Faulu Microfinance Bank Limited v Wanyaga & another [2022] KEHC 9877 (KLR)

Faulu Microfinance Bank Limited v Wanyaga & another (Civil Appeal E070 of 2021) [2022] KEHC 9877 (KLR) (Commercial and Tax) (8 July 2022) (Judgment)

Neutral citation: [2022] KEHC 9877 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Civil Appeal E070 of 2021

DAS Majanja, J

July 8, 2022

Between

Faulu Microfinance Bank Limited

Appellant

and

Patrick Gathi Wanyaga

1st Respondent

Prominence Capital Limited

2nd Respondent

(Being an appeal from the Ruling and Order of Hon. A. N. Makau, PM dated 18th May 2022 at the Magistrates Court at Nairobi, Milimani in Civil Case No. E310 of 2022)

Judgment

1. This is an appeal against the ruling and order of the subordinate court dated May 18, 2022 allowing the respondents’ application for an interlocutory injunction restraining the appellant from exercising its statutory power of sale, on terms that the injunction would subsist until the respondents are served with the statutory notices in accordance with the law at their correct postal address to be furnished to the appellant within 14 days of the ruling. The court also ordered the Appellant to conduct a valuation of the charged property within 14 days of the order and to furnish the respondent with a copy thereof. It further ordered the appellant to furnish the respondents with the current statement of account in respect of the loan facility within 14 days of the ruling.

2. The facts leading the application before the subordinate court and this appeal are common ground. By a Letter of Offer dated August 23, 2016, the appellant advanced the 2nd respondent a Biashara SME loan ofKES 20,000,000. 00 secured by a charge over the LR No 13537/797 (“the suit property’’) owned by the 1st respondent. Subsequently, the loan amounting to KES11,255,000. 00 was restructured by the Letter of Offer dated July 17, 2020 secured by a charge over the suit property, personal guarantees of the 1st respondent and by the directors of the 2nd respondent. It is not disputed that the 2nd respondent defaulted in making payments to the appellant. The appellant took steps to exercise its statutory power of sale by issuing the requisite notices and advertising the suit property for sale thus precipitating the suit and application before the subordinate court.

3. The application before the subordinate court dated January 26, 2022 was made, inter alia, under Order 40 of the Civil Procedure Rules and supported by the 1st respondents supporting and supplementary affidavits. The respondents stated that the 2nd respondent had been servicing the loan and that they were shocked when the suit property was advertised without them being served with the requisite statutory notices. They complained that despite several demands, the Appellant had not given them statements of account. They stated that the appellant had deliberately declined to give them a valid valuation report in an attempt to illegally sell the suit property. The respondents urged that they had established a prima facie case with a probability of success.

4. In opposition to the application, the Appellant relied on the replying affidavit of Maurine Kahiro. The thrust of its case was that the 2nd respondent had defaulted in its obligations and that it had issued all the requisite statutory notices in accordance with the law which the respondent failed to heed. It also stated that it had commissioned a valuation of the suit property in compliance with the law. It asserted that there was no basis to grant the injunction as the 2nd respondent was indebted and that it had complied with all the statutory procedures before advertising the suit property for sale.

5. The parties filed written submissions which the trial magistrate considered. In the ruling, the trial magistrate found as a fact that the respondents had not disputed the existence of arrears and non-performance of their obligations under the restructured terms and conditions of the loan facility. As regards the statutory notices issued under the Land Act, 2012; the 90-day statutory notice, the 40-day notice to sell, the 45-day redemption notice and the notification of sale, the court found that the notices were sent to the Chargor’s last known address provided which is P O Box 257-01001, Kalimoni. The learned magistrate held the Respondents had not given sufficient proof to show that the notices were sent and received by the Respondents through the said post office box and whether in fact the address belonged to the Respondents. The court invoked the overriding objective under section 1B of the Civil Procedure Act (Chapter 21 of the Laws of Kenya) which encourages the court to use appropriate technology and conducted a google search of the address which showed that the address P O Box 257-01001, Kalimoni was an address in the United States and a mission hospital based in Juja, Kiambu County, Nairobi. On the basis of non-service of the notices, the trial magistrate granted the conditional injunction.

6. The appellant challenges the ruling and order based on 11 grounds of appeal in the memorandum of appeal dated May 31, 2022. At the hearing of the appeal, counsel for both sides agreed that the issue for determination was whether the trial magistrate erred in the granting the injunction on the basis of lack of service of the statutory notices. The appellant’s position is that the notices were served on the 1st respondent at its last known address stated in the charge documents. It urged that once the notices were issued and sent to the postal address, the Appellant had discharged its obligation to effect service. The respondents, on the other hand, support the decision of the trial magistrate. They urged that they ought to have been served at the address which they had been corresponding with the Appellant.

7. This is an appeal against the exercise of discretion by the trial court hence the court’s approach to the exercise of its appellate jurisdiction is guided by known principles. In Mbogo v Shah [1968] EA 93, Newbold P., expressed the nature and extent of the appellate court’s jurisdiction to interfere with the discretion of the lower court as follows;A court of appeal should not interfere with the exercise of the discretion of a judge unless it is satisfied that the judge in exercising his discretion has misdirected himself in some matter and as a result has arrived at a wrong decision, or unless it is manifest from the case as a whole that the judge has been clearly wrong in the exercise of his discretion and that as a result there has been misjustice.

8. The Court properly paid homage to the conditions for the grant of an interlocutory injunction settled in Giella v Cassman Brown [1973] EA 385. In order to succeed in obtaining an interlocutory injunction, the applicant must demonstrate that it has a prima facie case with a probability of success, that it will suffer irreparable loss which cannot be compensated by an award of damages if the injunction is not granted and if the court is in doubt regarding the nature of injury, determine the matter on a balance of convenience. In Nguruman Limited v Jane Bonde Nielsen and 2 Others Nrb CA Civil Appeal No 77 of 2012 [2014] eKLR, the Court of Appeal reiterated those conditions and added that the they are to be considered as separate, distinct and logical hurdles a plaintiff is expected to surmount sequentially.

9. In this case the Respondent’s indebtedness was not in dispute. Its prima facie case rested on the issue of service of the statutory notices. Once there is default, the Appellant, as chargee, is entitled to exercise its statutory power of sale. In order to do so, it must issue and serve the chargor notices under the Land Act. The first notice prescribed under section 90 is issued when the chargor defaults in any of its obligations which include payment of interest or any other periodic payment or any part thereof due under the charge. If the chargor does not comply with the demand within 90 days after service of the notice, the chargee may proceed to sell the charged property. It is at this point that it is said the statutory power of sale has crystallised. Upon crystallization of the power of sale, the chargee is required to issue and serve on the chargor a 40-day notice to sell the subject property under section 96 of the Land Act. If the chargor does not comply, the chargee may then instruct an auctioneer who will serve a 45-day redemption notice under the provisions of the Auctioneers Rules.

10. Service of the statutory notices by the chargee on the chargor is mandatory for it is only upon service, that a chargor is notified of default of obligation under the charge and given the opportunity to exercise its right of redemption. The duty to serve the notices and the burden of proof when the issue of service is in dispute was explained by the Court of Appeal in Nyagilo Ochieng and Another v Fanuel Ochieng and 2 Others [1995-1998] 2 EA 260 as follows:The appellants stated, in their plaint, that they did not receive any statutory notices. This averment should have put the bank on guard. It is for the chargee to make sure that there is compliance with the requirements…. That burden is not in any manner on the chargor. Once the chargor alleges non-receipt of the statutory notice it is for the chargee to prove that such notice was in fact sent. It must be understood that in face of the denial of receipt of statutory notice or notices it is incumbent upon the chargee to prove the posting. It would have been a very simple exercise for the bank to produce a slip or letters containing statutory notice or notices. The bank did not do so. Instead an officer from the bank simply produced file copies of the notices to prove that the same were sent. Even on a balance of probability it is not sufficient to say that a file copy is proof of posting. Unless the receipt of statutory notice is admitted, posting thereof must be proved and upon production of such proof the burden of proving non-receipt of such notice or notices shifts to the addressee as is contemplated by section 3(5) of the Interpretation and General Provisions Act, Cap 2, Laws of Kenya. It is quite possible that such notices were sent but that fact, in the face of the denial of receipt, must be proved. It is possible that the letters addressed to the two appellants were received by the first respondent who avoided telling the appellants of anything about the same as he was the “villain in the matter”. In the absence of proof of such posting the court is constrained to hold that the sale by auction was void. [Emphasis mine]

11. The Appellant therefore bore the burden of proving that it sent notices. How did it do this? The charge document admitted in evidence shows the address of the 1st respondent, who is the chargor, as “Post Office Box Number 257-01001 Kalimoni” (“the Kalimoni address”). It is worth noting that the affidavit of consent of spouse, 1st Respondent’s spouse shows her address as the Kalimoni address. The Appellant sent a demand for payment of arrears and notice under section 90 of the Land Act dated June 3, 2021 to the 2nd Respondent’s Kalimoni address with copies to the 1st Respondent and his spouse at the said address. The demand notice was sent by registered post as evidenced by certificates of postage on June 3, 2021.

12. This was followed by the 40-day notice under section 96(2) of the Land Act dated September 23, 2021 addressed to the 1st respondent and his spouse at their Kalimoni address. Service of these notices was supported by certificates of postage showing that they were sent on September 23, 2021. The 45-day redemption notice dated November 9, 2021 was also sent to the 1st respondent through his Kalimoni address as evidenced by the certificate of postage dated November 11, 2021.

13. In light of the decision in Nyangilo’s Case (Supra), the appellant discharged its burden of showing that it sent the notices to the 1st respondent’s address disclosed in the charge. The 1st respondent did not deny or contest the certificates of postage proving that the notices were indeed sent to his address. His response was merely to state that he did not receive the notices. He did not state, for example, that the Kalimoni address, he and his spouse gave when executing the charge was not his address. A postal address is a matter of personal knowledge and in line with section 112 of the Evidence Act (Chapter 80 of the Laws of Kenya) which states that, “In civil proceedings, when any fact is especially within the knowledge of any party to those proceedings, the burden of proving or disproving that fact is upon him,” the 1st respondent bears the burden of proving his own address. Further, there is nothing on record, as suggested by counsel for the respondents, that the 1st respondent notified the appellant of the change of address. The appellant therefore was entitled to serve the 1st respondent through his last known address as agreed by the parties in clause 42 of the charge.

14. Further, I find and hold that it was wrong the trial magistrate to proceed and conduct a google search to aid one of the parties. A magistrate had a duty to remain and impartial and deal with evidence and submissions brought by the parties. The case belongs to the parties and it is improper for the court to carry out its own research on issues of fact on a matter in dispute. The approach by the trial magistrate is deprecated.

15. From the material before the court, I find and hold that the appellant discharged its burden of proving that the statutory notices were served on the 1st respondent at his last known and disclosed address. It is clear therefore that the trial magistrate failed to consider the evidence of service of the statutory notices supported by certificates of postage presented by the appellant in its replying affidavit. The trial magistrate ignored the address provided by the 1st respondent in the charge and proceeded to direct the appellant to serve fresh notices at the correct address. In this case, the correct address can only be the one provided by the 1st respondent in the charge.

16. As part of the order, the trial magistrate directed the appellant to conduct a valuation of the suit property within 14 days. I would be remiss if I did not comment on this aspect of the ruling. The appellant has instructed the Hillscape Valuers to carry out a valuation in accordance with Rule 11(b)(x) of the Auctioneers Rules. It prepared a report dated November 4, 2021 which showed that the market value of the suit property asKES 41,600,000. 00 while the forced sale value was KES 39,000,000. 00. When served with the replying affidavit containing the valuation report, the 1st respondent then instructed Adept Realtors Limited which produced a report dated February 25, 2022 showing the market value as KES80,000,000. 00 and the forced sale value at KES 60,000,000. 00. Given the differences between the two valuation reports, the 1st respondent’s contented that appellant intended that to sell the suit property at an undervalue. Although the trial magistrate made an order regarding valuation of the suit property, the court did not, in the ruling, make any finding or give any reasons for the making the order.

17. 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. Under Rule 11(b)(x) of the Auctioneers Rules, a professional valuation of the reserve price must 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.

18. The appellant complied with the aforesaid legal provisions in procuring a valuation report. In its plaint, application and supporting affidavit, the respondents accused the appellant of failing to procure a valuation report. The issue of undervaluation only arose when the when the 1st respondent was served with the appellant’s the replying affidavit whereupon he commissioned his valuation to make a case for undervaluation. At the end of the day though, if the suit property is sold at an undervalue, the 1st respondent’s remedy is for damages as provided for under section 99 (4) of the Land Act which provides that:99. (4)A person prejudiced by unauthorized, improper or irregular exercise of the power of sale shall have a remedy in damages against the person exercising that power.

19. For the reasons I stated above, the learned magistrate erred in holding that the respondents established a prima facie case with a probability of success. I therefore allow the appellant’s appeal and order as follows:(a)The application dated January 26, 2022 filed in the subordinate court be and is hereby dismissed and the order granted on May 18, 2022 be and is hereby set aside.(b)The respondents shall pay the costs of the application and this appeal assessed at KES 40,000. 00.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF JULY 2022. D. S. MAJANJAJUDGECourt Assistant: Mr M. Onyango.Mr Kitur instructed by Kitur and Company Advocates for the Appellant.Mr Ndichu instructed by Mundui Murai Advocates for the Respondents.