Intex Construction Limited v Credit Bank Limited [2016] KEHC 8692 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

COMMERCIAL AND ADMIRALTY DIVISION

CIVIL SUIT NO. 134 OF 2016

INTEX CONSTRUCTION LIMITED.....................................................PLAINTIFF

VERSUS

CREDIT BANK LIMITED..................................................................DEFENDANT

RULING

1. The plaintiff INTEX CONSTRUCTION LIMITED has been a customer of CREDIT BANK LIMITED since the year 2012.  During the currency of their customer/banker relationship the bank granted to Intex various loans, overdrafts and other banking facilities.

2. The banking facilities were secured by a legal charge registered against the plaintiff’s property L.R. No. 209/13318 ELGON ROAD, NAIROBI.

3. The charge in favour of the bank was for the sum of Kshs. 260,000,000/-.

4. As at 16th September 2015 the defendant demanded from the plaintiff, the sum of Kshs. 298,900,873. 39.

5. It is the plaintiff’s case that the alleged debt of Kshs. 298,900,873. 39 was illegal and not due or payable in law or under the terms of the contract between the parties.

6. As far as the plaintiff was concerned, the sums being demanded consisted of Interest; Commissions and Penalty Charges which had been illegally charged to the plaintiff’s account.

7. It is common ground that the plaintiff secured a loan of Kshs. 270,000,000/- from the KENYA COMMERCIAL BANK. The said loan was to be utilized to partially take over and repay the debt owed to CREDIT BANK LIMITED.

8. The plaintiff’s case was that upon the payment, by Kenya Commercial Bank, of Kshs. 270,000,000/-, the only balance that was then due and owing to Credit Bank Limited was Kshs. 28,900,873. 39.

9. The plaintiff’s further case was that the balance of Kshs. 28,900,873. 39 was payable through monthly installments of Kshs. 2,677,977, inclusive of interest.

10. It was the understanding of Intex that the balance would attract Interest at 20% per annum, and a Penalty Interest at the rate of 28% per annum on the arrears.

11. The plaintiff conceded that the defendant reserved the right to change the agreed Interest Rate and Penalty Interest Rate, provided that the plaintiff had been served with a Notice of the intention to increase the applicable rates.

12. In order to secure the balance which would be outstanding after Credit Bank received Kshs. 270,000,000/- from Kenya Commercial Bank, the plaintiff’s directors and the plaintiff issued corporate and joint and several Guarantees, in favour of Credit Bank.

13. Meanwhile, the Kenya Commercial Bank was also supposed to issue an irrevocable Bank Guarantee to secure the residual balance.

14. After the defendant received Kshs. 270,000,000/- from Kenya Commercial Bank Limited, it issued a Demand Notice to the Kenya Commercial Bank, and also the plaintiff, demanding Kshs. 61,002,548. 49, as at 2nd February 2016.

15. In view of the fact that the plaintiff believed that the residual balance was Kshs. 28,900,873. 39, it was a serious shock to be asked to pay Kshs. 61,002,548. 49.

16. The plaintiff attributed the huge difference between what it considered due to the defendant, and the sum demanded, as being due to the illegal increase of the agreed rate of interest.

17. The plaintiff asserted that the defendant had increased the rate of interest up to 40%.

18. The plaintiff also complained that the defendant had increased the monthly installments from Kshs. 2,677,977/- to Kshs. 5,651,254. 94.

19. The increments to the interest rates were said to have been effected by the defendant, without any notice to the plaintiff.

20. Apart from the increase to the rate of interest, the defendant was said to have charged Penalty Interest of 40% per annum on arrears.  However, the plaintiff insisted that there were never any arrears.

21. As the defendant had demanded money, from the plaintiff and the Kenya Commercial Bank, the plaintiff brought this application to court, seeking interim injunctive reliefs, to stop the defendant from insisting that the plaintiff and Kenya Commercial Bank should honour the Guarantee.

22. If issued, the injunction would restrain the defendant from calling up the Guarantee, to demand Kshs. 64,258,872. 35.

23. The plaintiff also asked the court to order that proper accounts be taken by the parties to ascertain the proper balance payable under the Guarantee dated 18th September 2015.

24. In response to the application, the bank pointed out that at all times, it had charged interest at the rates agreed upon between the parties.

25. The bank also insisted that the plaintiff had fallen into arrears, necessitating the debiting of penalty interest.

26. Assuming for a moment that the plaintiff was supposed to remit Kshs. 2,677,977/- every month, that would mean that when the plaintiff remitted any installments late, it must have been in arrears prior to such remittances.

27. According to the plaintiff, it remitted Kshs. 5,355,954/- on 18th May 2016; and that sum was in respect of the installments of February and March 2016.  By necessary implication, the installments for February and March were paid late.

28. The plaintiff also said that on 27th May 2016, it paid Kshs. 5,355,954/- in respect to the installments for April and May 2016.  By necessary implication, at least the installment for April 2016 was paid late.

29. As each late payment created arrears, it would appear, on a prima facie basis, that the defendant became entitled to charge penalty interest whenever arrears had accumulated.

30. Meanwhile, the defendant wrote to Intex on 15th September 2015 requesting for a Partial Pay-off of Kshs. 270,000,000/- and the;

“Restructure of the residual balance of Kshs. 28,900,873. 39 plus interest to term out your overdraft facility currently outstanding at Kshs. 298,900,873. 39?.

31. In response to that request, the plaintiff procured a Bank Guarantee from KENYA COMMERCIAL BANK for Kshs. 28,900,873. 39.  The said Bank Guarantee is dated 18th September 2015, and it was received by the defendant on 22nd September 2015.

32. Notwithstanding the fact that the defendant had cited the sum of Kshs. 28,900. 873. 39 as the residual balance, the defendant later insisted that the residual balance was Kshs. 61,002,548. 49.  That information is contained in the letter written by Credit Bank on 2nd February 2016.

33. The increase of the residual balance was attributed to the fact that Kenya Commercial Bank (hereinafter “KCB?) did not remit the sum of Kshs. 270 Million until 21st January 2016.  In other words, the balance of Kshs. 298,900,875. 39, is said to have continued attracting further interest from 15th September 2015 until 21st January 2016.

34. And therefore when the defendant credited the plaintiff’s account with Kshs. 270,000,000/-, the outstanding balance was Kshs. 61,002,548. 49.

35. I find the defendant’s explanation reasonable, because if the residual balance was still Kshs. 28,900,873. 39 as at 21st January 2016, it would imply that the overdraft facility did not attract any further interest between 15th September 2015 and 21st January 2016.

36. But I also find, on a prima facie basis, that even though the residual balance may have increased due to interest debited to the overdraft facility between September 2015 and January 2016, the Bank, Guarantee issued by KCB was not altered.  The Bank Guarantee remains for the sum of Kshs. 28,900,873. 39 plus the applicable interest.

37. Accordingly, I find that when the defendant wrote to KCB on 18th April 2016, calling up the Guarantee No. MD 1526100007 C, and indicating that the liability of KCB under the said Guarantee was Kshs. 64,258,872. 35, the defendant erred.

38. Therefore, if the defendant is minded to rely on the demand notice which, prima facie, cites an erroneous figure, this court says to it, that that will not be allowed to proceed.

39. However, this finding is not and cannot be a bar to the defendant calling up the Guarantee for the sums specified on the face of the Guarantee instrument.

40. The court takes cognizance of the fact that the Guarantee is valid until 18th September 2016.  Therefore, if the defendant was restrained from calling up the said Guarantee until the case was heard and determined, the court would have, effectively, let off the hook, KCB, even in relation to the liability it had expressly guaranteed.

41. Meanwhile, as regards the plaintiff, I find that even though the defendant increased the repayment installment sum from Kshs. 2,677,977/- to Kshs. 5,651,254. 94, the defendant had a contractual discretion to increase the quantum.

42. Of course, by more than doubling the monthly installments, the defendant may be deemed to be unfair.  But then again, the parties agreed that the residual balance would be payable over 12 months.  Therefore, if the residual balance was over Kshs. 61 million in January 2016, it could only be cleared by monthly installments of Kshs. 5,651,254. 94.  By so holding, I must not be taken to have already decided that the residual amount was accurately stated by the defendant.  The issues as to what were the correct interest rates; the correct penalty interest rates; and therefore the correct residual balance still require to be determined by the court.

43. But the fact that there is still a dispute over those aspects of the case is not a basis for granting an injunction to restrain the defendant from making a demand on the plaintiff.

44. In my considered opinion, if the court were to stop the defendant from demanding payment now, both parties may ultimately suffer grave injustices if the court were to finally find that the defendant was not wrong.

45. But I am also alive to the injustice that could have been visited upon the plaintiff if it was compelled to pay a debt which might ultimately be found to have been improperly inflated.

46. In these circumstances, I find that the issue must turn on a balance of convenience.

47/ Accordingly, I find that the plaintiff must continue to remit monthly installments to the defendant.  The said installments shall be in the sum of not less than Kshs. 3,000,000/-, with effect from 31st October 2016.

48. Provided that the plaintiff makes those payments, the defendant shall be restrained from calling up the Guarantees of either the plaintiff or of the plaintiff’s directors.

49. Finally, I order that each party will pay it own costs of the application dated 20th April 2016.

DATED, SIGNED and DELIVERED at NAIROBI this14th day of September 2016.

FRED A. OCHIENG

JUDGE

Ruling read in open court in the presence of

Kan’gethe for the Plaintiff

Owino for the Defendant

Collins Odhiambo – Court clerk.