Bernard Kariuki Mungai,Grace Waitherero Kariuki & Croton Herbs Co. Limited v Family Bank Limited [2017] KEHC 698 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT KIAMBU

CIVIL SUIT NO. 8 OF 2017

BERNARD KARIUKI MUNGAI..............................1STAPPLICANT

GRACE WAITHERERO KARIUKI.......................2ND APPLICANT

CROTON HERBS CO. LIMITED...........................3RD APPLICANT

VERSUS

FAMILY BANK LIMITED.............................................DEFENDANT

RULING

1. As is in most cases of this nature, the basic facts are undisputed.  Here, the 1st and 2nd Applicants are married. They also incorporated a company together, the 3rd Applicant, whence they derived most of their livelihood.  That company’s main business was to process liquor.

2. By all accounts, the 1st and 2nd Applicants and, by extension, the 3rd Applicant, have enjoyed good business relationships with the Respondent, a bank.  The 2nd Applicant has listed at least four different accounts she holds or has held with the Respondent.

3. It was therefore natural that when time to expand the business of the 3rd Applicant presented itself, the 1st and 2nd Applicant approached the Respondent for a loan.  The business plan was, by the rendering of the 1st and 2nd Applicants, to acquire a liquor processing machine from China at an estimated cost of Kshs. 10,450,000/=.  The Respondent agreed to grant the loan through the 2nd Applicant’s bank account on condition that the 1st and 2nd Applicants, as co-directors of the 3rd Applicant, grant collateral security and also execute guarantees on behalf of the 3rd Applicant.

4. The collateral provided for that loan is the parcel known as Ndarugu/Gacharage/3028 and 3029 situated in Munyu-ini in Gatundu, Kiambu.  Naturally, this is the subject matter of the present suit and I will now refer to it as “Suit Property.”

5.  All the documents for the loan were signed, Ts crossed, Is dotted and amount disbursed as per the agreement.  The Suit Property was charged in favour of the Respondent as the collateral for the loan.  The Applicants say they proceeded to order for and pay for the machine from the manufacturer in China.  It is unclear if it ever arrived but that is irrelevant for our purposes.

6. As the Applicants tell their story, a series of misfortunes began beating them.  First, a national crackdown on illicit brews was declared and one may say that Kiambu County was “Ground Zero” for that campaign.  Although the Applicants insist that their business was legal, the campaign to rid the County of illicit brews became politicized with the result that a mob attacked their business unlawfully and completely destroyed it.  By the time the act of vandalization happened, the Applicants say, the business was valued at more than Kshs. 37 Million.

7. This, obviously, badly affected the Applicants’ economic fortunes and their ability to continue financing their loan with the Respondent.  Still, they say, they continued paying part of the loan amounts.  To mitigate their circumstances, they started another business – to supply wood.  However, since misfortunes do not come singly, their main customer went under shortly thereafter – and did so owing the 1st and 2nd Applicants more than Kshs. 3 Million.

8. Meanwhile, by their own admission, the Applicants had fallen behind in the payment of their loan amounts to the Respondent. Still, they claim that their first inkling that the Respondent would act adversely against them came on 09/03/2017 when they received a 45-days Redemption Notice from Leakeys Auctioneers acting on behalf of the Respondent threatening to sell their charged property.

9.  Consequently, on 30/03/2017, the Applicants took out a Notice of Motion under Certificate of Urgency seeking the following four substantive prayers:

a. Upon hearing of this Application inter partes, this Honourable Court be pleased to grant an interim injunction directed at the defendant by itself, its employees, agents and any other person authorized by it from advertising for sale, selling or dealing with LR Nos Ndaragu/Gacharage/3028 and 3029 in any manner whatsoever that will deprive the 1st Plaintiff his titles and motor vehicle registration number KBY 526K.

b. This Honourable Court be pleased to order that accounts be taken in respect of Family Bank Account Numbers 004AFFL13170001, 004FFL140930001, 004SERL14250001 and 004FFL1511420001, Gatundu Branch to ascertain the amount due from the 1st and 2nd Plaintiffs.

c. That this Honourable Court be pleased to order the release of Motor Vehicle Registration number KBY 529K unlawfully attached by the Respondent pending the hearing and determination of this Application.

d. That the costs of this Application be borne by the Defendant.

10. As far as I can tell, the Applicants are aggrieved with the decision by the Respondent to exercise its power of statutory sale over the Suit Property for the following reasons:

a. First, they contest that the Respondent ever served them the requisite statutory 90-days notice before reverting to statutory sale. Therefore, they find the advertised sale illegal.

b. Second, the Applicants claim that upon perusing their statement of accounts they have found what they call “gross abnormalities” – including grossly inflated charges and unlawful fees.  Hence, the Applicants argue that it is important that accounts be taken first before any advertisement takes place.  To beef up this claim, the Applicants have attached a report from Interest Rates Advisory Centre (IRAC) demonstrating an overcharge of Kshs. 1,095,135. 83/=. This, the Applicants say, is clear demonstration that there is need to take accounts first so that it can be established how much they actually owe.

c. Third, as I understand it, the Applicants say that they have demonstrated good will and good faith to settle the loan save for the misfortunes that they have suffered. The 2nd Applicant says she was faithfully paying the loan on a monthly basis until the misfortunes hit.  They find the inability or refusal by the Respondent to take into consideration their peculiar circumstances to be vindictive and punitive.

d. Fourth, the 1st and 2nd Applicants contend that the Suit Property is the only residential home of the applicants and they will be rendered destitute if it is sold as they will remain homeless.

e. Lastly, with respect to the Motor Vehicle Registration No. KBY 529K, the Applicants claim that it is “self-evident” that they have paid more than two-thirds of the purchase price and that therefore it cannot be sold without an order of the Court.

11. It is important to recall that the procedural posture of the Application: it is an application for interlocutory reliefs. Hence, by definition, I cannot come to anything more than provisional conclusions on the merits of the case or even disputed legal positions.  The main purpose of a preliminary injunction is to protect the plaintiff from irreparable injury and to preserve the power of the Court to ultimately render a meaningful decision on the merits.  The Court must be careful, in considering applications for preliminary injunctions, not to determine any disputed right.  The aim is to prevent a threatened wrong or the doing, by one of the parties to a litigation, an act which might threaten or endanger the rights of the plaintiff.

12. In our jurisprudence, this legal position is now enshrined in a tripartite legal criterion for granting interlocutory injunctions.  This criterion, setting out the legal principles for granting interlocutory injunctions, is set out in the celebrated case of Giella vs Cassman Brown in the words of Spry V.P.:

First, an applicant must show a prima facie case with a probability of success. Secondly, an interlocutory injunction will not normally be granted unless the applicant might otherwise suffer irreparable injury, which would not be adequately compensated by an award of damages. Thirdly, if the court is in doubt, it will decide an application on the balance of convenience.

13. Hence, the Court’s first task is to determine if the Plaintiff has established a prima facie case with a probability of success once the full case is ventilated.  I must be careful to reiterate that this first Giella factor suggests that the Applicant must establish with certainty that she will succeed on the merits; only that she raises an arguable case with a probability of success (see, for example, MraoLtd v First American Bank of Kenya Ltd & 2 others [2003] KLR 125).

14. Does the instant Application raise a prima facie case with a probability of success? In order to come to a reasoned conclusion on that question, I will look at each of the Applicants’ expressed grievances in seriatim. I have reversed the order of Applicants’ grievances for logical reasons.

15. First,the Applicants argue that any intended sale should be delayed because there is a need to take a statement of accounts first.  Their argument is that they have been grossly overcharged and the annexed IRAC Report is meant to give feet to this claim.  Our jurisprudence is now quite clear on this point: a dispute as to the actual amount owing under a charge is not a good cause to restrain a chargee or mortgagee from exercising their statutory power of sale.  This is now a decisional rule in Kenya of long progeny starting with Shah v Devji [1965] E.A. 91 including, recently, the case cited to me by the Respondent: Palmy Company Limited v Consolidated Bank of Kenya Limited [2014] eKLR.  In the latter case, Justice Gikonyo cited the best known encapsulation of the law on this issue, to wit, Halsbury's Laws of England,volume 32 (4th edition) paragraph 725 which is as follows:

“725. When mortgagee may be restrained from exercising power of sale.

The mortgagee will not be restrained from exercising his power of sale because the amount due is in dispute, or because the mortgagor has began a redemption action, or because the mortgagor objects to the manner in which the sale is being arranged. He will be restrained, however, if the mortgagor pays the amount claimed into court, that is, the amount which the mortgagee claims to be due to him, unless, on the terms of the mortgage, the claim is excessive.”

16. So it is here.  There is no dispute that the Applicants owe and that they have defaulted in payments. Their only refuge is that there is an amount in dispute.  That does not rise to the level of prima facie case to clog the Respondent’s right to statutory sale. In Morris & Co. Ltd v Kenya Commercial Bank Ltd [2003] 2 EA 605, Justice Ringera dismissed an application for injunction in similar circumstances and held that “It was well settled law that a dispute as to amount due cannot be a ground for an injunction to restrain a lender from appointing a receiver on grounds of default in payment obligation.”

17. I will deal with the Applicants’ third and fourth arguments together.  In the third, they claim that they have demonstrated good faith and that the Respondent should, in essence, take into account their misfortunes which I enumerated above.  Sad as these misfortunes are, borrowers must always understand that charging one’s property is a business decision which involves risks and rewards.  One cannot hope to benefit from the risks in the upswing but demand that the bank eats up their losses in the downswing. It would be to encourage bad business practices to allow a “mercy rule” of the nature that forces banks to accommodate borrowers who have suffered misfortunes.  That may belong to the realm of philanthrophy but it would be bad for business and bad for the economy to clog a borrower’s ripened statutory power of sale on the ground that the borrower suffered some misfortune.

18. The same argument goes for the argument that the Suit Property is matrimonial property and the 1st and 2nd Applicants will be left destitute if it is sold.  Both the 1st and 2nd Applicants consented to the charge voluntarily.  Both understood the risks involved.  There is no law that stops a bank from exercising its statutory power of sale where spousal consent was obtained simply because it will leave the spouses destitute.  See Julius Mainye Anyenga v EcoBank Limited [2004] eKLR.

19. The last argument the Applicants make is a specific one with respect to the Motor Vehicle Registration No. KBY 529K: that it is “self-evident” that they have paid more than two-thirds of the purchase price and that therefore it should not be repossessed without an order of the Court.  It is obviously not “self-evident” that the Applicants have paid more than two-thirds of the purchase price and it is not clear from the pleadings whether the motor vehicle was repossessed as part of the loan secured by the charge on the Suit Property or under a Chattels Mortgage or a Hire Purchase Agreement.  Suffice it to say that the pleadings on this aspect are too sparse for one to conclude that a prima facie case has been raised  even on this specific aspect of the case.  It is only in their written submissions that the Applicants’ lawyers disclose for the first time that the Motor Vehicle is under a Chattels Mortgage.

20. Having found no merit in all the other grounds for relief advanced by the Applicants, I will now turn to their most potent argument: that necessary statutory notices were either not served or were defectively or inadequately served. This is potent because our jurisprudence has tended to read the rights of borrowers or chargors to receive these statutory notices quite strictly so as to maximize the rights of chargors to redeem their property.  Hence, our Courts strictly scrutinize all required statutory notices to ensure that they comply with the statute or regulations before they allow a financial institution to exercise its statutory power of sale.  This is in the realization that the statutory power of sale is a radical power which a chargee should only be permitted to deploy once it has demonstrated that it has strictly complied with the law regarding the notice period, the form of notice and the manner of service of the notice.

21. Here, the Applicants claim that they did not receive the requisite statutory notices under the Land Act and that they were surprised by the redemption notice from the auctioneers hence making the Respondent’s attempt to sale their property illegal according to the Land Act.  In response to this allegation, the Respondent has produced two notices which are exhibited to the Replying Affidavit of Anthony Ouma, the Respondent’s Legal Officer.  These are:

a. A 90-days’ Notice issued under section 90 of the Land Act.  It is dated 10/08/2016 and it is addressed to the 1st Applicant as the chargor and copied to the 2nd Applicant as the borrower.  The Respondent has also exhibited the return of service i.e. a list of registered mail posted by the Respondent duly stamped by the Postal Corporation of Kenya and the certificate of posting thereto.

b. A 40-days Notice issued under Section 96 of the Land Act.  It is dated 05/12/2016.  Similarly, it is addressed to the 1st Applicant as the chargor and copied to the 2nd Applicant as the borrower and to the Land Registrar, Kiambu.  The Respondent has also exhibited the return of service i.e. a list of registered mail posted by the Respondent duly stamped by the Postal Corporation of Kenya and the certificate of posting thereto

22. I have looked at the exhibited notices. I have found no defect in them. In response to these two statutory notices, the Applicants’ simple response is one of denial: they say they did not receive them.  That position is, however, untenable.  I have looked at the Charge and it is clear at Paragraph 39 where and how Notices to the Chargor and the Borrower should be sent or served. It includes serving by way of registered post to their registered offices.  It is what happened here.  The ground that the Applicants did not receive the statutory notices is, therefore, disingenuous. I readily reject it based on the evidence on record.

23. The last issue on notice is whether an appropriate Auctioneers’ Notice was served on the chargor.  Rule 15 of the Auctioneers Rules, 1997 provides as follows:-

Immovable property

Upon receipt of a court warrant or letter of instruction the auctioneer shall in the case of immovable property—

a) record the court warrant or letter of instruction in the register;

b) prepare a notification of sale in the form prescribed in Sale Form 4 set out in the Second Schedule indicating the value of each property to be sold;

c) locate the property and serve the notification of sale of the property on the registered owner or an adult member of his family residing or working with him or where a person refuses to sign such notification, the auctioneer shall sign a certificate to that effect;

d) give in writing to the owner of the property a notice of not less than forty-five days within which the owner may redeem the property by payment of the amount set forth in the court warrant or letter of instruction;

e) on expiry of the period of notice without payment arrange sale of the property not earlier than fourteen days after the first newspaper advertisement.

24. Our Courts have read this rule strictly. The Applicants cited two cases: Rose Chepkirui Mibei v. Jared Mokua Nyariki & 2 others [2015] eKLRand Albert Mario Cordeiro & another v. Vishram Shamji [2015] eKLRto demonstrate that decisional law has clarified that this rule is couched in mandatory terms.  This is because the rule is for the protection of the registered owner.  Rule 15(c) requires the auctioneer to locate the property and serve the notification of sale of the property on the registered owner or an adult member of his family residing or working with him or where a person refuses to sign such notification, the auctioneer shall sign a certificate to that effect.

25. Here, even by the terms of the Certificate of Service filed on behalf of the Respondent, Rule 15(c) was not adhered to.  Instead, the Auctioneer affixed the Notice on the gate of the registered property.  He then proceeded to send the Notice by registered post.  The Applicants admit receiving the Notice but only on 23/03/2017 that is 31 days before the intended sale and less than the 45 days required by law.  It is precisely to avoid situations like this that the Rule is strict that service should be effected in the registered owner or an adult member of his family either residing or working with him.  This did not happen here.  This renders the Auctioneer’s Notice defective.  As such, it cannot be relied on to redeem the statutory power of sale by the Respondent.

26. To return to the test to be applied to the case at hand, the first Giella factor requires the Court to establish if an applicant has demonstrated that she has a prima facie case with a probability of success.  As both the Rose Chepkirui Mibei Caseand Albert Mario Cordeiro Caseestablished, a defective Auctioneer’s Notice entitles an applicant to a restraining order until a proper one is served.  Both cases found it unnecessary, once a Court determines the Notice is defective, to go to the second and third Giella factors.  This is because any sale in the absence of a proper notice will amount to a clog on the chargor’s equity of redemption.

27. In the circumstances, then, it seems that the only fair outcome is to issue an event-limited restraining order: The Respondent is hereby injuncted from selling the Suit Property until its Auctioneers issue and properly serves a proper 45-days Auctioneers Notice under Rule 15 of the Auctioneers’ Rules. Once a good 45-days Auctioneers’ Notice is issued and properly served, there will be no further basis to stop the Respondent from exercising its statutory power of sale.  This is the only extent to which the Applicants have succeeded.

28. It should be readily obvious to the Applicants that this is an ephemeral solution to their financial problems. Legal stratagems will only take them so far. The Respondent will be at liberty to exercise its statutory power of sale once it adheres to the letter of the law in terms of service of the Auctioneers’ Notice.  It may, therefore, be a better option for the Applicants to find a more durable solution to their financial problems.

29. Given the circumstances of the case and the overall conduct of the Applicants in this transaction, I will not award costs.

30. Orders accordingly.

Dated and delivered at Kiambu this 5th day of September, 2017.

.........................

JOEL NGUGI

JUDGE