Mr Anthony Kegode and his partner were paid off Sh5 in 2004 for a 90 per cent of their share in the debt-ridden airline. By the end of the judges’ ruling, they had all the reasons to laugh all the way to the bank, literally.
They can now access Sh136 million stashed in their account, which was the centre of the suit, purported to have been withdrawn from the company’s account without the board’s authority.
The current management of the airline had successfully obtained a temporary order against the two, baring them from accessing the money.
According to the court papers, purported to have been filed on behalf of East African Safari Air Ltd — it later emerged hat those who had filed had no authority to do so — the transfer is alleged to have happened immediately before the parties, Mr Kegode and Mr Adam Ogden and others, had executed a sale agreement in which the Kegodes were to transfer 90 per cent shareholding to Ogden.
The company was, thus, demanding that the Kegodes be compelled to return Sh136 million that they took from the company before they sold it away. Its managers believed that the Sh136 million was part of the Sh5 price money. The Kegodes, represented by Dr Albert Mumma and Dr Kenneth Kiplagat, argued successfully that the withdrawal was valid and legal payment made by the company as instructed by board.
“The complaint in this suit happened when the only shareholders of the plaintiff company were the defendants and no one else. No complaint can be raised by persons, who are not members of the company regarding those transactions,” said Justice Anyara Emukule in his ruling delivered last Tuesday.
In what has turned out to be the most viciously fought battle in the Africa aviation industry, the ruling by Justice Emukule will definitely pacify the Kegodes but it is bound to fuel more anger in the Ogdens who believe to have been more injured by the transfer. And for the first time since the collapse of the East Africa Community an advocate has been condemned to personally pay the defendants’ cost of the suit.
Dismissing the suit as lacking merit to sustain itself before the court of law, the Judge said:
“Essentially the suit at hand is about a party who has negotiated a bad or poor bargain and now wishes the court to put right that bargain.”
Justice Emukule laid the blame squarely on the investors, saying they failed to take precaution while entering into the agreement. “I am afraid that this is one of those rare cases of failure by a prospective investor to carry out what is commonly referred to as ‘due diligence study’ of the entity’s operations before penning his signature on the dotted lines of the sales agreement. That burden lies entirely upon the prospective investor and not the seller. This suit cannot, therefore, be employed as a vehicle to put right that failure, fundamental as I think it was.”
The Judge also questioned the validity of directors’ authority to instruct the advocate to file the suit on behalf of the company as well as signing of documents in support of the application. The judge noted that appointment of the seating board members, who purported to make a resolution to pursue the matter, was of no legal consequence as it was done contrary to the company’s rules and regulations.
The regulation only empowered the Annual General Meeting to alter the constituent of the board either by adding or removing directors.
The appointment of new directors in absence of Mr Kegode and his wife was thus, the court ruled, a nullity and all consequent acts suffered a similar fate.
“In consequence therefore, the appointment of the new directors, that is to say, Adam Craig Ogden, Kirankumar Chandubhai Patel, and Elly Aluvale as directors of the plaintiff company was ultra vires the company’s Articles of Association,” Justice Emukule noted. “Any subsequent board meeting held without the previous directors of the plaintiff company did not have the necessary quorum to transact any business on behalf of the company,” Mr Emukule added.
By extension lack of valid resolution to authorise the filing of the suit and giving Mr Ogden power to sign the suit document on behalf of the company meant that no lawsuit could not be sustainable.
“Where the authority of an agent is challenged like in this application, it behoves the
corporation to show such authority; the mere fact of appointment as a director does not constitute one an agent for the purposes of suit.”
The Judge ruled that the invalidity of instructions affect even the advocates who failed to satisfy him that proper procedure was followed before his appointment was made.
“The issue whether there was a valid resolution appointing the firm of Walker Kontos Advocates to act for the plaintiff must therefore be answered in the negative. This conclusion has important consequences on the question of costs.”
The judge noted that the rules were clear where an advocate files a suit without authority of the purported plaintiff: s/he becomes personally liable to the defendant(s) for the costs of the action.
“Where the necessity of filing suit against a director or directors of a company has risen it should trigger alarm bells in the mind of an advocate that serious mischief is afoot.
These ringing bells will alert the advocate concerned to ensure that all necessary steps have been taken to authorise the institution of the proposed suit. Where counsel fail to pay heed to such warning bells, they do so at their own peril to costs,” ruled the judge.
But the firm will get reprieve by being indemnified by the purported directors, as the court ruled they were the authors of the defective instructions to the advocate.