' Background and Introduction
1. By an application dated 7th October 2024, the Applicants seek leave to pursue a derivative claim on behalf of Sansora Bakers & Confectioners Limited (“the Company”) against the Respondents, arising from alleged breaches of fiduciary duty in their capacity as directors. The Applicants pray, among other reliefs, for an order compelling the Respondents to produce the sale agreement and transfer instrument relating to property Title Number WANJARE/BOGIAKUMU/4778 (the Property), which was transferred to Pine Tree Real Estate LLP.
2. In addition, the Applicants seek interim injunctive relief restraining the Respondents from selling, transferring, charging, disposing of, or otherwise dealing with the assets of the Company. They further pray for orders directing the Respondents to produce the Company’s books of account, banking slips evidencing receipt of the purchase price, audited financial statements, and bank statements from 2021 to date.
3. The respondents opposed the application by way of a notice of preliminary objection dated 18th November 2024 and a replying affidavit sworn by JAMALUDIN SHAMSUDIN ALIBHAI RAJWANI on even date. I have also considered the submissions filed by the parties.
Analysis and Determination
4. As established in Mukisa Biscuit Manufacturing Co. Ltd v West End Distributors [1969] EA 696, a preliminary objection must rest upon a pure point of law. Such a point must either be expressly pleaded or arise by clear implication from the pleadings, and it must be capable of disposing of the entire suit if upheld.
5. The objections raised in the present matter clearly satisfy the threshold for a proper preliminary objection. In particular, the objection grounded on the doctrine of sub judice necessitates a legal comparison of the pleadings and the reliefs sought in the respective suits. This exercise is confined to the four corners of the pleadings and does not call for factual inquiry or evidentiary evaluation. Rather, it requires a judicial determination of whether the suits involve substantially similar parties, subject matter, and causes of action.
6. Additionally, the issues of jurisdiction and locus standi raised alongside the sub judice objection are also threshold questions of law. Jurisdiction speaks to the authority of the court to entertain the matter, while locus standi concerns the legal capacity of a party to institute proceedings. Both are determinative issues which, if resolved against a party, conclusively dispose of the suit without recourse to factual investigation.
7. Accordingly, I find that the preliminary objection is properly framed, rests on pure points of law, and is ripe for determination at this stage.
8. The first issue raised in the preliminary objection is that this Court lacks jurisdiction to hear and determine the present matter, owing to the arbitration clause contained in Article 33 of the Articles of Association of the Company. The law is clear that a party seeking to rely on such a clause must invoke it at the earliest opportunity and before taking any substantive steps in the proceedings.
9. Section 6 of the Arbitration Act, 1995 codifies this principle. It provides that a party who wishes to rely on an arbitration agreement must apply to the court for a stay of proceedings and referral to arbitration not later than the time when that party enters appearance or files any pleadings in the matter. The purpose of this requirement is to prevent parties from submitting to the jurisdiction of the court, participating in the proceedings, and only later attempting to oust the court’s jurisdiction by invoking the arbitration clause.
10. Jurisprudence is settled that once a party has taken steps in the suit, such as filing pleadings, participating in interlocutory applications, or otherwise submitting to the court’s jurisdiction, that party is deemed to have waived its right to rely on the arbitration clause. The doctrine of estoppel then applies, barring such a party from belatedly seeking to rely on arbitration as a shield.
11. In the present case, the Respondents did not file a Section 6 application at the earliest instance. Instead, they submitted to the jurisdiction of this Court by participating in the proceedings. They are estopped from relying on the arbitration clause at this stage.
12. On the issue of sub judice, I have undertaken a comparison of the pleadings in the present matter with those in E160 of 2023. It is evident that the parties are not identical. In E160 of 2023, the two Applicants herein are enjoined merely as interested parties, whereas in the instant suit they stand as Applicants. Further, the 1st Defendant in the present matter is the Plaintiff in E160 of 2023, while the 2nd Defendant herein is not a party to that earlier suit.
13. Equally important, the causes of action in the two suits are materially distinct. The dispute in E160 of 2023 primarily concerns issues of shareholding, directorship, and management of the interested parties. By contrast, the present suit substantially revolves around the disposal of properties belonging to the Company, allegedly undertaken by the Respondents in breach of their fiduciary duties as directors. While there may be a peripheral overlap in the broader theme of corporate management, the gravamen of the present claim is different in nature and scope from that in E160 of 2023. The doctrine of sub judice is therefore inapplicable, as the suits do not share substantially similar parties, subject matter, or causes of action.
14. Turning to the issue of locus standi, I am not persuaded by the Respondents’ contention that the Applicants lack standing. The suit before this Court has not been instituted by an individual seeking to interfere in the internal affairs of the company. Rather, it has been brought by a corporate shareholder of the Company, acting to preserve and protect its assets. This is a legitimate exercise of shareholder rights and fiduciary oversight, and cannot be characterized as intermeddling.
15. The preliminary objection is therefore dismissed.
16. The substance of the present application is whether this Court should grant permission to the Applicants to proceed with the suit as a derivative action. The governing provisions are found in sections 238 and 239 of the Companies Act, 2015 (the Act).
17. Section 238(1) of the Act defines a derivative claim as one brought 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. The essence of this provision is that the company, as a separate legal entity, is ordinarily the proper plaintiff in proceedings concerning wrongs done to it.
18. However, where those wrongs are committed by persons in control of the company, such as directors, the law permits members to step in and institute proceedings on the company’s behalf, so as to prevent injustice and protect the company’s interests. A derivative action is therefore an exception to the rule established under Foss v Harbottle (1843) 2 Hare 462 that a corporation should sue in its own name and in its corporate character or in the name of the person appointed by the law to be its representative.
19. Under section 238(1) of the Companies Act, 2015, an applicant seeking to institute a derivative claim must satisfy three interrelated requirements. First, the applicant must demonstrate that he or she is a member of the company. Second, the cause of action must be one that is vested in the company itself, rather than in the individual member. Third, the reliefs sought must be pursued on behalf of the company and for its benefit, not for the personal gain or advantage of the applicant.
20. These requirements are cumulative and must be read together. They are not independent or severable from one another, as the Court has previously emphasized in Ghelani Metals Limited & 3 Others v Elesh Ghelani Natwaral & Another [2017] eKLR . In that case, the Court underscored that the essence of a derivative claim is the protection of the company’s rights and interests, and not the advancement of private or collateral agendas by individual shareholders.
21. Where these elements are demonstrated, the Court may then proceed to consider the further requirements under section 239, including whether the claim discloses a prima facie case, whether the applicant is acting in good faith, and whether it is in the interests of the company that the claim be allowed to proceed.
22. Turning to the evidence before me, the CR12 dated 12th September 2019 confirms the 1st applicant’s shareholding in the Company and therefore the legal standing to bring the present application.
23. The Applicants are only required, at this stage, to demonstrate through evidence that they have established a prima facie case. It is not necessary for them to prove that the claim will ultimately succeed at trial. The threshold is simply whether the material placed before the Court discloses an arguable case worthy of further judicial inquiry.
24. The action complained of concerns the disposal of the Company’s property without the consent of the shareholders, including the Company, and without a board resolution authorizing such disposal. The Applicants contend that the property was sold at an undervalue and to an associated entity, Pine Tree Real Estate LLP. Such conduct, if established, would amount to a breach of fiduciary duty and a conflict of directors’ duties, as directors are bound to act in good faith, in the best interests of the company, and to avoid situations where their personal interests conflict with those of the company.
25. To substantiate these allegations, the Applicants have annexed a certificate of official search dated 20th December 2023, which confirms that the property in question was indeed transferred to Pine Tree Real Estate LLP. Further, the Applicants have demonstrated that following the discovery of the alleged sale, a Special General Meeting (SGM) of the Company was convened, with the agenda specifically addressing the legality of the transaction.
26. More importantly, the fact of the sale is not in dispute. Indeed, by a letter dated 17th January 2024 from the firm of Ms. Nyamurongi Advocates, the transaction is expressly confirmed. The Respondents contend, however, that the parcel of land was acquired by the Company without the involvement of the 1st Applicant. This assertion does not negate the central issue, namely whether the disposal of the property was undertaken in accordance with the requirements of corporate governance and the fiduciary obligations of directors.
27. Further, a subsequent letter dated 30th January 2024 confirms that no board resolution was passed authorizing the sale. Taken together, the correspondence of 17th January 2024 and 30th January 2024 provides clear documentary evidence that the sale occurred, and that it was effected under circumstances that require further interrogation.
28. The totality of my analysis leads me to the conclusion that the Applicants have established a prima facie case which warrants further interrogation and the taking of evidence on the circumstances surrounding the impugned sale. I have equally reviewed the plaint filed, and I am satisfied that the reliefs sought are directed towards the protection of the Company as a whole. This is consistent with the statutory framework under sections 238 and 239 of the Companies Act, 2015. The application is grounded on a suit contrary to the assertions by the Respondents.
Disposition
i. Accordingly, the application dated 7th October 2024 is allowed as prayed. Leave is hereby granted to the applicants to proceed with this suit as a derivative action on behalf of, and for the benefit of, the 2nd applicant.
ii. The Respondents shall produce and serve upon the Applicants the Sale Agreement and Transfer Instrument for property Title Number WANJARE/BOGIAKUMU/4778 expended in alienation of the property in favor of Pine Tree Real Estate within the next 30days.
iii. Pending the hearing and determination of the ensuing derivative claim, a temporary injunction is hereby issued restraining the defendants, their servants, agents and/or employees from selling, alienating, transferring, charging, disposing, removing or in any manner whatsoever dealing with the assets of the 2nd Applicant
iv. The Respondents shall produce and serve upon the Applicants the books of account, banking slips evincing receipt of the purchase price for the property Title Number WANJARE/BOGIAKUMU/4778, audited financial statements and bank statements of the 2nd Applicant company in their custody from 2021 up to date in the next 30 days.
v. The costs of this application shall be in the cause.
'
1. By an application dated 7th October 2024, the Applicants seek leave to pursue a derivative claim on behalf of Sansora Bakers & Confectioners Limited (“the Company”) against the Respondents, arising from alleged breaches of fiduciary duty in their capacity as directors. The Applicants pray, among other reliefs, for an order compelling the Respondents to produce the sale agreement and transfer instrument relating to property Title Number WANJARE/BOGIAKUMU/4778 (the Property), which was transferred to Pine Tree Real Estate LLP.
2. In addition, the Applicants seek interim injunctive relief restraining the Respondents from selling, transferring, charging, disposing of, or otherwise dealing with the assets of the Company. They further pray for orders directing the Respondents to produce the Company’s books of account, banking slips evidencing receipt of the purchase price, audited financial statements, and bank statements from 2021 to date.
3. The respondents opposed the application by way of a notice of preliminary objection dated 18th November 2024 and a replying affidavit sworn by JAMALUDIN SHAMSUDIN ALIBHAI RAJWANI on even date. I have also considered the submissions filed by the parties.
Analysis and Determination
4. As established in Mukisa Biscuit Manufacturing Co. Ltd v West End Distributors [1969] EA 696, a preliminary objection must rest upon a pure point of law. Such a point must either be expressly pleaded or arise by clear implication from the pleadings, and it must be capable of disposing of the entire suit if upheld.
5. The objections raised in the present matter clearly satisfy the threshold for a proper preliminary objection. In particular, the objection grounded on the doctrine of sub judice necessitates a legal comparison of the pleadings and the reliefs sought in the respective suits. This exercise is confined to the four corners of the pleadings and does not call for factual inquiry or evidentiary evaluation. Rather, it requires a judicial determination of whether the suits involve substantially similar parties, subject matter, and causes of action.
6. Additionally, the issues of jurisdiction and locus standi raised alongside the sub judice objection are also threshold questions of law. Jurisdiction speaks to the authority of the court to entertain the matter, while locus standi concerns the legal capacity of a party to institute proceedings. Both are determinative issues which, if resolved against a party, conclusively dispose of the suit without recourse to factual investigation.
7. Accordingly, I find that the preliminary objection is properly framed, rests on pure points of law, and is ripe for determination at this stage.
8. The first issue raised in the preliminary objection is that this Court lacks jurisdiction to hear and determine the present matter, owing to the arbitration clause contained in Article 33 of the Articles of Association of the Company. The law is clear that a party seeking to rely on such a clause must invoke it at the earliest opportunity and before taking any substantive steps in the proceedings.
9. Section 6 of the Arbitration Act, 1995 codifies this principle. It provides that a party who wishes to rely on an arbitration agreement must apply to the court for a stay of proceedings and referral to arbitration not later than the time when that party enters appearance or files any pleadings in the matter. The purpose of this requirement is to prevent parties from submitting to the jurisdiction of the court, participating in the proceedings, and only later attempting to oust the court’s jurisdiction by invoking the arbitration clause.
10. Jurisprudence is settled that once a party has taken steps in the suit, such as filing pleadings, participating in interlocutory applications, or otherwise submitting to the court’s jurisdiction, that party is deemed to have waived its right to rely on the arbitration clause. The doctrine of estoppel then applies, barring such a party from belatedly seeking to rely on arbitration as a shield.
11. In the present case, the Respondents did not file a Section 6 application at the earliest instance. Instead, they submitted to the jurisdiction of this Court by participating in the proceedings. They are estopped from relying on the arbitration clause at this stage.
12. On the issue of sub judice, I have undertaken a comparison of the pleadings in the present matter with those in E160 of 2023. It is evident that the parties are not identical. In E160 of 2023, the two Applicants herein are enjoined merely as interested parties, whereas in the instant suit they stand as Applicants. Further, the 1st Defendant in the present matter is the Plaintiff in E160 of 2023, while the 2nd Defendant herein is not a party to that earlier suit.
13. Equally important, the causes of action in the two suits are materially distinct. The dispute in E160 of 2023 primarily concerns issues of shareholding, directorship, and management of the interested parties. By contrast, the present suit substantially revolves around the disposal of properties belonging to the Company, allegedly undertaken by the Respondents in breach of their fiduciary duties as directors. While there may be a peripheral overlap in the broader theme of corporate management, the gravamen of the present claim is different in nature and scope from that in E160 of 2023. The doctrine of sub judice is therefore inapplicable, as the suits do not share substantially similar parties, subject matter, or causes of action.
14. Turning to the issue of locus standi, I am not persuaded by the Respondents’ contention that the Applicants lack standing. The suit before this Court has not been instituted by an individual seeking to interfere in the internal affairs of the company. Rather, it has been brought by a corporate shareholder of the Company, acting to preserve and protect its assets. This is a legitimate exercise of shareholder rights and fiduciary oversight, and cannot be characterized as intermeddling.
15. The preliminary objection is therefore dismissed.
16. The substance of the present application is whether this Court should grant permission to the Applicants to proceed with the suit as a derivative action. The governing provisions are found in sections 238 and 239 of the Companies Act, 2015 (the Act).
17. Section 238(1) of the Act defines a derivative claim as one brought 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. The essence of this provision is that the company, as a separate legal entity, is ordinarily the proper plaintiff in proceedings concerning wrongs done to it.
18. However, where those wrongs are committed by persons in control of the company, such as directors, the law permits members to step in and institute proceedings on the company’s behalf, so as to prevent injustice and protect the company’s interests. A derivative action is therefore an exception to the rule established under Foss v Harbottle (1843) 2 Hare 462 that a corporation should sue in its own name and in its corporate character or in the name of the person appointed by the law to be its representative.
19. Under section 238(1) of the Companies Act, 2015, an applicant seeking to institute a derivative claim must satisfy three interrelated requirements. First, the applicant must demonstrate that he or she is a member of the company. Second, the cause of action must be one that is vested in the company itself, rather than in the individual member. Third, the reliefs sought must be pursued on behalf of the company and for its benefit, not for the personal gain or advantage of the applicant.
20. These requirements are cumulative and must be read together. They are not independent or severable from one another, as the Court has previously emphasized in Ghelani Metals Limited & 3 Others v Elesh Ghelani Natwaral & Another [2017] eKLR . In that case, the Court underscored that the essence of a derivative claim is the protection of the company’s rights and interests, and not the advancement of private or collateral agendas by individual shareholders.
21. Where these elements are demonstrated, the Court may then proceed to consider the further requirements under section 239, including whether the claim discloses a prima facie case, whether the applicant is acting in good faith, and whether it is in the interests of the company that the claim be allowed to proceed.
22. Turning to the evidence before me, the CR12 dated 12th September 2019 confirms the 1st applicant’s shareholding in the Company and therefore the legal standing to bring the present application.
23. The Applicants are only required, at this stage, to demonstrate through evidence that they have established a prima facie case. It is not necessary for them to prove that the claim will ultimately succeed at trial. The threshold is simply whether the material placed before the Court discloses an arguable case worthy of further judicial inquiry.
24. The action complained of concerns the disposal of the Company’s property without the consent of the shareholders, including the Company, and without a board resolution authorizing such disposal. The Applicants contend that the property was sold at an undervalue and to an associated entity, Pine Tree Real Estate LLP. Such conduct, if established, would amount to a breach of fiduciary duty and a conflict of directors’ duties, as directors are bound to act in good faith, in the best interests of the company, and to avoid situations where their personal interests conflict with those of the company.
25. To substantiate these allegations, the Applicants have annexed a certificate of official search dated 20th December 2023, which confirms that the property in question was indeed transferred to Pine Tree Real Estate LLP. Further, the Applicants have demonstrated that following the discovery of the alleged sale, a Special General Meeting (SGM) of the Company was convened, with the agenda specifically addressing the legality of the transaction.
26. More importantly, the fact of the sale is not in dispute. Indeed, by a letter dated 17th January 2024 from the firm of Ms. Nyamurongi Advocates, the transaction is expressly confirmed. The Respondents contend, however, that the parcel of land was acquired by the Company without the involvement of the 1st Applicant. This assertion does not negate the central issue, namely whether the disposal of the property was undertaken in accordance with the requirements of corporate governance and the fiduciary obligations of directors.
27. Further, a subsequent letter dated 30th January 2024 confirms that no board resolution was passed authorizing the sale. Taken together, the correspondence of 17th January 2024 and 30th January 2024 provides clear documentary evidence that the sale occurred, and that it was effected under circumstances that require further interrogation.
28. The totality of my analysis leads me to the conclusion that the Applicants have established a prima facie case which warrants further interrogation and the taking of evidence on the circumstances surrounding the impugned sale. I have equally reviewed the plaint filed, and I am satisfied that the reliefs sought are directed towards the protection of the Company as a whole. This is consistent with the statutory framework under sections 238 and 239 of the Companies Act, 2015. The application is grounded on a suit contrary to the assertions by the Respondents.
Disposition
i. Accordingly, the application dated 7th October 2024 is allowed as prayed. Leave is hereby granted to the applicants to proceed with this suit as a derivative action on behalf of, and for the benefit of, the 2nd applicant.
ii. The Respondents shall produce and serve upon the Applicants the Sale Agreement and Transfer Instrument for property Title Number WANJARE/BOGIAKUMU/4778 expended in alienation of the property in favor of Pine Tree Real Estate within the next 30days.
iii. Pending the hearing and determination of the ensuing derivative claim, a temporary injunction is hereby issued restraining the defendants, their servants, agents and/or employees from selling, alienating, transferring, charging, disposing, removing or in any manner whatsoever dealing with the assets of the 2nd Applicant
iv. The Respondents shall produce and serve upon the Applicants the books of account, banking slips evincing receipt of the purchase price for the property Title Number WANJARE/BOGIAKUMU/4778, audited financial statements and bank statements of the 2nd Applicant company in their custody from 2021 up to date in the next 30 days.
v. The costs of this application shall be in the cause.
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