Introduction
1. This ruling arises from Miscellaneous Application No. E205 of 2024 in the High Court of Kenya at Nairobi, filed by Dormans Coffee Limited (the Applicant/Decree Holder) against Ocean Grocer Limited (the Respondent/Judgment Debtor), Kass and Company Limited (Judgment Debtor Shareholder), and Kavita Bhupendra Mandaliya (Judgment Debtor Director).
2. The dispute emanates from a judgment delivered on 23rd May 2022, in which the Applicant obtained a decree against the Respondent for a sum of KES. 564,272.00, inclusive of costs and interest. The Applicant alleges that despite the judgment, the Respondent has failed to satisfy the decretal amount.
3. Aggrieved by the failure of the Judgment Debtor to satisfy the decretal amount and alleging impropriety on the part of the Judgment Debtor’s directors and shareholders, the Applicant, Dormans Coffee Limited, filed the present application dated 10th January 2024. The application seeks the following orders:
i. That the Judgment Debtor’s directors and shareholders, namely Kass & Company Limited and Kavita Bhupendra Mandaliya, be compelled to attend court for examination on the Judgment Debtor’s means and assets under Order 22 Rule 35 of the Civil Procedure Rules.
ii. That the corporate veil of Ocean Grocer Limited be pierced, holding Kass & Company Limited and Kavita Bhupendra Mandaliya personally liable for the decretal amount.
iii. That warrants of attachment and sale of assets belonging to the directors and shareholders of the Respondent be issued to satisfy the decretal amount.
4. The Respondent opposed the application, arguing that:
i. Ocean Grocer Limited is a distinct legal entity under the Companies Act, and the directors/shareholders cannot be held personally liable.
ii. A payment plan was agreed upon and partly implemented, with several installments paid to reduce the outstanding debt.
iii. The application lacks merit and amounts to an abuse of the court process, as there is no evidence of fraud or improper conduct warranting the lifting of the corporate veil.
5. The application was canvassed by way of written submissions. The Applicant’s submissions are dated 31st July 2024, while the Respondents’ submissions are dated 11th September 2024. Both sides reiterated their positions, with the Applicant emphasizing fraudulent conduct warranting the piercing of the corporate veil and the Respondents disputing the claims, citing adherence to an agreed payment plan.
Applicant’s submissions
6. The Applicant submitted that the Respondent and its directors/shareholders have failed to satisfy the decretal sum of KES 564,272.00 as awarded by the court on 23rd May 2022. The Applicant argued that despite obtaining a decree, the Judgment Debtor has not made sufficient efforts to settle the amount, leaving the Applicant unable to enjoy the fruits of its judgment.
7. The Applicant contended that the Judgment Debtor has no known attachable assets within the jurisdiction and that its directors/shareholders, namely Kass & Company Limited and Kavita Bhupendra Mandaliya, possess vital information regarding the Judgment Debtor’s means and assets. The Applicant submitted that it is within the law under Order 22 Rule 35 of the Civil Procedure Rules to summon these parties for examination and compel the production of books of account to ascertain the financial position of the Judgment Debtor.
8. On the issue of piercing the corporate veil, the Applicant submitted that the directors/shareholders of Ocean Grocer Limited have engaged in improper conduct by transferring assets to avoid execution of the decree. The Applicant relied on the principle established in Salomon v. Salomon & Co Ltd [1897] AC 22 and local precedents such as Victor Mabachi & Another v. Nurturn Bates Ltd [2013] eKLR, arguing that the corporate veil may be pierced where evidence shows fraud or improper conduct.
9. The Applicant further submitted that the directors/shareholders used the company as a façade to evade legal obligations, rendering them personally liable for the debt. In support, the Applicant cited Jayden Limited v. Bradley Limited (Misc. Application E202 of 2019) [2021] KEHC 127 (KLR), where the court held that asset transfers designed to defraud creditors justify piercing the corporate veil.
10. On compliance with the payment plan, the Applicant submitted that the Respondent’s claims of adherence to an installment plan lack substantiation. The Applicant argued that the Judgment Debtor has failed to provide credible evidence of compliance, and even if partial payments were made, they do not absolve the Respondent of its obligation to settle the full decretal amount promptly.
11. The Applicant emphasized that the corporate veil should not shield directors and shareholders who act in bad faith or with fraudulent intent. The Applicant relied on Section 1002 of the Companies Act, 2015, which holds directors personally responsible for debts where business operations were carried out with intent to defraud creditors.
12. The Applicant concluded by urging the court to grant the orders sought in the application. They emphasized that the Respondent and its directors/shareholders must be compelled to disclose the Judgment Debtor’s financial position and that the corporate veil should be pierced to prevent further injustice and ensure that the Applicant enjoys the fruits of its judgment.
Respondent’s Submissions
13. On the issue of examination under Order 22 Rule 35 of the Civil Procedure Rules, the Respondents submitted that the Applicant has not demonstrated the necessity for such an intrusive measure. They argued that the Judgment Debtor has shown goodwill by proposing a payment plan, which has been partly implemented through the payment of several installments. The Respondents further cited Ultimate Laboratories v. Tasha Bioservice Limited (NBI HCCC No. 1287 of 2000), where the court held that examination under this provision should only be invoked when execution against the company is genuinely impracticable.
14. The Respondents maintained that the Applicant has not proven that the Judgment Debtor lacks attachable assets or that execution is impossible. They argued that the existence of ongoing payments negates the need for examination.
15. On the Applicant’s prayer to pierce the corporate veil, the Respondents submitted that no evidence has been provided to support allegations of fraud or improper conduct. They relied on Jiang Nan Xiang v. Cok Fast Company Limited [2018] eKLR, where the court held that the corporate veil may only be pierced where a company is used as a sham or to perpetrate fraud. The Respondents contended that the Applicant’s claims are speculative and do not meet the legal threshold required to lift the veil of incorporation.
16. The Respondents further submitted that the Applicant has failed to consider that the Judgment Debtor’s challenges in settling the decretal amount are due to its closure of business operations in August 2020. They argued that this closure was done in good faith and was not intended to defraud creditors.
17. On compliance with the payment plan, the Respondents stated that six installments have been paid and acknowledged by the Applicant. They argued that this demonstrates their commitment to settling the debt. The Respondents emphasized that the Applicant has acted in bad faith by disregarding the agreed payment plan and pursuing unnecessary litigation.
18. The Respondents relied on Carey Ngini v. Dennis Ogolla & Another [2010] eKLR, where the court held that the veil of incorporation should not be lifted merely because a company is insolvent or unable to pay its debts. They argued that there are alternative remedies available to the Applicant, and piercing the corporate veil should only be a last resort.
19. The Respondents concluded by urging the court to dismiss the application with costs. They emphasized that granting the orders sought would set a dangerous precedent that undermines the fundamental principles of corporate law, including the protection of directors and shareholders from personal liability without sufficient evidence of wrongdoing.
Analysis and Determination
20. I have carefully reviewed the Applicant’s application, the response thereto as well as the parties’ submissions in support of their respective positions. It is clear from the pleadings and submissions filed that the main reason for which the Applicant herein is seeking the summoning of the Respondent’s directors and piercing of the cooperate veil is the unpaid decree of KES. 564,272.00.
21. From the pleadings, it is not in dispute that the decree sought to be enforced through the present Application was issued by the Small Claims Court on 23rd May 2022 in the Nairobi SCCC No. E2225 of 2022.
22. Order 22 Rule 35 aforesaid is couched in the following terms: -
“Where a decree is for payment of money, the decree-holder may apply to the court for an order that –
a) the judgment debtor;
b) In the case of a corporation, any officer thereof; or
c)Any other person, be orally examined as to whether any or what debts are owing to the judgment-debtor, and whether the judgment-debtor has any and what property or means of satisfying the decree, and the court may make an order for the attendance and examination of such judgment debtor or officer, or other person, and for the production of any books or documents.”
23. It is however critical to note that Section 34(1) of the Civil Procedure Act provides that all questions arising between the parties to a suit relating to among others, execution of a decree from the said suit is to be determined by the court that passed the decree. The Section provides as follows: -
“34. Questions to be determined by court executing decree
(1) All questions arising between the parties to the suit in which the decree was passed, or their representatives, and relating to the execution, discharge or satisfaction of the decree, shall be determined by the court executing the decree and not by a separate suit.
(2) ………….”
24. Further Section 29 of the Civil Procedure Act defines the term “court which passed a decree” as follows; -
“The expression “court which passed a decree”, or words to that effect, shall, in relation to the execution of decrees, except where the context otherwise requires, include: -
“a) Where the decree to be executed has been passed in the exercise of appellate jurisdiction, the court of first instance;
b) Where the court of first instance has ceased to exist or to have jurisdiction to execute it, the court which, if the suit wherein the decree was passed were instituted at the time of making the application for the execution of the decree, would have jurisdiction to try such suit.”
25. In the circumstances, I find that this Court has no original jurisdiction to deal with matters arising out of the execution of the decree of the SCC. This Court’s jurisdiction on such matters is only on appeals. Although the High Court has inherent powers, the same has to be exercised within procedural boundaries.
26. The Court in the case of Jepkemoi v Zaburi Enterprises Company Ltd & 2 others (Miscellaneous Civil Application 43 of 2023) [2024] KEHC 2343 (KLR) (8 March 2024) (Ruling) in determining with a similar application stated as follows;-
“The Applicant’s recourse is to therefore file the Application before the same Court of first instance, namely, the Magistrate’s Court that issued the decree.”
27. The above finding is in my view sufficient to dispose of the Application. Accordingly, I do find and hold that the Application dated 10th January 2024 hereby fails for want of jurisdiction.
28. On costs, I direct that each party bears their own costs, particularly taking into account that the Application was necessitated by the Respondent’s failure to settle a lawful decree.
29. It is so ordered.
SIGNED DATED and DELIVERED IN VIRTUAL COURT
THIS 22ND DAY OF JANUARY 2025
ADO MOSES
JUDGE
In the presence of:
Moses – Court Assistant
Njeri Kamwana h/b for Karanja……………for the Applicant
Mwaka h/b for Muoka……………………….for the Respondent