Equity Bank (Kenya) Limited v Maina [2024] KEELC 6786 (KLR)

Equity Bank (Kenya) Limited v Maina (Environment & Land Case E005 of 2023) [2024] KEELC 6786 (KLR) (16 October 2024) (Judgment)

Neutral citation: [2024] KEELC 6786 (KLR)

Republic of Kenya

In the Environment and Land Court at Mombasa

Environment & Land Case E005 of 2023

SM Kibunja, J

October 16, 2024

Between

Equity Bank (Kenya) Limited

Plaintiff

and

Peter Mugambi Maina

Defendant

Judgment

1. The suit herein was instituted vide an Originating Summons dated 21st July 2023 by the plaintiff under Sections 90(1), (2), & (3)(e), 96, 97, 98, 104(1), 150 of the Land Act No.6 of 2012, Order 37 Rule 4 of the Civil Procedure Rules, and Sections 1A. 1B and 3A of the Civil Procedure Act. It seeks for leave to sell the suit property at the best reasonable price, but not necessarily one above the forced market value as previous auctions have failed due to the low bids. The plaintiff invited the court to determine the following questions:“1. Whether the Plaintiff in this suit can seek the Court’s leave to sell the suit property known as Mombasa/MN/Block 1/1121, in exercise of the said Plaintiff's Statutory Right of Sale at the best reasonable obtainable price but not necessarily one above forced sale value as the Plaintiff has conducted several auctions which have all failed due to low bids. 2. Whether the Plaintiff has exercised a reasonable degree of care to ensure that the suit property obtains the best market price during its sale.

3. Whether this Honourable court is obliged to grant the Plaintiff leave to sell the suit property know as Mombasa/MN/Block 1/1121, Mikindani Area at the best obtainable price but not necessarily one above the forced market value as the auctions done on the said property have failed due to having low bids.

4. Whether the sale of the suit property at the best obtainable price but not necessarily above the forced sale value is the only viable solution to reduce a greater part of the balance owed by the Defendant to the Plaintiff.

5. Whether the Defendant shall bear the costs of this suit.”

2. The originating summons is supported by the affidavit of Kariuki Kingori, manager for legal services, who inter alia deposed that Welcap Works Limited (“Company”) sought and obtained a facility of Kshs 19,950,000/= from the Plaintiff as the borrower, which facility was secured by a First Legal Charge registered on 26th February 2016 over Mombasa/MN/Block 1/1121, suit property, and where the Defendant is the registered proprietor; that the Company approached Plaintiff again on 1st November 2016 and sought another facility from Plaintiff in the amount of Kshs. 45,000,000. 00 which facility was also secured by the First Legal Charge registered on 26th February 2016 over the suit property; that the Company perennially defaulted in the repayment of the loan facilities, which necessitated the Plaintiff to issue a Statutory notice under Section 90 of the Land Act to both the defendant, as the Guarantor/Chargor, and to the Company and its directors, as the borrower, demanding the payment of the outstanding arrears of Kshs. 5,608,763. 88 as of 27th October 2017; that after the lapse of the 90 days, the Plaintiff issued to Defendant, the Company and its directors a subsequent Notice dated 23rd April 2018 declaring its intention to sell the suit property after three (3) Months if Defendant or the Company did not settle the outstanding debt of Kshs. 64,948,039. 66; that when the said notice lapsed, the Plaintiff issued Defendant, the Company and its directors with a Redemption Notice dated 20th November 2018 under Section 96 of the Land Act, notifying them of the plaintiff’s intention to sell the suit property after forty (40) days if the Defendant or the Company did not settle the outstanding debt of Kshs. 67,019,914. 26 at the time; that after the said notices lapsed, and no payment of the charge had been made, the Plaintiff instructed Antique Auctions Agencies to issue the Defendant and the Company with a Redemption Notice dated 21st June 2019, notifying the Defendant of the intended Sale of the property in the event the Defendant or the Company do not settle the outstanding amount; that after the issuance of the redemption notice, the plaintiff complied with section 97(2) of the Land Act, and instructed Accurate Valuers Limited to carry out a valuation of the suit property and the valuation report dated 18th July 2019 was done; that the Auctioneers sent out a notice of sale by public auction, stating that the auction would be held on which 26th of August 2019, and the defendant filed Nairobi High Court Commercial Case No. 209 of 2019 seeking to stop the auction scheduled for 26th August 2019; that consent orders stopping the sale were issued on 29th August 2019, but lapsed without defendant settling the matter; that Antique Auctions Agencies issued the Defendant and the Company with another Notification of Sale dated 13th July 2021 notifying them of the auction scheduled for 13th August 2021 and the plaintiff instructed Gimco Valuers Limited to carry out a second Valuation over the suit property, which brought a value of Kshs. 25,000,000/=; that the company filed obtained conditional orders dated 10th August 2021 stopping the sale in Nairobi High Court Commercial Case No. E736 of 2021- Welcap Works Limited versus Equity Bank but the defendant failed to comply with the said court orders, which prompted the plaintiff to instruct Antique Auctions Agencies to auction the suit property; that the initial auction set for 14th January 2022 was cancelled for the reason that the highest bid of Kshs 12,500,000/= was below the forced sale value; that the Auctioneers re-advertised the suit property and carried out a second auction on 25th March 2022 where the highest bid was Kshs.12,500,000/=,which was again below the forced sale value, and the auction was cancelled; that the plaintiff then instructed Gimco Valuers Limited to carry out a third valuation, which revalued the suit property at Kshs. 25,000,000/= and with a forced sale value of Kshs. 18,750,000/=; that once more, the plaintiff instructed Antique Auctions Agencies to advertise the suit property for auction on 23rd September 2022, where the highest bid received was Kshs 12,000,000/=, which was below the forced value sale, and auction was cancelled; that the defendant has never followed through with a viable solution of settling the outstanding debt, which is a substantial loss to the bank; that despite trying severally to auction the suit property, the plaintiff have been unsuccessful due to the low bids received; that the plaintiff is concerned that the defendant’s debt, which continues to attract interest may outstrip the value of the security held; that as the bank had a duty to obtain the best possible price for the suit property when selling the defendant’s suit property, and as it is public financial institution holding funds for the public, and hence obligated to trade carefully with the depositors’ money, it is acting in good faith by trying to clear and reduce the balance owed by the defendant through this suit; that the court should grant the plaintiff leave to sell the suit property at the best obtainable price, but not necessarily above the forced sale value or the forced market value.

3. The originating summons is opposed through the replying affidavit of Peter Mugambi Maina, defendant, sworn on 16th January 2024, who inter alia deposing that he has transacted with the plaintiff as an individual and as the managing director of Welcap Works Limited and acquired a charge of Kshs 45,000,000/= over the suit premises; that the company expected the plaintiff would discharge the facility and free it from debt upon settlement but it did not do so; that sometimes in February 2019 he found an auction advertised in the local dailies, which led him to file Nairobi High Court Commercial Case No. 209 of 2015 where he obtained injunctive orders stopping the sale; that the orders however lapsed before the parties could agree on the amount owed to the plaintiff; that the intention of the plaintiff to sell the suit property below its market value is made in bad faith, an abuse of the court process and should not be allowed by this court, as the plaintiff is bound by Section 97 (1) of the Land Act to obtain the best price reasonable at the time of sale; that the plaintiff’s obligation enshrined in Section 97 (1) of the Land Act was statutory and obligatory to reinforce his rights as the charger, to acquire a reasonable value of his property; that the bank is a greedy chargee who seeks to sell the charged property at a throwaway price, and if the application is allowed, it would cause him irreparable damage that cannot be compensated by way of damages, and should be dismissed with costs.

4. The plaintiff filed a Supplementary Affidavit sworn on 4th March 2024 by Kariuki Kingori in response to the defendant’s Replying Affidavit sworn on 16th January 2024, deposing among others that the defendant is the Director of the Company known as Welcap Works Limited, which sought and obtained several separate facilities from the Plaintiff, as the borrower and the Defendant as the Chargor; that the defendant defaulted on the agreed terms of the facilities and the Plaintiff commenced recovery proceedings by issuing the relevant statutory notices to the Defendant and the Borrower; that even after the said statutory notices were issued the default persisted and that the charges remain un-serviced to date, to the prejudice of the Plaintiff; that every time the Plaintiff advertises the suit properties for sale by auction, the Defendant and Borrower file numerous suits and applications in court seeking to stop Plaintiff from exercising its statutory powers of sale, which orders have since lapsed and the court has declined to extend them; that the plaintiff has attempted to auction the suit premises on various occasions being 14th January 2022, 25th March 2022 and 23rd September 2022 however they did not attain the reserved price, and the sales have never sailed through; that the inability to dispose of the property through a Public Auction has placed the Plaintiff in a prejudiced position as the outstanding balances continue to grow exponentially to a level where the Sale proceeds, in the now unlikely event that bids meeting the Forced Sale Value are met, will not satisfy and settle the sums due, which will hurt the financial health of and the ability to recover the debt by the Plaintiff; that that the Plaintiff has taken all the necessary steps to comply with the requirements of the Land Act, 2012 and prays for the orders sought to be granted since the defendant has not made any viable proposal to pay the debt.

5. The court issued directions on filing and exchanging submissions on the on 21st February 2024. The learned counsel for the plaintiff and defendant filed their submissions dated 7th March 2024 and 25th April 2024 respectively, which the court has considered. The learned counsel also highlighted their submissions orally on the 12th June 2024, and the court has equally considered the same.

6. The issues for the determinations by the court are as follows:a.Whether the plaintiff has made out a reasonable case to be granted leave to sell the suit property at the best price, but without being tied down by the forced sale value.b.Who pays the costs?

7. I have carefully considered the grounds on the originating summons, affidavit evidence by both parties, submissions by both learned counsel, superior courts decisions cited thereon, and come to the following findinfs:a.It is not disputed that vide a letter dated 16th December 2015 the plaintiff, bank, granted Welcap Works Limited, the company, four facilities that’s is, letter of credit, post import finance loan, business loan and an overdraft for Usd 191,183. 50, Kshs.19,500,000/=, Kshs 22,400,000/= and Kshs 4,200,000/= respectively, which totaled to Kshs.54,000,000/=. The facilities were secured by the personal guarantee Peter Mugambi Maina, the defendant, supported by inter alia a first legal charge over LR Title No. Mombasa Mainland North Block 1/1121, suit property, securing Kshs 19,950,000/=. It has also not been disputed by the defendant that vide a charge dated 26th February 2016, and registered on 7th April 2016, Peter Mugambi Maina, the defendant, as the chargor, and Welcap Works Limited, as the borrower, entered into a charge agreement with Equity Bank, plaintiff, as the chargee over LR Title No. Mombasa Mainland North Block 1/1121, to secure the principal sum of Kshs.19,500,000/=.b.Clause 9 of the charge states that in case of default, the bank shall cease to have any commitments to the charger, and the charge shall become payable upon demand. Clause 10 states that once the charge is demanded, and a notice is issued as per Section 90 of the Land Act, the bank may inter alia exercise its statutory power of sale in accordance with the Land Act. It is also not disputed that on 27th October 2017 the bank wrote to the defendant demanding for payment of arrears of Kshs 5,608,763. 66 secured by a charge over the suit property. In the demand letter, the bank notified the defendant that in three months it would exercise its statutory power of sale if the said amount was not paid. On 23rd April 2018, the bank wrote a follow-up letter to the said demand letter as a Notice of exercise of statutory power of sale over the suit property demanding Kshs 64,948,039/= as the balance of the principal sum together with interest. The defendant was notified that if payment was not received in 3 months, the bank would proceed to sell the charged property in realization of the securities. The bank then issued the defendant with a redemption notice on 20th November 2018 pursuant to the demand letter dated 27th October 2017, and the statutory notice dated 23rd April 2018, over the charge registered against LR Title No. Mombasa/ Mainland North Block 1/1121 to secure Kshs 19,450,000/=, of the principal sum of Kshs 54,000,000/= advanced to the defendant. The bank demanded Kshs 67,019,914. 26 as the outstanding balance and notified the defendant that if the said amount is not settled in 40 days the bank would sell the charged property, by way of private or public auction in realization of the securities.c.The defendant has on two occasions, restrained the bank from auctioning the suit property. The first time was vide an application dated 27th August 2017 in Milimani High Court Commercial Case No. 209 of 2019 Peter Mugambi Maina versus Equity Bank Limited. On 29th August 2019, the court therein issued a temporary injunction restraining the bank from selling the suit property pending the determination of the application. The second attempt was vide an application dated 5th August 2021 in Milimani High Court Commercial Case No. E736 of 2021, Welcap Works Limited versus Equity Bank Limited. The court granted a conditional injunction restraining the bank from selling the suit property provided the plaintiff paid Kshs 10,000,000/= within 30 days, and incase of any default the bank would be at liberty to exercise its statutory power of sale. It is not disputed that the defendant defaulted in paying the charge as directed in Milimani High Court Commercial Case No. E736 of 2021 Welcap Works Limited versus Equity Bank Limited, and the bank sought to exercise its statutory power of sale, and on 14th January 2022, Antique Auctions Agencies conducted a public auction for the sale of the suit property. However, the highest bid was Kshs 12,500,000/=, which was below the forced sale value of Kshs 18,500,000/=. This forced sale value i.e reserve price was arrived at after the suit property was valued on 2nd August 2021 by Gimco Limited. In the second public auction held on 25th March 2022, by Antique Auctions Agencies, there was only one bid of Kshs 12,500,000/=, which again was below the forced sale value. The bank carried out yet another valuation by Gimco Limited on 20th September 2022, which still placed the forced sale value i.e. reserve price at Kshs 18,500,000/=. The bank through Antique Auctions Agencies attempted for a third time to carry out a public auction, where they got only one bid of Kshs 12,000,000/=, that was once again below the forced sale value.d.In his replying affidavit sworn on 16th January 2024, the defendant among others deposed that the dispute between himself and the bank concerns the amount he allegedly owes the bank. He claimed that the court in Milimani High Court Commercial Case No. 209 of 2019, Peter Mugambi Maina versus Equity Bank Limited granted injunctive orders restraining the bank from selling the suit property. He further claimed that the injunctive orders lapsed as the bank and himself could not settle the dispute as per the consent entered on 29th August 2019. The court has noted the consent the defendant alleged was entered on 29th August 2019, has not been attached to the affidavits.e.I have perused the attached court order issued on 29th August 2019, and it is evident that the court in Milimani High Court Commercial Case No. 209 of 2019, Peter Mugambi Maina versus Equity Bank Limited issued a temporary injunction restraining the bank from selling the suit property pending the determination of the application and fixed a further mention on 15th October 2019 when the court was to be briefed on the status of the sale by private treaty, which the parties had embarked on as a way of resolving the dispute. The orders of the court of 29th August 2019 in my view are in no way consent orders, but orders of the court, stopping the sale of the suit property pending the determination of the application.f.The defendant in his replying affidavit has also deposed that the selling of the suit property below the market value would be an abuse of the court process, and an embarrassment to the court process. He urged the court to find that the bank owes him a duty of care to obtain the best reasonable price at the time of sale, as Section 97 obligates the bank to find a reasonable value for his property. He added that the bank’s desire to sell the suit property below the forced sale price would cause him great loss and irreparable damage that cannot be compensated by way of damages.g.It is not disputed that the defendant is the registered proprietor of Mombasa/ MN Block 1/1121, the suit property, which is a lease from the County Government of Mombasa as seen from the Certificate of lease dated 20th March 2013. A legal charge in favour of the plaintiff was registered against the title on 7th April 2016, securing Kshs.19,450,000/=. It is clear to the court that the defendant has since defaulted in payments and that the bank has undertaken the elaborate legal procedure laid down in law to secure its statutory power of sale. The plaintiff has carried out three different valuations. The first valuation was done by Accurate Valuers Limited on 18th July 2019, the second and third by Gimco Limited on 9th August 2021 and 20th September 2022. The valuations gave the estimated the market value of the suit property at Kshs.25,000,000/= and the forced sale value at Kshs.18,750,000/=. The bank has adduced evidence that it conducted three different auctions, on 14th January 2022, 25th March 2022 and 23rd September 2022 where the highest bids were Kshs.12,500,000/=, Kshs.12,500,000/= and Kshs.12,000,000/= respectively. All these bids fell below the forced sale price and were cancelled.h.Indeed the bank is obligated by Section 97 of the Land Act to ensure that prior to selling off the charged property by public auction, a forced sale valuation had been undertaken by a valuer. Section 97 (1) to (3) of the Land Act states that :“1. A chargee who exercises a power to sell the charged land, including the exercise of the power to sell in pursuance of an order of a court, owes a duty of care to the chargor, any guarantor of the whole or any part of the sums advanced to the chargor, any chargee under a subsequent charge or under a lien to obtain the best price reasonably obtainable at the time of sale.

2. A chargee shall, before exercising the right of sale, ensure that a forced sale valuation is undertaken by a valuer.

3. If the price at which the charged land is sold is twenty-five per centum or below the market value at which comparable interests in land of the same character and quality are being sold in the open market—a.there shall be a rebuttable presumption that the chargee is in breach of the duty imposed by subsection (1); andb.the chargor whose charged land is being sold for that price may apply to a court for an order that the sale be declared void, but the fact that a plot of charged land is sold by the chargee at an undervalue being less than twenty-five per centum below the market value shall not be taken to mean that the chargee has complied with the duty imposed by subsection (1).”In the case of First Choice Mega Store Limited versus Ecobank Kenya Limited [2017] eKLR the court held that;“It is common ground that a chargee who exercises or seeks to exercise his power of sale owes a duty to take reasonable precautions to obtain the true market value or a proper price for the property at the time when he comes to sell : see Cuckmere Brick Co Limited vs. Mutual Finance Ltd [1971] 2 All E R 633, Yorkshire Bank plc vs. Hall [1999] 1 All E R 879andMadhupaper International Ltd vs. Paddy Kerr and others [1985] LLR 2396 (CAK). The chargee is expected to act honestly and without reckless disregard for the chargor’s interests. This duty, which had its genesis in equity, like much of the solicitous concern of equity for the interests of chargors, is now enshrined in statute. Inscrutably, Section 97 of the Land Act imposes the duty to obtain the best possible price reasonably obtainable at the time of sale. The chargee is then under a duty, in the circumstances, to cause a forced sale value to be ascertained by the valuer.”It is apparent that the valuations of 9th August 2021 and 20th September 2022 gave the suit property a value of Kshs.25,000,000/= and the forced value of Kshs.18,500,000. The best bids obtained during the auctions on 14th January 2022 and 25th March 2022 were Kshs.12,500,000/= and Kshs.12,500,000/= respectively, and during the auction of 23rd September 2022, the best bid was Kshs.12,000,000/=. The difference between the market value of the suit property and the best bid offered in the first two auctions was Kshs.12,500,000/=, which is half the value of the suit property, while in the third auction, the difference was Kshs.13,000,000, which is more than half the value of the said property.i.It is clear from the outcomes of the three auctions that the discrepancy between the market value and the highest bid was huge since the suit property was losing half its value, a loss that will be borne by the defendant. The court however notes that the defendant has not made any reasonable attempts to service or reduce the outstanding loan since 2017. From the facts presented to the court, the defendant knew or ought to have known when he took the loans and charged the suit property as security, that the bank would sell the property if he and the company defaulted. The defendant cannot expect the court to stop the sale where he has blatantly failed to meet his contractual obligation of servicing the loan over the years, and leave the bank without recourse to recoup its money indefinitely.j.The bank’s right to exercise its statutory power of sale is evident and this court cannot deny it. It has shown through the three attempts of the failed auctions that it is keen in complying with its legal obligations. The filing of this suit is another clear manifestation of the bank’s interest to do the right thing and it gave the defendant an opportunity to present his case on Whether or not it should be allowed to sell the suit property at the best price obtainable, even if it be below the forced sale price. The learned counsel for the plaintiff cited the decision in the case of NCBA BANK KENYA PPLC Versus ANGRAN LIMITED [2021] KLR in which the court allowed a similar application and ordered that the statutory power of sale shall be undertaken although below forced sale value.k.It goes without saying that the bank’s right to exercise its statutory power of sale has to be exercised with caution, as the bank still has the legal obligation to ensure that it obtains the best possible price, reasonably obtainable at the time of sale. The bank wants to sell the suit property below a forced value price. The existing forced sale price of Kshs.18,500,000 was calculated under the valuations obtained two years ago. The evidence it has presented before this court is that the best bid received then was Kshs.12,500,000 which was also two years ago. In my view, a valuation report that is two years old is insufficient to determine what is the current best possible price for the suit property. The Court in the case of Joan Wangui Karanja v Stanbic Bank Limited [2020] eKLR held that;“Under section 97 of the Land Act, the chargee has a duty of care to the chargor to obtain the best price reasonably obtainable at the time of sale and in that regard, it is required to ensure a forced sale valuation is obtained. This provision in reinforced by Rule 11(b)(x) of the Auctioneers Rules which requires that a professional valuation of the reserve price be carried out not more than 12 months prior to the proposed sale. The collective effect of these provisions is that the Bank is required to obtain a forced sale value of the property within the year of the intended sale.”It is therefore necessary that the plaintiff do commission for another valuation of the suit property before any further attempt to exercise its statutory power of sale is commenced again.l.There is no indication that the defendant has been servicing the loan, which continues to balloon due to interest and other charges. It is abundantly clear that the longer the plaintiff takes in realizing its power of sale, the more interests and other charges will continue to accrue on the outstanding loan amount making it to continuous increase, as the company and the defendant are not taking any steps to repay or reduce it. This situation is not beneficial to both the chargor and the charge, and I am of the view that the sale of the suit property should be conducted without undue delay, because it is the just thing to do. However, the sale should not be conducted on the basis of the existing two year old valuation reports. Instead, the bank should to carry out a fresh valuation of the suit property to get the most recent forced value price. Once the bank obtains a new valuation, it should be at liberty to exercise its statutory power of sale, in accordance with the law, even if below the forced sale value.

8. In conclusion, the court finds the plaintiff has partially proved its claim in the originating summons dated the 21st July 2023. The court enters judgement for the plaintiff and orders as follows:a.That the plaintiff shall within thirty [30] days from today carry out a fresh valuation of the charged property to determine the forced sale value, and share a copy of the valuation report thereof with the defendant.b.That defendant shall have sixty [60] days after the valuation to engage the plaintiff to have the suit property sold under private treaty, and in default thereof the plaintiff be at liberty to proceed with the sale by public auction, and conclude the sale through the highest bid that shall be received.c.The plaintiff is awarded costs of the suit.

Orders accordingly.

DATED, SIGNED AND VIRTUALLY DELIVERED ON THIS 16TH DAY OF OCTOBER 2024. S. M. KIBUNJA, J.ELC MOMBASA.In the presence of:Plaintiff : Mr Gitau For WamuyuDefendant :M/s Wangari.Leakey – Court Assistant.S. M. KIBUNJA, J.ELC MOMBASA.