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|Case Number:||Miscellaneous Civil Case 273 of 2012|
|Parties:||In the Matter of CMC Holdings Limited  eKLR|
|Date Delivered:||04 Oct 2012|
|Court:||High Court at Nairobi (Milimani Law Courts)|
|Judge(s):||Daniel Kiio Musinga|
|Citation:||In the Matter of CMC Holdings Limited  eKLR|
|Advocates:||Miss Ondari for Mr. Karori for the Applicant Mr. Mbobu for the Respondent|
|Parties Profile:||Government v Private Body|
|Advocates:||Miss Ondari for Mr. Karori for the Applicant Mr. Mbobu for the Respondent|
|History Advocates:||Both Parties Represented|
|Case Outcome:||Application Dismissed|
|Disclaimer:||The information contained in the above segment is not part of the judicial opinion delivered by the Court. The metadata has been prepared by Kenya Law as a guide in understanding the subject of the judicial opinion. Kenya Law makes no warranties as to the comprehensiveness or accuracy of the information|
REPUBLIC OF KENYA
IN THE HIGH COURT OF KENYA AT NAIROBI
COMMERCIAL & ADMIRALTY DIVISION
MISC.CIVIL CASE NO.273 OF 2012
IN THE MATTER OF CMC HOLDINGS LIMITED
IN THE MATTER OF COMPANIES ACT, CAP 486 LAWS OF KENYA
IN THE MATTER OF AN APPLICATION FOR LEAVE TO COMMENCE DERIVATIVE ACTION
A. THE APPLICANTS’ APPLICATION
“1. That this Honourable Court be pleased to discharge and/or set aside the leave issued ex parte on 10th May 2012.
2. That this Honourable Court be pleased to strike out HCCC No. 307 of 2012 which was filed pursuant to the leave granted on 10th May 2012.
3. That in the alternative to prayer 2 above, this Honourable Court be pleased to stay all proceedings in HCCC No. 307 of 2012 pending the hearing and determination of High Court Petition Number 216 of 2011, HCCC No. 149 of 2012 and HCCC No. 154 of 2012.
4. That the costs of this application be provided for.”
B. THE APPLICANTS’ DEPOSITIONS
10th May 2012.
C. THE RESPONDENTS’ REPLY
D. PRELIMINARY OBJECTIONS TO THE APPLICATION
“1. The application before court is fatally defective in that the applicants have not appeared nor appointed an advocate for them in the above matter.
2. The application dated 28/5/2012 has been brought by an advocate not duly and properly appointed.
3. Without prejudice to the foregoing, prayer 3 of the application before the court exceeds the leave granted on 22/5/2012 which was limited to a challenge to the leave of court granted on 10/5/2012. It must be struck out limine.
4. In any event, prayer 3 cannot be brought within the present
application as indeed the same pertains to HCCC No. 307 of 2012 which is the object of the challenge in the application in the first instance.
5. The Applicants herein cannot purport to have a common interest to the extent that the application for leave (12/5/2011) was made on behalf of CMC Holdings Ltd against the wrong-doing directors of the company.
6. Other grounds to be argued at the hearing hereof.”
E. THE APPLICANTS’ COUNSEL’S SUBMISSIONS
F. THE RESPONDENTS’ COUNSEL’S SUBMISSIONS
“A barrister ought not to accept instructions or a brief to represent two clients whose interest will or may conflict. if, after a barrister has accepted a set of instructions or a brief on behalf of more than one client, there appears to be a conflict of interest between any one or more of such clients, he may not continue to act for any such client unless all such clients consent that he should so act, and he is able to do so without embarrassment. Even if there is no conflict of interest, when a barrister has accepted a set of instructions or held a brief for any party in any proceedings, he should not accept a set of instructions or a brief on an appeal or further stage in the proceedings for any other party without obtaining the prior approval and consent of the original client.”
“There is no approved pre-action protocol in relation to derivative claims.”
The learned author states that only in cases of extreme urgency is a claimant advised to set out his complaint in a letter before action because of the court’s wide discretions to costs.
(See L.C.B. Gower, The Principles of Modern Company Law, 3rd Edition).
23. From the exhaustive affidavits and submissions on record, the major issues that I deem appropriate for determination in this application are as follows:
(a) Whether the application to set aside the leave granted ex parte was properly brought before the court.
(b) Whether an application for leave to commence a derivative action should be brought ex parte or inter partes.
(c) Whether the respondents were entitled to grant of leave to commence the derivative actions, in other words, whether the respondents met the threshold set out in FOSS vs. HARBOTTLE.
(d) Whether the issues raised by the respondents are sub judice.
24. The 1st and 2nd preliminary objections that were raised by the counsel were subsequently abandoned and therefore they do not fall for determination. As regards grounds 3 and 4 of the preliminary objection, I agree with the respondents’ advocate that the third prayer in the applicants’ application exceeds the leave that was granted on 22nd May, 2012 which was limited to a challenge of the leave granted to the respondents to commence this derivative action on 10th May, 2012. That being the case, the third prayer is hereby struck out in limine.
25. The issue of representation of the directors and the company by Mr. Karori that was raised by Mr. Mbobu is important. An advocate employed or retained by an organization represents the organization which ordinarily acts through its duly authorized officers, in this case the directors. In this instance, Mr. Karori has been instructed to represent the company by the very same directors who are alleged to have mismanaged the company. Even though it was argued that there is likelihood of a conflict of interest, at this stage that is yet to be established since no evidence has been adduced. If at the appropriate time such evidence is availed the court will make appropriate directions in the event that Mr. Karori, of his own volition, will not opt to cease representing either the company or the directors.
26. I now proceed to consider whether the application for leave to commence the derivative action ought to have been brought ex parte or inter partes. Mr. Karori for the applicants strongly argued that the application ought to have been argued inter partes. He stated that at the leave stage the court has to be satisfied that the applicants have locus standi to commence the action on the basis of the allegations in their pleadings. That can only be established if the plaint is filed together with the application for leave, he added. The respondents herein, having obtained leave vide Misc. Civil Cause No. 273 of 2012, filed their plaint vide HCCC No. 307 of 2012. Mr. Karori further submitted that at the leave stage the court must be satisfied that the shareholders have a prima facie case against the alleged wrong doing directors. That determination cannot be made unless all the parties are heard, he stated. He cited the case of DADANI vs. MANJI (Supra) where the court held, inter alia:
“The permission or leave to continue with an action such as this is sought after the suit has been instituted. And substantially all that has been done. Then came the question whether the proceedings in this aspect are ex parte or ought to be after serving the other side. Again we revert to Joffe who continues:
‘the claim form the application notice and written evidence in support of the application must be served on the defendant within the period within which the claim form is to be served….in any event at least 14 days before the court is to deal with the application.’
In our context the claim form is the plaint and the application is the one to continue the derivative action. May it not be forgotten that Joffe writes specifically for the English courts with their law procedures and practices. All those may not be applicable here in Kenya. So the plaint plus the application for permission to continue the derivative action must be served before the application is heard. The application has to be heard inter partes because the plaintiff has to demonstrate a prima facie case by the company against the wrong doing directors and that the plaintiff should bring the case. The service of the plaint and the application affords an opportunity to the defendants in their own pleadings to try and knock out the intended derivative action.”
27. In AGIP (NIGERIA) LIMITED vs. AGIP PETROLEUM INTERNATIONAL & OTHERS (Supra), the Supreme Court of Nigeria was dealing with the question whether an application for leave to institute a derivative action ought to be brought with notice to the defendants. At Page 54 of the judgment the court held as follows:
“It is consequently imperative that a minority shareholder who intends to bring a derivative action in the name of the company must first and foremost apply for leave of court by way of originating summons on notice to the company….The hearing of the shareholders’ application thereafter proceed in the manner of an ordinary interim application with both sides being afforded the opportunity to submit evidence and submission. The company must be given notice of such hearing so that the company or director may be able to appear and present their view of the shareholder’s case.”
28. On the other hand, Mr. Mbobu submitted that there is no statutory provision or hard and fast procedure on how an application for leave to commence a derivative action should be brought, since the concept of such an action emanates from common law. The application for leave can be heard ex parte, he stated.
29. In DADANI vs. MANJI & 3 OTHERS (Supra), the court rightly observed that the procedure set out by Joffe in his book is in conformity with the statutory law of England, whereas in Kenya our outdated Companies Act contains no provisions as to how a derivative action ought to be instituted. That notwithstanding, Mwera, J. stated:
“But whether we have the law or procedure covering derivative actions…..we are persuaded and inclined to adopt and follow the English courts procedures when derivative actions come calling.”
The learned judge came to the conclusion that:
“The proper way to lay a derivative action is to begin with filing the suit, then following it with an application to be served along with the plaint, followed by the court hearing and determining whether the plaintiff should continue with the action.”
30. In the above cited case, the plaintiff had filed an ex parte application seeking leave to prosecute a derivative action and the leave had been granted. The company then filed an application to set aside the ex parte orders granting leave to institute the derivative action. It argued that leave must precede the instituting of a derivative action and that had not been the case since the plaint was filed together with the application for leave. On the other hand, the plaintiff’s counsel argued that the application that had been filed was for the court to allow him to continue with the derivative suit and not to file it.
31. Although Mwera, J. was convinced that the application seeking leave (or permission to continue) ought to have been argued inter partes following the practice in England, considering all the circumstances of the case he declined to set aside the ex parte orders. The judge observed:
“The hearing base of a derivative action is cemented in equity. Much as principles, maxims and rules of equity reign it is never in doubt that the ancient basis of discretion underlies them all.”
The reference to the procedure of instituting derivative actions as quoted by Mwera, J., relying on the writing of Joffe was before the amendment to the Companies Act 2006 of the United Kingdom which has made provisions for instituting derivative claims.
32. Currently, the Companies Act 2006 (UK) specifically provides for leave before commencement of derivative actions. This qualification of the proceedings for derivative actions under the 2006 Companies Act led to a review and amendment of the English Civil Procedure Rules with the result that an application for leave is now to be made ex parte. The application does not involve the defendants at that stage. The defendants are only heard after the determination of application for leave and where the court finds that the evidence filed by the applicant in support of the application for leave discloses a prima facie case for giving leave, only then will the court order the company be served and give directions as to the evidence to be provided by the company.
33. In the English case of PRUDENTIAL ASSURANCE COMPANY LIMITED vs. NEWMAN INDUSTRIES LIMITED (NO. 2)  Ch.2004 at pages 221 -222, the Court of Appeal, with regard to granting of leave prior to the 2006 Companies Act stated that:
“….the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in FOSS vs. HARBOTTLE.”
34. In the English case of ALEXANDER MARSHALL WISHART vs CASTLECROFT SECURITIES LTD and OTHERS [2009 CSIH 65] the court set out the procedure of commencing a derivative action under the Companies Act 2006 which is as follows:
“266 Requirement for leave and notice
(1) Derivative proceedings may be raised by a member of a company only with the leave of the court.
(2) An application for leave must-
(a) specify the cause of action, and
(b) summarise the facts on which the derivative proceedings are to be based.
(3) If it appears to the court that the application and the evidence produced by the applicant in support of it do not disclose a prima facie case for granting it, the court-
(a) must refuse the application, and
(b) may make any consequential order it considers appropriate.
(4) If the application is not refused under subsection (3)-
(a) the applicant must serve the application on the company,
(b) the court-
(i) may make an order requiring evidence to be produced by the company, and
(ii) may adjourn the proceedings on the application to enable the evidence to be obtained, and
(c) the company is entitled to take part in the further proceedings on the application.
(5) On hearing the application, the court may-
(a) grant the application on such terms as it thinks fit,
(b) refuse the application, or
(c) adjourn the proceedings on the application and make such order as to further procedure as it thinks fit."
35. The procedure for commencing derivative actions set out in DADANI v. MANJI & 3 OTHERS (Supra), in my view, can only be insisted on in Kenya if our Companies Act had such peremptory provisions but that is not the case. In the circumstances, the long standing practice, and which I find reasonable, has always been that before a derivative action is filed, the applicant brings to court an ex parte application for leave, supported by a detailed affidavit so as to demonstrate that he has locus standi to institute such an action and that he has a prima facie case. In so doing, the applicant must satisfy the court that the company is entitled to the intended relief and that the action falls within the threshold of the exceptions to the rule in FOSS vs. HARBOTTLE.
36. If the court is so satisfied and grants leave, then the suit is filed. In my view, if one were to first file the suit and then follow with an application for permission to continue with the derivative action, if the court is not satisfied that the applicant has locus standi and/or prima facie case and therefore declines to grant the permission, the applicant will have wasted resources in filing the suit.
37. Once leave has been granted, the plaint should then be filed in the same court file and must accord with the leave granted. The plaint together with a copy of the application for leave will be served upon the company and/or the alleged wrong doing directors, who may choose either to challenge the grant of the leave by way of an application or file a statement of defence. Since the plaintiff is suing in a representative capacity on behalf of himself and all the other members of the company other than the ones who may already be involved in the suit, it is necessary that all the other shareholders are notified of the suit. An application can be made at this stage under Order 1 rule 8 of the Civil Procedure Rules for the court to give appropriate directions as to the mode of service/notification of the other shareholders.
38. It should be borne in mind that in derivative suits the applicant usually alleges that some ills have been or are being committed by some directors against the company and if the application for leave were to be served and argued inter partes, the directors are likely to use every means available to frustrate, delay or defeat such an application and the company may continue to suffer loss.
39. The case of AGIP (NIGERIA LIMTIED v. AGIP PETROLEUM INTERNATIONAL & OTHERS (Supra) which was cited by Mr. Karori is distinguishable from the present case simply because in Nigeria the COMPANY AND ALLIED MATTERS ACT specifically stipulates the procedure for commencement and prosecution of derivative actions. Section 303 of that Act states:
“Subject to the provisions of Section (2) of this section, an applicant may apply to the court for leave to bring an action in the name or on behalf of a company or to intervene in an action to which the company is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the company”.
40. I think time has come to enact a new Companies Act which will, inter alia, shed light on all the grey areas of company law practice, including derivative claims. But before that is done, our courts cannot adopt wholesome the practices in other jurisdictions such as England and Nigeria which have statutory provisions laying down the procedure for instituting derivative actions.
41. In the application for leave that was made by the respondents herein, the court, being satisfied that the respondents had met the threshold set out in FOSS v. HARBOTTLE, granted leave to commence the derivative suit.
42. Grant of such leave cannot amount to condemnation of the directors unheard. They will bring all their defences and the court will determine the matter accordingly.
43. Billionaires and millionaires, who are usually the majority shareholders in public quoted companies as well as the middle class and people of meager income, usually the minority shareholders in such companies, are all equal in the eyes of the law and must therefore be treated alike in legal proceedings. Courts should be slow in driving out minority shareholders from the seat of justice when they are questioning the manner in which directors of a company are running its affairs.
44. The fact that the plaint herein was filed in a different court file from the one where leave was granted cannot per se invalidate the suit. That is a procedural issue and Article 159 (2) (d) of the Constitution of Kenya, 2010 enjoins the court to dispense justice without undue regard to procedural technicalities.
45. The last issue for determination is whether the issues raised by the respondents herein are sub judice. I have looked at all the other suits filed either by the company or against the company and its directors or some of them and there is none that is specifically dealing with the law regarding holding of an Annual General Meeting (AGM) and other specified wrongs alleged to have been done by the directors. High Court Petition No. 216 of 2011 is a petition by a majority shareholders seeking to convene an Extraordinary General Meeting (EGM). The simple and straight forward answer is that the issues raised herein are not sngaib judice. There may be some similarities between this case and some of the other cases but I believe further directions can be given as to how the various matters will be handled.
46. In conclusion, I find no merit in this application and dismiss the same with costs to the respondents.
DATED, SIGNED AND DELIVERED AT NAIROBI THIS 4TH DAY OF OCTOBER, 2012.
In the presence of:
Muriithi – Court Clerk
Miss Ondari for Mr. Karori for the Applicant
Mr. Mbobu for the Respondent