Introduction and Background
1. The parties herein are embroidered in a family business feud over control and management of the 1st and 2nd respondent companies (the companies). The petitioner, JITU SAVANI (hereinafter JT) contends that the respondents have been running the 1st and 2nd respondent companies (hereinafter the companies) in an oppressive and unfairly prejudicial manner to his interests. This is in violation of Section 780 of the Companies Act, 2015 (hereinafter the Act).
2. Vide the petition dated 14th July 2022 the petitioner now seeks the following prayers:
a) A perpetual injunction do issue restraining the 3rd respondent from interfering and/or intermeddling with the management and affairs of the 1st and 2nd Respondents in any manner whatsoever, without consultation with the Petitioner herein
b) A declaration do issue that the 3rd Respondent's actions threaten with violation the 1st and 2nd Respondents' rights to property.
c) A scheme be framed for the management, administration, control and affairs of the 1st and 2nd Respondents on such terms and conditions as to this Honorable Court may seem fit and proper.
d) Cost of this suit
e) Any other relief that that this Honourable court may deem fit and just to grant.
3. The petition is supported by the affidavits sworn by JT. He confirms that the companies are family businesses to which the 3rd respondent (hereinafter PARAG) and himself are involved in management of as directors even though he acknowledges that his relationship and that of his nephew PARAG have irretrievably broken down. In fact, he acknowledges that there has not been a meeting with PARAG to discuss the running of the companies in over 5 years.
4. JT, who contends that he is the Managing Director (hereinafter MD) of the companies, accuses PARAG of mismanaging the affairs of the companies in a manner prejudicial to shareholders and to him as MD. In particular, JT objects to the recruitment of SHAYLAAN PARAG SAVANI, the 4th respondent, (hereinafter SHAYLAAN) by PARAG, who is PARAG’s son.
5. Furthermore, JT asserts that SHAYLAAN was appointed to an undefined position within the companies and granted excessive remuneration, equivalent to that of senior directors, including himself. He contends that he was not consulted in the hiring decision, despite his claim that PARAG had relinquished his role as a technical director and was therefore not responsible for that aspect of the business. According to JT, following their father’s passing, the responsibility for hiring staff fell under his authority. He further argues that the companies already had dedicated IT personnel, making SHAYLAAN’s hiring unnecessary.
6. JT maintains that PARAG’s actions deviate from fair business practices and violate corporate governance principles. He asserts that as a director, PARAG has a common law duty to avoid conferring undue financial benefits upon himself, his associates, or beneficiaries, a duty that has been breached in this case, amounting to a violation of fiduciary duty. Consequently, JT seeks an order requiring SHAYLAAN to refund all excessive payments received since May 2022.
7. The respondents opposed the petition through a replying affidavit sworn by PARAG on 5th August 2022. In his response, PARAG maintains that the affairs of the companies have not been conducted in an oppressive or unfairly prejudicial manner, as alleged by the petitioner.
8. He further asserts that, according to the companies’ Articles of Association, there is no formal position of an MD. However, he explains that their father had assigned JT that title solely for marketing purposes. He clarifies that both he and JT had been independently hiring staff within their respective areas of responsibility, and that neither had veto power over the other’s hiring decisions.
9. Regarding the appointment of SHAYLAAN, PARAG states that the companies previously lacked IT personnel and had initiated an IT upgrade. He justifies the hiring by pointing out that SHAYLAAN, a computer science graduate, was well-suited to oversee the implementation of new software. Since IT operations affected both directors' areas of responsibility, he contends that he hired SHAYLAAN within his authority.
10. Lastly, PARAG argues that the petitioner has consistently opposed efforts to convene meetings for the companies, further complicating governance and decision-making within the businesses.
Analysis and Determination
11. The petition proceeded by way of viva voce evidence with both JT and PARAG testifying. Their testimonies are largely mirrored in their respective pleadings; therefore, I will not reiterate them in detail but will refer to them where necessary. Ultimately, the parties filed their written submissions, which I have carefully considered alongside the pleadings, evidence, and cited authorities.
12. The court is being called upon to examine PARAG’s conduct and determine whether his actions amount to oppression and unfair prejudice against JT, as alleged. Section 780 of the Act provides as follows:
“(1) A member of a company may apply to the Court by application for an order under section 782 on the ground—
(a) that the company's affairs are being or have been conducted in a manner that is oppressive or is unfairly prejudicial to the interests of members generally or of some part of its members (including the applicant); or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be oppressive or so prejudicial.
(2) In this section, "member", in relation to a company, includes a person who is not a member of the company but is a person to whom shares of the company—
(a) have been transferred; or
(b) have been transmitted by operation of law.”
13. Should the court find that a petitioner has made out a case under Section 780, this court has power to make appropriate orders under Section 782 of the Act.
14. Judicial pronouncements on this subject establish the elements that must be present for unfair prejudice to be established. The two elements are that:
a) The conduct complained of must cause prejudice or harm to the interests of shareholders and
b) The conduct must be unfair, meaning a reasonable, objective bystander would consider it unjust.
15. The case of Velani & 6 Others V Naran & 2 Others, [2021] KEHC 75 (KLR) has been cited by both parties. The court in stating what amounts to oppressive conduct and unfair prejudice additionally stated that:
“The conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely. …
The test as to what amounts to unfair prejudice is objective. It is not necessary for the petitioning shareholder to show that anybody acted in bad faith or with the intention of causing prejudice. The courts will regard the prejudice as unfair if a hypothetical reasonable bystander would believe it to be unfair. …
Fairness is judged in the context of a commercial relationship, the contractual terms of which are, in the main, set out in the Articles of Association of the company and in any shareholders agreement. The starting point is therefore to ask whether the conduct of which the shareholder complains is in accordance with the Articles and the powers which the shareholders have entrusted to the board. The best protection for a shareholder is appropriate protection in the articles themselves. Therefore, if the conduct is in accordance with the Articles, to which the shareholder has agreed, it will be more difficult to succeed with an unfair prejudice petition. …
Even if the conduct is not in accordance with the Articles, it does not necessarily render the conduct unfair, as trivial or technical infringements of the Articles may not give rise to a remedy under section 780. For example, a member can clearly show prejudice if the economic value of his shares has significantly decreased or is put in jeopardy by the conduct of which the complaint is made.
However, prejudice justifying a Petition is not confined to such economic detriment, especially where it is established that one or more features of a quasi-partnership exist.”
16. There is disagreement as to whether JT’s position as MD entitled him to sole hiring rights. Both parties admit that there was no formal MD position in the companies’ Memorandum and Articles of Association. However, they acknowledge that JT was designated as such by their late father.
17. Since the Articles of Association do not define the MD’s role or powers, it appears that JT would effectively be responsible for overseeing the companies’ day-to-day operations and implementing strategic decisions. However, the lack of a formal appointment process or removal procedure creates a governance vacuum, which has been further exacerbated by the irretrievable breakdown in communication between JT and PARAG. Ideally, the Board of Directors would have appointed a new MD, if necessary, but due to the existing deadlock, this has not happened over the years.
18. Given this admission, and in the absence of any contrary provision in the Articles of Association, I find that JT indeed occupied the position of MD at all material times. During trial, JT testified that in this capacity, it was his responsibility to hire staff and he provided evidence of 63 employees he had previously hired.
19. In contrast, while PARAG claimed that he also had hiring authority within his area of operation, no evidence was presented to substantiate this assertion. This leaves me with no doubt that, as a matter of practice, JT was responsible for hiring staff, and this practice created a legitimate expectation that he would have been involved in the hiring of SHAYLAAN.
20. The evidence presented shows that on the contrary, PARAG unilaterally hired his son, SHAYLAAN, without consulting or seeking approval from JT as MD. While the companies are family-owned, which naturally involves family dynamics, proper corporate governance principles would have dictated that such a major appointment be subject to consultation.
21. The evidence further reveals that one CORNELIUS ODIPO (hereinafter Odipo), had been appointed as Planning ERP Head through an appointment letter dated 14th September 2021. I have not been shown a resignation or exit letter and it is therefore not clear whether he is still in the companies’ employment. The appointment however contradicts PARAG’s claim that there was a need for SHAYLAAN’s position if indeed Odipo was still working in that capacity. I am also unable to tell, in the absence of any evidence, that Odipo exited the company as a result of SHAYLAAN’S employment.
22. Furthermore, no documentary evidence has been provided to establish SHAYLAAN’s job description, qualifications, specific duties, or the basis upon which his salary was determined. A properly structured hiring process for any company would require clear documentation outlining the role, responsibilities, required qualifications, and salary structure for the employee. The absence of such documentation raises serious corporate governance concerns, particularly in a family business where internal checks and balances are evidently already weak due to the lack of board cohesion and oversight.
23. The financial records further indicate that since May 2022, SHAYLAAN has been receiving a cumulative salary of Kshs. 525,000 per month (Kshs. 175,000 from the 1st respondent and Kshs. 350,000 from the 2nd respondent). This figure appears disproportionately high, against the Kshs. 130,000/= offered to Odipo through his letter of appointment. No evidence was presented to justify this level of remuneration in comparison to other employees within the companies noting that SHAYLAAN was a fresh graduate with hardly any practical experience in ERP implementation.
24. More concerning is the fact that despite SHAYLAAN’s employment since May 2022, the ERP system he was hired to oversee remains unimplemented. The testimony from PARAG confirmed this fact, calling into question the value addition of SHAYLAAN’s employment to the companies.
25. From my analysis, the hiring of a senior staff member at an inflated salary while replacing or bypassing an existing employee with more experience may, on the face of it, amount to an unfair and prejudicial act against the company. The law recognizes that directors owe a fiduciary duty to act in the best interests of the company and avoid conflicts of interest. Under Section 143 of the Act, directors are required to:
a) Exercise independent judgment in decision-making,
b) Promote the success of the company for the benefit of its shareholders,
c) Avoid placing themselves in a position where their personal interests conflict with those of the company.
26. In this case, PARAG, as a director, failed to exercise independent judgment by unilaterally appointing his son to a senior position without due process, consultation, or consideration of the company’s best interests. This conduct deviates from fair business practices, violates corporate governance principles, and undermines the trust that shareholders place in company leadership.
27. Be that as it may, this act however reflects a pattern of arbitrary decision-making, not just on PARAG but a concern that is further reinforced by JT’s testimony which confirms the absence of structured consultation processes in the company’s operations.
28. JT himself has admitted that his relationship with PARAG has irretrievably broken down, a factor that has likely contributed to the ongoing dysfunction within the companies’ governance structures. The inability of the two directors to communicate and engage in meaningful decision-making has clearly led to a governance vacuum, allowing for unilateral actions to take place without accountability.
29. Notably, JT’s conduct as MD has also played a role in perpetuating this state of affairs. It has been established that when PARAG applied to court for permission to convene an Annual General Meeting and Special General Meeting, JT declined to facilitate the process. This effectively prevented a structured forum where governance and operational concerns such as hiring practices could have been discussed and resolved.
30. By failing to engage in the processes, JT contributed to the continued paralysis of the companies' governance, reinforcing a scenario where directors act independently without oversight, to the detriment of shareholders and the companies as a whole.
31. Despite my observations on the employment of SHAYLAAN, I feel constrained by the absence of formal policies or governance structures that would provide a definitive benchmark against which to assess the fairness of the recruitment process. There is a lack of a clear chain of decision-making authority in the companies to guide this court in making a direct ruling on the appointment.
32. As this court has consistently held, it is not the role of the courts to run private companies or interfere in internal management decisions, particularly in matters such as hiring and firing of employees. I shall therefore resist that invitation appreciating that the companies are distinct legal entities with their own decision-making structures, primarily governed by their Articles of Association, shareholder agreements, and established corporate governance practices.
33. In this instance, while the lack of consultation and the excessive remuneration raise serious concerns, I am limited in my ability to make a direct ruling on whether SHAYLAAN’s appointment should be revoked outright, which in any case is not a prayer sought by JT. I find great difficulty suspending the excessive renumeration for the same reason that I have not been shown any salary scale for the position against which such an order would issue
34. For these reasons, the most appropriate intervention is not for the court to substitute itself as the decision-maker on hiring matters, but to ensure that governance reforms are put in place to prevent similar disputes in the future. Given that both parties acknowledge the absence of structured human resource and governance policies, it is imperative to resolve this impasse by establishing clear policies to guide future decision-making and prevent further disputes of this nature. In light of these findings and noting the prayers contained in the petition, I hereby make the following orders:
Disposition and final orders
i. The Board of Directors of the 1st and 2nd respondent companies shall convene a meeting within 60 days of this judgment, under the supervision of the Chairperson of the Institute of Certified Public Secretaries of Kenya (ICPSK) or a person duly appointed by them.
ii. The meeting shall address amongst other issues, the formulation and adoption of HR policies, including recruitment procedures, salary structures, director responsibilities, the establishment of a clear governance framework, defining the roles of the MD and board members.
iii. The meeting shall also review SHAYLAAN’s employment status to determine the need for the position, any adjustments to his salary or role and mechanisms to check on unauthorized or excessive salary payments.
iv. In the meantime, no director shall unilaterally hire or set salary terms for any employee without prior board approval, pending the adoption of HR policies.
v. A report shall be prepared by the Chairperson of (ICPSK) upon which this court shall make final orders based on the said report. This Judgment shall be served upon the Chairperson of ICPSK.
vi. Considering the nature of the dispute, the relationship between the parties and the outcome of the petition, it is only fair that each party bears its own costs. The costs incurred by ICPSK shall be borne by the companies jointly.
DATED, SIGNED AND DELIVERED IN NAIROBI
THIS 21ST DAY OF FEBRUARY 2025.
F. MUGAMBI
JUDGE