Background
1. This ruling determines the Preliminary Objection dated 29th December 2023 raised by the 2nd, 3rd, 4th, and 5th Defendants on the Plaintiff’s suit arguing among others, that the suit time-barred.
2. The genesis of the primary suit is a loan facility of KES. 14,000,000 granted by the Plaintiff to the 1st Defendant on 2nd November 2017. The loan was secured by a charge over property known as NGONG/NGONG/14493, which had been valued at KES. 28,500,000, based on a valuation report prepared by the 2nd Defendant, through the 3rd, 4th, and 5th Defendants which gave the market value of the property as Kshs. 28,500,000/-; Mortgage value of Kshs. 24,200,000/- and a Forced Sale Value of 21,375,000/-.
3. The Plaintiff alleges that the valuation report was materially false and misleading, misrepresenting the state and value of the property. Subsequent valuations by other independent firms revealed that the property was largely undeveloped and its actual market value was significantly lower than the valuation presented by the 2nd Defendant.
4. Aggrieved by the alleged misrepresentations as to the value of the property on the part of the 2nd – 5th Defendants (which the Plaintiff alleges led to a loss of over KES. 20,000,000 including interest and valuation costs), the Plaintiff instituted this suit on 17th November 2023, seeking recovery of the outstanding loan amount and other damages from the Defendants, jointly and severally.
5. The 2nd – 5th Defendants opposed the suit and filed a joint Notice of Preliminary Objection dated 29th December 2023 in which they raised the following as their grounds of Objection: -
i. This Honourable Court lacks jurisdiction to entertain this suit for reasons that: -
a. Pursuant to Section 4(1) of the Limitations of Actions Act, Cap 22 of the Laws of Kenya, the Plaintiff's case is stale as it seeks remedies for an action that arose under a contract, and therefore it is time-barred.
b. The suit is time-barred as provided under Sections 3 and 26(c) of the Limitations of Actions Act since some of the averments in the defective suit against the 2nd, 3rd, 4th, and 5th Defendants are partially founded on fraud.
ii. By dint of Section 6 of the Companies Act, and the Fourth Schedule of the Companies (General) Regulations, 2015, and the 2nd Defendant’s Articles and Memorandum of Association, the 3rd, 4th, and 5th Defendants lack locus standi to be joined in the instant suit.
iii. The suit has been brought to this Honourable Court in clear disregard of the law, is an abuse of the due process of Court, and cannot be heard/or ventilated by this Court.
iv. The suit herein is otherwise bad in law and fundamentally defective and ought to be dismissed with costs to the 2nd, 3rd, 4th, and 5th Defendants.
v. The suit against the 2nd, 3rd, 4th, and 5th Defendants is frivolous, vexatious, and a waste of this Honourable Court’s precious judicial time and hence should be dismissed with costs to the 2nd, 3rd, 4th, and 5th Defendants.
6. The Plaintiff filed a Replying Affidavit dated 7th May 2024, disputing the Preliminary Objection and asserting that the action is properly filed within the timelines prescribed under Section 26(c) of the Limitation of Actions Act. The Plaintiff further contends that the 3rd, 4th, and 5th Defendants were directly involved in the preparation of the false valuation report and are therefore properly joined in the suit.
7. On 13th June 2024, the 2nd, 3rd, 4th, and 5th Defendants filed a Notice of Withdrawal of grounds 1(a) and 1(b) of the Notice of Preliminary Objection, leaving only grounds 2,3 and 4 for this court’s determination.
8. The Preliminary Objection was canvassed by way of written submissions. The Plaintiff’s submissions are dated 5th October 2024, while the 2nd 3rd, 4th, and 5th Defendants filed a joint submission dated 24th June 2024. Both sides reiterated their respective positions.
9. The 1st Defendant did not file any response to the Preliminary Objection, neither did they file any submissions.
Defendants/Applicants’ submissions
10. The 2nd – 5th Defendants submitted that the 3rd, 4th, and 5th Defendants are improperly joined in the suit. They argued that under Section 6 of the Companies Act and the principle established in Salomon v. Salomon & Co. Ltd [1897] AC 22, a company is a distinct legal entity separate from its shareholders, directors, and employees. The Defendants contended that the 2nd Defendant, as a corporate entity, is the proper party to be sued and not its directors or employees, as they acted on behalf of the company.
11. The Defendants cited a number of case law, including the decision in Protus Opwora Wabwoto v. Ken Manda & 2 Others [2020] eKLR, to support the position that the corporate veil may only be lifted in exceptional circumstances, such as fraud or improper conduct. They argued that the Plaintiff failed to establish any evidence of fraud attributable to the 3rd, 4th, and 5th Defendants in their individual capacities, and as such, there is no justification to pierce the corporate veil.
12. It was the Defendants’ position that the mere fact that the 3rd and 4th Defendants are directors of the 2nd Defendant and the 5th Defendant its employee does not make the 3rd, 4th, and 5th Defendants liable for the actions and/ or wrongs of the 2nd Defendant. The defendants cited the case of Leiten Tea Factory Company Limited & Another vs Davis Kiplagat Mutai & 5 Others [2015] eKLR in support of the argument.
13. The Defendants dismissed the Plaintiff’s allegations of fraud and misrepresentation as speculative and unsubstantiated. They contended that the valuation report dated 16th October 2017 was prepared professionally and in good faith, based on the information provided to them at the time. They also argued that the Plaintiff’s reliance on subsequent valuations is irrelevant, as these were conducted after the loan was disbursed and cannot retroactively invalidate the earlier valuation.
14. In asserting that the suit is frivolous and vexatious, the Defendants reiterated that the Plaintiff’s allegations are baseless and amount to an abuse of the court process. They contended that the issues raised in the suit do not warrant a trial, as they are premised on the Plaintiff’s failure to exercise due diligence before approving the loan.
15. In conclusion, the 2nd -5th Defendants argued that the suit as filed against the 3rd, 4th, and 5th Defendants is an abuse of the Court process and that their names ought to be struck out from the proceedings.
Plaintiff/Respondent’s Submissions
16. Regarding the argument that the 3rd, 4th, and 5th Defendants lack locus standi to be joined/sued in the current proceedings, the Plaintiff submitted that these Defendants, being the directors and practicing valuers of the 2nd Defendant company, were directly involved in preparing and signing the valuation report dated 16th October 2017 which unduly misrepresented the value of the subject property. The Plaintiff asserted that their inclusion in the suit is critical to determining the claims/questions of fraud and misrepresentation as highlighted in the suit.
17. The Plaintiff further contended that while a company is a separate legal entity under the Companies Act, the doctrine of corporate personality is not absolute. Citing the decisions in the cases of Protus Opwora Wabwoto v. Ken Manda & 2 Others (2020) eKLR and Kolaba Enterprises Ltd v. Shamsudin Hussein Varvani & Another (2014) eKLR on the doctrine of separate corporate identity, the Plaintiff argued that the corporate veil may be lifted in cases where fraud or improper conduct is alleged.
18. The Plaintiff emphasized that the 2nd Defendant, through its directors (the 3rd and 4th Defendants) and employee (the 5th Defendant), knowingly misrepresented the value and condition of the suit property, causing the Plaintiff to suffer substantial financial loss. The Plaintiff argued that allowing the corporate veil to shield these Defendants from accountability would be a miscarriage of justice.
19. On the claim that the suit is frivolous, vexatious, and an abuse of the court process, the Plaintiff argued that the Preliminary Objection lacks merit and does not meet the threshold set in the case of Mukisa Biscuits Manufacturing Ltd v. West End Distributors Ltd (1969) EA 696. The Plaintiff maintained that the issues raised by the Defendants require full determination on merit, as they involve factual disputes that cannot be resolved through a preliminary objection.
20. In conclusion, the Plaintiff urged the court to dismiss the Preliminary Objection with costs, asserting that the suit is properly before the court and that the defendants are all necessary parties to the proceedings.
Analysis and Determination
21. I have carefully considered the pleadings, submissions, and authorities cited by both parties in relation to the Notice of Preliminary Objection dated 29th December 2023. From the material placed before this court, the singular issue for determination is whether the Preliminary Objection is merited.
22. The legal parameters for a valid Preliminary Objection were clearly enunciated in Mukisa Biscuits Manufacturing Co. Ltd v West End Distributors Ltd [1969] EA 696, where the court defined a Preliminary Objection as follows: -
“A Preliminary Objection consists of a point of law which has been pleaded, or which arises by clear implication out of pleadings, and which, if argued as a preliminary point, may dispose of the suit.”
23. The court further emphasized that a Preliminary Objection must raise a pure point of law and cannot be based on contested facts. Sir Charles Newbold, P. in the same case, stated:-
“A Preliminary Objection is in the nature of what used to be a demurrer. It raises a pure point of law which is argued on the assumption that all the facts pleaded by the other side are correct. It cannot be raised if any fact has to be ascertained or if what is sought is the exercise of judicial discretion.”
24. Further, in Oraro v Mbaja [2005] 1 KLR 141, the court held that:-
“Anything that purports to be a Preliminary Objection must not deal with disputed facts and must not derive its foundation from factual information that stands to be tested by rules of evidence.”
25. In this case, the main ground raised by the 2nd – 5th Defendants in the Notice of Preliminary Objection the subject of this ruling is that the joinder of the 3rd, 4th, and 5th Defendants is improper, as the Plaintiff has not demonstrated exceptional circumstances warranting the lifting of the corporate veil.
26. However, from a perusal of the pleadings filed herein, I note that the 2nd to 5th Preliminary Objection is mainly based on the fact that they were wrongly joined to the instant proceedings since the 2nd Defendant against whom the Plaintiff has a claim is a separate legal entity different from its directors (3rd and 4th Defendants) and its employee, the 5th defendant.
27. In Republic v National Environment Management Authority; Water Service Providers Association (WASPA) (Intended Interested Party/Applicant) Ex parte Nairobi City Water and Sewerage Company & another [2021] eKLR Nyamweya J (as she then was), citing the Court of Appeal, stated as follows on the question of non-joinder and misjoinder of parties; -
“The grounds raised cannot therefore be raised in a preliminary objection as they are not pure questions of law. In addition, the legal nature of a plea of misjoinder or non-joinder was addressed by the Court of Appeal in Republic Ex Parte the Minister for Finance & The Commissioner of Insurance as Licensing and Regulating Officers v Charles Lutta Kasamani T/A Kasamani & Co. Advocate & Another Civil Appeal (Application) No. Nai. 281 of 2005 as follows:
“Suffice it to say that a defect in form in the title or heading of an appeal, or a misjoinder or non-joinder of parties are irregularities that do not go to the substance of the appeal and are curable by amendment...Is the form of title to the appeal as adopted by the Attorney General in this matter defective or irregular? We think not, as we find that it substantially complies with the guidelines set out by this Court.”
28. The 2nd – 5th Defendants contend that the 3rd, 4th, and 5th Defendants are shielded from personal liability under the doctrine of corporate personality enshrined in Salomon v Salomon & Co Ltd [1897] AC 22, which establishes that a company is a separate legal entity distinct from its shareholders and directors.
29. The Plaintiff, however, alleges fraud and misrepresentation by the said Defendants, which it argues justifies piercing the corporate veil. In Victor Mabachi & Another v Nurturn Bates Ltd [2013] eKLR, the Court of Appeal held:-
“The veil of incorporation may be lifted where there is evidence of fraud, sham transactions, or improper use of the corporate structure.”
30. This principle was reiterated in Kolaba Enterprises Ltd v Shamsudin Hussein Varvani & Another [2014] eKLR, where the court observed:
“The separate legal personality of a company can never be departed from except in instances where the statute or the law provides for the lifting or piercing of the corporate veil, say when the directors or members of the company are using the company as a vehicle to commit fraud or other criminal activities.”
31. In the present case, the Plaintiff has pleaded specific allegations of fraud and misrepresentation, which, if proven, may warrant lifting the corporate veil. At this stage, the court is not called upon to determine the veracity of these allegations but to assess whether the claims disclose a reasonable cause of action against the 3rd, 4th, and 5th Defendants.
32. Having reviewed the pleadings, the court finds that the Plaintiff has sufficiently pleaded a prima facie case against the 3rd, 4th, and 5th Defendants. Their joinder in the suit is therefore proper, as their participation may assist the court in determining the issues in dispute.
33. The upshot of the foregoing is that the Defendants’ Preliminary Objection dated 29th December 2023 lacks merit since the joinder of the 3rd, 4th, and 5th Defendants is proper and necessary in the circumstances of this case.
34. In the circumstances, I make the following orders:
a. The Defendants’ Preliminary Objection dated 29th December 2023 is hereby dismissed.
b. Costs of the Preliminary Objection shall abide the outcome of the main suit.
SIGNED DATED and DELIVERED IN VIRTUAL COURT
THIS 27TH DAY OF FEBRUARY 2025
ADO MOSES
JUDGE
In the presence of:
Moses – Court Assistant