Court declines to liquidate hotel after directors affair turns sour

The High Court in Mombasa has declined to liquidate a firm operating a high-end beach hotel in Diani, Kwale County, after a romantic relationship between its two directors ended.

Justice Nabil Orina said that despite the irreparable breakdown of the romantic relationship between Petra Lettau and YVes Berter, it was not enough reason to liquidate Paradiso Toys Limited.

The firm also runs a high-end boutique hotel, Zum Zum Beach House, that hosts six guest bedrooms and a presidential suite together with a residential wing for its foreign clientele, which generates substantial revenue.

Justice Nabil noted that their relationship breakdown had extended beyond personal differences and affected the manner in which the affairs of the company were conducted, and the two had not conducted the business of the company as one.

However, the judge said there was no evidence that the substratum of the company ceased to exist as alleged by Lettau.

“I decline to make an order for the liquidation of Paradiso Toys Limited, as there is an adequate alternative remedy available under section 782 of the Companies Act, read together with section 427 of the Insolvency Act,” said Justice Orina.

Lettau had applied for the liquidation of the said company, accusing Berter of oppressing her and locking her out of the company’s affairs following the breakdown of their romantic relationship.

She applied to have her 33.3 per cent shares of the company bought out by Berter, and she was allowed to buy 66.6 per cent shares from Berter.

Justice Orina ordered that upon independent valuation of the company, the two shall proceed to buy out their respective interests in the company, with Berter having the priority to buy Lettau’s shares.

“Upon completion of the valuation, the Respondent (Berter) shall have the right of first refusal to purchase the Petitioner's (Lettau) 33.33 per cent. Should the Respondent decline or fail to exercise that option within a period of 14 days, the Petitioner shall have the option to purchase the Respondent's 66.66 per cent shareholding at the corresponding value determined by the same valuation, which option shall similarly be exercised within 14 days,” said Justice Orina.

He directed that the said purchase price shall be paid within 60 days of the exercise of the relevant option, unless the parties agree otherwise in writing.

The judge said the transfer of the shares shall take place simultaneously with payment of the purchase price.

The judge said that although the Court must resist the temptation to resolve matters of a failed personal relationship through company law, it must equally resist the corresponding temptation of pretending that the personal relationship is irrelevant where the company was itself built upon it.

He said deep personal relationships and sometimes friendships form the bedrock of corporate relationships.

“It is through these relationships that parties build trust and find a common vision to establish a business. Equally, because relationships and friendships can end, businesses built on their foundation are at the biggest risk of resulting in a deep legal quagmire when such relationships collapse,” said Justice Orina.

Lettau, through his lawyer Wandabwa, said that where a pre-existing relationship informs the running of the affairs of the company and all the parties participate in the affairs and they are unable to agree, it may establish a basis for liquidation under the just and equitable principle.

Lettau said that Berter excluded her from the company’s management, leading to a prolonged dispute over the company, and failed to buy out of the company.

She said that Berter's offer of sh.14.8 million (100,000 euros) to be paid in seven years is unreasonable.

Lettau said that after selling off her Turtle Beach House, she invested sh74 million towards the construction of the high-end beach hotel.

She said that despite her contribution and involvement in the company’s affairs, she was not remunerated or paid dividends and was kicked out of the company's residence where she lived.

“I relied, in part, on a joint account with Berter for her upkeep while residing at the company's premises,” said Lettau.

In his defence, Berter told the court that it was Lettau who abandoned the company when their relationship ended, necessitating the meeting for her removal as a director.

Berter regarded Lettau’s petition as malicious, misconceived and an abuse of the Court process.

“The petition does not arise from any genuine oppression in the conduct of the company's affairs but from the breakdown of the former romantic relationship between us,” said Berter.

He said that Lettau was never an employee of the company, nor was there a contract, resolution or other company record creating an entitlement to her remuneration.

However, Justice Orina held that the manner in which the affairs of the closely held company have evolved following the breakdown between the parties has become unfairly prejudicial to Lettau's interests as a member.

“It is evident that there is a complete breakdown of mutual trust between the shareholders, and there is no likelihood of the two parties transacting the business of the company in a mutually beneficial way,” said Justice Orina.