Githunguri Dairy Farmers Co-operative Society v Ernie Campbell & Co. Ltd & another [2018] KECA 721 (KLR)
The bottom line
#Kenya's Court of Appeal confirmed that companies cannot dodge court judgments by hiding behind asset-less subsidiaries — the corporate veil will be lifted.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.Whether the High Court had jurisdiction to determine the application for the lifting of the veil of incorporation after entering judgment on the arbitral award (functus officio and finality)
- 2.Whether the appellant's right to a fair trial as guaranteed under section 77(9) of the former Constitution was infringed, having not been a party to the arbitral proceedings
- 3.Whether in the circumstances of the appeal it was lawful or proper to allow the lifting of the appellant's veil of incorporation
Key legal issues
#Jurisdiction of the executing court after adoption of an arbitral award
The High Court had jurisdiction; section 34 of the Civil Procedure Act requires all questions relating to execution, discharge or satisfaction of a decree to be determined by the executing court, and such engagement is not a reopening of the merits.
The Court held the proceedings before Kimaru J. were execution proceedings ancillary to the arbitral award and decree, not a merit-based re-engagement with the decided suit. Relying on Telkom Kenya Ltd v John Ochanda, functus officio does not bar a court's engagement with a case it has decided; it only bars merit-based decisional re-engagement after final judgment and decree. Invoking Raila Odinga v IEBC, the Court noted courts must uphold the integrity of the judicial process even after judgment. The submission that the court stood functus officio was therefore rejected.
Fair hearing under section 77(9) of the former Constitution
No violation: the appellant was given notice of the notice of motion, filed a response and was heard; at the arbitration stage the doctrine of privity gave the 1st respondent no basis to enjoin the appellant.
The contract was between the two respondents, so privity meant the 1st respondent could not enjoin the appellant as a third party at that stage. Only after execution objections and examination of the directors did it become necessary to seek lifting of the veil. The appellant duly appeared, mounted a defence and exercised its right to be heard, and its central response (that it was not a party to the suit) was in fact considered by the Judge. A notice of motion is a valid procedural vehicle.
Lifting of the corporate veil
The lifting of the 2nd respondent's veil and treatment of the appellant as the party behind it was proper, as the incorporation was a device for an improper and fraudulent purpose to defeat the decree.
Applying Halsbury's statement of the doctrine and VTB Capital v Nutritek, the Court found the appellant and its chairman were the relevant actors behind both entities. The 2nd respondent had no assets, was a wholly-owned shell, and the appellant took possession and management of the plant constructed by the 1st respondent. Mr. Baiya's insistence that the decree be settled by an asset-less company was inferred to be an attempt to defeat the decree - an improper purpose. Findings of fact by the trial court, being evidence-based, could not be disturbed.
Legal principles established
#- A court executing a decree retains jurisdiction under sections 3A, 34 and 44(1) of the Civil Procedure Act to determine questions arising between the parties relating to execution, discharge or satisfaction of the decree; such proceedings do not offend functus officio or res judicata.
- Functus officio bars merit-based re-engagement with a decided case but does not bar a court's engagement with execution or ancillary matters after final judgment.
- Courts will disregard the veil of incorporation where the device of incorporation is used for some illegal, fraudulent or improper purpose, including where the corporate form is used to defeat satisfaction of a decree while the controlling entity enjoys the benefit of the works.
- A matter need not be initiated by plaint or originating summons for a party to be fairly heard; a notice of motion can satisfy the right to a fair hearing.
- An appellate court will not interfere with a trial court's finding of fact unless it is based on no evidence, on a misapprehension of the evidence, or on a wrong principle.
Court orders
#- 1.Appeal dismissed
- 2.Costs of the appeal awarded to the 1st respondent
The bench
#One judgment of the whole court — no separate or dissenting opinions.
Wrote the judgment
Wrote the judgment
Wrote the judgment
- On appeal from
- High Court of Kenya at Nairobi
- H.C. Misc. Application No. 79 of 2003 (O.S)
- Jurisdiction invoked
- Appeal from a ruling of the High Court; the Court declined to determine a preliminary objection questioning the right of appeal under sections 36, 37 and 39 of the Arbitration Act and heard the appeal on its merits.
Relief refused
#The appellant's challenge to the jurisdiction of the High Court (functus officio, finality, res judicata)
The proceedings below were execution proceedings ancillary to the decree and did not reopen the merits of the suit
The claim that section 77(9) of the former Constitution and natural justice were violated
The appellant appeared, filed a response and was heard on the notice of motion
The challenge to the lifting of the corporate veil
The incorporation was used for an improper and fraudulent purpose to defeat satisfaction of the decree while the appellant enjoyed the benefit of the works
Costs
The appeal is dismissed with costs to the 1st respondent.
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
The upshot of all the above assessment and reasoning is that the appeal is dismissed with costs to the 1 st respondent.
What it does bar is a merit-based decisional re-engagement with the case once final judgment has been entered and a decree thereon issued.
all property belonging to a judgment debtor, including property over which or over the profits of which he has a disposing power which he may exercise for his own benefit, whether held in his name or in the name of another but on his behalf, shall be liable to attachment and sale in the execution of a decree.
the law is that courts will disregard the veil of incorporation where it is apparent that the device of incorporation is used for some illegal, fraudulent or improper purpose.
the appellate court would not normally interfere with a finding of fact by the trial court unless it is based on no evidence or on a misapprehension of the evidence or the trial court acts on a wrong principle in reaching its findings.
It is not necessary that a matter in court must only be initiated by way of plaint or originating summons, so that a party can claim to have been heard fairly as submitted by the appellant.
Key timeline
#Practical implications
#Frequently asked questions
#Later judgments citing this (1)
#Judgments in the corpus that rely on this one. Where the Court said how it treated the authority, that is shown.
Cite this brief
#Cite this brief
Caselaw, "Githunguri Dairy Farmers Co-operative Society v Ernie Campbell & Co. Ltd & another [2018] KECA 721 (KLR)", Case Analysis (2018). Civil Appeal No. 123 of 2011. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2018/721/eng@2018-03-16
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.