Housing Finance Corporation & another v Mbuthia [2022] KEHC 3066 (KLR)

Housing Finance Corporation & another v Mbuthia (Civil Appeal E035 of 2020) [2022] KEHC 3066 (KLR) (18 May 2022) (Ruling)

Neutral citation: [2022] KEHC 3066 (KLR)

Republic of Kenya

In the High Court at Eldoret

Civil Appeal E035 of 2020

RN Nyakundi, J

May 18, 2022

Between

Housing Finance Corporation

1st Appellant

Legacy Auctioneers

2nd Appellant

and

Gitau Karanja Mbuthia

Respondent

Ruling

Introduction & Background 1. The instant interlocutory appeal was filed by the appellants through their memorandum of appeal dated 3rd December 2021 seeking primarily to set aside/review the decision of the trial court in Eldoret CMCC No.473 of 2020 delivered on the 6th of November 2020.

2. The background resulting in the instant appeal is that the respondent herein filed an application through a notice of motion dated the 19th of June 2020 and a plaint against the appellants seeking an interlocutory injunction restraining the appellants from selling and/or transferring and advertising land parcel number Eldoret/municipality/block 16(kamukunji) 362-kamukunji Estate Uasin Gishu County Measuring 0. 5HA (hereinafter suit property) pending hearing and determination of the main suit.

3. The main ground for the application as can be gleaned in the Notice of Motion dated the 19th of June 2020, was that the respondent herein secured a loan of Kshs 2,800,000 on the 14th of August 2013 from the 1st appellant using the suit property as a charged security but failed to service the loan. This is the respondent’s own admission in the supporting affidavit sworn on the 19th of June 2020. As a result, the 1st appellant sought to exercise its power of sale and through the 2nd appellant served the respondent herein with notification of sale forms dated the 18th of May 2020. It is on this premise that the respondent filed the Notice of Motion dated the 19th of June 2020 arguing that the suit property is a family property and if sold, he will suffer irreparable loss and damage as he has nowhere with his family to stay.

4. The above application was opposed by the appellants through their reply dated the 13th of July 2020 indicating that the respondent had an aggregate total of Kshs 3,958,188. 66/= having failed to service the loan he took which entitled the bank to exercise its right to sale. The appellant also averred in their reply that at the time of taking the loan and charging the same to the suit property, the respondent knew the risks that could arise for failure to repay the loan.

5. After directing parties to file submissions and parties having duly complied, the trial court delivered its ruling on the 6th of November 2020 directing that the status quo be maintained pending hearing and determination of the suit.

6. Being dissatisfied with this ruling, the appellants preferred the instant appeal citing 4 grounds namely:a.That the learned Trial Magistrate erred both in law and fact by making a finding to the effect that the Respondent has established a prima facie caseb.That the learned Trial Magistrate erred both in fact and law by granting reliefs not pleaded for hence the orders of status quo is erroneousc.That the learned Trial Magistrate erred in fact and law by awarding the respondent status quo which award was not prayed for by the respondent in his notice of motion dated 19th June 2020 hence determining matters not properly before her.d.That the Learned Trial Magistrate erred in law and fact by failing to find that the Appellant’s statutory power of sale in relation to the suit property had crystalized.

7. The court directed the appeal to be canvassed by way of written submissions. The appellants have filed their submissions while the respondent is yet to file its submissions.

Appellants Submissions 8. The appellants main submission is that the respondent did not prove that he had a prima facie case for the simple reason that failure to repay one’s debt automatically empowers the financial institution to exercise its statutory power of sale. To this end, the appellants argued that no right of the respondent was violated and or threatened since he knew very well at the time of taking the loan and using the suit property as security, that it risked being sold were he ever to fail to repay his debt to the 1st appellant.

9. Furthermore, the appellants were of the view that the Charge document was clear that the chargor was obligated to pay interest on all monies, liabilities and obligations at the rate of 16% per annum and that in case of any changes to the interest rate, the bank would notify the respondent. In this regard, the appellants submitted that following a review of the interest rate by the Central Bank, the 1st appellant notified the respondent of the alteration to its interest rate vide letter dated the 30th of July 2015.

10. To this end, the appellants submitted that greater prejudice would occasion to them as opposed to the respondent since they are likely to lose monies advanced to the respondent. In any case, they submitted that the sale would be at current market value taking into account the improvements made on the property.

11. They therefore urged the court to allow the appeal and set aside the status quo orders issued by the lower court’s ruling of 6th November 2020.

Determination 12. This appeal is hinged on exercise of judicial discretion which is at the heart of the decision making process of any magistrate or judge. Professor Cardozo in his lecture on “The nature of judicial process at Colombia University delivered in 1921” emphasized the following points on discretion “The choice of methods, the appraisement of values, must in the end be guided by like considerations for the one as for the other. Each indeed is legislating within the limits of his competence. No doubt the limits for the judge are narrow. He legislates only between gaps. He fills the open spaces in the law… None the less, within the confines of these open spaces and those of precedent and tradition, choice moves with a freedom which stamps its action as creative. The law which is the resulting product is not found, but made. The process, being legislative, demands the legislator’s wisdom.”In the case of Associated Provincial Picture Houses Ltd v Wednesbury Corp(1948) 1 KB 223 some of the considerations in the decision making process are principles set out by Lord Greene in the following text “It is true the discretion must be exercised reasonably. Now what does that mean? Lawyers familiar with the phraseology commonly used in relation to exercise of statutory discretions often use the word "unreasonable" in a rather comprehensive sense. It has frequently been used and is frequently used as a general description of the things that must not be done. For instance, a person entrusted with a discretion must, so to speak, direct himself properly in law. He must call his own attention to the matters which he is bound to consider. He must exclude from his consideration matters which are irrelevant to what he has to consider. If he does not obey those rules, he may truly be said, and often is said, to be acting "unreasonably." Similarly, there may be something so absurd that no sensible person could ever dream that it lay within the powers of the authority. Warrington LJ in Short v Poole Corporation [1926] Ch. 66, 90, 91 gave the example of the red-haired teacher, dismissed because she had red hair. That is unreasonable in one sense. In another sense it is taking into consideration extraneous matters. It is so unreasonable that it might almost be described as being done in bad faith; and, in fact, all these things run into one another.”

13. The significance of this test to me refers to a generalized cluster of not only sheer absurdity, whim or caprice but merges into irregularity, illegitimate purposes, errors on the face of the record, irrelevant considerations, mistakes and misunderstandings which can be classed as self-misdirection or addressing oneself to the wrong question. See “Lambeth LBC V Secretary of State for Social Services (1980) 79 LGR 61, Niarchos V Secretary of State for the Environment(1977) 76 LGR 480” There is therefore a judicial binder that the decision maker if in exercise of discretion departs from the settled principles of law he must give clear reasons for doing so in order for the claimant to know the basis of the decision and the exception to the guiding general principles.

14. As adumbrated above the ultimate measure of this appeal is underpinned as to whether the discretion so exercised by the trial magistrate was within the norm or ultra vires the jurisdiction vested by statute.

15. In terms of Order 40 Rule 1 & 2 of the Civil Procedure Rules on temporary injunction, the purpose of the same is to prevent an irreparable harm and this expected harm outweighs the expected irreparable harm imposed as a result of temporary injunction. The issuance therefore of injunction and the scope of the relief ordinarily rests in the sound discretion of the trier of facts. As the court in EM Loews Enterprises INC vs International Alliance of Theatrical Stage Employees et.al 127 conn 415, 419, (1941) stated: -“An action for an injunction being equitable, whether or a plaintiff is entitled to relief is determined, not by the situation existing when it begun, but by that which is developed at the trial”

16. The ultimate challenge I see in the exercise of discretion whether to grant or deny a motion of temporary injunction is that confusion persist regarding the interpretation and construing of the standard parameters to the particular facts of the case. The reason being the standard of proof is interpreted differently by the various trial and appeals court and there is no uniformity in applications. For example, relying on the principles in Giella -v- Cassman Brown [1973] E.A 358 and Mrao Ltd vs First American Bank[2003] eKLR one cannot miss to see the differentia in opinion by the courts in applying the four-point tests for grant or refusal of temporary injunction. It is crystal clear from the case-law some court circuit interpret and construe the exercise of discretion by implementing a two-part balancing standard when faced with a motion on injunction. Whereas others apply the three-part sliding scale model.

17. It is evident from the record and affidavit evidence as deponed by the parties the motion substantially indicate that the respondent had paid partially the loan amount amounting to Kshs 1. 6M. The respondent also contends that the charged parcel of land, that is the suit property, forms the only fixed abode and residence for himself and members of his family. It is against this backdrop the trial court granted the respondent the status quo orders against the appellant bank.

18. Generally, there are objectives upon which a court exercises discretion to grant a temporary injunction namely: -(a)to maintain the status quo,(b)to preserve the court ability to render meaningful decision,(c)managing the risk of error likely to occasion prejudice or injustice to the other party.

19. The question before this court then is whether the instant case tried before the learned trial magistrate met the formulated test on injunction. I note that the appellant seeks to invoke the appellate jurisdiction under Order 42 of the Civil Procedure Rules to challenge the findings of the trial court. That therefore brings me to the standard of review of the inferior court decision at the interlocutory stage by this court. The function is typically guided by the principles in Michael Murage vs Dorcas Atieno [2019] eKLR and Mbogo vs Shah [1968] EA 93.

20. The assorted factors to be considered in reviewing the trial court's decision are whether there was misdirection on the evidence, the law and the overall facts of the case, whether the trier of facts took into account irreverent material or acted in excess of jurisdiction. No single factor is dispositive, rather each factor must be considered by this court to determine whether there was an overreach with the exercise of discretion so as to review the impugned ruling.

21. In the instant case, the trial court was asked to consider the guiding principles which lean towards grant or refusal of an injunction as stipulated under Order 40 Rule 1 & 2 of the CPR. As I have held elsewhere, what was at stake the way I perceive from the pleadings, is whether the respondent had a prima facie case likely to succeed on the merits. Second that he will suffer irreparable injuries not remedied in damages. Thirdly, was a question on the balance of convenience.

22. It is not in dispute that the suit property had been offered by the respondent as security to the appellant bank to guarantee redemption of the loan amount by way of sale in the event of default. The main contention by the respondent are that interlocutory stage was that the suit property though charged to the bank is also a family home for himself and the rest of the dependants. He also raised concerns on the amount of interest under the deed of charge which he argued was increased without notice by the appellant bank, hence a violation of the loan agreement. This was disputed by the bank which made reference to a letter dated 30th July 2015.

23. That as it may be, the appellant assert that it would never recover the unpaid loan if the court proceeds to sustain the status quo. Likewise, the appellant contends that the injury is irreparable because the respondent has continually defaulted to make good the repayment as agreed within the terms set out in the agreement. With those facts in mind the position taken by the court is that once it is conceded that the disputed loan amount and interests as prescribed in the mortgage contract remains unpaid, the court approach ought to be in consonant with the principles by Digby's An Introduction to The History of the Law of Real Property(1897) (5th) at page 285:“In the time of Littleton, a mortgage had become a species of estate upon condition. The land was conveyed, usually by feoffment, by the debtor to the creditor, subject to the condition that on repayment of the loan by a certain date by the feoffment (the debtor) might re-enter. On the failure to the feoffment to perform the condition, the law refused to regard the fact that the real nature of and intent of the transaction was that the land should be held by the feoffee merely as security for the debt, and insisted on the enforcing of the rules relating to estates upon condition in all their strictness, holding that the estate was thereupon vested absolutely in the feoffee. In later times, when the jurisdiction of the Chancellor was firmly established, the rights and duties of the mortgagor and mortgagee recognized by Equity became wholly different from those recognized by Law. .... In Equity, however, the real nature of the transaction is regarded, and even after default is made, notwithstanding the terms of the instrument creating the mortgage, the mortgagee will be made to reconvey the land to the mortgagor on payment of the debt, interest, and costs. The right which remains in the mortgagor is called his equity of redemption (right to redeem), and is in fact the ownership of land subject to the mortgage debt. (Emphasis added)”

24. Whereas courts are not only supposed to determine those matters on the subject of the validity of the mortgage agreement through which the parties agreed to contract but it must always resolve that validity alongside ripeness of the statutory power of sale. In the disposed application before the trial court it has not been shown that the power of sale was exercised by the mortgagee appellant bank for other purposes other than merely recovering of the outstanding debt.

25. The law as it relates to injunction calls for courts of equity to look at both side of the coin to serve the interests of justice. It is noteworthy to mention that one of the key grievances by the respondent was on the interest rates imposed by the appellant bank. However even in that area of concern, the court in Mrao Limited (supra), had this to say: -“I have always understood that it is the duty of any person entering into a commercial transaction particularly one in which a large amount of money is involved to obtain the best possible legal advice so that he can better understand his obligations under the documents to which he appends his signature or seal. If courts are going to allow debtors to avoid paying their just debts by taking some of the defences I have seen in recent times for instance challenging contractual interest rate, banks will be crippled if not driven out of business altogether and no serious investors will bring their capital into a country whose courts are a haven for defaulters. I agree entirely with the Commissioner of Assize Shah that the appellant was not entitled to an injunction upon any one of the grounds urged on its behalf.”

26. The court of equity cannot overlook all sideline which has come out of the wisdom of the two contracting parties unless there exist an allegation of misrepresentation, fraud or mistake in the transaction. The effect of the illegality is to prevent a party from receiving or benefiting under his own illegal act. Clearly it is important to note that the respondent borrowed the loan amount from the appellant bank and on the basis of it offered the suit property as security.

27. The redemption of it dependent upon evidence of settling the debt. The court in Debenture Trust Corporation PLC vs Concord Trust[2007] EWHC 1380 said thus:“The essence of the equitable right to redeem is that the mortgagor is allowed to perform his contract, apart from time stipulations I do not consider that the court in the exercise of it is equitable jurisdiction, can or should rewrite the contractual terms of redemption in favour of the mortgagor. To do that would in effect allow the mortgagor to benefit from his own breach of contract.”

28. So, the question I must answer is what liabilities are secured by the security. In the appeal before court the learned Trial Magistrate having determined that there were serious triable issues in respect of the mortgage contract grounded on the strength that the property charged was family land and that there was varying of interest rates which had resulted in the respondent being unbale to settle the debt, went ahead to grant an order of status quo whose net effect is restraining the appellants from selling the suit property.

29. As a matter of law and facts the appellant is challenging the legality of that decision which he submitted runs contrary to the provisions of Section 90, 91, 92 & 96 of the Land Act 2012 and the terms of the charge instrument.

30. In exercising discretion, it is not sufficient that the court approves an application simply because it seems the right thing to do. That exercise of discretion in decision making in the adjudication of dispute has to be judiciously considered to give effect to the facts and the law in a particular case. The unfettered discretion under Order 40 Rule 1 & 2 of the CPR is an important tool in promoting good administration of justice but the standards to be applied must be in conformity with the law. There should be a caveat placed on the injunctive orders that the consequences of it has not resolved the appropriate suit.

31. Let us consider now the model of the decision made by the trial court and whether we must accept it or interfere with it as submitted by the appellant. There are factors which are intertwined with the reading of the impugned ruling which I fault the trial court for not legitimately addressing them in the decision-making process:1. Whether the power of sale had arisen at all to call upon the appellant to exercise it within the ambit of the statute.2. Whether the validity of the mortgage instrument was in issue at the main trial i.e for allegations of fraud, mistake, misrepresentation, voidness or illegality.3. Whether the loan amount claimed by the appellant had fallen due and owing from the respondent.

32. With this in mind the discretion so challenged by the appellant is indicative that the trial magistrate did not properly apply the conditions precedent to the exercise of discretion of granting an injunction in favour of the respondent. The power to make that choice was whether the above questions were responsive in the decision making under Order 40 Rule 1 & 2 of the CPR to grant an injunction in the subject matter. In the circumstances it is clear that the decision made was not in accordance with clear and specific criteria for grant of an injunction. Furthermore, the learned trial magistrate did not bother to explain reasons why he found that the respondent had demonstrated a prima facie case. He simply states that after considering the pleadings, the respondent had demonstrated prima facie case. In my view, this did not constitute sufficient reasons to grant the respondent the orders of status quo.

33. In Kenleb Cons Ltd vs New Gatitu Service Station Ltd another, [1990] eKLR the court noted that: -“To succeed in an application for injunction an applicant must not only make a full and frank disclosure of all relevant facts to the just determination of the application, but must also show he has a right, legal or equitable, which requires protection by injunction.”

34. Furthermore, in my view, the respondent in taking the loan from the appellant bank conditionally transferred his proprietary rights in the suit property to the appellant bank as the value of the loan advanced for his primary use. That is to say, that at the time that the respondent charged the property as security for loan, he was fully aware that the same would be sold without any further reference and or concurrence.

35. In this regard, I must reflect on the words of court in Sambai Kitur vs Standard Chartered Bank & 2 Others, Eldoret HCC No. 50 of 2002 where Emukule J held that: -“….it must also be noted that when a chargor lets lose its property to a charge as security for a loan or nay other commercial facility on the basis that in the event of default it be sold by a charge, the damages are foreseeable. The security is henceforth a commodity for sale or possible sale without prior concurrence and consent of the chargor. How can he, having defaulted to pay loan arrears prompting a charge to exercise its statutory power of sale claim that he is likely to suffer loss and injury incapable of compensation of damages? Such an argument is definitely misplaced and has no merit. It is immaterial that the property is a family residence, a fact well known to the chargor at the time of offering it as security to the charge.”

36. The overall consideration in my judgment persuades me to find on appropriate scrutiny of the record and the impugned decisions it is difficult to ascertain where the trial magistrate was coming from in rendering the decision. It is interesting to note that the deliberate use of the word status quo imports in certain instances vagueness and ambiguity.

37. From the foregoing, it is clear to me that among other things which the court failed to address are matters on prejudice the appellant bank was likely to suffer in the event the injunction turns out to have been wrongly granted. For the above reasons, it is my finding that the lower court misdirected itself on the law and facts and consequently, I find that the decision of the trial court must be set aside and reversed with costs to the appellant.

DATED, SIGNED AND DELIVERED VIA EMAIL AT ELDORET THIS 18th DAY OF MAY, 2022. R. NYAKUNDIJUDGE