Rohit Reddy & 1 other v Humming Healthcare Ltd (in Receivership) & 2 others

Plaint filed on 4th October 2023. They seek the following reliefs: i. A declaration that the loan facility of USD 486,343.00 advanced on 1st February 2013 by the 3rd Defendant to the 1st Defendant was irregular. ii. A declaration that the 3rd Defendant acted in bad faith in advancing the said loan. iii. Special damages comprising the of USD value of 284,865.61, the Plaintiffs' shares, unpaid dues, a ten percent premium and interest and currency losses. iv. General damages for negligence. v. Costs of the suit; interest on the foregoing and any other relief the Court considers fit to grant. 2. It is their case that the Plaintiffs were shareholders of the 1st Defendant (the Company), each holding 15% of the issued share capital, comprising 150 shares. The 1st Plaintiff sat on the board as a director, while the 2nd Plaintiff held the position of Head of Sales and Technology within the Company. The balance of seventy percent (70%) of the HCCOMM CS 11 OF 2015 JUDGMENT Page 2

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shareholding was held jointly by Vali Kasim, Narina Popat and Nazmina Popat. 3. They contend that sometime in 2012, the Company applied for and obtained an asset-based finance facility in the sum of USD 486,343.00 from the 3 rd Defendant (the Bank), for purposes of acquiring medical equipment. By a board resolution dated 29th September 2012, all five directors, the 1 st Plaintiff included, sanctioned the borrowing and authorized the creation of security therefore. In furtherance executed of an this resolution, all-asset the debenture Company dated 22 nd October 2012 in favour of the Bank, and each of its directors, including the 1st Plaintiff, executed personal guarantees on that same date. The facility was subsequently disbursed on 1st February 2013. 4. It is the Plaintiffs' case that they resigned as directors and employees of the Company on or about 10th December 2012, which resignation was to take effect on 31st December 2012, citing unfavourable working conditions and irreconcilable differences with their co-directors. The Plaintiffs HCCOMM CS 11 OF 2015 JUDGMENT Page 3

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aver that it was agreed that, upon their resignation, that their shares would be bought out and that they would be released from any liabilities attaching to the Company. They further aver that on 24th December 2012, they notified the Bank of their resignation and requested that it either withhold disbursement of the facility or, in the alternative, discharge them from their personal guarantees on the ground that the board was no longer properly constituted. 5. The Plaintiffs contend that the Bank, being aware of these developments, proceeded nonetheless to disburse the loan to a board it knew, or ought to have known, was improperly constituted, thereby rendering the loan and the debenture irregular and tainted by negligence and bad faith on its part. They further subsequently contend that defaulted in the its Company obligations, occasioning the Bank to appoint the 2nd Defendants as Joint Receivers and Managers on 18th December 2014. It is additionally contended that the said Receivers thereafter fraudulently disposed of the Company’s business to a third party within a month of their appointment, to the exclusion of the HCCOMM CS 11 OF 2015 JUDGMENT Page 4

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Plaintiffs and in total disregard of their shareholding in the company. 6. In response, the 2nd Defendants and the Bank filed a joint Statement of Defence dated 7th May 2024, in which they deny that the Plaintiffs ever validly resigned from the Company. They plead that the operative date for assessing the proper constitution of the board is the date on which the borrowing resolution was passed, and not the date of disbursement of the facility. They further plead that the resolution of 29th September 2012 was passed by a properly constituted board, of which the 1st Plaintiff was a member, and that no resignation, whether evidenced by an accepted notice, a board resolution, or notification to the Registrar of Companies, was ever proved. 7. They rely on correspondence from the Registrar of Companies dated 15th November 2013, annual returns filed on 21st August 2014, and an email dated 29th December 2014 in which the 1st Plaintiff described himself as a director and shareholder of the Company, all of which continued to list the Plaintiffs as such. They further plead that the HCCOMM CS 11 OF 2015 JUDGMENT Page 5

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personal guarantees constituted continuing security independent of directorship, and that the receivership, together with the sale of the Company's business to SVG Healthcare Limited was regular and properly conducted. They contend, in addition, that any claim founded in negligence is time-barred, and that the special damages pleaded by the Plaintiffs have not been proved. 8. During the hearing, the Plaintiffs called a single witness, PW1, Rohit Reddy, who testified in his own right and, by authority granted to him, on behalf of the 2nd Plaintiff. The 2nd and 3rd Defendants called Felix Okwany (DW1), the 3rd Defendant's Relationship Manager and Kereto Marima (DW2), one of the Joint Receivers. Their testimonies align with the summary of the case as I have provided and therefore, I will not regurgitate the same save to refer to the testimonies in my analysis. 9. Having considered the pleadings, the evidence and the rival submissions, the following issues arise for determination: HCCOMM CS 11 OF 2015 JUDGMENT Page 6

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i. Whether the Plaintiffs validly resigned as directors of the Company before disbursement of the loan and the effect thereof on the resolution to borrow; ii. Whether the loan of USD 486,343.00 and the debenture securing it were irregularly procured and whether the Bank was negligent and/or acted in bad faith in disbursing it; iii. Whether the appointment of the 2nd Defendants as Joint Receivers and Managers and the subsequent sale to SVG Healthcare Limited was lawful and regular; iv. Whether the Defendants' conduct amounted to fraud; and v. Whether the Plaintiffs are entitled to the reliefs sought. Analysis and Determination i. Resignation of the Plaintiffs and Constitution of the Board: HCCOMM CS 11 OF 2015 JUDGMENT Page 7

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10. Section 138 of the Companies Act, 2015 provides that any change in the directorship of a company, whether by appointment, resignation, retirement or removal, must be notified to the Registrar of Companies within the period prescribed by the Act, and the particulars thereof entered in the company's register of directors. This is to be read together with Section 134, which obliges every company to keep, at its registered office, a register of directors reflecting the true state of its directorship at any given time. The evident purpose of these provisions is to preserve the integrity and reliability of the public record of a company's governance, so that third parties, including financiers, creditors and regulators, may safely rely upon it. 11. This statutory framework is reinforced by the Shareholding Agreement dated 22nd August 2011, which governed the relationship between the shareholders and directors of the Company. The Agreement imposed equally stringent requirements of written notice in respect of the entry or exit of any director or shareholder. From a conjunctive reading of these instruments, the HCCOMM CS 11 OF 2015 JUDGMENT Page 8

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resignation of a director could not be effected by mere unilateral perfected intimation. through the It required Company's to be internal governance processes and, thereafter, through compliance with the statutory requirements aforementioned. 12. Measured against this standard, the Plaintiffs' assertion of their resignation is unsupported by the evidence on record. No letter of resignation was done and accepted by the board, no resolution of the remaining directors acknowledging the same, and no notification to the Registrar under Section 138 was placed before the Court to demonstrate that the purported resignation was ever legally perfected. 13. The uncontroverted documentary trail points to the contrary. Significantly, the Registrar's letter of 15 th November 2013, issued over 10 months after disbursement of the facility, continued to list the 1 st Plaintiff as a director and shareholder. The Company's annual returns filed on 21 st August 2014 reflected the same position and on 29 th December 2014, upon learning of the appointment HCCOMM CS 11 OF 2015 JUDGMENT Page 9

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of the Receivers, the 1st Plaintiff himself wrote to Kereto Marima, one of the Joint Administrators, describing himself as a director and shareholder of the Company. 14. This finding is fortified by the testimony of PW1, who, in cross-examination, admitted that he was aware of the requirement to file returns at the Companies Registry evidencing his resignation, and conceded that he had never had the same done nor produced any document corroborating that there was acceptance of the alleged resignation by the board. Confronted with the letter of 15th November 2013, he confirmed that it indicated the Plaintiffs remained shareholders and that their directorship status was unchanged. 15. Clause 4.8.4 of the Shareholding Agreement fixed the quorum for a board meeting transacting relevant business at 5 directors. Given my finding that there was no proper resignation, contention that the board was constituted at material times all the improperly cannot be sustained. HCCOMM CS 11 OF 2015 JUDGMENT Page 10

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ii. Regularity of the Loan and Alleged Negligence of the 3rd Defendant: 16. Having found that the board properly quorate, the evidence establishes further that the resolution authorizing the borrowing was passed on 29th September 2012. The Plaintiffs contend that they resigned between the passing of that resolution and the disbursement of the facility on 1 st February 2013, thereby divesting the board of quorum. This contention too cannot stand in the face of the finding that I have already made. 17. In any case, it bears emphasis that a bank disbursing a facility pursuant to an already- sanctioned resolution is not obliged to revisit the propriety of that sanction on account of subsequent internal changes, unless such changes are shown to have been formally completed and communicated to it in terms sufficient to place it on notice that the sanctioning resolution had itself been vitiated. It is, moreover, a settled principle that a party who continues to hold himself out, and to be held out, as a director after a purported resignation cannot later assert, to the prejudice of a third party who dealt with the company on the HCCOMM CS 11 OF 2015 JUDGMENT Page 11

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strength of that representation, that the resignation had already taken effect. 18. The Plaintiffs' conduct, extending as it did into late 2014, is wholly inconsistent with a claim to have divested themselves of directorship as at December 2012. This is more so given the Bank's position which was communicated to the directors in the email of 29th November 2012 where the Bank correctly stated that: ‘the exiting director will continue to be held liable until such a time that they are formally and legally released from their obligations on the facilities that you have taken with us’. No action was taken by the Plaintiffs towards this end. 19. It also follows that the foundation of the claim that the Bank knowingly disbursed funds to an improperly constituted board falls away. What remains is the narrower complaint that the Bank, aware of internal friction within the Company, ought to have suspended disbursement pending regularization of the Company structure. The evidence of DW1, establishes that the Bank was alive to the friction within the Company and that it HCCOMM CS 11 OF 2015 JUDGMENT Page 12

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required, as a post-disbursement condition, fresh personal guarantees and confirmation of any change in shareholding. This conduct is in my view consistent with prudent banking practice rather than evidence that the resolution underlying disbursement was itself defective. A bank is entitled to rely on a board resolution that is regular on its face and executed by directors who remained on the statutory record, and is not ordinarily required to look behind it absent clear notice of formal rescission or a perfected resignation. 20. The Bank's reliance upon its stated position finds further corroboration in an email of 29 th November 2012 in which the Bank wrote to the directors. The 1st Plaintiff was copied to the email in which the Bank clearly laid out what was required to release the Plaintiffs from their personal guarantees. That letter provided in part that: “The Company directors Humming Health need write to of will probably us formally to advising of the change in the shareholding HCCOMM CS 11 OF 2015 of the JUDGMENT Company. Page 13

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The incoming shareholder will then have to execute fresh guarantees to take obligations of the on the exiting shareholder. If there is no new shareholder the new shareholding structure will have to be advised guarantees and executed for fresh the same.” 21. Almost 6 months later, in a letter dated 14 th May 2013 sent by V.M Kasim, a director of the Company, it was confirmed to the Bank that there had not been any changes in directorship or shareholding of the Company. The letter read in part: “It is made clear to Mr Rohit Reddy if he wishes to take out guarantee for the Bank, the regulations require that we need to have the resignation of Rohit Reddy to issue fresh guarantees…as of now till date, there is no change that has taken HCCOMM CS 11 OF 2015 JUDGMENT Page 14

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place in the structure of shareholding/directorship of the Company”. 22. The evidence shows that despite reminders from the Bank, the exit process of the Plaintiffs was not formalized. The letter of 21st January 2013 relied upon by the Plaintiffs was ambiguous and did not fulfil the specific requirements that the Bank had asked the Plaintiffs to meet. Equally, the letter of 30th January 2013 from Nazma Popat to the Bank did not confirm that the Plaintiffs' shares had in fact been sold; it was, at its highest, anticipatory in nature. DW1 corroborated this position under cross-examination, confirming that the Plaintiffs had expressed an intention to resign and transfer their shares, but that neither the resignation nor the share transfer was ever effected. 23. I am further guided on this position by the settled reluctance of courts to impugn as negligent a secured lender's contractual dealings with its customer absent compelling evidence of impropriety, a principle affirmed in National Bank of Kenya Ltd V Shimmers Plaza Ltd, [2009] HCCOMM CS 11 OF 2015 JUDGMENT Page 15

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eKLR, and applied in Pajeta Acres Limited V Comity LLP, [2025] KEHC 18464 (KLR), where it was held that contractual rights under debentures and loan agreements should not be lightly disturbed absent compelling grounds. 24. The Plaintiffs have in toto failed to demonstrate that the Bank breached any duty of care owed to them personally in disbursing the facility pursuant to a resolution regular on its face. The loan was not irregularly procured, and the Bank was neither negligent nor did it act in bad faith. This finding disposes of the alternative plea of limitation, the negligence cause of action having accrued, at the earliest, on 1st February 2013, more than six years prior to the joinder of the Bank by the Further Amended Plaint of 4th October 2023, contrary to the Limitation of Actions Act, Cap 22. iii. Legality of the Receivership and Sale of Assets: 25. Clause 14.1 of the debenture dated 22nd October 2012 empowered the Bank, upon default, to appoint a receiver and manager as agent of the Company, and HCCOMM CS 11 OF 2015 Clause 14.1.3 JUDGMENT entitled it to Page 16

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exercise the power of sale by public auction or otherwise. 26. The validity of a receiver's appointment turns ordinarily on strict compliance with the debenture and the occurrence of the triggering default. Having found the debenture and the underlying facility validly constituted, and default being undisputed, the appointment of the 2nd Defendants on 18th December 2014 was properly anchored on valid, subsisting security. PW1 himself admitted, under cross-examination, that the Bank held a debenture over the assets of the Company and that the 2nd Defendants were appointed pursuant thereto. 27. The evidence of DW2, which was corroborated by unchallenged financial statements, establishes that the Company was insolvent as at the date of receivership. Its liabilities exceeded its assets, accumulated losses had grown from approximately Kshs.29.9 million in 2012 to approximately Kshs.180 million by December 2014, shareholders' interest had been wholly extinguished, and rent arrears of approximately Kshs.7.4 million had HCCOMM CS 11 OF 2015 JUDGMENT Page 17

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prompted the landlord to threaten distress against specialized medical equipment whose value the receivers reasonably assessed would be impaired if disaggregated from the going concern. 28. In these circumstances, the decision to realize the business as a going concern, rather than permit distress or disorderly winding-up, was a reasonable exercise of the receivers' discretion under the Insolvency Act and the debenture, consonant with their duty to secure the best price reasonably obtainable for the general body of creditors. The receivers advertised for competitive bids, received three, and evaluated them on price and capacity to complete. The highest and most credible bid, that of SVG Healthcare Limited, was accepted, and the sale completed on 31st March 2015. 29. That DW2 conceded, under cross-examination, the absence of a written evaluation and the executed sale agreement with SVG Healthcare Limited, goes to the adequacy of the receivers' record-keeping and not to the legality of the sale itself. The handover schedule, receipts and payments, and a final report to the Official Receiver were produced HCCOMM CS 11 OF 2015 JUDGMENT Page 18

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and their accuracy not impugned. No evidence was adduced of any higher or more credible offer that was overlooked, or that the price obtained was other than the best reasonably available for an insolvent going concern under threat of distress. The appointment of the 2nd Defendants and the sale to SVG Healthcare Limited are accordingly found to have been lawful, regular and within the powers conferred by the debenture and the Insolvency Act, 2015. iv. Whether the Defendants' Conduct Amounted to Fraud: 30. It is trite that fraud must be pleaded with particularity and proved to a standard beyond the ordinary balance of probabilities, though falling short of the criminal standard. This position was succinctly stated by the Court of Appeal in Arthi Highway Developers Limited V West End Butchery Limited & 6 Others, [2015] KECA 816 (KLR). Fraud cannot therefore be inferred from surrounding facts alone. A bare allegation, unparticularized, offends Order 6 Rule 8 of the Civil Procedure Rules. HCCOMM CS 11 OF 2015 JUDGMENT Page 19

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31. The particulars of fraud pleaded in the present case, namely the disbursement of the facility without valid board authority, disregard of the resignation notice, and the sale to a third party excluding the Plaintiffs, have each already been examined and rejected by this Court. The Plaintiffs additionally point to correspondence suggesting that SVG Healthcare Limited had expressed interest in the Company's assets as early as October 2014, and urge the Court to infer a scheme predating the receivership. 32. In my view, an expression of interest that is made ahead of a formal tender process is not, without more, evidence of collusion. It is at least as consistent with ordinary commercial prospecting in a distressed sector. No evidence of undervaluation, concealment, or improper communication between the receivers and SVG Healthcare Limited was tendered to displace this more benign inference. The Plaintiffs have accordingly not discharged the heightened burden applicable to a claim in fraud. v. Whether the Plaintiffs are Entitled to the Reliefs Sought: HCCOMM CS 11 OF 2015 JUDGMENT Page 20

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33. By now it may be clear that the Plaintiffs have not surmounted the burden of proof required of them. Besides that, it is settled law that special damages must be specifically pleaded and strictly proved. This remains the governing principle as per set jurisprudence including Hahn V Singh, [1985] KLR 716. 34. The Plaintiffs claim special damages of USD 284,865.61, comprising an alleged share value of USD 113,891.00, unpaid dues of USD 108,000.00, a 10% premium, and interest and currency losses. No valuation report or independent evidence was tendered to substantiate the claimed share value as at 2013 or any other date. The 1st Plaintiff conceded during cross-examination, that no valuer's report existed and that he could not demonstrate how the pleaded figures, or the interest rate applied, had been arrived at. A bare, unsupported assertion of value cannot found an award of special damages. 35. Having found neither negligence nor fraud established against the 2nd Defendants or the Bank, and the share-value claim being, in substance, one HCCOMM CS 11 OF 2015 JUDGMENT Page 21

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against the Company arising from internal shareholding arrangements rather than against the receivers or the Bank, the claim for special damages fails in its entirety. It follows, too, that the claim for general damages for negligence, being parasitic upon a finding of liability this Court has declined to make, must equally fail. Costs and interest fall to be determined on the ordinary rule that costs follow the event. 36. For completeness, it is noted that although the Company did not participate in these proceedings, no case distinct from that made against the 2nd Defendants and the Bank was established against it. Final Orders and Disposition 37. For the reasons set out above, the Further Amended Plaint dated 4th October 2023 is dismissed with costs. DATED, SIGNED AND DELIVERED AT NAIROBI THIS 24TH DAY OF JULY 2026. F. MUGAMBI HCCOMM CS 11 OF 2015 JUDGMENT Page 22

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JUDGE Delivered in presence of: Ms Anyango for the plaintiffs Muriithi h/b for Ochieng for 2nd & 3rd defendants Court Assistant: Lillian HCCOMM CS 11 OF 2015 JUDGMENT Page 23

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