CONTINENTAL DEVELOPERS LTD v SAUTI HOUSING CO-OPERATIVE SOCIETY [1998] KEHC 89 (KLR)

Full Case Text

REPUBLIC OF KENYA

IN THE HIGH COURT

AT NAIROBI

MILIMANI LAW COURTS

Civil Case 933 of 1996

CONTINENTAL DEVELOPERS LTD.................................... PLAINTIFF

VERSUS

SAUTI HOUSING CO-OPERATIVE SOCIETY............... DEFENDANT

RULING

This is the Decree holder's application dated 3. 9.97 for an order thatWatts Enterprises be authorised to sell L.R No. Nairobi/Block/82/4264 byPublic Auction for recovery of the decretal sum of shs 41,665,857. 70 plusinterest at the rate of 18% p.a on terms that a sum not exceeding shs34,600,000 be secured from the proceeds of the sale in favour of Co-Operative Bank of Kenya Ltd. The circumstances of the application are as follows:

Plaintiff agreed to sell the land the subject matter of this application tothe defendant - a Co-Operative Society. The land is 83. 1 acres and the agreed purchase price was shs 86,839,500. The defendant borrowed shs60,000,000 from the co-operative Bank Ltd on the security of its otherproperties and on the security of the land the subject of this matter. It wasagreed that a charge to secure the payment of shs 34. 6 million would beregistered against L.R No. Nairobi 82/4264. Plaintiff agreed to transfer theland to the defendant before it was fully paid on condition that out of theloan of shs 60,000,000 to the defendant it would be paid shs 50,000,000 Itwas agreed that defendant would pay the balance of the purchase price fromthe monies which it would be receiving in its bank account with the bankand defendant gave anirrevocable authorityto thebankto thateffect. The:bank by a letter dated 15. 5.95 confirmed to plaintiffs advocates that it hadsuch irrevocable authority. Plaintiff then transferred the land to thedefendant and the defendant charged the same property to the Bank for shs34. 6 million. The charge in favour of the Bank was registered against thetitle on 29. 5.95. The balance of the purchase price was shs 28,155,550. Mrs Alice Mumo the Chief Manager of the Co-operative Bank admits thatwhen the Bank registered the charge, it was aware that plaintiff the owner ofthe property had not been fully paid. When defendant defaulted in thepayment of the balance of purchase price for a long time plaintiff filed the present suit and a consent judgement was entered. According to the consentletter dated 18. 7.96, signed by the defendant and the plaintiffs advocates, thejudgement sum was for shs 36,812,972 with interest at 18% p.a. costs of shs750,000 and 15% Vat.

By the time the application for execution of the decree was filed on 5. 3.97,the decretal sum was shs 44,018,864. The court ordered the attachment ofthe property to satisfy the decree and a prohibitory order in terms of orderXXI Rule 49 CP Rules was registered against the title. By that Rule, theattachment is complete and effective upon the registration of the prohibitoryorder. What remains is the issuance of warrants of sale by public auction.When the application came for hearing before me I thought it just to orderthat the Judgement debtor be served with the application. On the hearingdate, counsel for the Bank attended and the Bank was joined as a party tothe execution proceedings The bank has filed grounds of opposition and areplying affidavit of Alice Mumo sworn on 17. 9.97 shows that the defendantowes the bank shs 74,211,598 and not shs 34,600, as stated in theapplication. In para 7 of the replying affidavit, she states that the Bank isapprehensive that plaintiff cannot be relied upon to secure and protect theinterest of the bank in the property fully and that the bank should be allowed to sell the property and realise its security first and then release the balanceto the plaintiff. In the cause of these proceedings the Bank has put it onrecord that it has no objection to the property being sold by Public Auctionor by private treaty on condition that:

1. The bank lawyers to act in the matter subject to strictaccounts

2. Proceeds of sale to be paid to banks lawyers in thefirst instance Proceeds of sale be paid out on the as follows:

(a) Full payment to the Bank

(b) Balance to the plaintiff

As for the defendant, the record shows that it bought the property for sale.The defendant lawyer has put it on record that a defendant intends thatproperty he sold. Infact defendant applied for time to sell the property. Thecourt has given defendant time to sell the property since last year but it hasnot succeeded.

Plaintiff has offered to sell the property at a reserve price of shs130,000,000 and gives an undertaking that the Bank will be paid first it is submitted that plaintiff knows the property intimately and it will be able togenerate interest among the purchasers. On the other hand, as the bank'sCounsel has put it, the bank cannot be ordered to sell the property at anyfixed price. It can sell at the market price so long as it acts in good faith.

It has turned out from the evidence of Mrs Alice Mumo that theinterest - claimed over the shs 34. 6 million is on consolidated debts whichdefendant has with the bank. She is unable to calculate the accrued intereston the shs 34. 6 million because the charges were consolidated. At the sametime, she admits that according to the charge the Bank cannot recover morethan shs 34. 6 million plus interest.

It is clear from the evidence of Alice Mumo that though the defendantdefaulted in the repayment of the loan since May 1995 and has not paid anymoney or interest to the Bank since then, the Bank has not taken steps torealise the charge. The result is that interest has accumulated enormously.

The strongest objection to the application is that the bank has priorityand statutory right to sell the property which right cannot be taken away. Itis true that the Bank as a chargee has a statutory right to realise the securityin case of default by the chargor. But it should be remembered that thecharge does not give the Bank any proprietary right over the property. The charged property still belongs to the defendant and the charge is a mereencumbrance on the property which encumbrance is required to be disclosedin the notification of sale (see Order XXI Rule 61(2) CP Rules)As section 73 (c) of the Registered Land Act shows any creditor of thechargor who has obtained a decree for sale of the charged land, lease orcharge may require the chargee to transfer the charge to him on his tenderingto the chargee the sums payable under the charge. The fact that a chargeexists as encumbrance on the property does not stop the owner from sellingthe property subject to the charge or stop any creditor of the chargor fromobtaining a decree for attachment of the charged property. It is lawful forthe court to make an order that any charged property be sold subject to thecharge - (see for instance section 96 of the Transfer of the property Act). Ifthe charged property is sold subject to the charge what the chargee is entitledto is a first priority on the proceeds of sale after payment of the expensesof the sale. Plaintiff has obtained a decree for the sale of the chargedproperty. The bank has not applied for an order to raise the attachment inaccordance with Rules of procedure (see order XXI Rule 55 to 58 CP Rules).As the attachment still stands the application and the banks objection to thesale is in the nature of proceeding to settle the terms of sale of the attachment property. In conclusion, there is nothing in law to stop the courtto order the sale of the attached property subject to the charge.

Moreover, this is a case where the court has to protect three competinginterests - the interest of the chargee, the interest of the plaintiff and theinterest of the defendant. None of the three interested parties can beentrusted to protect the interest of the others. If the Bank has to sell theproperty, it will take longer to sell the property than if the property is soldthrough the order of the court because the bank will have to give the chargora three months notice. It is unlikely that the property will be sold at its truemarket value because the bank is not required to sell at any price so long asit acts in good faith. The Bank has consolidated the charges and calculatedinterest due not on the principal sum of shs 34. 6 million but on theconsolidated charges thereby showing that if the bank is allowed to sell theproperty, it will first recover all the debts owed to it by the defendant and notmerely the sum secured by the charge. In that event, it is unlikely that thebank will leave any balance to be paid to the plaintiff. The Bank has noauthority to consolidate the charges except in cases provided in S.84 of theRegistered land Act. We have not received any evidence that theconsolidation of the charges in this case is lawful.

In the circumstances of this case it is just that the attached chargedproperty be sold by public auction subject to the charge. Consequently, Iallow the application with costs to the extent that and I order that:

1. The attached property be sold by public action subjectto the charge by co-operative Bank by WattsEnterprises subject to a reserve price of shs140,000,000/-

2. The whole of the proceeds of sale be paid into court anddistributed as follows:

(a) First, to the auctioneer for the expenses of thesale and auctioneers charges which shall beassessed by court if not agreed

(b) Second, to Co-operative Bank for the amountsecured by the charge - that is to say

(I) The principal sum of shs 34. 6 million plusinterest as agreed in the charge and anyother bank charges related to the charge

(ii) The interest on the amount secured by thecharge to be calculated on the principal a sum of shs 34. 6 million and not on theconsolidated charge,(iii) The amount secured by the charge to bedetermined by the court if not agreed

(d) Fourthly - Balance, if any, to the defendant(J.D)

3. Liberty to any party to apply in respect of any ofthe above orders.

E.M.GITHINJI

JUDGE

1/10/98

Mr. Rachi present

Mr. Gatonye present

Mr. Rao present