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ELRCAllowedIndustrial Court Cause (application arising from award of Kosgey J dated 13th February 2012)· [2013] KEELRC 898 (KLR)

Elsephan Ingalula Shisoka v Master Bakers (1987) Limited [2013] KEELRC 898 (KLR)

Industrial Court of Kenya (Employment and Labour Relations Court)
25 November 2013
LNLinnet Ndolo
1,564 words in judgment
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The bottom line

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Kenya's Industrial Court made three company directors personally pay a former employee's award because they hid company assets during winding down.

What this practically means

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Executive summary

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The Claimant obtained an award of Kshs 1,050,000 from Kosgey J on 13th February 2012, but execution against the Respondent company failed because its address and assets were unknown. The Claimant moved the Court by Notice of Motion seeking to have the company's Directors - Bupendra Somchand Shah, Cornelius Muthuri and Sanju Lalchand Shah - summoned, examined and held personally liable for the decretal amount. The Directors elected to be represented by Sanju Lalchand Shah, who testified that the company made losses, ceased operations in July 2009, sold its business to one Simon Mugaa for Kshs 3.2 million and applied the proceeds to creditors, leaving funds exhausted by 2010. Counsel for the Directors invoked Salomon v Salomon on corporate personality. The Claimant, however, disputed the sale price, produced evidence of a Director's personal cheque into the company account, and pointed to payments to an enterprise in which two Directors had an interest. The Court found the purchase price figure on the sale agreement had been deliberately blocked, the original untraceable, and details of bankings withheld, leading to the conclusion that the concealment was designed to defeat justice and that the Directors declined to pay for reasons other than lack of funds. The Court also held the Directors failed to exercise due care by making no provision for the Claimant's salary and service pay while paying a related-party debt. The Court lifted the corporate veil, imposed joint and several personal liability on the three Directors for the decretal amount and the costs of the application, and allowed warrants of attachment and sale against their personal assets.

Key legal issues

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01

Whether the corporate veil should be lifted to hold the Directors personally liable for the decretal amount

Holding

Yes - the veil was lifted and the three Directors were held jointly and severally liable

Reasoning

The company ceased operations and sold its business, but the Directors could not explain why the purchase price was blocked out of the sale agreement or why the original could not be traced; details of bankings for the final period were withheld. The Court concluded the concealment was to defeat justice and that the Directors declined to pay for reasons other than lack of funds, warranting lifting of the veil.

p. 3
02

Whether the Directors exercised due care and diligence in winding down the company

Holding

No - they failed to provide for the Claimant's statutory dues and paid a related-party debt instead

Reasoning

At the time of sale the Claimant was on indefinite suspension and was entitled to unpaid salary and service pay even upon justifiable termination. The Directors paid Kshs 566,720 to Kuster Bakers, in which two Directors had an interest, yet made no provision for the employee's award, breaching the duty of care and dilgence and disregarding the priority of employee debts.

p. 3

Legal principles established

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  • The corporate veil may be lifted only where it is being used to defeat the ends of justice
  • In insolvency, a debt owed to a former employee ranks higher in priority than a debt owed to a director or an enterprise in which a director has an interest
  • A prudent director must make provision for an employee's final dues, including unpaid salary and service pay, when winding down the company's business

Court orders

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  1. 1.Corporate veil lifted and personal liability imposed on the named Directors Bupendra Somchand Shah, Cornelius Muthuri and Sanju Lalchand Shah jointly and severally for the decretal amount
  2. 2.Warrants of attachment and sale may issue against the Directors' personal assets towards satisfaction of the decretal amount and costs of the application
  3. 3.Directors to pay the costs of the application

Authorities

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Legislation

  • Civil Procedure Rules, 2010Order 22

Cases cited (2)

  • Salomon Vs Salomon & Co.
    [1897] AC 22
  • Aviation and Allied Workers Union Vs Kenya Aerotech Limited & Another
    Industrial Court Cause No 1494 of 2011
Jurisdiction invoked
Employment and labour relations jurisdiction of the Industrial Court; examination of judgment-debtors under Order 22 of the Civil Procedure Rules, 2010

Key timeline

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Practical implications

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Frequently asked questions

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Cite this brief

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Cite this brief

Caselaw, "Elsephan Ingalula Shisoka v Master Bakers (1987) Limited [2013] KEELRC 898 (KLR)", Case Analysis (2013). Industrial Court Cause (application arising from award of Kosgey J dated 13th February 2012). Source: https://new.kenyalaw.org/akn/ke/judgment/keelrc/2013/898/eng@2013-11-25

Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.