Background
1. Before me for determination is the Plaintiff’s Originating Summons dated 19th September 2022 as amended on 9th February 2024 in which the Plaintiff, RICHARD SHIMEJERO SHIVOGO seeks the leave of this Court, to commence and sustain a derivative action for and on behalf of Kenya Teq Ltd, against NCBA BANK KENYA PLC, the Defendant herein.
2. The application is based on the following grounds; -
a) That the Plaintiff is a shareholder at Kenya Teq Ltd (hereinafter referred to as “the Company”), which entity operates an account with the Defendant Bank.
b) That the crux of this lawsuit is an overdraft of $ 16, 344.88 that was overdrawn from the account held by the Company without the sanction of the account holder’s shareholders.
c) That the Plaintiff, in person, sued the Defendants in the Milimani Civil Suit No. E1035 of 2020: RICHARD SHIMEJERO SHIVOGO V. NCBA BANK KENYA PLC, which suit was struck off in limine after a successful Preliminary Objection Application was made by the Defendant.
d) That the Plaintiff has elected not to appeal against the scorching decision of the learned magistrate and instead opted to institute the instant suit at an appropriate forum.
e) That the Plaintiff approaches the court for leave to institute and sustain a suit for and on behalf of Kenya Teq Ltd against the aggression of the third-party Defendant.
3. The Application was further supported by the affidavit of RICHARD SHIMEJERO SHIVOGO, the Plaintiff/Applicant herein, sworn on 9th May 2024. In the affidavit, the Applicant has essentially reiterated the grounds in support of the application as indicated above.
4. In a nutshell, the Applicant/Plaintiff contends that the Defendant allowed transactions on the company's account without his knowledge, consent, or signature, contrary to the established account mandate requiring joint authorization by directors for withdrawals.
5. It is further the Applicant’s contention that those unauthorized withdrawals led to an overdraft position of USD 16,344.88, which caused reputational and financial harm, both to himself and to the Company. The Plaintiff asserts that he attempted to address these concerns with the Defendant Bank through correspondence, but the Defendant failed to provide adequate responses or remedies.
6. The Application was opposed by the Defendant who filed a Replying Affidavit dated 12th January 2023 and sworn by Ibrahim Ngatia, a Legal Counsel employed by the Defendant.
7. According to the Defendant, the Plaintiff’s Application for leave to institute or continue derivative action is an abuse of the court process, incompetent, and unmeritorious for among other reasons, that the suit/claim has been brought by the Plaintiff/Applicant for his own personal benefits and not for the benefit of the Company.
8. The Application was canvassed by way of written submissions. The Plaintiff/Applicant’s submissions are dated 10th August 2023 whilst that of the Defendant is dated 25th August 2023.
Plaintiff’s/Applicant’s Submissions
9. The Plaintiff submitted that the Defendant acted negligently and in breach of their contractual obligations, leading to unauthorized withdrawals from the bank account of Kenya Teq Holdings Limited. These actions caused significant financial loss to the company and reputational damage to the Plaintiff as a co-director.
10. The Plaintiff contended that the Defendant violated the joint account mandate, which explicitly required the signatures of both directors for any withdrawals. By facilitating transactions without proper authorization.
11. The Applicant/Plaintiff maintained that while Kenya Teq Co. Ltd just like any other company, stands as a juristic person, the inanimate nature of corporations implies that despite their legal personality, they remain incapable of taking actions without intermediaries, such as the Plaintiff herein.
12. It was further the Applicant’s submissions that in any event, the bank directly contacted the Plaintiff in his personal capacity vide the Bank’s email of 2nd July 2020 in which the Defendant bank asked him (the Plaintiff) to regularize the accounts, which was then overdrawn. The Plaintiff therefore maintained that in the same breadth, he should be allowed to bring derivative action on behalf of the Company.
13. Regarding the Respondent’s argument that the Plaintiff was advancing personal interest, the Applicant submitted that the reverse is the correct position. The Applicant asserted that the intended suit is for the benefit of the Company and not for personal interest as argued by the Respondent.
14. It was also the Applicant’s argument that his application was in line with the provisions of Article 159(2)(d) of the Constitution which stresses on substantive justice as opposed to procedural technicalities.
15. It was further the Applicant’s submissions that should the court be inclined not to allow his application, then the court should consider an amendment of the Application as opposed to its outright dismissal. Citing the case of Charles Mugane Njonjo & Another vs Gucokaniria Kihato Traders & Farmers Company Limited & Another [2016] eKLR, the Applicant asserted that the right to be heard must be jealously protected.
16. On the Defendant’s conduct, the Plaintiff argued that the bank failed to address his concerns when he raised queries about the unauthorized withdrawals. That instead of resolving the matter, the Defendant falsely claimed that the Plaintiff was indebted to them. This behavior, the Plaintiff submits, is indicative of gross negligence and a lack of accountability on the part of the Defendant.
Defendant’s/Respondent's Submissions
17. The Defendant submitted that the Plaintiff’s suit is not a derivative action as claimed in the pleadings, but a personal claim. The Defendant submitted that the reliefs sought in the suit are for Plaintiff’s personal benefit, as demonstrated by the pleadings.
18. Referring to the case of Isaiah Waweru Njumi & 2 Others v Muturi Ndungu [2016] eKLR, the Defendant submitted that derivative actions must primarily benefit the company and not the individual shareholder or director.
19. It was further the Respondent’s submissions that the Applicant herein lacks the requisite locust standing to institute and continue any proceedings in the name of Kenya Teq Holdings Limited which is a separate legal entity. According to the Respondent, the bank account in question was in the name of the company and not the Applicant herein. The Defendant cited the case of Salomon v Salomon & Co Ltd [1897] AC 22 on the question of separate legal personality.
20. The Defendant further submitted that the Plaintiff failed to demonstrate any efforts to have the company initiate legal proceedings in its name, as required under Section 239 of the Companies Act, 2015. The Defendant contended that the failure by the Plaintiff to explore internal company mechanisms or involve other shareholders invalidates the claim.
21. On the alleged negligence, the Defendant denied any breach of duty or improper conduct. The Defendant submitted that the transactions resulting in the overdraft were authorized using cheques duly signed by the Plaintiff, as evidenced by the bank’s records. The Defendant argued that it adhered to the account mandate and cannot be held liable for transactions authorized by a legitimate signatory.
22. The Defendant further submitted that under the Turquand Rule, the bank is entitled to presume that internal company formalities were complied with in the absence of evidence to the contrary. The Defendant relied on Royal British Bank v Turquand [1856] EWHC J65, which protects third parties dealing with companies in good faith.
23. On the procedural irregularities raised by the Plaintiff, the Defendant submitted that the omission to seek leave before filing a derivative suit is not a mere technicality but a fundamental defect that renders the suit incompetent. The Defendant cited Macfoy v United Africa Co. Ltd [1961] 3 All ER 1169, where the court held that acts done without proper authority are void ab initio.
24. The Defendant therefore urged this court to uphold the Preliminary Objection and strike out the Plaintiff’s suit for being fatally defective.
Analysis and Determination
25. This Court is called upon to ascertain whether the Plaintiff's application meets the legal and evidentiary thresholds required for leave to proceed with the derivative suit under the Companies Act, 2015.
26. I have carefully reviewed the Plaintiff’s application, the Defendant’s replying affidavit, and the submissions filed by both parties. I have also examined the relevant statutory provisions under the Companies Act, 2015, and applicable legal principles on derivative actions.
27. The foundational principle in corporate law is that a company is a separate legal entity, as established in Salomon v. Salomon & Co. Ltd [1897] AC 22. A derivative action is an exception to the rule in Foss v. Harbottle [1843] 2 Hare 461, where the company, rather than an individual shareholder, is the proper plaintiff in litigation concerning wrongs done to the company.
28. In this case, The Plaintiff seeks leave to continue a derivative suit under Sections 238 and 239 of the Companies Act, 2015. Derivative actions are a critical mechanism in corporate law, allowing minority shareholders or members to seek remedies on behalf of a company where the company itself is unable or unwilling to take action against alleged wrongdoing.
29. Section 238 of the Companies Act defines a derivative claim as follows:-
“Proceedings by a member of a company in respect of a cause of action vested in the company and seeking relief on behalf of the company.”
30. The statutory framework under Section 239 provides for judicial oversight of such claims to prevent abuse of the process. It requires the applicant to seek permission to continue the claim and establishes a two-stage process. In the first stage, the court must determine whether the application and the evidence disclose a prima facie case for granting leave. If a prima facie case is established, the court then moves to the second stage to consider other discretionary factors.
31. In Ghelani Metals Limited & 3 Others v. Elesh Ghelani Natwarlal & Another [2017] eKLR, the late Onguto J explained the essential principles guiding derivative actions. He observed that derivative actions serve as a tool of accountability, enabling shareholders to litigate on behalf of the corporation where there is alleged wrongdoing by insiders, such as directors or majority shareholders. The court emphasized that such claims must be bona fide and in the best interest of the company.
32. The court further outlined a two-stage process for judicial approval under Sections 238 and 239 of the Companies Act. The first stage involves establishing a prima facie case that the claim falls under the causes of action contemplated under Section 238(3), such as negligence, default, breach of duty, or breach of trust by a director. The purpose is to screen out frivolous or unmeritorious claims.
33. The courts have consistently held that derivative actions must be brought in good faith and in the best interest of the company. In Nurcombe v. Nurcombe [1985] 1 All ER 65, the court observed that:
“The court must be satisfied that the applicant is acting in good faith and in the genuine interest of the company and not merely as a tool to pursue personal grievances.”
34. It is however important that an applicant in the application for leave commence and sustain an action on behalf of a company must first demonstrate proof that the company is unable or unwilling to pursue the claim.
35. For a suit to qualify as a derivative action, the plaintiff must demonstrate that the cause of action is vested in the company, not the individual. The relief sought must flow to the company and address harm to the company’s assets, operations, or reputation. In contrast, personal claims seek remedies for harm or grievances specific to the individual shareholder, such as emotional distress or personal embarrassment.
36. In this case, the Plaintiff alleges that NCBA Bank allowed unauthorized withdrawals from the company’s account, resulting in financial loss to Kenya Teq Holdings Limited. At face value, this appears to be a corporate grievance. However, the Plaintiff’s particulars of breach of contract and negligence include references to personal inconvenience, embarrassment, and harm to his reputation. These allegations raise questions about whether the claim is truly brought for the company’s benefit or is motivated by personal grievances.
37. The relief sought includes damages for the inconvenience caused by the Defendant’s alleged negligence. This relief does not flow directly to the company but instead addresses the Plaintiff’s personal grievances. This undermines the claim's characterization as a derivative action and aligns more closely with a personal claim.
38. In Ghelani Metals Limited & 3 Others v. Elesh Ghelani Natwarlal & Another [2017] eKLR, Onguto J emphasized that:-
“A derivative claim must be brought bona fide and for the benefit of the company. The court must be cautious of claims cloaked as derivative suits but designed to advance personal interests.”
39. In the present case, while the Plaintiff asserts that the company suffered financial harm, the pleadings and relief sought suggest a significant overlap with personal grievances. For instance, the Plaintiff alleges inconvenience and embarrassment, which do not pertain to the company’s interests.
40. A key element of a derivative action is that it must be brought in good faith and in the genuine interest of the company. The applicant must demonstrate that the claim is bona fide and not motivated by ulterior motives or personal vendettas.
41. Upon careful consideration of the application in its entirety, I am of the view that the Plaintiff has not demonstrated any efforts to address the alleged grievances through internal company mechanisms before resorting to litigation. The absence of evidence that the Plaintiff engaged with the company’s directors or shareholders to rectify the alleged harm raises concerns about whether the claim is brought in good faith.
42. In Victor Mabachi & Another v. Nurturn Bates Ltd [2013] eKLR, the court warned against the misuse of the derivative claim mechanism, stating:
“A derivative action should not serve as a backdoor to pursue personal claims or grievances under the guise of corporate litigation.”
43. While the Plaintiff alleges harm to the company’s finances, the personal nature of the reliefs sought such as embarrassment and inconvenience suggests that the cause of action is not entirely vested in the company. This undermines the claim's characterization as a proper derivative action.
44. In any event, it is evident from the pleadings filed that the Plaintiff/Applicant has not shown by way of evidence, that the company is unable to institute the suit in its own name. That the majority shareholders have frustrated the process of pursuing the claim in the name of the company.
45. In the premises, the Plaintiff’s Originating Summons dated 19th September 2022 as amended on 9th February 2024 is hereby dismissed, and the Suit is equally struck out with costs to the Respondent.
SIGNED DATED and DELIVERED IN VIRTUAL COURT
THIS 22ND DAY OF JANUARY 2025
ADO MOSES
JUDGE
In the presence of:
Moses – Court Assistant
Ojanaga h/b for Majani…………...for the Plaintiff/Applicant
Makori…………………………….for the Defendant/Respondent