LAW OF BUSINESS ASSOCIATIONS, 2025

GROUP 42, MODULE 2 DAY

MEMBERS’ REMEDIES V COMMON LAW PROTECTION OF MINORITY

SHAREHOLDERS

TONY KIPKORIR KIPRONO GPR3/145924/2023

OGEGA JOY GPR3/146012/2023
LUCKY NJOROGE MACHARIA GPR3/146446/2023
STACEE CHEPKOECH GPR3/145949/2023
ASHLEY MORAA KEBAYA GPR3/146820/2023
COMMON LAW REMEDIES FOR MINORITY SHAREHOLDERS
A minority shareholder is not defined by the Companies Act, 2015 but it may
be defined as a shareholder who holds less than fifty percent of the voting
1
stock, therefore lacking de jure control and has no controlling interest in a
company.2 Balancing the interests of minority and majority shareholders is
therefore a complex issue since the majority principle states that the will of
the majority shareholders is considered to be the will of the company but this
leads to subjugation of minority shareholders.3 This realization has prompted
most legal systems to recognize the need to balance the interests of minority
and majority shareholders by granting extensive rights and protections to the
minority shareholders.4Kenya has done this through the Companies Act, 2025
which gives the circumstances in which minority shareholders may apply to
the court where they feel that the decisions or actions of the majority
shareholders are prejudicial during cases such as compulsory acquisition of
shares.5 It also gives guidance on the right to buy out minority under section
611 and the effect of notices under section 613 all aimed at protecting
minority shareholders.

1) DERIVATIVE ACTION
Derivative action can be defined as the means by which a member of a
company who is dissatisfied with the acts or omissions of the directors of the
company owing to the fact that such acts or omissions have occasioned
harm to the company, can institute court proceedings to seek relief on behalf
of the company for the wrongs it has suffered.6 It can also be defined as a
representative claim on behalf of all shareholders other than the defaulting
shareholders against the wrong doers and the defaulting shareholders, and
the company as a nominal defendant.7 Part XI of the Companies Act, 2015
has codified derivative action. This action is derivative since the right to sue is
not directly vested in the shareholders but flows from the right of the
company to institute proceedings in its own name.8
The landmark case of Foss v Harbottle is where the derivative claim traces its
origins.9

RULE IN FOSS V HARBOTTLE

Facts of the case
“Richard Foss and Edward Starkie Turton were two minority shareholders in
the Victoria Park Company. The company had been set up in September 1835

1
Iman Anabatwi & Lynn A. Stout, Fiduciary Duties for Activist Shareholders, 60 STAN. L. REV. 1255,
1269 (2008).
2
Anupam Chander, Minorities, Shareholder or Otherwise, 128 YALE L.J. 119(2003).
3
D Nelson, ‘The Dilemma of the Shareholders under the Nigerian Company Law’, 2015(37) Journal of
Law, Policy and Globalization.
4
J Black, ‘Minority Shareholder Rights: The European Union and Beyond’ ,(2002) 3(1) European Business
Organization Law Review, 7 .
5
Companies Act 2015, Kenya( Cap. 486), section 618.
6
Yohana Gadaffi and Miriam Tatu, Derivative action under the Companies Act 2015: New jurisprudence
or mere codification of common law principles?
7
Hicks A and Goo S, Cases and materials on company law , 5ed, Oxford University Press, Oxford, 2004,
380.
8
Yohana Gadaffi and Miriam Tatu, Derivative action under the Companies Act 2015: New jurisprudence
or mere codification of common law principles?
9
Foss v Harbottle (1843) 2 Hare 461.
to buy 180 acres of land near Manchester and according to the report,
‘enclosing and planting the same in an ornamental and park-like manner, and
erecting houses thereon with attached gardens and pleasure grounds, and
selling, letting or otherwise disposing thereof.’
This became Victoria Park, Manchester. Subsequently, an Act of Parliament
incorporated the company. The claimants alleged that property of the
company had been misapplied and wasted and various mortgages were given
improperly over the company’s property. They asked that the guilty parties be
held accountable to the company and that a receiver be appointed.
The defendants were five company directors( Thomas Harbottle, Joseph
Adshead, Henry Byrom, John Westhead, Richard Bealey) and the solicitors and
architectand several other assignees of Byrom, Adshead and Westhead who
had become bankrupts.”10
“Wigram VC dismissed the claim and held that when a company is wronged
by its diectors it is only the company that has standing to sue.”11 The Court
held that the action of the two claimants could not proceed as the individual
shareholders were not the proper claimants rather, the proper claimant was
the company as it was the one which had suffered the alleged wrongs.12
Wigram VC followed the older cases on unincorporated companies by
insisting that the minority must show that they had exhausted any possibility
of redress within the internal forum, stating that the court will not intervene
where a majority of the shareholders may lawfully ratify irregular conduct.13
Later, it would be established that the rule in Foss v Harbottle barred a
minority action whenever the alleged misconduct was in law capable of
ratification, whether or not an independent majority would ever be given a real
opportunity to consider the matter.14
Two rules were established as a result of this case.

a. ) Proper plaintiff rule

The rule of Foss v Harbottle has established an elementary principle in the
field of company law asserting that the proper plaintiff for a wrong done to a
company is the company itself.15 This principle, read together with the
principle in Salomon v Salomon16 a case where the facts were that “ Mr. Aron
Salomon made leather boots or shoes as a sole proprietor. His sons wanted
to become business partners, so he turned the business into a limited liabilty
company. This company purchased Salomon’s business at an excessive price
for its value. His wife and five elser children became subscribers and the two
sons became directors . Mr Salomon took 20,001 of the company’s 20,007

10
Wikipedia contributors. (n.d). Foss v Harbottle. In Wikipedia. Retrieved December 5, 2025 from
[Link]
11
Wikipedia contributors. (n.d). Foss v Harbottle. In Wikipedia. Retrieved December 5, 2025 from
[Link]
12
Yohana Gadaffi and Miriam Tatu, Derivative action under the Companies Act 2015: New jurisprudence
or mere codification of common law principles?
13
A. J. Boyle, Minority Shareholders’ Remedies, Cambridge Studies in Corporate Law, Cambridge
University Press, 2004.
14
A. J. Boyle, Minority Shareholders’ Remedies, Cambridge Studies in Corporate Law, Cambridge
University Press, 2004.
15
Agustin Ricardo Spotorno, ‘Why Is The Rule in Foss v. Harbottle Such an Important One?92018),
39,Business Law Review, Issue 6, pp. 190-197,
[Link]
16
Salomon v Salomon & Co Ltd (1897) AC 22(HL)
shares which were payments from A Salomon & Co Ltd for his old business
( each share was valued at 1 pound). The transfer of the industry took place
on 1 June 1892. The company also issues to Mr. Salomon10,000 ponds in
debentures. On the security of his debentures, Mr. Salomon received an
advance of 5000 pounds from Edmund Broderip.
Soon after Mr. Salomon incorporated his business, boot sales declined. The
company failed, defaulting on its interest payments on its debentures.
Broderip sued to enforce his security. The company was put into liquidation.
Broderip was repaid his 5000 pounds. This left 1,055 pounds in company
assets remaining, of which Salomon claimed under the retained debentures
he retained. If Salomon’s claim was successful, this would leave nothing for
the unsecured creditors. When the company failed, the company’s liquidator
contended that the floating charge should not be honored, and Salomon
should be made responsible for the company’s debts. Salomon sued. It was
later established that a company is a legal entity from its shareholders.”17 The
effect of this case was to uphold the existence of a separate corporate
personality stating that once a company was incorporated it became a legal
entity separate from the shareholders and could therefore sue in its own
name, further show that the proper plaintiff was indeed the company itself
since it had suffered injury.
Historically, minority shareholders have been at the mercy of the majority
shareholders who could ratify various internal wrongdoings or decide not to
pursue litigation by simply calling a meeting where the majority would end up
getting its way.18This called for protection of the minority shareholders
against internal wrongdoings and unfairness from the majority shareholders.
The proper plaintiff principle is upheld so as to prevent a deluge of suits which
may arise if the doors were open to all shareholders to bring derivative claims
whenever they felt that the company had suffered injury.19 Another
justification is that it would be pointless for a member to bring a derivative
claim for a wrong suffered by the company yet the company could ratify the
wrongs complained of.20 In the event that the organs mandated to act on
behalf of the company are controlled by the wrongdoers, the organ would fail
to act in the best interest of the company thereby posing a challenge to the
proper plaintiff rule.21

b. )Majority rule principle

Courts are hesitant to meddle in the affairs concerning the internal
management decisions of a company that can be sanctioned by the majority.
James LJ stated that shareholders are bound by the majority shareholders’
decisions on the matter and the court will not interfere.22

17
Wikipedia Contributors , ‘ Salomon V A Salomon& Co Ltd’ (Wikipedia 2025)
[Link] accessed 8 December 2025.
18
Agustin Ricardo Spotorno, ‘Why Is The Rule in Foss v. Harbottle Such an Important One?92018),
39,Business Law Review, Issue 6, pp. 190-197,
[Link]
19
Bourne N. Bourne on company law, 6ed, Routledge, London, 2013, 227; Ogolla J, Company law, 2ed,
Focus Books , Nairobi, 2006, 245.
20
Bourne, Bourne on company law, 227.
21
Yohana Gadaffi and Miriam Tatu, Derivative action under the Companies Act 2015: New jurisprudence
or mere codification of common law principles?
22
MacDougall v Gardiner (1875) 1 Ch D13
Jenkins LJ made an attempt to explain the relationship between the majority
rule and the proper plaintiff rule contending that the will of the majority, vis a
vis the minority, is to be identified with that of the company and therefore
meaning that the company is prima facie the proper plaintiff in actions
concerning its affairs is only another way of saying that the majority have the
sole right to determine whether on not a dispute will be brought before the
courts.23 The majority rule prevails in matters to do with the administration of
company affairs such that if the acts of directors are approved by majority
shareholders, minority shareholders cannot prevent the action.24
A challenge posed by the majority rule principle is that a company may, during
a general meeting, ratify the acts or omissions which are the subject of a
derivative suit, limiting the scope of the derivative actions since the majority
shareholders get their way.25

Conclusion
The issues that could arise as a result of the majority rule and proper plaintiff
rule has led to the need for a system of exceptions to enable the minority to
get justice when there are situations of unfairness. Without these exceptions,
the majority would always have their way and in essence, oppress the minority
by failing to consider them.

Exceptions to the rule

26
In Edwards v Halliwel per Jenkins LJ the court of Appeal established the
following four categories of exceptions for situations where the Foss v
Harbottle rule would not apply traditionally and they were divided into the
following four parts:
1. Personal claims.
2. Claims involving ultra vires/illegal transactions.
3. Claims involving transactions which require a special majority.
4. Claims involving transactions which constitute a “fraud on the
minority”
Gower’s Principles of Modern Company Law explains the reasoning behind
these exceptions as follows; “If there were no such exceptions, the minority
would be completely in the hands of the majority. Even the limitations
imposed by the substantive law would be stultified, for as long as the
company remained a going concern no action could effectively be brought to
enforce them.”27

23
A. J. Boyle, Minority Shareholders’ Remedies, Cambridge Studies in Corporate Law, Cambridge
University Press, 2004.
24
The Lawyers & Jurists. (n.d.). MAJORITY RULES. Retroeved December 5, 2025, from
[Link]
25
Yohana Gadaffi and Miriam Tatu, Derivative action under the Companies Act 2015: New jurisprudence
or mere codification of common law principles?
26
Edwards v Halliwel (1950) 2 All ER 1064, 1066- 1069
1) Infringement of Personal Rights
The rule in Foss v Harbottle does not apply where the personal and individual
membership rights of a shareholder have been violated. As stated in Edwards
v Halliwell, when such rights are infringed, the shareholder is entitled to sue
independently of the majority.28
Shareholders possess a range of personal rights enforceable against the
company and, where necessary, against other members. While some of these
rights are conferred by statute, others arise directly from the company’s
articles. In relation to these rights—often termed individual membership
rights—the principle of majority rule is entirely displaced.
Among these personal rights are:
 the right to vote in accordance with the articles and to have one’s vote
duly recorded, whether or not aligned with the majority;
 the right to transfer shares and protect class rights or preferential
interests;
 the right to be registered as a member and to obtain a share certificate;
 the right to enforce a declared dividend as a legal entitlement, and
where none is declared, to ensure dividends are not distributed
contrary to the articles;
 the right to prevent irregular forfeiture of shares;
 the right to challenge directors holding office contrary to the articles;
 the right to proper notice of meetings and resolutions; and
 the right to prevent amendments to the articles that amount to a fraud
on the minority.
Further, section 114(3) of the Companies Act29 reinforces these protections
by granting members the right to receive proposed written resolutions,
requisition the circulation of such resolutions, demand the convening of
meetings, appoint proxies, receive notices and financial statements,
and—specifically for public companies—require circulation of resolutions for
annual general meetings.30
Where such individual rights are infringed, a shareholder may initiate
proceedings either personally or representatively on behalf of other members
who have similarly been denied their rights. This was affirmed in Pender v
Lushington, where a member successfully asserted his right to vote, and in
Wood v Odessa31 Waterworks, where the shareholder upheld his entitlement
to a cash dividend rather than a dividend in specie as dictated by the articles.
As Palmer succinctly states, a single shareholder may, on principle, challenge
an entire majority where a personal right is at stake.
A related instance arises in Daniels v Daniels32, where minority shareholders
challenged directors who had caused the company to sell land to one of them
at an undervalue. Templeman J reaffirmed the principle drawn from
Alexander v Automatic Telephone that a minority shareholder may sue where
directors exercise their powers—whether negligently, fraudulently, or
inadvertently—in a manner that benefits themselves at the expense of the
company.
28
Edwards v Halliwel 1950] 2 All ER 1064, 1066-1069
29
Companies Act 2015(Kenya ) s 114(3)
30
Companies Act 2015(Kenya ) s 114(3)
31
Wood v Odessa Waterworks Co (1889)
32
Daniel v Daniel (1978)
2) Special Majority Requirement
The rule in Foss v Harbottle is also displaced where the act in question is one
that, under the company’s constitution, requires more than a simple majority
vote. In such circumstances, if the action is taken without attaining the
requisite special majority, an individual shareholder may challenge it despite
the ordinary prohibition on personal actions.33
This principle was articulated in Edwards v Halliwell (1950), where the
executive committee of a trade union increased membership subscription
fees in contravention of the union’s constitution and without obtaining
member approval. Although the matter concerned a union rather than a
company, the same reasoning applies in corporate governance. Jenkins L.J.
clarified that where certain acts must be sanctioned by special resolution,
they cannot lawfully be carried out without 34 adherence to that procedure.
Any member is therefore entitled to seek relief to prevent such ultra vires
action.
Similarly, in Dhakeswari Cotton Mills v Nil Kamal Chakravarty35, the court
upheld that actions undertaken without following the mandated procedural
requirements—including the need for special majority approval—may be
challenged by shareholders.
3) Ultra Vires and Illegal Acts:
Where the conduct complained of amounts to a wholly ultra vires act, the rule
in Foss v Harbottle is inapplicable36. The same principle extends to acts that
are illegal. In such circumstances, a shareholder is entitled to challenge the
company and its officers because no majority vote can validate an act which
the company itself lacks the power to perform. Put differently; if the
transaction is outside the general authority granted by the memorandum and
Articles of Association, the company cannot subsequently ratify if since it
cannot confer legality on an act it was never authorized to perform.
This position was affirmed in Smith v Croft, where the transaction involved the
provision of financial assistance for the purchase of the company’s own
shares. As this was prohibited under the Companies Act 1881 and fell outside
the company’s powers, the court held that a minority shareholder was entitled
to pursue the action, because an act that is illegal or ultra vires cannot be
validated by majority approval.
Accordingly, the rule in Foss v Harbottle applies only where the company acts
within its lawful authority. A clear illustration is found in Bharat Insurance Co
Ltd v Kanhaiya Lal37, where the plaintiff sought an injunction restraining
directors from investing company funds without adequate security, contrary
to the company’s memorandum. The court recognized that although internal
company matters are generally insulated from judicial interference,
misapplication of company assets constitutes more than mere internal
management. Thus, a single shareholder may sue on behalf of the company
where directors misuse corporate funds.

33
Edwards (n 2)
34
Companies Act, 2015
35
Dhakeswari Cotton Mills v Nil Kamal Chakravarty
36
Edwards(n)
37
Bharat Insurance Company Ltd v. Kanaiya Lal AIR 1935
However, the court also emphasized that such relief is subject to the
shareholder’s conduct; delay or improper motives may bar the claim. This
principle was reaffirmed in Prudential Assurance Co Ltd v Newman Industries
Ltd (No 2)38, where the court held that the rule in Foss v Harbottle cannot
operate in circumstances where the impugned act is ultra vires.

Prudential Assurance Co Ltd v Newman Industries Ltd

Facts:
In this case, a shareholder of Newman Industries Ltd brought proceedings
against two company directors, Bartlett and Laughton, alleging that they had
breached their fiduciary duties and consequently caused a reduction in the
value of his shares. The claimant, an institutional investor holding
approximately 3% of the company’s issued share capital, sought to institute a
derivative action on the basis that the directors had fraudulently
misappropriated £400,000 from the company. He argued that the wrongful
conduct of the directors resulted in financial loss to the company, which in
turn diminished the value of his investment.
Issue:
The central question was whether a shareholder may personally recover for
diminution in share value where such loss simply mirrors the company’s loss
arising from the directors’ breach of fiduciary duty.
Held:
The court dismissed the claim, holding that a shareholder cannot seek
compensation for a loss that merely reflects the company’s loss. In such
circumstances, it is the company, as the primary victim of the wrongdoing,
which must bring the action. A personal claim by a shareholder will only lie in
exceptional circumstances, such as where directors have engaged in fraud
specifically targeting minority shareholders.
Conclusion:
Acts carried out beyond the scope of a company’s powers as defined in its
memorandum, or beyond the authority conferred by the Companies Act, are
classified as ultra vires. Such acts are void and incapable of ratification, even
with unanimous shareholder approval. Where a company exceeds its lawful
capacity—for instance by engaging in ultra vires transactions—a shareholder
may, in limited instances, seek relief to restrain the company, such as by
applying for an injunction. In Smith v Croft39, it was affirmed that ultra vires
acts are legally unenforceable and therefore fall outside the ambit of the Foss
v Harbottle rule, as the majority has no authority to validate actions that the
company itself has no power to undertake.

Fraud on the Minority

Where the acts complained of amount to what is commonly termed a fraud
on the minority, and the alleged wrongdoers are themselves in control of the
company’s decision-making organs, the strict rule in Foss v Harbottle is
relaxed. In such circumstances, the disadvantaged minority shareholders are
permitted to institute what is known as a minority shareholders’ (derivative)
38
Prudential Assurance Co Ltd v Newman Industries Ltd (no 2) (1982)
39
Smith v Croft ( No 2) (1987) ALL ER 909
action, brought on their own behalf and on behalf of all other innocent
shareholders. This exception exists because, if the matter were left solely to
internal corporate mechanisms, the controlling wrongdoers would inevitably
40
block any attempt by the company to sue them.
In this context, “fraud” refers to situations where the majority seeks, directly or
indirectly, to obtain for themselves financial benefits, property, or other
advantages belonging to the company, or in which all shareholders are
entitled to share.41

Hooper’s Telegraph Works Ltd v Menier42

In Hooper’s Telegraph Works Ltd v Menier, a company had been formed to lay
a transatlantic telegraph cable. The majority shareholder, Hooper, realized
that greater profit could be obtained by transferring the cable rights to a
separate entity interested in pursuing the same route, but only after necessary
government concessions were secured. Hooper therefore induced the trustee
holding those concessions to transfer them to the second company.
In order to avoid liability to the original company for this diversion of
concessions, Hooper used his voting power to pass a resolution that the
original company be wound up and a liquidator appointed who would
deliberately refrain from pursuing any claim against Hooper and the trustee.
Menier, a minority shareholder, instituted a derivative action seeking
disclosure and recovery of the profits obtained through this scheme.
The court held Hooper liable, finding that his conduct amounted to an
oppressive appropriation of corporate assets, to the exclusion of the minority.
James L.J. emphasized that allowing the majority to distribute company
assets amongst themselves, to the detriment of the minority, would be
unconscionable and would effectively enable them to divest the company
entirely and deny the minority any participation.

This case marks a significant departure from the rigid Foss v Harbottle
principle, confirming that 43where fraud is perpetrated by those in control,
ratification is ineffective and a derivative action is permissible.
Templeman J, relying on Alexander v Automatic Telephone Co 44and Cook v
Deeks45, affirmed that the plaintiffs could sue under the fraud on the minority
exception, noting that there is no logical reason to confine the exception
solely to cases of express fraud—minority shareholders should also be
permitted to sue where the actions of the majority and directors, though not
overtly fraudulent, confer improper benefit upon themselves.
Atwool v Merryweather46
Similarly, in Atwool v Merryweather, two directors, Merryweather and
Whitworth, secretly profited by selling mining property to the company without
disclosing the true circumstances of the transaction. Page Wood V.C.
described the arrangement as “a complete fraud,” underscoring that if no

40
Edwards (n 2)
41
Burland v Earle (1902) AC 83 (PC), at p 93 per Lord Davey
42
Menier v Hoopers Telegraphs Works Ltd (1874)
44
Alexander v Automatic Telephone Co(1900)
45
Cook v Deeks (1916) UKPC 10
46
Atwool v Merryweather (1867)
derivative action were possible, directors holding majority control could
simply ratify any self-serving transaction that diverted company resources for
their personal benefit.
47
In Elder v Elder Watson Ltd , Jenkins L.J. observed that oppression may arise
where a majority shareholder, by virtue of their dominant voting power, acts
contrary to the decisions of, or without authorization from, the properly
constituted board of directors. In relation to majority conduct, fraud is
established where the majority seeks to extract financial or proprietary
benefits for themselves that properly belong to the company or are to be
shared equally among shareholders. Such conduct imposes unfair harm upon
the minority. Importantly, where fraudulent transactions are involved,
ratification is not possible, and consequently the rule in Foss v Harbottle does
not apply.

In Alexander v. Automatic Telephone Co.

A minority shareholder was permitted to sue notwithstanding the absence of
proven fraud against the directors. In this case, the directors—who also
constituted the majority—allocated shares to themselves on more favorable
terms than those offered to other allottees. While the ordinary shareholders
were required to pay upon application and allotment, the directors paid
nothing for their shares, despite becoming liable under the memorandum to
contribute when calls were made.
Lindley MR articulated the standard expected of directors, noting that the
Court of Chancery has consistently required directors to observe utmost good
faith towards shareholders and all persons who acquire shares and become
co-adventurers with them. He rejected the applicability of caveat emptor in
such circumstances, stressing those directors who use their powers to obtain
a personal benefit at the expense of shareholders, while concealing such
benefit, cannot retain it and must account for it to the company so that all
shareholders participate equally.
Summary of the Rule and Its Exceptions
The exceptions to the rule in Foss v Harbottle perform a crucial protective
function in company law by controlling majority abuse and enabling minority
shareholders to seek redress. Initially articulated in Edwards v Halliwell, these
exceptions have been expanded and clarified through decisions such as
Smith v Croft, Hooper’s Telegraph Works Ltd v Menier, and Daniels v Daniels.
In each of these cases, minority actions were permitted where the impugned
conduct involved, among other things, ultra vires acts, fraud on the minority,
or breaches of procedural safeguards such as the requirement for a special
majority.
The necessity of these carve-outs becomes clear when considering that, in
their absence, majority control would be unchecked, affording directors and
controlling shareholders unrestricted power to act in ways detrimental both to
the company and to minority interests. As recognized in Prudential Assurance
Co Ltd, ultra vires acts are incapable of ratification and void ab initio. Likewise,
Hooper’s Telegraph Works Ltd v Menier reinforces the principle that the
courts will intervene where those in control act for selfish advantage to the

47
Elder v Elder and Watson Ltd (1952)
detriment of others.
Furthermore, cases such as Pender v Lushington and Wood v Odessa
Waterworks illustrate the enforceability of personal membership
rights—whether grounded in statute or in the articles of association—against
improper majority conduct.
Conclusion
The exceptions to the rule in Foss v Harbottle are foundational to corporate
accountability. They ensure that the power of the majority is subject to legal
restraint, they guard against abuses by directors and dominant shareholders,
and they preserve the rights of minority shareholders to challenge unlawful,
oppressive, or procedurally defective conduct.

REQUIREMENTS FOR DERIVATIVE ACTION

A derivative action is a lawsuit where a shareholder can sue on behalf of the
company.48It is used when the company has been wronged but cannot or will
not sue by itself. This is an exception to the rule in Foss v Harbottle where
“Wigram VC dismissed the claim and held that when a company is wronged
by its diectors it is only the company that has standing to sue.”49 The Court
held that the action of the two claimants could not proceed as the individual
shareholders were not the proper claimants rather, the proper claimant was
the company as it was the one which had suffered the alleged wrongs.50 This
section explores the two main requirements for this type of action. These are:
fraud against the company and wrongdoer control.

Fraud on the minority

For a derivative action to be allowed, there must be a fraud on the minority.51
Fraud here does not just mean lying. It means a serious abuse of power by
those in control of the company for their own gain.

Cook v Deeks

Facts of the case

“The Toronto Construction Co had four directors GM Deeks, GS Deeks, Hinds

and Cook. It helped in the construction of railways in Canada. The first three
directors wanted to exclude Cook from the business. Each held a quarter of
the company’s shares. GM Deeks, GS Deeks and Hinds took a contract with
the Canadian Pacific Railway Company in their own names. They then passed
a shareholder resolution declaring that the company had no interest in the
contract. Cook claimed that the construction contract did belong to the
Toronto Construction Co and the shareholder resolution ratifying their actions
should not be valid because the three directors used their votes to carry it.
Lord Buckmaster said that the three had deliberatelydesigned to exclude and
used their influence and position to exclude , the company whose first interest

48
Prudential Assurance Co Ltd v Newman Industries Ltd(No. 2)(1982) Ch 204.
49
Wikipedia contributors. (n.d). Foss v Harbottle. In Wikipedia. Retrieved December 5, 2025 from
[Link]
50
Yohana Gadaffi and Miriam Tatu, Derivative action under the Companies Act 2015: New jurisprudence
or mere codification of common law principles?
51
Cook v Deeks (1916)1 AC 554.
it was their duty to protect…the benefits of that contract need to be regarded
as held on behalf of the comapany. It was quite certain that directors holding
a majority of votes would not be able to make a present to themselves. This
would allow a majority to oppress the minority and such voting power has
never been sanctioned by court.”52

The principle that was made clear here is that this was stealing a corporate
opportunity. The court held that this was fraud on the company. The directors
could not use their majority votes to make the theft legal.

Daniels v Daniels [1978] Ch 406

In this case, a director sold company land to herself at a very low price. She
then quickly sold it for a much higher price. The monitory shareholder claimed
that this had led to a breach of fiduciary duties and was detrimental to the
company’s interest.53

Burland v Earle (1902)AC 83

The Court has no jurisdiction to interfere with the internal management of a

company as long as they are acting within their [Link],majority
shareholders sold company assets to another company they owned.

The principle that shows up is that the court said that if the transaction was
done honestly and for the benefit of the company, it was not fraud just
because the majority made a profit. This case shows the limit of what counts
as fraud.

It was made clear that where “a director purchased property without mandate
from the company and under such circumstances as did not make him a
trustee thereof for the company,and thereafter resold the same to the
company at a profit, whether or not the company was entitled to a rescission
of the contract of resale, it was not entitled to affirm it and at the same time
treat the director as a trustee of the profit made,”54

Pavlides v Jensen [1956] Ch 565

“In Pavlides v Jensen, the directors approved the sale of a mine belonging to
the company for 182,000 pounds when it was actually worth about 100000
pounds. The minority shareholders complained , alleging fraud and gross
misamanagement. They alleged that directors had been guilty of gross
negligence in selling a valuable asset of the company at a price greatly below
its true market value. However, it was stated that since the sale of the asset in

52
Cook v Deeks, Wikipedia, [Link]
53
Daniels v Daniels (1978)Ch 406
54
Burland and others v Earle and others(Ont.)(No.1)(1902)AC 83(PC)
question was not beyond the powers of the company and since there was no
allegation of fraud on the part of the directors or appropriation of the assets
of the company by the majority shareholders in fraud of the minority, the
action did not fall, within the rule in Foss v Harbottle. The sale of the asset
was not beyond the powers of the company and it was not alleged to be ultra
vires. It was held that a minority shareholders’ action was not available since
it was open to the company, on the resolution of the majority of the
shareholders to sell the mine at a price decided by the company in that
manner. Additionally, it was open to the company, on resolution of the
majority, to commence legal proceedings against the directors on the basis of
negligence or error of judgement in selling the asset at an undervalue. Thus
the court held that a minority shareholder could not sue on behalf of the
company in these circumstances, as only negligence, and not actual fraud
could be proved.”55

Here, the principle that is shown is that simple negligence is not enough for
derivative action. There has to be fraud or a personal gain for those in control.

Estmanco (Kilner House) Ltd v GLC [1982]

The facts of the case are that “ Ms Frances Mary Cope had bought a flat in a
refurbished housing block, Kilner House Clayton St, London SE11 5SE, that
had been owned by the Greater London Council until the Conservative
Party began its right to buy policy of privatizing council housing. Estmanco
(Kilner House) Ltd was set up to hold properties, and allot to each buyer a
share, but with the GLC retaining all voting rights until the last flat was sold.
Then the Labour Party won the election, and halted the privatization policy. Ms
Cope requested permission to bring a derivative claim for herself and other
people who had bought their flats, alleging that the directors (now effectively
the Labour administration of the GLC) breached their duty to act for proper
[Link] Robert VC held that the derivative claim could continue, and the
greater London Council could not use its voting power to permanently prevent
shareholders acquiring voting rights, as that would undermine the purpose for
which the company was formed. This would amount to fraud on the
minority.”56 The principle that was upheld here is that using control over a
company for your own personal or political reasons, instead of for the
company's benefit, is a fraud on the minority.

The Wrongdoer control principle

It is not enough to show fraud. You must also show that the people who did
the wrong control the company57. This means they have enough votes to stop
the company from suing them.

Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch 204

55
Pavlides v Jensen , Oluwapemi Mofoluwawo, Academic. Edu.
56
Estmanco(Kilner House )Ltd v Greater London Council, Wikipedia,
[Link]
57
Foss v Harbottle (1843) 2 Hare 461 and is confirmed in Prudential Assurance Co Ltd v
Newman Industries Ltd (No.2) [1982] Ch 204.
Here,minority shareholders sued directors for a fraudulent deal. This is the
most important case on this point. The court said the shareholder must prove
that the wrongdoers "are in control of the company in the sense that they will,
by reason of their voting power, prevent the company from suing."

Atwool v Merryweather (1867) LR 5 Eq 464n

A director and another shareholder cooperated to cheat the company.

Together, they owned most of the shares. Because the cheaters controlled
the company through their shares, a minority shareholder was allowed to sue
on the company's behalf.

Smith v Croft (No.2) [1988] Ch 114

“Minority shareholders claimed to recover money paid away contrary to

the financial assistance prohibition (now found at section 678 of the
Companies Act 2006) and being ultra vires. They had 14% of the company's
shares, the defendants held 63%, and another shareholder, who did not want
litigation, held 21%.Knox J held that if the claimants were a minority even after
the wrongdoers were taken out of the equation, then there is no right to sue,
even with a Foss v Harbottle exception. Independence is a question of fact.
He followed Burland v Earle in Lord Davey’s dicta that shareholders cannot
have a bigger right to sue than the company with its procedural and
substantive limitations.”58

Directors were accused of wrongdoing, but they did not own most of the
shares. Other independent shareholders [Link] court said you must also
consider what the independent shareholders think. If they, acting in good faith
for the company, do not want a lawsuit, then a derivative action may not be
allowed. Control is not just about counting shares.

Why Wrongdoer Control is necessary

The control requirement is very important. The normal rule is that the
company decides for itself whether or not to sue. If the wrongdoers fail to
control the company, then the shareholders can meet and vote to sue them. A
derivative action is only needed when the wrongdoers are in charge and can
block any lawsuit against themselves.

Conclusion
To bring a derivative action, a shareholder must prove two things. First, there
must be a fraud against the company. This is shown by cases like Cook v
Deeks (stealing opportunities) and Daniels v Daniels (unfair deals). It is not
just negligence, as shown in Pavlides v Jensen. Second, the shareholder must
show the wrongdoers control the company, as explained in Prudential v
Newman. This idea was further developed in Smith v Croft, which looks at
what independent shareholders think. These two requirements work together
to protect minority shareholders without letting them interfere in normal
company business.

58
Smith v Croft(No 2)(1988)Ch 114, Wikipedia, [Link] )
PROCEDURAL AND FORMAL REQUIREMENTS
The court recognizes that a company has autonomy. It however overlooks any
decision that may infringe on the rights of the members or result to a
wrongdoing by the majority shareholders. If this happens a minority
shareholder has the right to initiate legal proceedings. These proceedings
should follows a strict procedural process to ensure that not only the
independence of the company is respected but also the rights of the
members are taken into account.

1. Identifying the type of claim

Before initiating a proceeding, a shareholder must determine the nature of the
claim;
 A Derivative action- this is the lawsuit brought by a shareholder to
remedy a wrong done to a company. The minority shareholders can act
for the company if directors or the controlling shareholders do a
wrongdoing. However, for this to happen the member should not only
bring the claim in their representative capacity but the company must
also be joined as a defendant. The reason for this is because the
company is recognized as a separate legal entity( 59Salomon v
Salomon & Co Ltd 1897). An example of this is when a director
misappropriates funds
 A Personal claim- this is the lawsuit brought by a shareholder to
protect their rights. An example is if a member has been wrongfully
denied a dividend or any other right as stated in the Article of
Association or The Company’s Act has been infringed. This was held in
the case of (60Pender v Lushington 1877).
 Representative action- when a member acts on behalf of other
shareholders who have the same interests and suffered the same harm.
The member should sue in representative company. An example is if a
group of shareholders are denied their voting rights.

2. Standing requirements.
This is to ensure that only the proper party should sue. Different types of
actions have different standing requirements. The standing will also ensure
that the plaintiff who is suing has clean hands as explained in the equity
maxim ‘he who comes into equity must come with clean hands as seen in
61
Kariuki & another v Kariuki and two others.
 Derivative action- for a derivative action a member should make sure
that the claim is for the benefit of the company and not a personal
claim. The court therefore checks if the claim is necessary and
genuine.
 Personal action – the requirement for this is to prove that you are a
59
Salomon v Salomon & Co ltd 1897
60
Pender v Lushington (1877) 6 Ch D 70
61
Kariuki & another v Kariuki and two others ( 1986) KLR 23 1843
 member of the company and your right as laid out either in the
company’s constitution or the company’s act, has been infringed.
 Representative action - for this action a member must prove that they
are bringing a claim that benefits both them and other members who
have the same interests and have suffered the same wrong.

3. Leave of court/ permission

Before a member presents a claim in court they must first seek leave from the
court. At this stage, the court will look into the issue of whether granting a
leave would prevent abuse of minority rights and whether the claim is genuine.
The majority rule principle (62Musa Misango v Eria Musigire) holds that the
court will not Interfere in the internal management of a company unless
necessary. The exception to this includes the following;
 If a fraud is committed against the minority- (63Edward v Grindlays
Bank)
 If the majority acts in ultra vires- (64Lord Cairns v Riche)
 In cases where personal rights of a shareholder are infringed- (65Wood
v Odessa Waterworks.)
 When the majority breach the article of association- (66Edward v
Halliwell)
This ensures court oversight even though the company has autonomy.
4. Joinder of parties

 Derivative action -The company must be joined as a defendant

One of the Company law principles is ‘The Proper Plaintiff Rule’ as was stated
in the case Salomon v Salomon 1897. A corporate company is recognized as
a separate legal entity with rights and obligations like that of a person under
the law. This therefore means that when a wrong is done to a company, the
company is the one that should be the proper plaintiff and not defended
through individual shareholders. The case of (67Foss v Harbottle) also held
that only the company has the right to sue.
 Personal action – defendant must be the party infringing the
shareholder’s personal rights

Representative action - Plaintiff must sue in representative capacity

.The pleadings must clearly show that the member suing is
representing an identifiable group that has the same interests as them.
This prevents multiplicity of suits and a proper legal standing (68Gray v Lewis)
62
Musa Misango v Eria Musigire (1966) EA 390
63
Edward v Grindlays Bank
64
Lord Cairns v Riche ( 1875) LR 7 HL 653
65
Wood v Odessa Waterworks (1889) 42 Ch D 636
66
Edward v Halliwell (1950) 2 All ER 1064
67
Foss v Harbottle (1843) 2 Hare 461
68
Gray v Lewis ( 1873) LR 8 Ch App 1035
 5. Filing the claim / pleadings
A pleading is written to state the facts in issue. Therefore, the member that is
presenting a claim will state the wrong that was done and its effects.
 Personal claim- In a personal claim, the pleading must show that the
breach was personal. This may be being denied a voting right,
dividends or any other infringement of their personal rights in the
company. The defendant should also be properly identified.
 Representative claim- in this action, a pleading should make it very
clear that the member is suing in a representative capacity. The group
that is represented should be identifiable and must have the same
interests as the member representing them.

6. Service of documents and compliance.

Once filed, the documents should be served to the defendant. They include;
the plaint, summons and any other supporting documents. Proper service
ensures that the defendant is aware of the suit and that they can defend
themselves ensuring fairness and transparency.
7. Compliance with civil procedure rules
Shareholders must comply with procedural rules under the civil procedure act
and rules. This includes timelines that should be adhered to and evidentiary
standards.
8. Court directions
After the court has gone through the pleadings, they will issue directions on
how the claim will proceed.
9. Presentation of evidence
 Derivative action – the evidence should prove the facts in issue being
that the company suffered a wrongdoing from the defendant.
Examples include proving that fraud or mismanagement was done.
 Personal action – proof of infringement of shareholder rights.
 Representative action – proof of infringement of rights of an
identifiable group of shareholders.

[Link] available
 Derivative action – remedies should be for the benefit of the company
 Personal action – should be one that benefits the individual
shareholders
 Representative action – should be the one that benefits the group of
shareholders affected
Importance of the procedural rigor
Following a strict procedural process serves the following purpose;
 Ensures that the process is fair and transparent because accountability
is needed from both parties of the suit
 By avoiding multiplicity of suits, efficiency of the court process is
upheld
 The procedures laid out promote company autonomy while also
catering to the rights of individual members.
 Encourages company investment by ensuring that the process doesn’t
 destabilize the company’s management.
 It prevents frivolous suits that may waste the courts time.

WINDING UP AS A COMMON LAW REMEDY FOR MINORITY SHAREHOLDERS

The Companies Act Cap 486 does not define the term winding up or
liquidation, however,it uses the terms interchangeably, and we therefore
assume them as synonymous.
Winding up is the process of putting an end to the life of a company. It is a
proceeding by means of which a company is dissolved and in the course of
such dissolution its assets are collected and its debts are paid off out of the
assets of the company or from contributions by its members , if necessary. If
any surplus is left, it is distributed among the members in accordance with
their rights. The management of the company’s affairs is taken out of its
directors hands, its assets are realized by the liquidator and its debts are paid
out of the proceeds of realization.

MODES OF WINDING UP
As per section 212 of the Companies Act cap 486 , there are three modes:
(i) Compulsory winding up by the court.
(ii)Voluntary winding up:-
(a)Members’ voluntary winding up.
(b) Creditors’ voluntary winding up
(iii)Winding up under the supervision of the court.

In Kenyan company law, an aggrieved minority shareholder can seek a court

order to wind up (liquidate) a company on the grounds that it is just and
equitable to do so. This remedy is applied in rare, exceptional circumstances.
This remedy is recognized in the Insolvency Act 2015 of
[Link] 424(1)(g) of the Insolvency Act 2015 provides that a company
may be liquidated if the Court is of the opinion that it is just and equitable that
the company should be liquidated. The just and equitable winding up ground
exists alongside statutory reliefs such as the unfair-prejudice remedy which
is stated in section 780 of the Companies Act No.17 of 2015. However,
judicial winding up is seen as a last resort, because it destroys the company
itself and affects all stakeholders.
Section 425(3) of the Insolvency Act 2015 permits a contributory/member to
apply on the just and equitable ground even if they are normally barred by the
six-month rule, provided they are liable to contribute under section 386.
However, Section 427(4) expressly warns that the court may refuse a petition
if some other remedy is available and the petitioners are acting unreasonably
in seeking liquidation instead. If an alternative remedy such as a a buy-out or
derivative action exists and petitioners unreasonably refuse it, the court must
dismiss the winding up petition. This statutory scheme makes clear that
winding up can succeed only when minor parties are effectively shut out and
no other fair solution is available, in other words, only when a company is
essentially irretrievable except by termination.
This reflects the principle that winding up is a severe step to be taken only
when other remedies ,such as minority oppression remedies or contractual
69
rights have failed.
It is anchored in the principle that a company is more than a mere legal entity
behind its corporate form lie individuals with legitimate expectations and
obligations towards one another.70

In Mohamed Yusufali & Another v Bharat Bhardwaj & Another

[2007] KEHC 2007 (KLR) - Kenya Law, the court explained that if a petitioning
minority rejects a reasonable offer to sell their shares and insists on
dissolution, that conduct is unreasonable and bars the winding-up order. In
sum, the just and equitable remedy exists for the most intractable
breakdowns of corporate confidence; it is not a substitute for ordinary
shareholder claims and will not be granted if other statutory or contractual
remedies can achieve justice.71
The leading case is Ebrahimi v Westbourne Galleries Ltd , where the House of
Lords held that in a quasi-partnership formed on the basis of mutual
confidence and shared management, it may be “just and equitable” to wind up
the company if majority shareholders exclude a minority partner from the
business. In this specific case, two business partners had incorporated their
firm, but when one partner’s son joined as a director, the other partner
,Ebrahimi,was outvoted and removed from management. The house of Lords
recognised that Ebrahimi’s exclusion violated the parties’ original
understanding that their relationship would mirror the old partnership. Thus,
even though the articles and statute had permitted his removal, the court
treated the company as if it were a partnership and ordered its winding up.
This landmark decision exemplifies how the just and equitable jurisdiction
protects minorities from oppressive conduct and unmet expectations beyond
what the formal articles provide.

Winding Up as a Last-Resort Remedy

Winding up under the just and equitable clause is considered a last resort
because it ends the company altogether and harms even innocent
stakeholders. As Justice Vinelott observed in an English case,Re A Company
(No 002567 of 1982), reported as [1983] 2 All ER 854, if a minority has a
genuine offer from the majority to buy its shares at a fair value, insisting on
winding up instead of accepting that alternative is an abuse of the process.
Kenyan courts have also been guided by this approach as seen in Mohamed
Yusufali & Another v Bharat Bhardwaj & Another [2007] KEHC 2007 (KLR) ,a

69
Section 427 ,Insolvency Act CAP 53, Kenya : Power of Courts on Hearing of Liquidation
Application,[Link]
hearing-of-liquidation-application
70
[Link]
[Link]
[Link]
71
[Link]
York House Properties case, the High Court struck a balance by staying a
petition where the majority had offered to purchase the petitioners’ shares
and the petitioners’ sole aim was to coerce that sale. Similarly, section 427(4)
of the Insolvency Act codifies that a petition will be refused if members
unreasonably reject other remedies.

In practice, petitioners must typically first turn to the statutory unfair-prejudice

remedy in section 780 of the Companies Act No. 17 of 2015, or seek
contractual buy-out mechanisms under any shareholders’ agreement. If those
fail, and only if the company’s internal relationships are truly irreparable, the
just and equitable winding-up may then be considered.72
Winding up is an equity in aid of contractual rights ,the court will not override
valid shareholding or statutory rights unless conscience demands it. Indeed,
courts require petitioners to come with “clean hands”. If the petitioner’s own
misconduct caused the breakdown, relief will be [Link] the rationale
behind this remedy is not to punish lawful majority decisions, but to enforce
the equitable understandings underpinning certain companies, especially
small, family or quasi-partnership firms, when those understandings are
breached. Only when those understandings collapse and no sensible exit
exists will the court wind up the company as a whole.
There are several grounds in which a just and equitable winding up order may
be appropriate.

These grounds include:

(a) failure of the company’s substratum or objects.
(b) fraudulent or oppressive formation.
(c) irretrievable deadlock between key members.
(d) justifiable loss of confidence in management.
(e) quasi-partnership status leading to exclusion of a minority.

A .Substratum Failure
A company’s substratum ,its foundational purpose, is said to have failed if it
can no longer carry out the business it was formed to do. In such cases, even
though the company may have assets, its reason for existence is gone,
making winding up justifiable.
In Re German Date Coffee Co Ltd (1882) 20 Ch D 169, the company’s
memorandum stated that it was formed to work a German patent for making
a coffee substitute from dates. When the German patent was never granted,
two shareholders petitioned for winding up on the grounds that the company’s
object had failed. The Court held that the patent failure made it impossible to
carry out the company’s main purpose and that the substratum had
disappeared. Even though the company was solvent and a majority of
members wanted to continue, Lord Justice Kay affirmed that when the prime
object of the company fails completely, the company must be wound up. In
effect, the Court treated the company as if it had been a partnership formed
for a single venture and once that venture collapsed, the company no longer

72
Statutory Protection for Oppressed Minority Shareholders in Kenya: Reflections on the Reforms under
the Companies Act 2015
[Link]
had anything to do.
Similarly, in Re Abbey Leisure (Virdi) Ltd [1990] ,the company’s purpose had
been achieved or rendered moot, so winding up was appropriate. The
company was formed for a single venture , that is to purchase and run a
nightclub. When that project ended, the company’s only remaining assets
were cash. The majority offered to buy out the minority’s shares at a valuation
under the company’s articles ,which would likely impose a minority discount,
but the minority shareholder Mr. Virdi, refused. The Court of Appeal held that
Virdi’s refusal was reasonable since the nightclub venture had ended and the
remaining purpose was simply to distribute the cash, it was just and equitable
to wind up the company rather than allow the majority to exploit a technical
discount. Lindley LJ with whom the other Lords Justices agreed, noted that
because the venture had concluded and Virdi would be exposed to a
discounted valuation, the wind-up petition could proceed.
In Re Perfectair Holdings Ltd [1990], the court applied the substratum
principle to a holding company. Perfectair’s sole remaining function was to
get in its assets and wind up its [Link] Scott J. held that if a
company’s sole purpose is itself winding up, then it is just and equitable to
liquidate; the orderly realization of assets is for the liquidator, not the directors.
Thus, when a company’s once-viable business has been completely wound
down for example, by selling its operating assets,the court may wind up the
company itself.
The rationale is that no reasonable expectation remains for the business to
continue, so it is fair to break the corporate shell. In sum, a failure of
substratum is shown where the company can no longer operate within its
objects: patent plans have failed (German Date), projects have been
completed (Abbey Leisure), or the company is effectively a hollow shell
(Perfectair)73

[Link] or Improper Formation

Winding up is also justified when a company was constituted or used for a
fraudulent purpose. The courts will not allow promoters or majority holders to
treat a company as a means for deceiving minority investors.
The case in this grounds is Re Thomas Edward Brinsmead & Sons [1887] 1
Ch 45. In this case, three former employees of a reputable piano maker ,John
Brinsmead & Sons, secretly formed a company under a similar name. Their
scheme was to manufacture and sell pianos passed off as being made by the
original Brinsmead firm, thereby defrauding the public and minority
[Link] this came to light in the winding up petition, the court
concluded that the company had been formed to perpetrate a fraud on its
shareholders and the public. Accordingly, it was “just and equitable” to wind it
up to protect the defrauded investors.74 As one report summarizes, the
company’s constitution was “found to be an act of fraud,” justifying

73
Metafile v Companies Act | [2006] IEHC 407 | High Court of Ireland | Judgment | Law | CaseMine
[Link]
74
[Link]
[Link]
compulsory liquidation.75
Generally, if directors or promoters have misrepresented the company’s
objects to the detriment of shareholders or carried out a fraud on the
minority,that meets the just and equitable test. Kenyan courts would
recognize such a misuse of incorporation and under section 424 of the
Insolvency Act, a court may also wind up a company if it has been formed to
defraud or is carrying on business illegally.

[Link]
Deadlock: when management is irretrievably split and the company’s affairs
cannot be conducted.
The definitive case in this grounds is the Re Yenidje Tobacco Co Ltd case
[1916] 2 Ch 426. Yenidje was a private company with two equal shareholders
who were also co-directors. A total breakdown in their personal relations (they
would no longer speak to each other) meant no business could be carried on.
The court treated the company as a partnership in substance and held that,
akin to dissolving a partnership, it must be wound up. Lord Cozens-Hardy MR
famously remarked that with the two directors at loggerheads and no means
of running the company, the company should not be allowed to continue.76
The partnership analogy was reaffirmed in The Model Retreading Co [1962]
E.A. 57 ,an East African case. A small private company’s two shareholders
had bitter and unresolved quarrelling going to the root of the company’s
business, preventing the petitioner from participating in management. The
court applied the Yenidje principle . Since the company was in the nature of a
partnership, it should be wound up whenever the quarrel between the only two
shareholders makes continuation impossible[15]. These cases show that
deadlock , where equal owners cannot break a stalemate, is a just and
equitable ground.77
The same principle applies if a board or shareholder meeting is deadlocked
and there is no dispute mechanism in the articles. In essence, where the joint
controllers of a small company are locked in conflict to the point of paralysis,
winding up is just and equitable. Kenyan courts have recognized this under
the Insolvency Act of 2015, section 427(3) that requires that creditors or
members must be able to act for the common benefit , and if deadlock leaves
no common ground, an order is conceivable. However, courts will still
consider alternative solutions such as appointing an administrator or
negotiating buy-outs first.

[Link] of Confidence
Another ground is the loss of confidence in the company’s management or
affairs. This is typically applied in small private companies formed by
associates or family.
This is illustrated in Loch v John Blackwood Ltd [1924] AC 783 decided by the

75
E-Learner- 09Dynamics Pakistan: Business Law- Insolvency Act 1986 & Companies Act 2006
[Link]
[Link]
76
[Link]
[Link]
77
Lubogo Isaac C . lecturer notes Business Associations Complete notes
Privy Council, is the leading case. The founder ,John Blackwood, set up a new
company to run his family foundry. After his death, a trustee ,for the founder’s
will, acting alongside his own wife who was a co-heir,ran the company. The
trustee allotted new shares to himself and his wife, thereby giving them voting
control, and paid himself a large salary , treating the business as his personal
preserve. The other (minority) family members, who had expected a share in
management and profit, felt betrayed. The Privy Council held that the trustee
had so abused his position that the other members could have no confidence
in the manner in which he ran the company.78
It was also therefore held that it was indeed just and equitable to wind up the
company. Lord Shaw emphasized that this remedy requires a true lack of
confidence in those running the company and typically occurs where there is a
quasi-partnership situation.
Accordingly, it was just and equitable to wind up the company. The key
lesson was that where shareholders were effectively running the company as
if in a partnership or trust, and one faction utterly loses trust in those running
the company, the court will intervene.
This case demonstrates that loss of confidence in management especially in
a small close company ,can justify winding up. Any conduct that
fundamentally breaks the relationship such as secret deals, diversion of
company funds, or exclusion from management without justification may, in
effect, be viewed like a quasi-partnership dissolution issue.
In summary , if a small company’s majority is acting oppressively or
incompetently against minorities who cannot protect themselves by other
means, loss of confidence may justify winding up.

[Link]-Partnership and Exclusion

The case of Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 illustrates the
quasi-partnership exclusion ground. In this case , two long-time business
associates ,Mr. Ebrahimi and Mr. Nazar,incorporated their rug-selling
partnership as Westbourne Galleries Ltd, initially with themselves as the only
shareholders and directors. All profits went to directors’ salaries, no dividends
were paid. Later, Mr. Nazar’s adult son was admitted to the board with a
minority stake from each father. After a falling out, at a general meeting Nazar
and his son ,holding a majority, voted to remove Ebrahimi as a director.
Although this used the company’s Articles power, Ebrahimi petitioned to wind
up the company just and equitable. The House of Lords agreed. It emphasised
that the company was essentially a close partnership among the original
members , that is Ebrahimi and Nazar, built on personal trust and mutual
expectation of shared management. Ebrahimi had a legitimate expectation
that he would continue to participate and using the majority rule to oust him
breached the equitable principles on which the company was [Link]
Wilberforce held that the Articles could not override the founders’ fair bargain
and it would be inequitable to allow the majority simply to deprive a co-
founder of his role. Consequently, the company was wound up and Ebrahimi
received his capital investment.79

78
Loch v John Blackwood Ltd [1924] AC 783 Case Summary
[Link]
79
Ebrahimi v Westbourne Galleries Ltd - Wikipedia
In summary, winding up a company on the just and equitable ground is a
discretionary remedy reserved for extreme cases of minority oppression or
breakdown.
It is strictly last resort and courts will not order it unless satisfied that no other
fair remedy is available and that the petitioners’ situation is truly unjust. The
condition under which shareholders may seek this relief requires showing that
the company cannot continue in accordance with the reasonable expectations
of its members.
Typical conditions include failure of the company's substrum ,fraudulently
misleading formation, deadlock,loss of confidence in those managing the
company, or the existence of a quasi-partnership in which one member is
being excluded. Landmark English cases such as: Re German Date Coffee Co
(1882) 20 Ch D 169,Virdi v Abbey Leisure Ltd [1990] BCLC 342, Re Perfectair
Holdings Ltd [1990] BCLC 423,Re Thomas Edward Brinsmead & Sons [1887] 1
Ch 45, Re Yenidje Tobacco Co Ltd [1916] 2 Ch 42, Loch v John Blackwood Ltd
[1924] AC 783, Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 ,illustrate
each ground.
Kenyan law codifies these principles in the Insolvency Act 2015, subject to
the requirement that petitioners act reasonably for example by pursuing share
purchase [Link], while the just and equitable winding up power
remains available to minority shareholders, it is exercised sparingly, to ensure
that only truly dissolved relationships lead to the company’s liquidation.

[Link]