Raindrops Limited & 3 others v Nzioka (Civil Appeal E054 of 2022) [2025] KECA 1570 (KLR)
The bottom line
#Kenya's Court of Appeal confirmed that shareholders can sue directors in the High Court over harm to the company, and procedural technicalities won't derail such suits.
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 suit was an Employment and Labour dispute
- 2.whether the Respondent was eligible to file a derivative suit
- 3.whether the 1st Appellant company could be sued so as to constitute a derivative suit
- 4.whether the learned Judge rightly allowed the Notice of Motion dated 10th April 2018 joining the third parties to the suit
Key legal issues
#Whether the suit was an employment and labour dispute outside the High Court's jurisdiction
The suit was a derivative action under Section 238 of the Companies Act, not an employer-employee dispute; the High Court had jurisdiction.
The court examined the plaint and found that, save for the prayer for allowances, the reliefs sought were for the benefit of the company: declarations of oppression and breach of fiduciary duty, accounts, financial reports and an injunction restraining informal conduct of the company's affairs. Such a claim by a member against directors is derivative in nature and cannot be characterised as an employment dispute under the Employment and Labour Relations Act. The trial judge therefore rightly assumed jurisdiction.
Whether the Respondent was eligible to file a derivative suit and whether leave was properly obtained
The Respondent, a member holding 150 shares who sued other members alleging detrimental acts by directors, had the necessary locus standi; the suit was prima facie derivative and leave granted despite contemporaneous filing was properly exercised.
Relying on Section 238 of the Companies Act, Titus Musyoki Nzioka, Ghelani Metals, Lalji v Diamond Hasham Lalji and Amin Akberali Manji, the court held that the requirement is a prima facie case within the Foss v Harbottle exceptions and that grant of leave is discretionary. Contemporaneous filing of the plaint and leave application raises no impropriety; the deeming of leave as properly obtained was correct.
Whether the 1st Appellant company could be sued as 1st Defendant in a derivative suit
Although the company would ordinarily be a co-plaintiff or interested/beneficial party, its joinder as defendant was to enable enforcement of any judgment against the directors, and in any event misjoinder cannot defeat a suit.
Citing Spokes v Grosvenor Hotel and Order 1 Rule 9 of the Civil Procedure Rules, the court held that even if the company was improperly joined as a defendant, the suit was not incompetent; the defect could be cured by amendment of the pleadings at any time before judgment. The preliminary objection on this ground therefore failed.
Whether the joinder of the 5th, 6th and 7th defendants without service of the application was proper
Order 1 Rule 10(2) permits addition of parties at any stage without requiring service of the joinder application on the intended co-defendants.
Following Pravin Bowry v John Ward, the court held that an application under Order 1 Rule 10 to join a co-defendant need only be filed; there is no requirement of service or of a draft amended pleading, and the court may even add a party of its own motion where its presence is necessary to effectually and completely adjudicate on all questions in the suit.
Legal principles established
#- A suit by a minority shareholder alleging breaches of duty by directors that are detrimental to the company, with prayers for the company's benefit, is a derivative suit under Section 238 of the Companies Act and falls within the High Court's jurisdiction, not the Employment and Labour Relations Court.
- Filing a derivative suit before, or contemporaneously with, the application for leave is not fatal where the applicant establishes locus standi, that the company is entitled to the relief, and that the action falls within the exceptions to the rule in Foss v Harbottle.
- Misjoinder or non-joinder of parties cannot defeat a suit under Order 1 Rule 9 of the Civil Procedure Rules, and an improperly joined company can be salvaged by amendment.
- An application to join a party as a co-defendant under Order 1 Rule 10(2) of the Civil Procedure Rules need not be served on the party intended to be joined.
Court orders
#- 1.The appeal is dismissed with costs to the Respondent
- 2.The Ruling and Order of the High Court of Kenya (Njoki Mwangi, J.) dated 8th February, 2019 is upheld
- 3.The Ruling and Order of the High Court of Kenya at Mombasa (D. Chepkwony, J.) dated 22nd October, 2019 is upheld
The bench
#One judgment of the whole court — no separate or dissenting opinions.
- On appeal from
- High Court of Kenya at Mombasa
- Jurisdiction invoked
- First appeal to the Court of Appeal under its appellate jurisdiction (the judgment does not cite a specific constitutional provision for its own jurisdiction); the trial court's jurisdiction was defended under Section 238 of the Companies Act, 2015 as against Article 162(2) of the Constitution and Section 12 of the Employment and Labour Relations Court Act relied on by the Appellants
Relief refused
#The Appellants' appeal against the dismissal of their preliminary objection and the joinder order
The appeal lacked merit on all four issues: the suit was a derivative suit within Section 238 of the Companies Act, not an employment dispute; the Respondent had locus standi; contemporaneous filing of the plaint and leave application was a curable irregularity; and joinder without service was permitted under Order 1 Rule 10
Costs
Appeal dismissed with costs to the 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.
In view of the foregoing, we find that that the appeal lacks merit and is hereby dismissed with costs to the Respondent. The Ruling and Order of the High Court of Kenya (Njoki Mwangi, J.) dated 8th February, 2019 and the Ruling and order of the High Court of Kenya at Mombasa (D. Chepkwony, J.) dated 22nd October, 2019 are hereby upheld.
given our conclusions above, there can be no question that the suit was brought as a derivative action in accordance with Section 238 of the Companies Act by the Respondent as a member and shareholder of the 1st Appellant company. In the circumstances, clearly, it could not have been an employee and employer dispute arising under the Employment and Labour Relations Act.
it cannot be doubted that it was established that the suit was prima facie a derivative suit. In so finding, we are satisfied that the trial Judge rightly exercised his discretion to grant leave to the Respondent to file the derivative suit.
in the event that the 1st Appellant Company was improperly joined as a defendant, this did not render the suit incompetent or so hopeless as to warrant a dismissal. In our view, it is capable of being salvaged by an amendment of the pleadings, which can be done at any time before judgment.
at the time of filing an application to join a party as a codefendant to the suit, Order 1 Rule 10 does not make it a requirement for such party to be served with the application.
Issues in the judgment
#The judgment contains an internal typographical inconsistency in the numbering of the Ghelani Metals quotation, including an anomalous paragraph marker
The judgment inconsistently refers to the 2nd to 4th Appellants as "2nd to 3rd Appellants" when describing the alleged withdrawals
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Raindrops Limited & 3 others v Nzioka (Civil Appeal E054 of 2022) [2025] KECA 1570 (KLR)", Case Analysis (2025). Court of Appeal, Mombasa (first appeal from High Court rulings of 8th February 2019 and 22nd October 2019). Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2025/1570/eng@2025-10-03
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.