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JudgmentMOTION CITY LIMITED VS IDB CAPITAL LIMITED12 min read

MOTION CITY LIMITED VS IDB CAPITAL LIMITED

High Court at Malindi High Court · · M Thande

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT MALINDI

CIVIL CASE NO. 3 OF 2018

MOTION CITY LIMITED ……….……..………………………………....................PLAINTIFF

VERSUS

IDB CAPITAL LIMITED ….………………….……..……..…………………..1ST DEFENDANT

NDUTUMI AUCTIONEERS………………….……..……..…………………..2ND DEFENDANT

RULING

  1. In the application before me dated 2.8.23, the Applicant IDB Capital Limited (IDB Capital) seeks the orders THAT:
  2. Spent.
  3. THAT this Honourable Court do find the Plaintiff/1st Respondent in contempt of the Order of this Honourable Court given on 18th October, 2018 and 14th December, 2022
  4. THAT without prejudice to (2) above, the Plaintiff/1st Respondent be compelled to comply with the Order given 18th October, 2018 by remitting the outstanding arears to the Applicant.
  5. THAT the temporary injunction Order given on 18th October, 2018 be set aside on account of the default by the Plaintiff/1st Respondent in complying with the Orders issued by Court.
  6. THAT subject to prayer (4) above, the Extension of the Temporary Injunctive Orders given on 15th October, 2019 be set aside and/or discharged.
  7. THAT the suit be struck out for want of compliance with Section 560 of the Insolvency Act.
  8. THAT costs of this application be provided for.

  1. The Application is premised on the grounds on the face of it and in the supporting affidavit of Joyce Karoki, Senior Investments & Appraisal Officer at the Kenya Deposit Corporation Ltd, the successor in title to the assets owned by IDB Capital. It was averred that the injunctive orders of 18.10.18 was conditional upon Motion City continuing to service the loan in accordance with the terms of the loan agreement and was to lapse in case of default. IDB’s case is that there has been default for over 4 years and that Motion City has taken advantage of the said Orders. Additionally, that Motion City had failed, refused and or ignored to provide information as to where the machinery and/or equipment should be delivered and the preson to receive them despite several inquiries and service of the Court Order.
  2. Further that IDB Capital appointed the Administrator over the affairs of Motion City on 9.7.17 and the suit together with the applications dated 24.5.18 and 25.4.19 were filed without the consent of the Administrator or sanction of the Court, a mandatory requirement under Section 560 of the Insolvency Act, 2015 (the Act). As such, the suit having been filed by suspended directors is fatally defective and ought to be dismissed. IDB Capital further contends that this Court lacks the jurisdiction to entertain this matter for want of compliance with Section 560 of the said Act. Further that the Motion City has failed to prosecute the suit for a period exceeding 1 year.
  3. Motion City opposed the Application vide a replying affidavit sworn on 15.1.24 by Samson Chome Ngallah, its Head of Operations. He averred that the equipment which IDB Capital had been directed by the Court to return to Motion City had been vandalized and intermeddled with and in a state of mere scrap metal. That for IDB Capital to seek to return the equipment/machinery in that state would cause great prejudice to Motion city. He added that the machinery was unprocedurally taken away and illegally kept despite previous court orders to return the same ought to have been return in the original state. It is Motion City’s case that the actions of IDB Capital are calculated to cripple its operations making it impossible to service the loan so that they can enforce the securities.
  4. It was further averred that failure by Motion City’s advocates to attend Court for 3 out of the 4 times the matter came up was not deliberate as it took time for them to be admitted on the online platform and some times never at all. 
  5. Motion City further stated that there is no gazette notice attached to the Application to confirm whether it is under receivership and for what period. As such, the Court cannot make a logical conclusion based on a newspaper advertisement. Additionally, that IDB Capital cannot on the one hand claim to be administering Motion City and on the other claim to execute the securities by illegal seizure of its equipment. Further that this issue cannot be determined on the basis of conflicting evidence. It was added that pursuant to the Supreme Court judgment in Samuel Kamau Macharia & another v Kenya Commercial Bank Ltd & 2 others [2012] eKLR, appointment of a receiver does not destroy the corporate existence and personality of a company and does not make directors in their capacity as members equally disabled. In conclusion, it was averred that it is doubtful that the purposes and objectives for the requirements of the Act had been satisfied following appointment of the administrator if at all there was any. The Court was urged to allow the prosecution of the suit on merit in the interests of justice.
  6. In rejoinder, IDB Capital filed a supplementary affidavit sworn on 6.2.24 by Joyce Karoki in which she reiterated the earlier averments in her supporting affidavit. She denied the allegations that the machinery was vandalized and reduced to scrap metal and asserted that the same was secured from the time of repossession. Further that Motion City cannot on the one hand claim to depend on the machinery and on the other fail to conduct the requested valuation and provide information as to where the machinery should be returned, noting that the same was repossessed by the administrator from the quarry.
  7. It was further averred that the appointment of the Administrator as per the Debenture agreement and Section 534 of the Act, became effective after compliance with Section 537 of the Act. Further that a secured creditor is entitled to stand outside the winding up proceedings and rely on its security. Additionally, that the Administrator took custody of Motion City’s assets in fulfilment of the administration objective of realizing the company’s property.
  8. IDB Capital contended that equity aids the vigilant and that it has been 4 years since orders to set down the case for hearing were given by the Court but that Motion City chose not to prosecute the same.
  9. IDB Capital filed written submissions as directed by the Court while Motion City chose not to file any and to rely on its replying affidavit.
  10. IDB Capital has in submissions referred to a preliminary objection dated 2.8.23 challenging the locus of Motion City to institute this suit in absence of authority of the Court or administrator. The Court has scoured the record and has found no such preliminary objection. Indeed, the same was not referred to at any time when the matter was in Court. Further Motion City made no mention of it in its response to the Application now under consideration. This notwithstanding, the Court must first make a determination as to whether the suit is properly before it, given that the issue was raised in the Application. 
  11. It is IDB Capital’s case that the appointment of administrator was notified to the public suit herein was filed after Motion City was placed under administration, contrary to the provisions of the Act. Further that the appointment of the administrator was advertised in the newspaper on 11.7.19 notifying the public and by a letter dated 11.7.17, Motion City was notified. Motion City countered this by asserting that no gazette notice was exhibited to support the claim that it was under administration.
  12. Section 534 of the Act gives power to the holder of a floating charge to appoint an administrator. It is not disputed that IDB Capital is the holder of debentures over the assets of Motion City. As such, it has the power to appoint an administrator.
  13. IDB Capital contends that the appointment of the administrator over Motion City became effective after compliance with the provisions of Section 537 of the Act. This section requires a holder of relevant floating charge to notify the Court on appointing of an administrator as follows:
  14. A person who appoints an administrator of a company under section 534 shall lodge with the Court—
  15. a notice of appointment that complies with subsections (2); and
  16. such other documents as may be prescribed by the insolvency regulations for the purposes of this section.
  17. A notice of appointment complies with this subsection if—
  18. it includes a statutory declaration by or on behalf of the person who makes the appointment—
  19. that the person is the holder of a qualifying floating charge in respect of the company's property;
  20. that each floating charge relied on in making the appointment is (or was) enforceable on the date of the appointment; and
  21. that the appointment is in accordance with this Part; and
  22. it identifies the administrator and is accompanied by a statement by the administrator—
  23. that the administrator consents to the appointment;
  24. that in the administrator's opinion the purpose of administration is reasonably likely to be achieved; and
  25. giving such other information and opinions of a kind prescribed by the insolvency regulations for the purposes of this section.
  1. Section 538 provides that the appointment of an administrator takes effect when the requirements of Section 537 are satisfied.
  2. The documents exhibited by IDB Capital contain a letter dated 20.6.17 from the administrator, PVR Rao forwarding to the Court, a copy of his appointment letter, a copy of his letter accepting the appointment, statutory declaration under Section 537(2) of the Act and a copy of his latter to the directors of Motion City. The letter was received by the Court on 25.6.17. In light of this, the Court is satisfied that the provisions of Section 537 of the Act were complied with. The appointment of the administrator thus took effect on 25.6.17.
  3. The record further shows that the administrator vide his letter dated 28.6.17 informed the directors of Motion city inter alia of his appointment and further that none of the directors, shareholders, employees or any other person was authorized to transact any business on behalf of the company without his express authorization.
  4. Section 560 of the Act provides for a moratorium on other legal process while and administration order has effect as follows:
  5. While a company is under administration—
  6. a person may take steps to enforce a security over the company's property only with the consent of the administrator or with the approval of the Court;
  7. a person may take steps to repossess goods in the company's possession under a credit purchase transaction only with the consent of the administrator or with the approval of the Court; if the Court gives approval, subject to such conditions as the Court may impose;
  8. a landlord may exercise a right of forfeiture by peaceable re-entry in relation to premises let to the company only with the consent of the administrator or with the approval of the Court; and
  9. a person may begin or continue legal proceedings (including execution and distress) against the company or the company's property only with the consent of the administrator or with the approval of the Court.
  10. In giving approval for a transaction under subsection (1), the Court may impose a condition on, or a requirement in connection with, the transaction.
  11. The above provision stipulates that any action against a company under administration whether enforcement of security, repossession of goods, forfeiture and re-entry of premises, or legal proceedings, can only be done with the consent of the administrator or with the approval of the Court.
  12. The issue under challenge herein though, is the filing of the present suit by the company when under administration. To determine this issue, it is necessary to look at the powers of an administrator. 
  13. Section 576 of the Act provides that the powers and functions of the administrator of a company are specified in the Fourth Schedule. Section 520 of the Act defines an administrator a person appointed under Part VIII to manage the company's affairs and property. To this end, an Section 584 places a duty upon the administrator to, immediately on being appointed as such, assume control of all the property of the company and under Section 585, to manage affairs and property of company.
  14. The powers of an administrator that are specified in the Fourth Schedule include inter alia, the power to take possession of, collect and get in the property of the company and, for that purpose, to take such proceedings as the administrator considers necessary; appoint an advocate solicitor or accountant or other professionally qualified person to assist the administrator in the performance of the administrator's functions; bring or defend any action or other legal proceedings in the name and on behalf of the company; do all acts and to execute in the name and on behalf of the company any deed, receipt or other document.
  15. As can be seen from the cited provisions, the administrator has power to take over all the affairs of the company in respect of which he is appointed, including instituting or defending any legal proceedings and executing any document in the name of and on behalf of the company.
  16. From the material placed before the Court, it is evident that IDB Capital appointed PVR Rao as administrator of Motion City on 9.6.17. By his letter dated 28.6.17, the administrator notified Motion City that the company had been placed under administration and that he had been appointed administrator. He further informed Motion City that none of the directors, shareholders, employees or any other person is authorized to transact any business on behalf of the company without the administrator’s express consent. This letter was received on 4.7.17 by Fred Mweni, the managing director of Motion City.  
  17. The foregoing notwithstanding, motion City went ahead and instructed and advocate and instituted the present suit.  
  18. In Midland Energy Limited v African Banking Corporation Ltd & another [2020] eKLR, Okwany, J.  dealt with a similar matter and stated:

My finding is that having found that the preliminary objections dated 29th January and 4th February 2019 were merited and having allowed the said objections, it naturally follows that the suit on which the two applications was founded would also fall on the wayside as it was not in dispute that the plaintiff did not obtain the leave of the court before filing the said suit…Needless to say, the instant suit having been filed without leave is incompetent ab initio, a fact which the plaintiff ought to have noted before filing the application dated 14th June 2019.

The learned Judge went on to state:

For the above reasons, I strike out the application dated 14th June 2019  with no orders as to costs.  Considering that I have already found that the plaintiff suit herein is incompetent ab initio having been filed without leave, I allow the application dated 24th June 2019 with no orders as to costs.

  1. I associate with the learned Judge and find that this suit filed by Motion City while under administration is void ab initio and that the suit is bad and incurably bad, to borrow the words of Lord Denning in Macfoy vs. United Africa Co. Ltd [1961] 3 All E.R. 1169, where he delivered the following opinion of the Privy Council at page 1172 (1):

If an act is void, then it is in law a nullity. It is not only bad, but incurably bad. There is no need for an order of the Court to set it aside. It is automatically null and void without more ado, though it is sometimes convenient to have the Court declare it to be so. And every proceeding which is founded on it is also bad and incurably bad. You cannot put something on nothing and expect it to stay there. It will collapse.

  1. Having found as I have that the suit herein is void for want of capacity of Motion City to file the same, it follows that all proceedings and orders issued herein are also void and a nullity, including the orders of 14.12.22, in respect of which IDB seeks a finding of contempt against Motion City. 
  2. It is not clear to the Court why in spite of placing Motion City under administration and appointing an administrator, IDB Capital did not challenge the suit on that basis at the outset. Instead, IDB Capital participated in the suit from 2018 when the same was filed, to 2023 when it filed the present Application in which it has challenged the competence of the suit. Even in this Application, IDB Capital has sought prayers which could only be granted in a competent suit. The conduct of IDB Capital needlessly increased costs and wasted judicial time.
  3. In the end and in view of the foregoing, the suit being incompetent for want of capacity of Motion City to file the same is hereby struck out. Each party to bear own costs. 

DATED, SIGNED and DELIVERED in MALINDI this 8th day of November 2024

_________________________

M. THANDE 

JUDGE

    MOTION CITY LIMITED VS IDB CAPITAL LIMITED MOTION CITY LIMITED VS IDB CAPITAL LIMITED