Background

The plaintiffs, who are shareholders and beneficiaries of the estate of Eustace Kagau Kangerwe (deceased), sought leave from the High Court to institute a derivative claim under the Companies Act against two fellow directors/shareholders. The claim centred on the administration of Kangerwe Holding Company Limited, a company incorporated in 2006 allegedly for the management of the deceased’s estate.

The plaintiffs alleged that, despite a family resolution reached during a meeting on 22 June 2024 to increase the company’s share capital and allocate shares to five daughters of the deceased, the defendants had refused to execute the necessary company documents. The plaintiffs sought various court orders to compel the defendants to comply, including an interim injunction restraining them from dealing with the company’s assets.

Arguments presented

The plaintiffs argued that the company was a vehicle for administering the deceased’s estate, and that the defendants were frustrating its objectives by failing to carry out resolutions passed at the June 2024 meeting. In response, the defendants contended that the meeting in question was not a properly constituted board meeting as required under the Companies Act and the company’s articles. They also pointed out that the plaintiffs had bypassed a critical provision in the articles which required that disputes between members be referred to arbitration.

The court’s determination

The court declined to address the substantive merits of the dispute and instead focused on the procedural question of jurisdiction. The court observed that all the parties were shareholders and directors of the company and that Article 31 of the articles provided a binding obligation for all member disputes to be resolved through arbitration in the first instance.

Crucially, the court held that it could not entertain the matter since the plaintiffs had not initiated or even attempted arbitration. There was also no application under the Arbitration Act seeking relief, such as the appointment of an arbitrator or interim measures. The court emphasised that the articles constituted a binding contract among members and that courts must respect the dispute resolution mechanisms agreed upon therein. Moreover, the court invoked the legal doctrine of exhaustion, which precludes courts from exercising jurisdiction where an alternative forum has not been utilised.

As a result, the application was dismissed, and the parties were directed to pursue arbitration in accordance with the articles.

Takeaways

This decision underscores the importance of internal corporate governance documents, particularly articles of association, as binding instruments that dictate how members of a company must conduct themselves. It further serves as a cautionary tale for directors and shareholders who may wish to bypass agreed internal procedures in pursuit of seemingly faster remedies through the courts. Failure to observe company procedures and contractual obligations – such as arbitration clauses – can result in procedural dismissal, regardless of the substantive merits of the claim.

Companies should review and ensure that their articles of association clearly define procedures and that all stakeholders are familiar with the provisions therein.