Introduction
1. This matter is founded on the petition dated 19th April 2021 and is presented by the Petitioners seeking, inter alia, to liquidate the Tamarind Valley Embakasi Limited (“the Company”). In addition to the petition, the Petitioners filed a Chamber Summons dated 19th April 2021 invoking Rule 5(2), 27(1) of the Companies Winding Up Rules seeking to appoint Mr Tom Ouma Mungai as an Interim Liquidator of the Company and consequential reliefs. The application is supported by the affidavit and further affidavit of Robert Darby, a director of the Company, sworn on 19th April 2021 and 2nd February 2022 respectively. The application is opposed by the Company through grounds of opposition dated 9th January 2021 and the replying affidavit of its chairman, Kirubi Kamau, sworn on 10th December 2021.
2. Pending hearing of the application, the Petitioners filed another Notice of Motion dated 3rd February 2022 invoking the inherent jurisdiction of the court to strike out the notice of appointment, grounds of opposition and the replying affidavit filed on behalf of the Company by McKay and Company Advocates (“McKay”). The application is supported by the affidavit of Robert Darby sworn on 2nd February 2022. The Company opposes the application through the grounds of opposition dated 9th May 2022.
3. Upon direction of the court, the parties filed written submissions in support of their respective positions. From those submissions the pleadings and depositions, the following issues arise from the two applications:
(a) Whether McKay is properly on record for the Company.
(b) Whether the Petitioners have made out a case for appointment of an Interim Liquidator.
Background facts
4. Before I deal with the two issues, I think it is appropriate at this stage to give a background of the dispute as is set out in the parties’ depositions. The Company is a Special Purpose Vehicle following a joint venture between Tamarind Investments Limited, Omega Commercial Services Limited and Rype Limited under which they would construct 805 houses and sell them at a profit. The Company was incorporated with an authorised share capital of KES 1,000,000.00 divided into 100,000 shares of KES. 10 each with the following shareholding: Tamarind Investments Limited (33,333), Omega Commercial Services Limited (30,866) and Rype Limited (35,801). According to the Petitioners, the 2nd petitioner acquired part of the shares held by the 1st Petitioner.
5. Under the joint venture, Omega would contribute land; LR No. 7340/1077 to the Company while Rype Limited would contribute LR No. 7340/115. Tamarind Investments would contribute cash amounting to KES. 60,000,000.00. In due course, 106 units were constructed on part of LR No. 7340/1077 with money lent to the Company by SMN Trust and Housing Finance Company of Kenya Limited secured by the charge in favour of Housing Finance Company of Kenya (“HFCK”), an equitable mortgage in favour of SMN Trust and personal guarantees by the directors of the Company. The Petitioners claim that construction of the 331 Units was frustrated by the failure of Kenya Commercial Bank Limited to release KES. 350,000,000 which it had agreed to lend and which was secured by a charge over KES. 7340/1077.
6. The joint venture did not materialize as expected. The Petitioners accuse the other shareholders in the Company represented by their directors of behaving secretly and breaching their duty to act in good faith and for the benefit of all members of the Company. They allege that the directors identified a buyer for shares but declined to name him or the source of funds despite the Petitioners agreeing to have the shares bought at a fair price following a valuation undertaken in 2017. The Petitioners state that in mid-2017, they received complaints from buyers who had paid deposits but had not been allocated any houses or refunded their deposits about the completion of the transactions. They state that the directors representing the majority shareholders have used criminal complaints to the Director of Criminal Investigations (“the DCI”) to oppress them causing a deterioration in the relationship between the majority and minority shareholders.
7. The Petitioners further allege that the majority shareholders secretly engaged HFCK and started dealing with the charged property to the to their exclusion. The Petitioners state that they have lost confidence in the management of the Company to resolve how money owed to secured and unsecured creditors will be paid, how the deposits will be refunded to the purchasers who have bought units and the refusal of HFCK to discharge the properties which have been paid for.
8. The Petitioners claim that they have been oppressed. That they have not been involved in discussions with HFCK. That the directors represented by the majority shareholders have declined to attend board meetings convened by the Petitioners thus creating a deadlock in the Company. That the majority shareholders have exposed the Petitioners to risk of having their personal guarantees given to HFCK enforced against them and that the majority shareholders are using the criminal process to force the Petitioners to sell their shares.
9. The Company denies the allegations made by the Petitioners. It alleges that the 1st Petitioner frustrated the joint venture agreement in various aspects and is liable for the internal wrangles. It points out the that the 1st Petitioner failed to honour its monetary contribution amounting to KES 60,000,000.00 towards the joint venture which in effect frustrated implementation of the project. It accuses that the 1st Petitioner of misrepresenting to the purchasers that the 2nd Phase of the project was ready for sale despite failing to carry out its obligations to provide professional services to ensure that the project was in fact ready. It states that the misrepresentation caused the buyers to sue the Company in arbitration proceedings resulting in hefty judgments against it. The deponent also states that he is aware that the directors of the 1st Petitioner received commissions from the sales and now owe refunds to the purchasers in respect of the impugned sales.
10. The Company further complains that the directors of the company representing the Petitioners borrowed money from a company by charging 25,000 shares of the 1st Petitioner without approval or sanction of the Company. That the loan was not utilized for the benefit of the Company or the project thereby breaching their fiduciary duty to the Company. The Company states that while it had approved KCB to be a financier of the Company’s project as the 1st Petitioner’s contribution to the joint venture, the 1st Petitioner’s directors failed to facilitate the funding process and failed to disclose to the Company that the KCB had not approved the loan forcing the Company to seek alternative funding.
11. The Company accuses the 1st Petitioner of failing to give relevant information concerning the sale agreements and documents relating thereto to the Company directors. That they have also refused to let the other directors access to the Company cheque books and company seals to date.
12. It is against the background of the aforesaid contentious facts that I now turn to deal with the issues framed for resolution.
Whether the firm of McKay and Company Advocates is properly on record
13. The firm of McKay has filed documents on behalf of the Company. The Petitioners contend that the firm is not authorised to act for the Company and that the Company has not appointed the said firm to act for it in this suit hence the pleadings filed by the said firm are invalid. They cite the case of LZ Engineering Construction Limited v Trade Bank Limited and 2 Others NRB HCC No. 3791 of 1993 as authority for the proposition that pleadings filed by a firm of advocates who have not been appointed by lawful directors or shareholders are invalid and ought to be struck out and the firm of advocates ordered to pay costs personally.
14. In order to support its case, the Petitioners rely on an exchange of e-mails dated 1st and 2nd December 2021, respectively, which Mr Darby describes as RD1. Mr Joe Mungai accuses Mr Kirubi Kamau of unilaterally appointing Mckay to represent the company liquidation in this suit, and in a reply, made on 1st December, he states that he and Omega Commercial Services Limited have not given him instructions. In the Petitioners’ view, this is clear evidence that the firm does not have authority to represent the Company therefore all the documents filed by the Company should be struck out.
15. In response, the Company submits the emails are inadmissible as they are not accompanied by a certificate of electronic records according to section 106 of the Evidence Act (Chapter 80 of the Laws of Kenya). It urges that the even if they are admissible, the Petitioners have taken them out of context as they refer to a different subject; Machakos ELC No 82 of 2019 Joshua Nyiera v Tamarind Valley Embakasi where the directors were discussing which Advocates would be appointed to represent the Company in that case. It states that at no time did the Chairman of the Company state that Mckay did not have the authority to represent the Company in the current Petition.
16. I agree with the Company that it has not disclaimed McKay to act for it in this matter as the emails deal with a separate subject. This position is affirmed by the fact that the same director, has deponed affidavits on behalf of the Company in this matter which affidavits are drawn by McKay. I therefore hold that in so far as the objection to the firm is based on the emails, it must fail. I also note that there is no dispute that the deponent of the Company’s deposition in opposition to the Petition and the application are sworn by the managing director whose position is not denied. He has authority to act on behalf of the Company and can lawfully instruct the firm. This objection is therefore rejected.
Whether the court should appoint an Interim Liquidator.
17. The issues under this head are procedural and substantive. I will deal with the procedural issues first. The Company contends that the application is incompetent as it has been brought under the rule 5(2) of the Companies Winding up Rules which have been repealed by the Insolvency Act, 2015. The Company submits that according to section 734 of the Insolvency Act, the Companies Act (Repealed) and rules made thereunder can only apply to the specified past events provided under the Insolvency Act and this petition is not a past event. When faced with this objection, the Petitioners, in the submissions, sought shelter in section 437 of the Insolvency Act which provides for the appointment of a Provisional Liquidator as the basis for their application.
18. I do not intend to belabor this issue as it is clear that both parties agree that this is an insolvency matter and this court has jurisdiction under the Insolvency Act to appoint a provisional liquidator. The Company has answered the factual allegations and both parties have made submissions on the issues. Neither party has been prejudiced in this regard. I will now deal with the substantive issue and it is whether the court, in circumstances of this case, should grant the orders.
19. Section 437 of the Insolvency Act, 2015 confers this court jurisdiction to appoint a provisional liquidator before or after making a liquidation order on the following terms:
(1) The Court may appoint a provisional liquidator either on or after, or at any time before, the making of a liquidation order in respect of a company.
(2) Only the Official Receiver or an authorised insolvency practitioner is eligible for appointment as a provisions liquidator.
(3) A provision liquidator shall perform such functions and may exercise such powers as the Court may specify in the order appointing the provisional liquidator.
(4) The acts of a person appointed as provisional liquidator of a company are valid despite any despite any defect in the person’s appointment or qualifications.
20. The purpose of appointing a Provisional Liquidator is to preserve the assets of a company pending the hearing and determination of the liquidation petition. This position is summarized in Palmer’s Company Law (Vol. 1), 1982 at page 1250 where the learned author states as follows:
It is almost invariable practice to apply for a provisional liquidator on presentation of the petition and (assuming the petition is prima facie justified) to grant the application unless the petition is opposed on grounds which appear substantial. In considering whether to make an appointment, the court is concerned to make a status quo in affairs of the company and will attempt to avoid prejudice in either party.
The provisional liquidator is normally the duly qualified accountant whom it is proposed should be appointed the official liquidator. The court will expect the petitioner to have ascertained that he is willing to act before presenting the petition. If there is a dispute as to the proper person to be appointed, the court may nominate an independent person. The appointment may be recalled, but if the interlocutor recalling the appointment is the subject of an appeal the provisional liquidator remains in office until the reclaiming motion has been disposed off. [Emphasis mine]
21. The general principle applicable in deciding whether or not to appoint a Provisional Liquidator is that the court must be satisfied that the applicant has a prima facie case or that the petition is not opposed on substantial grounds. As the name suggests, a Provisional Liquidator, takes steps to liquidate or otherwise wind up the affairs of a company hence an applicant bears a heavy burden to convince the court to make a drastic order that may not only impair the standing of the company but also lead to is demise.
22. Both parties have put forth facts that show that the joint venture has not achieved it principal objective, that is to construct units. There have been accusations and counter accusations on who is to blame for the stalling of the project. At this interlocutory stage the court is not required to make definite findings where the issues are substantially disputed as this would amount to hearing the petition without the giving the parties an opportunity to examine the witnesses (see Nguruman Limited v Jane Bonde Nielsen and 2 Others NRB CA Civil Appeal No. 77 of 2012 [2014] eKLR). I will therefore refrain from making comments on matters that may prejudice the ultimate hearing.
23. The Petitioners contend that on the basis of the facts as pleaded, they have made out a case for liquidating the Company on the ground that it is just and equitable. They point out that there is a deadlock in running of the affairs of the Company. Further, that the principle object for which the Company was established has failed.
24. The Company submits that the option to liquidate the Company for just and equitable reasons is not available to the Petitioners as there exist other alternative remedies to resolve the disputes between the shareholders. The remedies available to the Petitioners include declaration of a dispute and arbitration under clause 37 of the Joint Venture Agreement and Termination of the Joint Venture and restitution as provided for under Clause 4 and 27 of the Joint Venture Agreement. It urges that where there exist alternative remedies, the court should refrain from liquidating the Company for just and equitable reasons as was held in Re Al Marshidy Enterprises Limited [2019] eKLR.
25. The Company also submits that one of the main objectives of the Insolvency Act is to enable Companies to continue operating as going concerns hence the court should resort to liquidation as a measure of last resort where there are no alternative remedies (see Re Spencon Kenya Limited [2016] eKLR).
26. I have considered the facts of the case and I note that this is a case where the shareholders have disagreed. However, the disagreement is between a majority and minority and it is for this reason that the Petitioners claim that they have been oppressed and that they cannot participate in the affairs of the Company. This is not a case where there is a deadlock since the majority control the Company and are able to make decisions regarding its management and operations. Further, this is a case where the facts are disputed and ultimately, the court will have to consider who is to blame. I cannot therefore state that this is a case where the Petitioners have established a prima facie case for the appointment of an interim liquidator.
27. Liquidation is a drastic measure to take against a company and in line with the policy of the Insolvency Act, it is the last measure the court will take if the company cannot be salvaged. Section 427(3) of the Insolvency Act provides that If the application is made by members of the company as contributories on the ground that it is just and equitable that the company should be liquidated, the Court shall make a liquidation order, but only if of the opinion that—
(a) that the applicants are entitled to relief either by liquidating the company or by some other means; and
(b) that, in the absence of any other remedy, it would be just and equitable that the company should be liquidated.
Section 427(4) of the Insolvency Act goes on to provide that the subsection 3 thereof does not apply if the Court is also of the opinion that some other remedy is available to the applicants and that the applicants are acting unreasonably in seeking to have the company liquidated instead of pursuing that other remedy.
28. On the other hand, the case by the Petitioners is that as minority shareholders, they have been oppressed by the conduct of the majority. The law provides a clear remedy in sections 780 and 782 of the Companies Act for oppression by minority shareholders which provides as follows:
780 (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.
782(1) If, on the hearing of an application made in relation to a company under section 780 or 781, the Court finds the grounds on which the application is made to be substantiated, it may make such orders in respect of the company as it considers appropriate for giving relief in respect of the matters complained of.-
(2) In making such an order, the Court may do all or any of the following:
(a) regulate the conduct of the affairs of the company in the future;
(b) require the company—
(i) to refrain from doing or continuing an act complained of; or
(ii) to do an act that the applicant has complained it has omitted to do;
(c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the Court directs;
(d) require the company not to make any, or any specified, alterations in its articles without the leave of the Court--
(e) provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company's capital accordingly.
(3) Subsection (2) does not limit the general effect of subsection (1).
(4) The company is entitled to be served with a copy of the application and to appear and be heard as respondent at the hearing of the application.
29. A reading of the aforesaid provision shows that the court has wide jurisdiction in fashioning an appropriate fact based remedy where the minority shareholders have proved 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 (see generally Velani & 6 others v Naran & 2 others (Petition E002 of 2020) [2021] KEHC 75 (KLR) (Commercial and Tax) (21 September 2021) (Judgment)).
30. In conclusion, I find and hold that the Petitioners have not made out a prima facie case to warrant the appointment of a provisional liquidator. They have not only alternative statutory remedy, they have alternative remedy under the Joint Venture Agreement. From the totality of the material before the court, I am unable to accede to the Petitioners’ plea.
31. The Chamber Summons dated 19th April 2021 and the Notice of Motion dated 3rd February 2022 are dismissed with costs to the Respondent.
DATED and DELIVERED at NAIROBI this 24th day of JUNE 2022.
D. S. MAJANJA
JUDGE