Background and introduction
1. For determination is the plaintiffs’ application dated 6th October 2023 in which they seek leave to continue the instant suit as a derivative action on behalf of the 2nd and 3rd applicants (hereinafter the Companies). The applicants also seek interim orders restraining the respondent from dealing with the assets and bank accounts of the companies, including their motor vehicles, machinery, and funds, until the matter is heard and determined.
2. The applicants seek to have the respondent compelled to produce the companies’ financial records, banking slips, audited statements, and his own Mpesa and bank statements from January 2023 to date. Finally, they pray that the 1st applicant be granted unrestricted access to the companies’ premises and yard along Langata North Road, next to Mamba Village, Karen. The application is supported by affidavits sworn by the applicant on even date and on 9th December 2024. It is opposed by way of Grounds of Opposition filed by the respondent. I have equally considered the written submissions filed by the parties as well as the oral submissions presented by learned Counsel.
Analysis and Determination
3. The question of whether this Court should grant permission to the applicants to proceed with the suit as a derivative claim is squarely governed by Sections 238 and 239 of the Companies Act. Section 238(1) defines a derivative claim as one brought by a member of a company in respect of a cause of action vested in the company, seeking relief on behalf of the company. The purpose of such claims is to protect the company’s legal interests, typically where wrongs have been committed against it by insiders such as directors or majority shareholders or third parties.
4. Section 239 then sets out the procedure and threshold for obtaining leave of the Court. The applicant must demonstrate that they are a member of the company, that the cause of action is vested in the company and that the relief sought is for the benefit of the company, not for personal gain. These requirements are cumulative, not independent, and the Court’s role at this stage is not to determine the merits of the claim but to be satisfied that a prima facie case has been made showing the company has suffered a wrong requiring redress. This was affirmed in Ghelani Metals Limited & Others v Elesh Ghelani Natwaral & Another [2017] eKLR.
5. On the facts and evidence presented before me, it is not in dispute that both the 1st applicant and the respondent are directors and shareholders of the 2nd and 3rd applicant companies. The 1st applicant’s standing to bring this suit and the application is therefore established. I agree with the applicant that the question of whether he is a majority or minority shareholder is immaterial. The law under Section 238 of the Companies Act only requires that he be a member of the company. That membership alone entitles him to seek redress on behalf of the companies where a wrong is alleged to have been committed against it.
6. The evidence placed before this Court paints a troubling picture of unilateral actions taken by the respondent in relation to the affairs of the 2nd and 3rd applicant companies. These include possible unauthorized changes to NTSA access credentials, numerous invoices and proforma invoices and questionable payments. The respondent’s Mpesa and bank statements show funds transferred to the respondent allegedly from company accounts. Further, the respondent appears to have altered instructions issued to Standard Chartered Bank through a letter dated 3rd October 2023 concerning the 3rd applicant’s overdraft facilities, and rerouted the company emails and bank statements.
7. These actions, on their face, suggest interference with the companies’ operations and finances. Whether they were undertaken for the benefit of the company or for personal gain is not for this Court to determine at this interlocutory stage. That is a matter reserved for trial, where the evidence will be tested and the respondent afforded an opportunity to rebut the allegations.
8. The respondent’s contention that the suit is for personal benefit cannot stand. The pleadings make it clear that the grievances raised are directed at protecting the assets and income of the 2nd and 3rd applicants. The applicant is not seeking relief for himself individually, but rather to safeguard the companies from alleged mismanagement and diversion of resources.
9. The reliefs sought by the applicants including restraining dealings with the company assets and accounts, compelling production of financial records, and ensuring access to company premises are all remedies that serve the collective interest of the companies. They are designed to prevent loss, preserve corporate property, and ensure transparency in the management of the 2nd and 3rd applicants. None of these prayers confer a personal advantage to the applicant outside the corporate context.
10. The respondent’s argument that the withdrawal of criminal charges by the Director of Public Prosecutions (DPP) demonstrates bad faith in the applicant’s claim is misplaced. The DPP’s decision under Article 157 of the Constitution not to prefer charges is immaterial to the question of whether leave should be granted for a derivative suit. This is because the criminal process and the derivative claim process are fundamentally distinct in purpose, outcomes and standard of proof.
11. I must however agree with the respondent that ordinarily, the requirement of notice before instituting a derivative claim serves an important gatekeeping role. It ensures that the applicant has first raised the alleged wrongs with the company’s organs whether the directors or shareholders, and that no remedial action was taken. This demonstrates that a claim is not personally instigated but genuinely intended to protect the company’s interests.
12. That said, I take the view that this requirement is not absolute. The overriding consideration is whether an applicant has shown a bona fide case that the company has suffered a wrong requiring redress. Where the totality of evidence points to genuine grievances affecting the company, the absence of formal notice cannot, by itself, defeat the application. In the present case, the notice requirement should not override substantive justice, particularly where the company’s assets or income are at imminently at risk.
Disposition
13. For the above reasons I am satisfied that the applicants have met the threshold under Sections 238 and 239 of the Act. The application dated 6th October 2023 is allowed in the following terms:
i. The applicants are hereby granted leave to continue with the derivative claim on behalf of HKR Enterprises Limited and RJ Varsani Enterprises Limited in respect of the alleged acts and omissions of the respondent, including negligence, default, breach of duty, diversion of company funds, and breach of trust in his capacity as director;
ii. The respondent is directed to furnish the Court and the applicants with the books of accounts, banking slips, and audited financial statements of the 2nd and 3rd plaintiffs from 1st January 2023 to date, together with his personal Mpesa and bank statements, pending the hearing and determination of the derivative claim;
iii. Pending the hearing and determination of this suit, the respondent, whether by himself, his servants, agents, or otherwise, is restrained from selling, alienating, transferring, charging, disposing, removing, or in any way dealing with the assets of the 2nd and 3rd plaintiff companies including motor vehicles registration numbers KCD 808Q, KCN 916T, KCG 531W, KCJ 818N, KBK 723Q, KCR 818S, KAT 055E, machinery located at the company premises next to Mamba Village, Karen and any other property belonging to the 2nd and 3rd plaintiffs;
iv. The 1st plaintiff shall be granted unlimited access to the premises and yard of the 2nd and 3rd plaintiffs located along Langata North Road next to Mamba Village, Karen.
v. The applicants shall have costs of the application.
DATED, SIGNED AND DELIVERED IN NAIROBI
THIS 18th DAY OF MAY 2026.
F. MUGAMBI
JUDGE
1. For determination is the plaintiffs’ application dated 6th October 2023 in which they seek leave to continue the instant suit as a derivative action on behalf of the 2nd and 3rd applicants (hereinafter the Companies). The applicants also seek interim orders restraining the respondent from dealing with the assets and bank accounts of the companies, including their motor vehicles, machinery, and funds, until the matter is heard and determined.
2. The applicants seek to have the respondent compelled to produce the companies’ financial records, banking slips, audited statements, and his own Mpesa and bank statements from January 2023 to date. Finally, they pray that the 1st applicant be granted unrestricted access to the companies’ premises and yard along Langata North Road, next to Mamba Village, Karen. The application is supported by affidavits sworn by the applicant on even date and on 9th December 2024. It is opposed by way of Grounds of Opposition filed by the respondent. I have equally considered the written submissions filed by the parties as well as the oral submissions presented by learned Counsel.
Analysis and Determination
3. The question of whether this Court should grant permission to the applicants to proceed with the suit as a derivative claim is squarely governed by Sections 238 and 239 of the Companies Act. Section 238(1) defines a derivative claim as one brought by a member of a company in respect of a cause of action vested in the company, seeking relief on behalf of the company. The purpose of such claims is to protect the company’s legal interests, typically where wrongs have been committed against it by insiders such as directors or majority shareholders or third parties.
4. Section 239 then sets out the procedure and threshold for obtaining leave of the Court. The applicant must demonstrate that they are a member of the company, that the cause of action is vested in the company and that the relief sought is for the benefit of the company, not for personal gain. These requirements are cumulative, not independent, and the Court’s role at this stage is not to determine the merits of the claim but to be satisfied that a prima facie case has been made showing the company has suffered a wrong requiring redress. This was affirmed in Ghelani Metals Limited & Others v Elesh Ghelani Natwaral & Another [2017] eKLR.
5. On the facts and evidence presented before me, it is not in dispute that both the 1st applicant and the respondent are directors and shareholders of the 2nd and 3rd applicant companies. The 1st applicant’s standing to bring this suit and the application is therefore established. I agree with the applicant that the question of whether he is a majority or minority shareholder is immaterial. The law under Section 238 of the Companies Act only requires that he be a member of the company. That membership alone entitles him to seek redress on behalf of the companies where a wrong is alleged to have been committed against it.
6. The evidence placed before this Court paints a troubling picture of unilateral actions taken by the respondent in relation to the affairs of the 2nd and 3rd applicant companies. These include possible unauthorized changes to NTSA access credentials, numerous invoices and proforma invoices and questionable payments. The respondent’s Mpesa and bank statements show funds transferred to the respondent allegedly from company accounts. Further, the respondent appears to have altered instructions issued to Standard Chartered Bank through a letter dated 3rd October 2023 concerning the 3rd applicant’s overdraft facilities, and rerouted the company emails and bank statements.
7. These actions, on their face, suggest interference with the companies’ operations and finances. Whether they were undertaken for the benefit of the company or for personal gain is not for this Court to determine at this interlocutory stage. That is a matter reserved for trial, where the evidence will be tested and the respondent afforded an opportunity to rebut the allegations.
8. The respondent’s contention that the suit is for personal benefit cannot stand. The pleadings make it clear that the grievances raised are directed at protecting the assets and income of the 2nd and 3rd applicants. The applicant is not seeking relief for himself individually, but rather to safeguard the companies from alleged mismanagement and diversion of resources.
9. The reliefs sought by the applicants including restraining dealings with the company assets and accounts, compelling production of financial records, and ensuring access to company premises are all remedies that serve the collective interest of the companies. They are designed to prevent loss, preserve corporate property, and ensure transparency in the management of the 2nd and 3rd applicants. None of these prayers confer a personal advantage to the applicant outside the corporate context.
10. The respondent’s argument that the withdrawal of criminal charges by the Director of Public Prosecutions (DPP) demonstrates bad faith in the applicant’s claim is misplaced. The DPP’s decision under Article 157 of the Constitution not to prefer charges is immaterial to the question of whether leave should be granted for a derivative suit. This is because the criminal process and the derivative claim process are fundamentally distinct in purpose, outcomes and standard of proof.
11. I must however agree with the respondent that ordinarily, the requirement of notice before instituting a derivative claim serves an important gatekeeping role. It ensures that the applicant has first raised the alleged wrongs with the company’s organs whether the directors or shareholders, and that no remedial action was taken. This demonstrates that a claim is not personally instigated but genuinely intended to protect the company’s interests.
12. That said, I take the view that this requirement is not absolute. The overriding consideration is whether an applicant has shown a bona fide case that the company has suffered a wrong requiring redress. Where the totality of evidence points to genuine grievances affecting the company, the absence of formal notice cannot, by itself, defeat the application. In the present case, the notice requirement should not override substantive justice, particularly where the company’s assets or income are at imminently at risk.
Disposition
13. For the above reasons I am satisfied that the applicants have met the threshold under Sections 238 and 239 of the Act. The application dated 6th October 2023 is allowed in the following terms:
i. The applicants are hereby granted leave to continue with the derivative claim on behalf of HKR Enterprises Limited and RJ Varsani Enterprises Limited in respect of the alleged acts and omissions of the respondent, including negligence, default, breach of duty, diversion of company funds, and breach of trust in his capacity as director;
ii. The respondent is directed to furnish the Court and the applicants with the books of accounts, banking slips, and audited financial statements of the 2nd and 3rd plaintiffs from 1st January 2023 to date, together with his personal Mpesa and bank statements, pending the hearing and determination of the derivative claim;
iii. Pending the hearing and determination of this suit, the respondent, whether by himself, his servants, agents, or otherwise, is restrained from selling, alienating, transferring, charging, disposing, removing, or in any way dealing with the assets of the 2nd and 3rd plaintiff companies including motor vehicles registration numbers KCD 808Q, KCN 916T, KCG 531W, KCJ 818N, KBK 723Q, KCR 818S, KAT 055E, machinery located at the company premises next to Mamba Village, Karen and any other property belonging to the 2nd and 3rd plaintiffs;
iv. The 1st plaintiff shall be granted unlimited access to the premises and yard of the 2nd and 3rd plaintiffs located along Langata North Road next to Mamba Village, Karen.
v. The applicants shall have costs of the application.
DATED, SIGNED AND DELIVERED IN NAIROBI
THIS 18th DAY OF MAY 2026.
F. MUGAMBI
JUDGE