into a land sale agreement to defeat a registered title.
- What was the legal framework governing constructive trusts in Kenya?
- Whether a constructive trust can be imported into a shareholding of a company as to disentitle a registered holder of shares in a company obtained for valuable consideration.
- The notice of appeal was properly filed before the Court of Appeal. Whereas the heading of the notice of appeal indicated that it was filed in regard to an application for grant of certification and leave to appeal to the Supreme Court, its contents specified the intent to appeal against the decision of the Court of Appeal rendered on April 4, 2019. The parties having engaged in the certification and leave to appeal proceedings both at the Court of Appeal and before the Supreme Court, there was little doubt left as to the appellants intention to appeal against the judgment of the Court of Appeal.
- It was not for the Supreme Court to entangle itself in the filing and administrative processes of the Court of Appeal. The failure to have an appeal stamped or endorsed by the Court of Appeal was not fatal, as the notice of appeal was duly lodged in the Court of Appeal.
- The instant case was a matter for determination of specific framed questions of general public importance. The documents stated as missing from the record would be useful for the interrogation of findings of facts which fell outside the purview of the Supreme Court.
- The failure by the appellants to mark every tenth line of the document, without condoning the same, was not fatal. Article 159 (2) (d) of the Constitution obliged the Supreme Court to administer justice without undue regard to procedural technicalities. The 3rd and 4th respondents preliminary objection had no merit.
- An appeal was granted in specific terms by the Constitution or statute. An appeal thus typically lay to a higher court and entailed a reconsideration of a decision by the higher court with a view to reversing it either in part or in toto. The appellate jurisdiction of the Supreme Court derived from article 163(4) of the Constitution. That involved an appeal as of right or an appeal on certification. The court could not exercise both jurisdictions concurrently. The litigant chose the best path upon which the matter would be considered within the established threshold. Unlike an appeal as of right where the court exercised its appellate jurisdiction on the application and interpretation of the Constitution by the superior courts below, the jurisdiction on certification was narrower as the court was only called upon to express its position on matters that transcend the litigants before Court among other parameters set out in Hermanus Phillipus Steyn v Giovanni Gnecchi-Ruscone eKLR without necessarily sitting on appeal between the parties before it. The Supreme Court was not just another appellate layer of courts to offer remedy to parties dissatisfied with the decisions of the Court of Appeal.
- It would always be a matter for the exercise of discretion whether to allow a point in no way connected with the certified point of law to be argued on the appeal, and it was not to be assumed that an appellant could as a matter of right raise any such point. None of the issues raised to challenge the jurisdiction of the court sufficed.
- The Trustee Act defined a trust and trustee as extending to implied and constructive trusts. A constructive trust was an equitable instrument which served the purpose of preventing unjust enrichment. Trusts were created either expressly, where the trust property, its purpose and the beneficiaries were clearly stated, or established by the operation of the law. Like in the instant case, where it was not expressly stated, the trust may be established by operation of the law.
- A constructive trust was a right traceable from the doctrines of equity. It arose in connection with the legal title to property when a party conducted himself in a manner to deny the other party beneficial interest in the property acquired. A constructive trust would thus automatically arise where a person who was already a trustee took advantage of his position for his own benefit.
- The doctrines of equity were applicable in Kenya vide section 3(1) of the Judicature Act and formed part of Kenyan laws. Common law, doctrines of equity and statutes of general application applied in so far as the circumstances of Kenya and its inhabitants permitted and subject to such qualifications as those circumstances rendered necessary.
- Courts imported the doctrines of implied, resulting and constructive trust as known in English law vide section 163 of the Registered Land Act (repealed) , into section 28 of the Registered Land Act (repealed). The doctrine of constructive trust was therefore applicable to land sale transactions.
- Every person either individually or in association with others, had the right to acquire and own property of any description, and in any part of Kenya. That right to property was however not absolute. Under article 40(3) of the Constitution, the State may deprive a person of property through a process of acquisition of land for a public purpose or in public interest in accordance with the Constitution. Further, under article 40(6) the rights to property did not extend to any property that had been found to have been unlawfully acquired.
- While article 40 had an internal limitation on the right to property, the general limitation of rights provision at article 24 of the Constitution provided that any limitation on a right shall be by law, and only to the extent that the limitation was reasonable and justifiable.
- While sections 25, 26 and 28 of the Land Registration Act recognized that the rights of a registered proprietor of land were absolute and indefeasible, those were only subject to rights and encumbrances noted in the register and overriding interests. The overriding interests included trusts. In the absence of any limitation as to the trusts, that included constructive trusts. Applying the provisions of article 24 of the Constitution therefore, the limitation of the right to property was provided under law, and included a constructive trust. Section 28 of the Land Registration Act provided that the registration was subject to overriding interests. One of the overriding interests was a trust, which included constructive trust.
- Constructive trusts could arise in various circumstances, including in land sale agreements. A trust was an equitable remedy which was an intervention against unconscionable conduct. Where the circumstances of the case were such that it would demand that equity treated the legal owner as a trustee, the law would impose a trust. It was imposed by law whenever justice and good conscience required it. A constructive trust can be imported into a land sale agreement to defeat a registered title.
- The Companies Act made provision to govern all types of companies. Section 20 provided for the articles of association as the Constitution of the company. Pursuant to section 26, for existing companies before the commencement of the Act, such as the companies in the instant suit, the memorandum of association was treated as provisions of the articles. Companies therefore had a free hand in managing their own affairs through those constitutive documents. Under section 30(1), the companys constitution bound the company and its members to the same extent as if the company and its members had covenanted, agreed with each other to observe the constitution. A court could not interfere with the internal affairs of a company except for limited circumstances.
- Section 93 of the Companies Act required the company to keep a register of its members including information relating to beneficial owners of the company, if any. Section 104(1) however provided that a company shall not accept, and shall not enter in its register of members, notice of any trust, expressed, implied or constructive. Section 104(1) was similarly contained in section 119 of the Companies Act (cap 486)(repealed) which provided that no notice of any trust, expressed, implied or constructive, was to be entered on the register, or be receivable by the registrar.
- Section 105 of the Companies Act stated that until the contrary was proved, the register of the members of a company was evidence of the matters required or authorised to be included in it. The Companies Act expressly provided that there could be no entry of a trust on the company register.
- Whereas section 104 of the Companies Act proscribed the entry of trusts on the register of members, the intention of the provision was not to bar any trust arrangements, including constructive trusts. There was no bar to the holding of share(s) upon a trust.
- Where there was unconscionable or inequitable behaviour, a trust was imposed as the most appropriate remedy. A constructive trust can be imported into a shareholding of a company. Section 104 of the Companies Act did not outlaw or bar importation of trust into the shareholding of a company. A shareholding signified proprietorship in a company to the extent of the share(s) held. Company shares constituted property under article 260 of the Constitution and therefore, where it was found that there was a wrong doing, then a constructive trust may be inferred. In the instant case, a constructive trust had therefore been created.
- The focus of the Supreme Court was on the recourse, rather than the applicability of the doctrine of trust. The court was not persuaded to re-open the merits of the Court of Appeal decision in concluding the applicability of the trust. Litigation had to come to an end. The Court of Appeal, having satisfied itself of the facts, came to one conclusion and made its orders. A decision arising out of adversarial litigation was not bound to be satisfactory to both parties and undoubtedly, different courts would come to different conclusions on the same facts. Re-opening the facts was not appropriate under circumstances, and would be going beyond the Supreme Courts constitutional remit.
- Courts were an integral part of the Kenyan judicial system, they were entrusted with the responsibility of adjudicating disputes and administering justice, in accordance with the Constitutions ethos, values and principles. In carrying out their judicial duties, they were obligated to adhere to the principles outlined under article 159 of the Constitution. That guaranteed that the objectives and tenets of the Constitution were upheld.
- [Obiter] A trend towards promotion of legal certainty, safeguarding of property rights, and equitable access to justice undoubtedly emphasizes the necessity for a revision of the legislation governing the registration of trusts (including constructive) in relation to shares held in a company. These changes would be indicative of a growing recognition of the importance of constructive trust as a means of addressing unjust enrichment and ensuring equitable outcomes in disputes. Legislation that is in line with international developments and prevailing standards can enhance the strength and adaptability of the legal system, enabling it to more effectively tackle present day issues pertaining to shareholding, property rights and fair redress. It provides an opportunity for courts to shape the legal landscape concerning providing clarity particularly on enforcing remedies when breaches or unfairness occur.
- [Obiter] We however, note that there may be legal uncertainty over the recourse that parties have upon declaration of trust by the Courts and how to actualise the same especially concerning shareholding. While it is open to each court to have regard to the specific circumstances, we think this is an issue that the Kenya Law Reform Commission, the Attorney General, Parliament and all the stakeholders should give consideration whether there is need for legislative intervention.