Company directors have no powers to sell assets before winding up suit

By Nyakundi Nyamboga

The petitioner, a debt collector, drew the court’s attention to the fact that a director of Invesco Insurance Company had disregarded its orders of October 17, last year.

The High Court had issued an injunction restraining Invesco from disposing of its assets, including its shares, until a bid by the petitioner to wind up the company over a Sh16 million debt was heard and determined.

This order was pursuant to an application by the petitioner.

The Nairobi Law Courts. Photo: File/Standard

Four months later, the Court of Appeal had been categorical on the issue: No disposition and/or transfer of the property of the company and transfer of shares or membership of the company shall take place until the determination of the winding up cause.

Three appellate judges—Philip Tunoi, Erastus Githinji and Philip Waki— gave the order in a motion by the Insurance Regulatory Authority to regain control of the company.

hand over

The company was placed under statutory management on February 29, last year. However, the Court of Appeal was later-— December 17, last year— to hand over the management to the board of directors only to reverse the decision on February 13.

Back to the High Court. The petitioner complained to Justice Kimaru that during the subsistence of the two court orders, the company, and in particular, a director— Joseph Gitau Mburu— disposed off 340,900 ordinary shares of Equity Bank owned by the company.

The shares, the petitioner said, were valued in excess of Sh58 million. The petitioner contended that the shares were fraudulently sold for the sole purpose of frustrating the winding up cause and, in effect, defeat realisation of the money it was owed for services rendered in 2007.

It sought an order to compel the debtor company and its directors and/or shareholders and, specifically, Joseph Gitau Mburu, to deposit in court the proceeds of the sale of 340,900 or Sh58 million.

Although the regulator filed grounds in opposition to the application, at the hearing, its lawyer— Mrs Lucy Kambuni — told the court she would not oppose the bid by the petitioner provided the amount recovered should be placed in an escrow earning account in the joint names of the advocates for the parties as opposed to being deposited in court.

The company, through lawyer Ken Watta, asked for time to allow it put its act together, but the application was refused.

In his ruling, Justice Kimaru was unequivocal: "It is apparent that the directors of the company, and in particular Joseph Gitau Mburu, took advantage of the order issued in their favour by the High Court on October 17, last year to sell the shares in question.

The order had barred the regulator from statutory managing the company. Instead of depositing the proceeds of the sale with the company, the directors diverted the sum to other accounts outside the control of the company.

When the Court of Appeal restored the statutory manager in the management of the company on February 13, it was realised the directors had sold the shares and failed to surrender the proceeds due to the company.

The shares were sold in breach of the order of the court prohibiting sale of any asset of the company pending the winding up proceedings.

winding up

The judge concurred with arguments by the petitioner’s lawyer Ahmednasir Abdullahi: "It is apparent, therefore, that the directors of the company, and particularly Mburu through his company Tafi Enterprises, sold the shares in a bid to defeat the course of justice and to frustrate the hearing and determination of the winding up proceedings.

"The sale of assets of the company was made in further bid to frustrate the statutory manager from managing the assets of the company for the benefit of the shareholders of the company, the creditors and the public, who took various insurance policies".

The judge noted that the directors of the company had no authority under the Companies Act to deal with the assets while there were pending winding up proceedings.

This was more so where the court had specifically issued an order barring such dealing.

Said the judge: "This court, in the circumstances, gave an order on March 12 directing the directors of Invesco Insurance Company Limited and Mburu to deposit in a joint interest earning account to be opened in a reputable bank by counsel for the petitioner and counsel for the regulator the proceeds of the sale of 340,900 shares of Equity Bank, equivalent to Sh58 million.

The directors were ordered to deposit the amount by Monday, March 16 at the close of the bank business.

"In this ruling, the court reaffirms its decision requiring the directors of Invesco Insurance to comply with the order issued on March 12," the judge directed.