High court.
A construction firm has been allowed to pursue the directors of a real estate developer over a debt of Sh55.9 million.
High Court judge Alfred Mabeya gave Silver Construction Limited the go-ahead to pursue the directors of Shady Acres Limited after lifting the corporate veil for failure to settle the debt for the past four years.
The judge considered the fact that the property developer entered into an agreement with the contractor in 2020 and consented to the terms of settlement but it failed to keep its part of the bargain.
“In such circumstances, the court is called upon to disregard the corporate personality and have the director’s personally liable for the company’s debt,” said the judge.
Justice Mabeya said although lifting the corporate veil should be done as last resort and for good reasons, evidence tabled before him showed illegality, breach and impropriety, necessitating the court to lift the veil.
The lifting of the veil refers to situations where the law or the courts look beyond the legal personality of the company and hold the directors, other officials (such as company secretary) or even the shareholders personally liable for the company’s actions or debts.
The contractor moved to court seeking some orders but the parties reached a deal before High Court judge Francis Tuiyott (now Court of Appeal judge) on December 14, 2020.
In the consent, the developer was to pay the construction firm Sh55.9 million within 120 days.
The parties further agreed that any amount received from the sale of any apartment or unit in Nairobi’s Madaraka estate, would be used to settle the debt.
However, the developer failed to comply with the consent and the construction firm commenced execution proceedings.
The directors of Shady Acres Mr David Muriuki Mambo and his wife Rose said the contract was for Sh747 million and that they paid the construction firm Sh7 million in the project financed by I&M Bank.
However, the directors argued that the land registry was closed for two years to transit to digitisation and later Covid-19 pandemic followed, adversely affecting its sales and the company’s cash flow.
Mr Mambo said the bank repayment was affected and the debt ballooned.
As part of the deal, they offered the contractor five to six units of the apartment but that Silver Construction wanted them transferred to it but the developer declined.
He confirmed that sales of the units reflected on the statements were Sh1.3 billion covered client’s deposits for the year 2021 which increased to Sh1.4 billion in 2022.
He maintained that Shady Acres had no shares in the project and that the property was registered in the name of Westpointe Reality Limited.
Mr Mambo further said the units offered to Shady Acres belonged to Westpointe Reality.
He stated that the directors of Westpointe Reality were himself, his wife and a Mr Makanga and that he could not produce the statements of the company without the consent of the other directors.
The construction firm submitted that the directors failed to satisfy the order of the court on the company’s ability to satisfy the debt.
According to justice Mabeya, the willful neglect and breach of the consent by the directors, the statements produced and the oral testimony, proved that the company earned income from clients’ deposits to the tune of Sh1.3 billion in 2021 and which increased to Sh1.4 billion the following year.
“The financial statements produced did not reflect the applicant’s debt meaning that the same was not prioritized,” said the judge.
From the records, the court said it was clear the directors of Shady Acres and Westpointe Reality were the same.
“There is credible evidence from the conduct of the directors and the respondent’s business that the relationship between the two companies has been used to evade payment of the debt in this case,” observed justice Mabeya.
