REPUBLIC OF KENYA
IN THE HIGH COURT OF KENYA AT NAIROBI
MILIMANI LAW COURTS
COMMERCIAL AND TAX DIVISION
CIVIL SUIT NO. 509 OF 2015
AFRICERT LIMITED........................................................................PLAINTIFF
VERSUS
RUTH RUGURU NYAGA……………..………….......................DEFENDANT
JUDGMENT
1. Through a plaint dated 16th October, 2015, the plaintiff seeks judgment against the defendant for-
a) The removal of the defendant as a director of the plaintiff;
b) Payment by the defendant of special damages of Kshs. 14,045,467.00 as set out and particularized in paragraph 15 of the plaint;
c) Reimbursement of the recertification of license fee of USD 7,495 for IOAS and Euros 3,574 for Dakks at the current exchange rates prevailing at the time of filing this suit;
d) General damages for breach of trust and fraud;
e) A permanent injunction restraining the defendant from in any manner whatsoever either by herself or through her officers, agents, servants, employees and attorneys, and/ or through those persons in active concert and participation with her from directly or indirectly using the domain www.africert.co.ke or any similar name which is likely to dilute the value of the plaintiff’s operations;
f) Consequent to the grant of prayer (e) above an attendant permanent injunction requiring the defendant to immediately make affirmative efforts to stop, cancel or discontinue any previously purchased advertising which refers to the name Africert Limited or the internet domain name www.africert.co.ke;
g) Costs of this suit;
h) Interest on (b), (c) and (d) above; and
i) Any other further relief this Honourable Court may deem fit and just to grant in the circumstances.
2. The plaintiff is a private limited liability company incorporated on 14th November, 2003, under the Companies Act, Cap 486 (Repealed). The plaintiff undertakes the business of certification of services, operating certification systems and processes and quality assurance service in the Agri-Business Sector. It is approved under ISO/IEC 17065. The defendant was the Managing Director of the plaintiff from incorporation until her resignation on 18th October, 2013.
3. It is averred in the plaint that in May 2014, there was a financial audit carried out which revealed that the defendant had failed to remit cheques in time for payment of PAYE and VAT amounting to Kshs. 9,085,406.00 to the Kenya Revenue Authority (KRA). Consequently, the plaintiff was charged interest and penalties of Kshs. 4,960,061.00 by the KRA, leading the plaintiff to sell a pool vehicle in order to settle the debt with KRA. The plaintiff alleges that the sale of the said motor vehicle greatly hampered its operations as it had to incur significant transport costs from transport service providers for its Auditors to access farms in different parts of the country. The plaintiff claimed that it also discovered that the defendant had engaged in other financial malpractices which led to further erosion of the plaintiff’s financial position.
4. The plaintiff alleges that the defendant formed another company known as Kencert (Kenya) Limited with objects similar to the plaintiff’s, moved with key staff and solicited clients by misrepresenting the plaintiff’s state of affairs, which led to the plaintiff losing one of its certification licenses from Global G.A.P. That thereafter, the plaintiff had to refund amounts received from clients for Global G.A.P. That the plaintiff also lost a lot of clients from January 2014.
5. The plaintiff averred that the defendant frustrated its operations by using its domain www.africert.co.ke to operate her new company and that she has declined to cede control of the said domain.
6. It was against the above background that the plaintiff filed this suit for breach of trust and for fraud. The particulars of the claim are that she misappropriated the plaintiff company’s resources and failed to remit statutory deductions to the KRA.
7. In response to the allegations, the defendant filed a statement of defence dated 30th November, 2015 in which she denied the claim. The plaintiff then filed a reply to the defence dated 12th June, 2017.
The evidence adduced.
8. The suit commenced hearing on 8th October, 2021 before Hon. Lady Justice Odero who heard the plaintiff’s case while this Court heard the defence case. The plaintiff called two witness, namely, Christopher Mwangi Kioi and Anthony Nderitu.
9. Mr. Kioi (PW1), a Certified Public Accountant (CPA) with a Masters in Business Administration (MBA) degree, working with the firm of Njuguna Kioi & Associates, produced the Audit Report he prepared, as Plaintiff exhibit 1 (Pexh1). He testified that he was instructed by the plaintiff’s Board Chairman to prepare the said report. He confirmed that he found that the plaintiff owed taxes (PAYE and VAT) of Kshs.9,703,918.00 and penalties of Kshs. 4,000,000/-, totalling to Kshs.14,039,548/- for the period January 2012 to December 2013. He explained that the plaintiff did not remit the taxes due to cash flow issues, but could not tell why there were cash flow issues. He expressed the view that since the plaintiff was having cash flow issues, it was not being run in a financially sound manner. He pointed out that the plaintiff was also exposed to tax penalties and interest due to delayed payment of director bonuses declared earlier as shown at page 4 of the Audit Report.
10. In cross-examination, PW1 confirmed that he did not produce any evidence that the defendant misappropriated the plaintiff’s funds. That the Audit Report covered two years from January 2012 to December 2013 and during that period, the plaintiff had appointed Mr. P. G. Wahome as its Internal Auditor and that he prepared an Audit Report for the year 2012 which had been approved. PW1 confirmed having had a look at the Audit Report prepared by Mr. Wahome but conceded that he did not indicate this in the Audit Report he prepared. PW1 also confirmed having come across the minutes of the Board meeting of 13th November, 2013 which reflected a discussion regarding the KRA report under item 3, where it was noted that the plaintiff’s Auditor, Mr. Wahome was engaging KRA with a view of having some of the penalties waived.
11. PW1 stated that he however did his own independent audit. He admitted that he did not have any written authority to conduct the audit, despite confirming that he was familiar with the process of appointing Auditors as per Article 135 of the Articles of Association of the plaintiff and Section 159 of the Companies Act. He referred to a letter dated 23rd May, 2014 addressed to the directors stating that he was appointed by them to carry out a due diligence audit of the company following a discussion on 29th July, 2013.
12. He stated that the Board Chairman communicated to him and he assumed that the directors had approved his appointment. He expressed the view that since he was merely appointed to carry out a specific assignment, there was no need for director’s written authority. He confirmed that under Article 130 of the plaintiff’s Articles of Association, only directors could authorize him to look at the plaintiff’s books of accounts. He stated that he obtained the cheques referred to in his report from the Accountant.
13. PW1 intimated that funds were probably used for operations as he had found ten instances where money was paid out without authority. He however conceded that the amount involved in these instances was less than the unremitted taxes.
14. In re-examination, PW1 clarified that he was not an external Auditor but was an Auditor mandated to perform a specific assignment, and that under Article 130 of the Articles of Association of the plaintiff, directors could determine when books of accounts could be opened to members who are not directors, and that the Accountant gave him copies of cheques and counterfoils.
15. In his witness statement dated 16th October, 2016 as his evidence in chief. He produced the plaintiff’s bundle of documents of the same date as Pexh4. He testified that following a tax demand issued by KRA in July 2013, the plaintiff appointed Njuguna Kioi & Associates to conduct a forensic audit which established that there were indeed outstanding taxes together with penalties and interest. It was discovered that cheques drawn in favour of the Commissioner of Domestic Taxes for payment of taxes had not been remitted as required. KRA then issued a payment plan and the plaintiff settled the total sum due from proceeds of the sale of a motor vehicle and other funds mobilized by the directors, excluding the defendant.
16. According to PW2, the defendant was wholly to blame for the delay of payment of the taxes. He stated that the defendant who was a shareholder in the plaintiff, also held the dual roles of Managing Director and Accounting Officer. That she was involved in the day to day running of the company. He stated that the defendant was responsible for remitting or ensuring that taxes were remitted to KRA, but she failed to ensure that the cheques that were signed by directors for payment of the taxes were remitted in time or at all. He contended that the delay in payment of the taxes was not due to cash flow issues as when drawing cheques, directors would go through the cash flow to ensure that funds were available.
17. In cross-examination, PW2 admitted that there was no demand from KRA produced in Court. He confirmed that based on perusal of the minutes of the previous Board meetings, the tax liability was only discovered at the meeting of 13th November, 2013, which was before he joined the plaintiff. He confirmed that the cheques in question were only for February 2013 to December 2013, and not the year 2012 which was also covered by the Audit Report.
18. He also confirmed that although he had claimed that the plaintiff had sufficient funds in the sum of Kshs.1,327,237.00 on 16th August, 2013 in its Equity Bank account, there were no bank statements produced. He further confirmed that the three cheques were for Kshs. 823,000/- which was less than what was in the Equity Bank account. That money was used to pay other company expenses, but priority ought to have been given to statutory dues.
19. He acknowledged that the money did not go to the defendant directly and that funds used for other expenses cannot be said to be misappropriated. He however maintained that the defendant partly misappropriated the funds by increasing her own salary. He also stated that the company accepted the defendant’s resignation, but there is no mention of the disputed cheques in the resignation letter. He indicated that due diligence audit was conducted in August 2013 and the defendant issued her resignation letter dated 18th October, 2013. That as at 13th November, 2013 when the Board meeting was held, the final Audit Report had not been issued, but the defendant was aware of what the report would reveal. He admitted that the AGM did not appoint Njuguna Kioi & Associates to conduct the audit.
20. As regards the cheques, Mr. Anthony Nderitu (PW2), stated that the cheques in question had the defendant’s signature and the Board Chairman’s signature. He explained that cheques would be prepared by the Accountant then first signed by the defendant. Thereafter, the cheques would be sent to the Board Chairman, at a different office location, who would only sign upon confirming that there were sufficient funds. The cheques would then be sent back to the Managing Director who would approve the same to be paid. The cheques were obtained from the Managing Director’s office.
Defendant’s case
21. The defendant, Ms. Nyaga (DW1) adopted her witness statement dated 26th April, 2018 as her evidence in chief. She produced the list and bundle of documents dated 30th November, 2015, marked as Dexh1-12.
22. DW1 testified that she and Dr. Hans R Herren founded the plaintiff company and that she was the Managing Director from incorporation until 31st December, 2013. That she issued a resignation letter dated 18th October, 2013 and on 23rd October, 2013, the Board of Directors unconditionally accepted her resignation. She also testified that from the year 2009, all the plaintiff’s financial audits and statements showed the amounts owed to different creditors including KRA and the same were discussed in the company’s Annual General meetings and were approved by all directors unanimously. It was her evidence that the amounts were also reflected in the quarterly management reports which were reviewed and accepted by the directors every quarter.
23. DW1 contended that the financial audit conducted in August 2013 was neither approved nor authorized by the plaintiff. This is because the firm of Njuguna Kioi & Associates was solely appointed by the Board Chairman who had an axe to grind with her. She also contended that the audit was not done professionally but was done at the whims, desires and aims of the Board Chairman.
24. DW1 disputed the notion that she resigned upon the alleged discovery of the financial misappropriation. She stated that she resigned when the plaintiff was at a successful streak, with good financial standing and she has remained as a shareholder and non-executive director. She contended that the plaintiff’s loss of business from January 2014 and loss of certification in September 2014 could not be linked to her as she had no influence on the independent German Accreditors who evaluated the plaintiff’s capacity to provide Global G.A.P services.
25. She stated that although she incorporated Kencert International Limited, its intended business of consultancy and training is distinct from that of the plaintiff which does certification of agricultural produce, and that Kencert International Ltd does not at all compete with the plaintiff.
26. She affirmed that upon resignation, she handed over all the processes, systems and company assets held on behalf of the plaintiff as promised. She also asserted that she had not used the plaintiff’s internet domain since her resignation but she was the contact person for billing purposes. That in January 2014, she informed Susan Mugure, the then Acting CEO to update the billing details for the domain www.africert.co.ke by substituting her details with the plaintiff’s or the email services would be suspended. She testified that on 1st July, 2014, she received an email from the service provider notifying her that the email services would be suspended by 5th August, 2014 if no payment was done, which she promptly forwarded to Ms. Mugure as well as to Patrick Karanja, the IT Assistant. That eventually, the business services were suspended on 10th August, 2014 for non-payment by the plaintiff and that all email traffic from www.africert.co.ke was redirected by the plaintiff to www.africertlimited.co.ke which had been registered on 27th March, 2014.
27. DW1 contended that the alleged resolution filed by the plaintiff’s Board of Directors on 29th July, 2015 to file this suit is not proper as she is still a director and she was not notified of the purported Board of Directors meeting or resolution.
28. She denied having committed any acts that would warrant her removal as a director and that the plaintiff has not proved any. She opined that this is not the proper forum to seek her removal as director, and that since the suit relates to her employment with the plaintiff, and the cause of action is a contract of employment, this Court has no jurisdiction to hear it.
29. DW1’s evidence was that the cheques were first signed by either her or the Operations Manager, Susan Mugure, at the management offices at Vision Plaza before they were forwarded to the Board Chairman’s offices at Westlands, where they would be signed by either the Board Chairman or the other “panel B” director, David Gray. She stated that afterwards, the cheques would go back to the Accountant who was responsible for physical deposit or remittance of payments.
30. In cross examination, DW1 confirmed that as the Managing Director, she had oversight over the Accountant, and they had a payment schedule that would be brought in a file on the 1st of every month containing invoices, payroll and other supporting documents. She stated that she would not personally track back on whether the previous payments had been made, but relied on the Accountant's word. She explained that once payments were made, KRA would issue receipts. She mentioned that it did not come as a surprise that payments were not being remitted to KRA. She indicated that she was not aware of the total amount not paid to KRA, and that when payments were not remitted to KRA she would inform the Board Chairman and directors. That the issue of unpaid taxes was discussed at the Board meeting of 13th November, 2013, and stated that the Board had approved and accepted the audited accounts for 2012. That no question was put to her at the meeting regarding the outstanding amounts, and on 18th February, 2014, the Board Chairman wrote to her regarding the outstanding amounts, and she responded on 19th February, 2014, requesting for Board minutes.
31. DW1 acknowledged that she had a duty of care but claimed that she was not aware that the cheques were found in her office. She was firm that the Board had recognized that she had led the company exemplarily for 10 years. She confirmed receipt of a copy of the Audit Report but claimed that there were no omissions found on her part as the Managing Director of the plaintiff. She explained that she did not raise any concern regarding the Audit Report at the meeting of 13th November, 2013 as she got the report later in 2014. She maintained that PW1 was instructed by the Board Chairman without approval from the Board and that there was nothing in the Audit Report that was different from what the company Auditor, Mr. Wahome, had brought up. She denied taking away the plaintiff’s clients.
32. In re-examination, DW1 clarified that she received the Audit Report forwarded to her in May 2014, which she accepted as it was for the plaintiff, and it did not implicate her as there was no mention of the cheques being found in her office.
Submissions.
33. Mr. Makori, learned Counsel for the plaintiff, through written submissions dated 25th August, 2023 and rebuttal submissions dated 13th September, 2023, argued that the defendant was the Managing Director from 2003 to 31st December, 2013 and that she was under fiduciary duty and loyalty to the plaintiff. Counsel submitted that the defendant was also the Accounting Officer responsible for ensuring statutory compliance including tax obligations.
34. Counsel submitted that the defendant was responsible for remitting cheques for PAYE and VAT on the plaintiff’s behalf and during cross-examination, the defendant confirmed that she was involved in counterchecking and approval of the monthly schedule of accounts, signing of the cheques as one of the “panel A” signatories, and that once the cheques for PAYE and VAT had been signed by the “panel B” signatories, they would revert to her for counterchecking and release to the Accountant who would physically take the cheques to KRA.
35. The plaintiff’s Counsel argued that the defendant gave no explanation as to why she continued to submit schedules for requisition of taxes and collected the cheques, without remitting them. Counsel squarely blamed the defendant, asserting that the tax demand from KRA came as a surprise to its other directors. He submitted that under Article 130 of the plaintiff’s Articles of Association, the directors had residuary powers to carry out an independent analysis of the plaintiff’s books of accounts, and it was on that premise that the directors appointed Njuguna Kioi & Associates to carry out an independent audit to ascertain the financial status of the plaintiff.
36. Mr. Makori submitted that the defendant owed the plaintiff the fiduciary duty of loyalty and good faith and duty of care and skill. He relied on Section 143 of the Companies Act to the effect that a director must act in good faith, and in a manner that would most likely promote the success of the company for the benefits of its members as a whole. The plaintiff’s Counsel also relied on Section 145 of the said Act which provides that a director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by the director in relation to the company (the “objective” test) and the general knowledge, skill and experience that the Director actually has (the “subjective” test).
37. Mr. Makori relied on the Court of Appeal decisions in Nyandarua Progressive Agencies Ltd v Cyrus Wahome Nduhiu & another [2017] eKLR, to the effect that directors stand in a fiduciary relationship to their principal, the company, and Ajay Shah v Deposit Protection Fund Board as Liquidator of Trust Bank Limited (In Liquidation) [2016] eKLR, where the directors were found to be agents of the bank and owed the bank the fiduciary duty of loyalty and good faith, and the duty of care and skill. The plaintiff’s Counsel also relied on the latter case in support of the remedies sought by the plaintiff. He further relied on Howard v Pooler AD3d, 2020 NY Slip Op 03347 [4th Dept June 12, 2020] cited with approval in the case of Family Bank Limited v Panda Co-operative Savings and Credit Society [2022] eKLR, where it was held that in respect of the tort of breach of fiduciary duty, a party is entitled to an award of damages once proven that there was a breach of a fiduciary duty even in the absence of any actual damages as a result of the breach.
38. The plaintiff’s Counsel urged this Court to allow its claim as prayed and award it reimbursement of the sums of Kshs.14,045,467.00 and damages for breach of fiduciary duty and trust in the sum of Kshs.1,000,000/-.
39. Mr. Masore Nyang’au, learned Counsel for the defendant, in written submissions dated 1st September, 2023, stated that the defendant was not implicated in hoarding the signed cheques in her office, misappropriating the funds for the plaintiff or impeding correspondence with KRA in a bid to waive the penalties in both the Auditor’s testimony, and the Audit Report.
40. The defendant’s Counsel challenged the reliability of PW2’s evidence because he had not joined the plaintiff during the tenure of the defendant as the Managing Director. Mr. Masore claimed that PW2’s testimony that the other directors of the plaintiff company only learned of the liability to KRA at the meeting of 13th November, 2013 was false as the minutes show that it was an item of discussion beforehand. Counsel also challenged PW2’s claim that the plaintiff had sufficient funds in the year 2013 to meet the financial liability to KRA for lack of evidentiary support, and for contradicting himself when he said that the money the plaintiff had then was used to pay other company expenses, while blaming the defendant for failure to prioritize statutory dues. Further, that PW2 admitted that the money did not go to the defendant directly, and that he conceded during cross-examination that part of the funds alleged to have been misappropriated by the defendant were used for other company expenses including her salary.
41. The defendant’s Counsel submitted that funds used for other company expenses cannot be said to have been misappropriated. He also argued that there was no evidence to show that DW1 wrongly increased her own salary, and if it was wrong, why this could not be recovered from her own dividends or emoluments as a shareholder and/or director respectively, as internally provided in the plaintiff’s Memorandum and Articles of Association.
42. The defendant’s Counsel asserted that PW2 contradicted his evidence by stating that once the Chairman has signed the cheques, they would be taken to the bank, then again stating that once the Chairman signed the cheques, they were taken back to DW1 who would approve the same for payment.
43. As regards the claim for USD 7,495 for IOAS for recertification licence and Euros 3,574 for Dakks, Mr. More submitted that there were neither particulars given nor documents produced in support of the said claim. Counsel contended that the claim against the defendant was unsustainable since whoever was purportedly competing for the business is Kencert (Kenya) Limited, a limited liability company.
44. The defendant’s Counsel also argued that special damages must not only be pleaded but the same must also be specifically proved. To support this assertion, he relied on the Court of Appeal decisions in Douglas Odhiambo Apel v Telkom Kenya Ltd [2014] eKLR and Capital Fish Kenya Limited v The Kenya Power and Lighting Company Limited [2016] eKLR, cited with approval in Ahmed Mbarak v Kenya Power and Lighting Company Ltd (Mbsa) Civil Appeal No. 190 of 2018 [2021] eKLR.
ANALYSIS AND DETERMINATION.
45. I have considered the pleadings, the evidence, the rival submissions and authorities relied on. The issues for determination are-
(1) Whether this Court has jurisdiction to hear and determine this suit.
(2) Whether the plaintiff has proved its case against the defendant and is entitled to the reliefs sought.
46. As regards the first issue, I note that on 18th July, 2018, the file was transferred to the Employment and Labour Relations Court by agreement of the parties on the premise that the dispute is an employment matter. When the matter was mentioned before that Court on 19th December, 2018, the Court held the view that neither the issues raised nor the prayers sought were on employment and Labour Relations. Consequently, the file was transferred back to this Court for hearing and determination. There was no appeal or review of the decision of the Employment & Labour Relations Court. It is therefore not within the purview of this Court to sit on appeal of a decision of the Employment and Labour Relations Court, which is a Court of equal status to the High Court as per Article 162(2)(a) of the Constitution of Kenya. It is therefore my considered view that the question of jurisdiction is res judicata.
47. The second issue is whether the plaintiff has proved its case against the defendant and is entitled to the reliefs sought. The plaintiff’s claim against the defendant is for breach of trust and for fraud. Section 107 of the Evidence Act provides as follows-
“Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”
48. The standard of proof required to prove fraud was illuminated by the Court of Appeal for East Africa in RG Patel v Lalij Makanji [1957] EA 314 at 317 as follows-
“Allegations of fraud must be strictly proved although the standard of proof may not be so heavy as to require proof beyond reasonable doubt, something more than a mere balance of probabilities is required.”
49. The Black’s Law Dictionary, 10th Edition defines fraud as-
“…some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury. As distinguished from negligence, it is always positive, intentional.”
50. The particulars of the claim are that the defendant misappropriated the plaintiff’s resources and failed to remit statutory deductions to the KRA. The plaintiff claimed that the defendant withheld cheques that had been issued in favour of the Commissioner for Domestic Taxes which had been signed by the requisite signatories.
51. From the record, I note that the defendant issued the Board of Directors of the plaintiff company with a resignation letter dated 18th October, 2013. From my reading of the said letter, the exact date when the resignation would take effect is not clear. Through the letter dated 23rd October, 2013, the Board Chairman confirmed receipt of the defendant's letter of resignation and thanked her for her service. It is evident from the evidence adduced by the defendant that she worked as the Managing Director of the plaintiff until 31st December, 2013. It is therefore safe to say that the defendant was the Managing Director during the period January 2012 to 31st December, 2013 when there was delay in payment of the taxes in issue.
52. On the alleged misappropriation of funds, the plaintiff relied on the audit report prepared by Njuguna Kioi & Associates for January 2012 to December 2013. From a keen perusal of the Audit Report, it is clear that the plaintiff failed to remit PAYE and VAT amounting Kshs. 9,085,406.00 and incurred penalties of Kshs. 4,000,000/-, totalling to Kshs. 14,039,548.00 for the period January 2012 to December 2013. The Audit Report also indicates that the plaintiff was exposed to tax penalties and interest due to delayed payment of directors’ bonuses that had been declared earlier. An increase was also noted in the defendant’s salary.
53. During trial, the Auditor, Mr. Kioi (PW1) confirmed that the reason for the delay in payment of the taxes was due to the plaintiff’s cash flow issues. He opined that the cash flow issues showed that the company was not being run in a financially sound manner. He however confirmed that there was no evidence of misappropriation of funds by the defendant. Mr. Kioi stated that the funds meant for settlement of the taxes were probably used for operations as he found ten instances where money was paid out without authority. PW1 however conceded that the amount involved in these instances was less than the amount of unremitted taxes.
54. Interestingly, according to the plaintiff’s CEO, Mr. Nderitu (PW2), the delay in payment of the taxes was not due to cash flow issues as when drawing cheques, the directors would go through the cash flow to ensure that funds were available. He stated that the defendant withheld the cheques as she was responsible for ensuring the cheques were banked after they were signed by the “panel B” directors. On being cross-examined, PW2 admitted that there were no account statements produced to show that the plaintiff was in funds during the period in question. He also admitted that he was not with the plaintiff during the period in question and that there was no demand from KRA produced in Court. He acknowledged that the money did not go to the defendant directly and that funds used for other expenses cannot be said to be misappropriated. He however maintained that the defendant partly misappropriated the funds by increasing her own salary.
55. I note that the plaintiff accepted the defendant’s resignation and that there was no mention of the disputed cheques in the acceptance letter. There was also no complaint that she had irregularly increased her salary.
56. From my reading of the minutes of the Board of Directors of 13th November 2013, the issue of delay in payment of the taxes was not novel to the Board of Directors. The company Auditor, Mr. Wahome had prepared an Audit Report for the year 2012 which had been issued to the directors by way of a management letter, receipt was acknowledged and the Audit Report was approved. The minutes also show that the reason for the delay in payment of taxes was due to lack of funds. The Auditor expressed the opinion that this was because the company was not being run in a financially sound manner. In BT Limited v MNN [2020] eKLR, the Court held as follows-
“36. The failure to keep proper books of accounts cannot be attributed solely to the fault of the defendant. That is a matter which ought to have been handled through management letters after each year’s audit, and the directors should have resolved the same.”
57. In the end, from my assessment of the evidence adduced, it is my finding that there is no sufficient proof of misappropriation of funds by the defendant. I also find that the defendant was not solely to blame for delay in payment of the taxes, as she could not pay taxes if there was shortage of cash.
58. The issue of the removal of the defendant as a director is a matter that should be dealt with by the Board of Directors in accordance with the plaintiff’s Articles of Association.
59. It is my finding that there is insufficient proof of competition and economic sabotage through her incorporation of a separate company, Kencert International Limited, which the plaintiff has referred to as Kencert (Kenya) Limited in the plaint.
60. No evidence of illegal use of the plaintiff’s internet domain was adduced. If anything, on receipt of the email of 1st July, 2014 from the internet service provider, the defendant informed the plaintiff’s Acting CEO at that time, Susan Mugure and the IT Assistant, Patrick Karanja, that services through the internet domain www.africert.co.ke would be suspended by 5th August, 2014 if no payment was made. Since no payment was made by the plaintiff, the services rendered through the said domain were suspended and the plaintiff redirected its email traffic to www.africertlimited.co.ke, which had been registered on 27th March, 2024. No evidence was called by the plaintiff to controvert the said assertion and no evidence was adduced to prove that the defendant used the plaintiff’s domain after she ceased being the Managing Director of the plaintiff.
61. The defendant gave a plausible explanation as to why she was the contact person for the domain www.africert.co.ke which was registered in the year 2004 and that since then, she had passed on administrative rights to the plaintiff’s Technical Manager and IT Assistant. In her statement which was adopted in evidence, she explained that the domain was registered in her name, and the plaintiff’s staff were assigned private, individual official email addresses and she could not stop or interfere with the communication flow to any such officers or from external clients. She was however responsible for the billing of the email services on contract, as the contact person.
62. The defendant indicated in her statement that on 30th January, 2014 she had informed Susan Mugure of the need to update the plaintiff’s billing details for the domain’s email services by substituting the defendant’s personal credit card details with the plaintiff’s, but that was not done. The defendant asserted that she uses her company’s domain www.kencert.com and not the plaintiff’s then domain www.africert.co.ke .
63. In the upshot, the plaintiff has not met the requisite threshold of proving its case on a balance of probabilities. The case is dismissed with costs to the defendant.
It is so ordered.
DATED, SIGNED and DELIVERED at NAIROBI on this 23rd day of February, 2024. Judgment delivered through Microsoft Teams Online Platform.
NJOKI MWANGI
JUDGE
In the presence of:
Mr. Makori for the plaintiff
Mr. Masore Nyanga’u for the defendant
Ms B. Wokabi – Court Assistant.
IN THE HIGH COURT OF KENYA AT NAIROBI
MILIMANI LAW COURTS
COMMERCIAL AND TAX DIVISION
CIVIL SUIT NO. 509 OF 2015
AFRICERT LIMITED........................................................................PLAINTIFF
VERSUS
RUTH RUGURU NYAGA……………..………….......................DEFENDANT
JUDGMENT
1. Through a plaint dated 16th October, 2015, the plaintiff seeks judgment against the defendant for-
a) The removal of the defendant as a director of the plaintiff;
b) Payment by the defendant of special damages of Kshs. 14,045,467.00 as set out and particularized in paragraph 15 of the plaint;
c) Reimbursement of the recertification of license fee of USD 7,495 for IOAS and Euros 3,574 for Dakks at the current exchange rates prevailing at the time of filing this suit;
d) General damages for breach of trust and fraud;
e) A permanent injunction restraining the defendant from in any manner whatsoever either by herself or through her officers, agents, servants, employees and attorneys, and/ or through those persons in active concert and participation with her from directly or indirectly using the domain www.africert.co.ke or any similar name which is likely to dilute the value of the plaintiff’s operations;
f) Consequent to the grant of prayer (e) above an attendant permanent injunction requiring the defendant to immediately make affirmative efforts to stop, cancel or discontinue any previously purchased advertising which refers to the name Africert Limited or the internet domain name www.africert.co.ke;
g) Costs of this suit;
h) Interest on (b), (c) and (d) above; and
i) Any other further relief this Honourable Court may deem fit and just to grant in the circumstances.
2. The plaintiff is a private limited liability company incorporated on 14th November, 2003, under the Companies Act, Cap 486 (Repealed). The plaintiff undertakes the business of certification of services, operating certification systems and processes and quality assurance service in the Agri-Business Sector. It is approved under ISO/IEC 17065. The defendant was the Managing Director of the plaintiff from incorporation until her resignation on 18th October, 2013.
3. It is averred in the plaint that in May 2014, there was a financial audit carried out which revealed that the defendant had failed to remit cheques in time for payment of PAYE and VAT amounting to Kshs. 9,085,406.00 to the Kenya Revenue Authority (KRA). Consequently, the plaintiff was charged interest and penalties of Kshs. 4,960,061.00 by the KRA, leading the plaintiff to sell a pool vehicle in order to settle the debt with KRA. The plaintiff alleges that the sale of the said motor vehicle greatly hampered its operations as it had to incur significant transport costs from transport service providers for its Auditors to access farms in different parts of the country. The plaintiff claimed that it also discovered that the defendant had engaged in other financial malpractices which led to further erosion of the plaintiff’s financial position.
4. The plaintiff alleges that the defendant formed another company known as Kencert (Kenya) Limited with objects similar to the plaintiff’s, moved with key staff and solicited clients by misrepresenting the plaintiff’s state of affairs, which led to the plaintiff losing one of its certification licenses from Global G.A.P. That thereafter, the plaintiff had to refund amounts received from clients for Global G.A.P. That the plaintiff also lost a lot of clients from January 2014.
5. The plaintiff averred that the defendant frustrated its operations by using its domain www.africert.co.ke to operate her new company and that she has declined to cede control of the said domain.
6. It was against the above background that the plaintiff filed this suit for breach of trust and for fraud. The particulars of the claim are that she misappropriated the plaintiff company’s resources and failed to remit statutory deductions to the KRA.
7. In response to the allegations, the defendant filed a statement of defence dated 30th November, 2015 in which she denied the claim. The plaintiff then filed a reply to the defence dated 12th June, 2017.
The evidence adduced.
8. The suit commenced hearing on 8th October, 2021 before Hon. Lady Justice Odero who heard the plaintiff’s case while this Court heard the defence case. The plaintiff called two witness, namely, Christopher Mwangi Kioi and Anthony Nderitu.
9. Mr. Kioi (PW1), a Certified Public Accountant (CPA) with a Masters in Business Administration (MBA) degree, working with the firm of Njuguna Kioi & Associates, produced the Audit Report he prepared, as Plaintiff exhibit 1 (Pexh1). He testified that he was instructed by the plaintiff’s Board Chairman to prepare the said report. He confirmed that he found that the plaintiff owed taxes (PAYE and VAT) of Kshs.9,703,918.00 and penalties of Kshs. 4,000,000/-, totalling to Kshs.14,039,548/- for the period January 2012 to December 2013. He explained that the plaintiff did not remit the taxes due to cash flow issues, but could not tell why there were cash flow issues. He expressed the view that since the plaintiff was having cash flow issues, it was not being run in a financially sound manner. He pointed out that the plaintiff was also exposed to tax penalties and interest due to delayed payment of director bonuses declared earlier as shown at page 4 of the Audit Report.
10. In cross-examination, PW1 confirmed that he did not produce any evidence that the defendant misappropriated the plaintiff’s funds. That the Audit Report covered two years from January 2012 to December 2013 and during that period, the plaintiff had appointed Mr. P. G. Wahome as its Internal Auditor and that he prepared an Audit Report for the year 2012 which had been approved. PW1 confirmed having had a look at the Audit Report prepared by Mr. Wahome but conceded that he did not indicate this in the Audit Report he prepared. PW1 also confirmed having come across the minutes of the Board meeting of 13th November, 2013 which reflected a discussion regarding the KRA report under item 3, where it was noted that the plaintiff’s Auditor, Mr. Wahome was engaging KRA with a view of having some of the penalties waived.
11. PW1 stated that he however did his own independent audit. He admitted that he did not have any written authority to conduct the audit, despite confirming that he was familiar with the process of appointing Auditors as per Article 135 of the Articles of Association of the plaintiff and Section 159 of the Companies Act. He referred to a letter dated 23rd May, 2014 addressed to the directors stating that he was appointed by them to carry out a due diligence audit of the company following a discussion on 29th July, 2013.
12. He stated that the Board Chairman communicated to him and he assumed that the directors had approved his appointment. He expressed the view that since he was merely appointed to carry out a specific assignment, there was no need for director’s written authority. He confirmed that under Article 130 of the plaintiff’s Articles of Association, only directors could authorize him to look at the plaintiff’s books of accounts. He stated that he obtained the cheques referred to in his report from the Accountant.
13. PW1 intimated that funds were probably used for operations as he had found ten instances where money was paid out without authority. He however conceded that the amount involved in these instances was less than the unremitted taxes.
14. In re-examination, PW1 clarified that he was not an external Auditor but was an Auditor mandated to perform a specific assignment, and that under Article 130 of the Articles of Association of the plaintiff, directors could determine when books of accounts could be opened to members who are not directors, and that the Accountant gave him copies of cheques and counterfoils.
15. In his witness statement dated 16th October, 2016 as his evidence in chief. He produced the plaintiff’s bundle of documents of the same date as Pexh4. He testified that following a tax demand issued by KRA in July 2013, the plaintiff appointed Njuguna Kioi & Associates to conduct a forensic audit which established that there were indeed outstanding taxes together with penalties and interest. It was discovered that cheques drawn in favour of the Commissioner of Domestic Taxes for payment of taxes had not been remitted as required. KRA then issued a payment plan and the plaintiff settled the total sum due from proceeds of the sale of a motor vehicle and other funds mobilized by the directors, excluding the defendant.
16. According to PW2, the defendant was wholly to blame for the delay of payment of the taxes. He stated that the defendant who was a shareholder in the plaintiff, also held the dual roles of Managing Director and Accounting Officer. That she was involved in the day to day running of the company. He stated that the defendant was responsible for remitting or ensuring that taxes were remitted to KRA, but she failed to ensure that the cheques that were signed by directors for payment of the taxes were remitted in time or at all. He contended that the delay in payment of the taxes was not due to cash flow issues as when drawing cheques, directors would go through the cash flow to ensure that funds were available.
17. In cross-examination, PW2 admitted that there was no demand from KRA produced in Court. He confirmed that based on perusal of the minutes of the previous Board meetings, the tax liability was only discovered at the meeting of 13th November, 2013, which was before he joined the plaintiff. He confirmed that the cheques in question were only for February 2013 to December 2013, and not the year 2012 which was also covered by the Audit Report.
18. He also confirmed that although he had claimed that the plaintiff had sufficient funds in the sum of Kshs.1,327,237.00 on 16th August, 2013 in its Equity Bank account, there were no bank statements produced. He further confirmed that the three cheques were for Kshs. 823,000/- which was less than what was in the Equity Bank account. That money was used to pay other company expenses, but priority ought to have been given to statutory dues.
19. He acknowledged that the money did not go to the defendant directly and that funds used for other expenses cannot be said to be misappropriated. He however maintained that the defendant partly misappropriated the funds by increasing her own salary. He also stated that the company accepted the defendant’s resignation, but there is no mention of the disputed cheques in the resignation letter. He indicated that due diligence audit was conducted in August 2013 and the defendant issued her resignation letter dated 18th October, 2013. That as at 13th November, 2013 when the Board meeting was held, the final Audit Report had not been issued, but the defendant was aware of what the report would reveal. He admitted that the AGM did not appoint Njuguna Kioi & Associates to conduct the audit.
20. As regards the cheques, Mr. Anthony Nderitu (PW2), stated that the cheques in question had the defendant’s signature and the Board Chairman’s signature. He explained that cheques would be prepared by the Accountant then first signed by the defendant. Thereafter, the cheques would be sent to the Board Chairman, at a different office location, who would only sign upon confirming that there were sufficient funds. The cheques would then be sent back to the Managing Director who would approve the same to be paid. The cheques were obtained from the Managing Director’s office.
Defendant’s case
21. The defendant, Ms. Nyaga (DW1) adopted her witness statement dated 26th April, 2018 as her evidence in chief. She produced the list and bundle of documents dated 30th November, 2015, marked as Dexh1-12.
22. DW1 testified that she and Dr. Hans R Herren founded the plaintiff company and that she was the Managing Director from incorporation until 31st December, 2013. That she issued a resignation letter dated 18th October, 2013 and on 23rd October, 2013, the Board of Directors unconditionally accepted her resignation. She also testified that from the year 2009, all the plaintiff’s financial audits and statements showed the amounts owed to different creditors including KRA and the same were discussed in the company’s Annual General meetings and were approved by all directors unanimously. It was her evidence that the amounts were also reflected in the quarterly management reports which were reviewed and accepted by the directors every quarter.
23. DW1 contended that the financial audit conducted in August 2013 was neither approved nor authorized by the plaintiff. This is because the firm of Njuguna Kioi & Associates was solely appointed by the Board Chairman who had an axe to grind with her. She also contended that the audit was not done professionally but was done at the whims, desires and aims of the Board Chairman.
24. DW1 disputed the notion that she resigned upon the alleged discovery of the financial misappropriation. She stated that she resigned when the plaintiff was at a successful streak, with good financial standing and she has remained as a shareholder and non-executive director. She contended that the plaintiff’s loss of business from January 2014 and loss of certification in September 2014 could not be linked to her as she had no influence on the independent German Accreditors who evaluated the plaintiff’s capacity to provide Global G.A.P services.
25. She stated that although she incorporated Kencert International Limited, its intended business of consultancy and training is distinct from that of the plaintiff which does certification of agricultural produce, and that Kencert International Ltd does not at all compete with the plaintiff.
26. She affirmed that upon resignation, she handed over all the processes, systems and company assets held on behalf of the plaintiff as promised. She also asserted that she had not used the plaintiff’s internet domain since her resignation but she was the contact person for billing purposes. That in January 2014, she informed Susan Mugure, the then Acting CEO to update the billing details for the domain www.africert.co.ke by substituting her details with the plaintiff’s or the email services would be suspended. She testified that on 1st July, 2014, she received an email from the service provider notifying her that the email services would be suspended by 5th August, 2014 if no payment was done, which she promptly forwarded to Ms. Mugure as well as to Patrick Karanja, the IT Assistant. That eventually, the business services were suspended on 10th August, 2014 for non-payment by the plaintiff and that all email traffic from www.africert.co.ke was redirected by the plaintiff to www.africertlimited.co.ke which had been registered on 27th March, 2014.
27. DW1 contended that the alleged resolution filed by the plaintiff’s Board of Directors on 29th July, 2015 to file this suit is not proper as she is still a director and she was not notified of the purported Board of Directors meeting or resolution.
28. She denied having committed any acts that would warrant her removal as a director and that the plaintiff has not proved any. She opined that this is not the proper forum to seek her removal as director, and that since the suit relates to her employment with the plaintiff, and the cause of action is a contract of employment, this Court has no jurisdiction to hear it.
29. DW1’s evidence was that the cheques were first signed by either her or the Operations Manager, Susan Mugure, at the management offices at Vision Plaza before they were forwarded to the Board Chairman’s offices at Westlands, where they would be signed by either the Board Chairman or the other “panel B” director, David Gray. She stated that afterwards, the cheques would go back to the Accountant who was responsible for physical deposit or remittance of payments.
30. In cross examination, DW1 confirmed that as the Managing Director, she had oversight over the Accountant, and they had a payment schedule that would be brought in a file on the 1st of every month containing invoices, payroll and other supporting documents. She stated that she would not personally track back on whether the previous payments had been made, but relied on the Accountant's word. She explained that once payments were made, KRA would issue receipts. She mentioned that it did not come as a surprise that payments were not being remitted to KRA. She indicated that she was not aware of the total amount not paid to KRA, and that when payments were not remitted to KRA she would inform the Board Chairman and directors. That the issue of unpaid taxes was discussed at the Board meeting of 13th November, 2013, and stated that the Board had approved and accepted the audited accounts for 2012. That no question was put to her at the meeting regarding the outstanding amounts, and on 18th February, 2014, the Board Chairman wrote to her regarding the outstanding amounts, and she responded on 19th February, 2014, requesting for Board minutes.
31. DW1 acknowledged that she had a duty of care but claimed that she was not aware that the cheques were found in her office. She was firm that the Board had recognized that she had led the company exemplarily for 10 years. She confirmed receipt of a copy of the Audit Report but claimed that there were no omissions found on her part as the Managing Director of the plaintiff. She explained that she did not raise any concern regarding the Audit Report at the meeting of 13th November, 2013 as she got the report later in 2014. She maintained that PW1 was instructed by the Board Chairman without approval from the Board and that there was nothing in the Audit Report that was different from what the company Auditor, Mr. Wahome, had brought up. She denied taking away the plaintiff’s clients.
32. In re-examination, DW1 clarified that she received the Audit Report forwarded to her in May 2014, which she accepted as it was for the plaintiff, and it did not implicate her as there was no mention of the cheques being found in her office.
Submissions.
33. Mr. Makori, learned Counsel for the plaintiff, through written submissions dated 25th August, 2023 and rebuttal submissions dated 13th September, 2023, argued that the defendant was the Managing Director from 2003 to 31st December, 2013 and that she was under fiduciary duty and loyalty to the plaintiff. Counsel submitted that the defendant was also the Accounting Officer responsible for ensuring statutory compliance including tax obligations.
34. Counsel submitted that the defendant was responsible for remitting cheques for PAYE and VAT on the plaintiff’s behalf and during cross-examination, the defendant confirmed that she was involved in counterchecking and approval of the monthly schedule of accounts, signing of the cheques as one of the “panel A” signatories, and that once the cheques for PAYE and VAT had been signed by the “panel B” signatories, they would revert to her for counterchecking and release to the Accountant who would physically take the cheques to KRA.
35. The plaintiff’s Counsel argued that the defendant gave no explanation as to why she continued to submit schedules for requisition of taxes and collected the cheques, without remitting them. Counsel squarely blamed the defendant, asserting that the tax demand from KRA came as a surprise to its other directors. He submitted that under Article 130 of the plaintiff’s Articles of Association, the directors had residuary powers to carry out an independent analysis of the plaintiff’s books of accounts, and it was on that premise that the directors appointed Njuguna Kioi & Associates to carry out an independent audit to ascertain the financial status of the plaintiff.
36. Mr. Makori submitted that the defendant owed the plaintiff the fiduciary duty of loyalty and good faith and duty of care and skill. He relied on Section 143 of the Companies Act to the effect that a director must act in good faith, and in a manner that would most likely promote the success of the company for the benefits of its members as a whole. The plaintiff’s Counsel also relied on Section 145 of the said Act which provides that a director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by the director in relation to the company (the “objective” test) and the general knowledge, skill and experience that the Director actually has (the “subjective” test).
37. Mr. Makori relied on the Court of Appeal decisions in Nyandarua Progressive Agencies Ltd v Cyrus Wahome Nduhiu & another [2017] eKLR, to the effect that directors stand in a fiduciary relationship to their principal, the company, and Ajay Shah v Deposit Protection Fund Board as Liquidator of Trust Bank Limited (In Liquidation) [2016] eKLR, where the directors were found to be agents of the bank and owed the bank the fiduciary duty of loyalty and good faith, and the duty of care and skill. The plaintiff’s Counsel also relied on the latter case in support of the remedies sought by the plaintiff. He further relied on Howard v Pooler AD3d, 2020 NY Slip Op 03347 [4th Dept June 12, 2020] cited with approval in the case of Family Bank Limited v Panda Co-operative Savings and Credit Society [2022] eKLR, where it was held that in respect of the tort of breach of fiduciary duty, a party is entitled to an award of damages once proven that there was a breach of a fiduciary duty even in the absence of any actual damages as a result of the breach.
38. The plaintiff’s Counsel urged this Court to allow its claim as prayed and award it reimbursement of the sums of Kshs.14,045,467.00 and damages for breach of fiduciary duty and trust in the sum of Kshs.1,000,000/-.
39. Mr. Masore Nyang’au, learned Counsel for the defendant, in written submissions dated 1st September, 2023, stated that the defendant was not implicated in hoarding the signed cheques in her office, misappropriating the funds for the plaintiff or impeding correspondence with KRA in a bid to waive the penalties in both the Auditor’s testimony, and the Audit Report.
40. The defendant’s Counsel challenged the reliability of PW2’s evidence because he had not joined the plaintiff during the tenure of the defendant as the Managing Director. Mr. Masore claimed that PW2’s testimony that the other directors of the plaintiff company only learned of the liability to KRA at the meeting of 13th November, 2013 was false as the minutes show that it was an item of discussion beforehand. Counsel also challenged PW2’s claim that the plaintiff had sufficient funds in the year 2013 to meet the financial liability to KRA for lack of evidentiary support, and for contradicting himself when he said that the money the plaintiff had then was used to pay other company expenses, while blaming the defendant for failure to prioritize statutory dues. Further, that PW2 admitted that the money did not go to the defendant directly, and that he conceded during cross-examination that part of the funds alleged to have been misappropriated by the defendant were used for other company expenses including her salary.
41. The defendant’s Counsel submitted that funds used for other company expenses cannot be said to have been misappropriated. He also argued that there was no evidence to show that DW1 wrongly increased her own salary, and if it was wrong, why this could not be recovered from her own dividends or emoluments as a shareholder and/or director respectively, as internally provided in the plaintiff’s Memorandum and Articles of Association.
42. The defendant’s Counsel asserted that PW2 contradicted his evidence by stating that once the Chairman has signed the cheques, they would be taken to the bank, then again stating that once the Chairman signed the cheques, they were taken back to DW1 who would approve the same for payment.
43. As regards the claim for USD 7,495 for IOAS for recertification licence and Euros 3,574 for Dakks, Mr. More submitted that there were neither particulars given nor documents produced in support of the said claim. Counsel contended that the claim against the defendant was unsustainable since whoever was purportedly competing for the business is Kencert (Kenya) Limited, a limited liability company.
44. The defendant’s Counsel also argued that special damages must not only be pleaded but the same must also be specifically proved. To support this assertion, he relied on the Court of Appeal decisions in Douglas Odhiambo Apel v Telkom Kenya Ltd [2014] eKLR and Capital Fish Kenya Limited v The Kenya Power and Lighting Company Limited [2016] eKLR, cited with approval in Ahmed Mbarak v Kenya Power and Lighting Company Ltd (Mbsa) Civil Appeal No. 190 of 2018 [2021] eKLR.
ANALYSIS AND DETERMINATION.
45. I have considered the pleadings, the evidence, the rival submissions and authorities relied on. The issues for determination are-
(1) Whether this Court has jurisdiction to hear and determine this suit.
(2) Whether the plaintiff has proved its case against the defendant and is entitled to the reliefs sought.
46. As regards the first issue, I note that on 18th July, 2018, the file was transferred to the Employment and Labour Relations Court by agreement of the parties on the premise that the dispute is an employment matter. When the matter was mentioned before that Court on 19th December, 2018, the Court held the view that neither the issues raised nor the prayers sought were on employment and Labour Relations. Consequently, the file was transferred back to this Court for hearing and determination. There was no appeal or review of the decision of the Employment & Labour Relations Court. It is therefore not within the purview of this Court to sit on appeal of a decision of the Employment and Labour Relations Court, which is a Court of equal status to the High Court as per Article 162(2)(a) of the Constitution of Kenya. It is therefore my considered view that the question of jurisdiction is res judicata.
47. The second issue is whether the plaintiff has proved its case against the defendant and is entitled to the reliefs sought. The plaintiff’s claim against the defendant is for breach of trust and for fraud. Section 107 of the Evidence Act provides as follows-
“Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”
48. The standard of proof required to prove fraud was illuminated by the Court of Appeal for East Africa in RG Patel v Lalij Makanji [1957] EA 314 at 317 as follows-
“Allegations of fraud must be strictly proved although the standard of proof may not be so heavy as to require proof beyond reasonable doubt, something more than a mere balance of probabilities is required.”
49. The Black’s Law Dictionary, 10th Edition defines fraud as-
“…some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury. As distinguished from negligence, it is always positive, intentional.”
50. The particulars of the claim are that the defendant misappropriated the plaintiff’s resources and failed to remit statutory deductions to the KRA. The plaintiff claimed that the defendant withheld cheques that had been issued in favour of the Commissioner for Domestic Taxes which had been signed by the requisite signatories.
51. From the record, I note that the defendant issued the Board of Directors of the plaintiff company with a resignation letter dated 18th October, 2013. From my reading of the said letter, the exact date when the resignation would take effect is not clear. Through the letter dated 23rd October, 2013, the Board Chairman confirmed receipt of the defendant's letter of resignation and thanked her for her service. It is evident from the evidence adduced by the defendant that she worked as the Managing Director of the plaintiff until 31st December, 2013. It is therefore safe to say that the defendant was the Managing Director during the period January 2012 to 31st December, 2013 when there was delay in payment of the taxes in issue.
52. On the alleged misappropriation of funds, the plaintiff relied on the audit report prepared by Njuguna Kioi & Associates for January 2012 to December 2013. From a keen perusal of the Audit Report, it is clear that the plaintiff failed to remit PAYE and VAT amounting Kshs. 9,085,406.00 and incurred penalties of Kshs. 4,000,000/-, totalling to Kshs. 14,039,548.00 for the period January 2012 to December 2013. The Audit Report also indicates that the plaintiff was exposed to tax penalties and interest due to delayed payment of directors’ bonuses that had been declared earlier. An increase was also noted in the defendant’s salary.
53. During trial, the Auditor, Mr. Kioi (PW1) confirmed that the reason for the delay in payment of the taxes was due to the plaintiff’s cash flow issues. He opined that the cash flow issues showed that the company was not being run in a financially sound manner. He however confirmed that there was no evidence of misappropriation of funds by the defendant. Mr. Kioi stated that the funds meant for settlement of the taxes were probably used for operations as he found ten instances where money was paid out without authority. PW1 however conceded that the amount involved in these instances was less than the amount of unremitted taxes.
54. Interestingly, according to the plaintiff’s CEO, Mr. Nderitu (PW2), the delay in payment of the taxes was not due to cash flow issues as when drawing cheques, the directors would go through the cash flow to ensure that funds were available. He stated that the defendant withheld the cheques as she was responsible for ensuring the cheques were banked after they were signed by the “panel B” directors. On being cross-examined, PW2 admitted that there were no account statements produced to show that the plaintiff was in funds during the period in question. He also admitted that he was not with the plaintiff during the period in question and that there was no demand from KRA produced in Court. He acknowledged that the money did not go to the defendant directly and that funds used for other expenses cannot be said to be misappropriated. He however maintained that the defendant partly misappropriated the funds by increasing her own salary.
55. I note that the plaintiff accepted the defendant’s resignation and that there was no mention of the disputed cheques in the acceptance letter. There was also no complaint that she had irregularly increased her salary.
56. From my reading of the minutes of the Board of Directors of 13th November 2013, the issue of delay in payment of the taxes was not novel to the Board of Directors. The company Auditor, Mr. Wahome had prepared an Audit Report for the year 2012 which had been issued to the directors by way of a management letter, receipt was acknowledged and the Audit Report was approved. The minutes also show that the reason for the delay in payment of taxes was due to lack of funds. The Auditor expressed the opinion that this was because the company was not being run in a financially sound manner. In BT Limited v MNN [2020] eKLR, the Court held as follows-
“36. The failure to keep proper books of accounts cannot be attributed solely to the fault of the defendant. That is a matter which ought to have been handled through management letters after each year’s audit, and the directors should have resolved the same.”
57. In the end, from my assessment of the evidence adduced, it is my finding that there is no sufficient proof of misappropriation of funds by the defendant. I also find that the defendant was not solely to blame for delay in payment of the taxes, as she could not pay taxes if there was shortage of cash.
58. The issue of the removal of the defendant as a director is a matter that should be dealt with by the Board of Directors in accordance with the plaintiff’s Articles of Association.
59. It is my finding that there is insufficient proof of competition and economic sabotage through her incorporation of a separate company, Kencert International Limited, which the plaintiff has referred to as Kencert (Kenya) Limited in the plaint.
60. No evidence of illegal use of the plaintiff’s internet domain was adduced. If anything, on receipt of the email of 1st July, 2014 from the internet service provider, the defendant informed the plaintiff’s Acting CEO at that time, Susan Mugure and the IT Assistant, Patrick Karanja, that services through the internet domain www.africert.co.ke would be suspended by 5th August, 2014 if no payment was made. Since no payment was made by the plaintiff, the services rendered through the said domain were suspended and the plaintiff redirected its email traffic to www.africertlimited.co.ke, which had been registered on 27th March, 2024. No evidence was called by the plaintiff to controvert the said assertion and no evidence was adduced to prove that the defendant used the plaintiff’s domain after she ceased being the Managing Director of the plaintiff.
61. The defendant gave a plausible explanation as to why she was the contact person for the domain www.africert.co.ke which was registered in the year 2004 and that since then, she had passed on administrative rights to the plaintiff’s Technical Manager and IT Assistant. In her statement which was adopted in evidence, she explained that the domain was registered in her name, and the plaintiff’s staff were assigned private, individual official email addresses and she could not stop or interfere with the communication flow to any such officers or from external clients. She was however responsible for the billing of the email services on contract, as the contact person.
62. The defendant indicated in her statement that on 30th January, 2014 she had informed Susan Mugure of the need to update the plaintiff’s billing details for the domain’s email services by substituting the defendant’s personal credit card details with the plaintiff’s, but that was not done. The defendant asserted that she uses her company’s domain www.kencert.com and not the plaintiff’s then domain www.africert.co.ke .
63. In the upshot, the plaintiff has not met the requisite threshold of proving its case on a balance of probabilities. The case is dismissed with costs to the defendant.
It is so ordered.
DATED, SIGNED and DELIVERED at NAIROBI on this 23rd day of February, 2024. Judgment delivered through Microsoft Teams Online Platform.
NJOKI MWANGI
JUDGE
In the presence of:
Mr. Makori for the plaintiff
Mr. Masore Nyanga’u for the defendant
Ms B. Wokabi – Court Assistant.