John K. Gilliat and Company Limited v Land and Agricultural Bank of Kenya (Civil Case No. 145 of 1938) [1938] EACA 187 (1 January 1938)

## ORIGINAL CIVIL

#### BEFORE SIR JOSEPH SHERIDAN, C. J.

# JOHN K. GILLIAT & COMPANY LIMITED, Plaintiff

## THE LAND AND AGRICULTURAL BANK OF KENYA, Defendant

### Civil Case No. 145 of 1938

Mortgage-Chattels mortgage-Power of Sale-Land and Agricultural Bank Ordinance, 1930 (Auction sale under section 45A)-Notice of sale—"Subsequent mortgagees"—Leave to bid—Powers of Land and Agricultural Bank of Kenya-Chattels Transfer Ordinance, 1930, section 29-Whether fiduciary relation.

By indenture of mortgage, dated 19th January, 1932, the defendants became the first legal mortgagees of a certain coffee estate and by an instrument dated 25th January, 1932, duly registered under the Chattels Transfer Ordinance, 1930, the plaintiff became mortgagees of all the crop and crops of coffee berries and cured coffee then growing, planted and harvested or to be grown, planted and harvested in or upon the said estate wherever the said crops of coffee berries might for the time being be.

The defendants, in exercise of their powers under section $45A$ of the Land and Agricultural Bank Ordinance, 1930, as amended on 30th June, 1937, put up the said estate for sale by public auction. The conditions of sale reserved to the defendants the right to bid and the defendants as highest bidder were declared to be the purchaser of the said estate at a price substantially less than the amount due to the defendants by the mortgagor on foot of the legal mortgage. Prior to the said sale notice thereof was inserted in the Official Gazette and the defendants had informed the plaintiffs of their intention to sell.

By an indenture dated 26th July, 1937, purporting to be made between the mortgagor as vendor of the one part and the defendant as purchaser of the other, but executed by the defendants only after reciting inter alia the said mortgage of 19th January, 1932, and further reciting that "whereas the vendor has fallen into arrear with the repayment of the aforesaid principal sum and interest thereon and Whereas the purchaser as Mortgagee has entered upon and taken possession of the said land in pursuance of section 4 of the Land and Agricultural Bank (Amendment) Ordinance One thousand Nine hundred and Thirty-three and did publish in the Gazette the intention to sell the said land by public auction and Whereas it was one of the conditions of sale that the sale would be subject to the right of the Purchaser or its authorized representative to bid at the auction in such manner as it should think fit and Whereas the said land was put up for sale by public auction on the Thirtieth day of June One thousand Nine hundred and Thirty-seven and at such sale the Purchaser was declared the Purchaser thereof at the price or sum of Shillings Twenty thousand." It was witnessed that "in consideration of the premises and of the sum of Shillings Twenty thousand aforesaid which shall be set off against the principal moneys and interest due

ν.

and owing to the Purchaser by the Vendor by virtue of the Mortgage the Vendor as beneficial owner doth hereby assign and release unto the Purchaser" the said estate "freed and absolutely discharged from all right or equity of redemption."

Plaintiffs' claim was $(a)$ for a declaration that the Instrument of 25th January, 1932, constitutes a valid first legal charge (or Chattels mortgage) under the Chattels Transfer Ordinance, 1930, over and upon all that and those the crop and crops of coffee berries and cured coffee now growing or planted and harvested or to be grown and planted and harvested in or upon the said estate, and $(b)$ for an order that the defendant do pay to the plaintiff the sum of Sh. 5,955 now in the defendant's possession being the proceeds of the 1937-38 crop as aforesaid and such moneys as come into the defendant's possession (as the result of sale thereof or otherwise) in respect of the 1938 and subsequent crops.

Held (30-12-38).—(1) That upon a correct interpretation of section 29 of the<br>Chattels Transfer Ordinance, 1930, the defendants' rights under the<br>mortgage dated the 18th January, 1932, were not prejudicially affected by<br>the to section 29 being inapplicable to the facts of this case;

(2) That although the defendants did discharge and cancel their first legal mortgage on 25th July, 1937, that did not mean that thereupon any rights under the chattels mortgage came into being;

(3) Plaintiffs were not subsequent mortgagees within the meaning of section 45<sub>A</sub>, Land and Agricultural Bank Ordinance, 1930 (as amended) and were not entitled to three months' notice of the sale;

(4) That the plaintiffs as persons interested in the sale were given sufficient notice of defendants' intention to sell;

(5) That the insertion without leave of the Court of the condition that the defendants reserved the right to bid at the auction sale was not invalid or ultra vires;

(6) That the defendants have the sole right to the coffee and coffee crops in question in the suit.

Buckley for the plaintiffs: $-$

The original position was that the defendants were first mortgagees of the farm of one Captain Sumpter and that plaintiffs held a subsequent chattels mortgage over the coffee produced from the said farm.

On 25th July, 1937, the defendants discharged and cancelled their mortgage; as a result, plantiffs' chattels mortgage became a first charge on the coffee and by such discharge of their mortgage the defendants had no title to the coffee, which became the sole property of plaintiffs under their chattels mortgage. Toulmin v. Steere (36 E. R. 81), Squire v. Ford (68 E. R. 408 at 414), Gokuldoss Gopaldoss v. Rambux Seochand (11 I. A. 126 at 133).

Having discharged their mortgage, the defendants then by virtue of their powers under the Ordinance purported to transfer the farm to themselves and thus cancel and exclude plaintiffs' chattels mortgage altogether. This transfer was wrong in law. No man can sell to himself and in no circumstances can a mortgagee sell to himself without the permission of the Court. Lewis v. Hillman (10 E. R. 239 at 249), Boyce v. Edbrooke (1903 1 Ch. 836 at 843), Farrar v. Farrar Ltd. (40 Ch. 409), National Bank of Australasia v. The United Hand-in-Hand and Band of Hope Company and Lakeland (4 A. C. 391 at 404).

No such permission was obtained and consequently the sale was void. The Land Bank Ordinance gives no specific power to effect a sale by the Bank to itself and such sale was ultra vires the Bank.

If the defendants' powers under their Ordinance are insufficient for their purpose, there was nothing to prevent them bringing the usual action on the mortgage when they could have then asked that the order for sale should include power for themselves to bid, and when plaintiffs would have been joined as second defendants after mortgagor and so had all proper notices. They elected instead to<br>proceed under the Land Bank Ordinance. The power to put up a property for sale by auction does not include power for the vendor to buy it for himself.

The defendants as holders of a power of sale committed a breach of the fiduciary relation, in which all holders of a power of sale stand by selling to themselves. *In re Bloye's Trust* (41 E. R. 1354 at 1357).

The defendants had not given proper notices of sale as required by the Land Bank Ordinance.

As the transfer and sale were void as being ultra vires the defendants having cancelled their mortgage may not revive it for the purpose of barring the plaintiffs. National Bank of Australasia v. The United Hand-in-Hand and Band of Hope Company and Lakeland (4 A. C. 391 at 408).

A person who acts ultra vires cannot be allowed to profit thereby. In re Hallett's Estate (13 Ch. D. 696 at 709); Thomas Doolan v. The Directors, etc., of the Midland Railway Company (2 A. C. 792 at 806).

Phillips for the defendants: -

Section 29 of the Chattels Transfer Ordinance, 1930, provides that no instrument of security over crops under section 28 of that Ordinance shall prejudicially affect the rights of any mortgagee of the land whereon the crops are growing unless and so far as the mortgagee consented in writing to such instrument. The proviso to section 29 refers to a sale by a third party. It does not affect the rights of a previous mortgagee.

Plaintiffs were not subsequent mortgagees of the land within the meaning of section 45<sub>A</sub> of the Land and Agricultural Bank Ordinance, 1930, and so were not entitled to three months' notice of the sale.

A sale subject to plaintiffs' chattel mortgage would be a sale prejudicially affecting the defendants' rights as mortgagees and so contrary to section 29 of the Chattels Transfer Ordinance, 1930.

The defendants' powers under section 45<sub>A</sub> of the Land and Agricultural Bank Ordinance are wide, but protection is afforded inter alia by the fact that the sale must be by public auction. The holder of a first charge is entitled to look to his own interests. If the cash a fail of the cash and of

Buckley in reply: $\rightarrow$ $\mathcal{L}(\partial \mathcal{D}) = \mathbb{E}[\mathcal{H}(\mathcal{G}) \setminus \hat{\mathcal{H}}(\mathcal{G})] \cup \mathcal{L}_{\mathcal{A}}$ $\mathbf{H} = \mathbf{H} \mathbf{H} + \mathbf{H} \mathbf{H}$

Section 29 of the Chattels Transfer Ordinance does not apply because it only protects mortgagees whilst they are mortgagees and not otherwise. Defendants ceased to be mortgagees when they discharged their mortgage in July, 1937.

JUDGMENT.—This is a suit by John K. Gilliat & Co., Ltd. versus the Land and Agricultural Bank of Kenya. The claim is: -

- (a) For a declaration that the instrument of 25th January, 1932, constitutes a valid first legal charge (or chattels mortgage) under the Chattels Transfer Ordinance, 1930, over and upon all that and those the crop and crops of coffee berries and cured coffee now growing or planted and harvested or to be grown and planted and harvested in or upon Karatina Estate (Farm Land Office No. 318/3, Fort Hall), comprising approximately 449 acres, and wherever the said crops of coffee berries might for the time being be in favour of the plaintiff. - (b) For an order that the defendant do pay to the plaintiff the $\frac{1}{2}$ sum of Sh. 5,955, now in the defendant's possession, being the proceeds of the 1937-38 crop as aforesaid, and such moneys as come into the defendant's possession (as the result of sale thereof or otherwise) in respect of the 1938 and subsequent crops.

The claim is resisted by the defendants on the ground that the property in question was mortgaged to them under a first legal mortgage dated the 19th January, 1932, and that it was subsequently sold by them by public auction on the 30th June, 1937, in exercise of the powers conferred upon them by section 45A of the Land and Agricultural Bank Ordinance, 1930, as amended.

Now in the first place it is important to advert to the provisions of section 29 of the Chattels Transfer Ordinance, 1930, which provides that: $-$

"No such instrument shall prejudicially affect the rights of any landlord or mortgagee of any land whereon the said crops are growing unless and so far as the landlord or mortgagee has consented in writing to such instrument:

"Provided that no such instrument being duly registered shall be extinguished or prejudicially affected by any subsequent sale, lease, mortgage or other encumbrance of or upon the land described or referred to in the instrument or in any schedule thereto."

It has been argued by Counsel for the defendants that the meaning of this section is for the purpose of this case that the defendants' rights which he said were properly exercised cannot be affected prejudicially by the instrument of the 25th January, 1932, under which the suit is brought. In that submission he appears to me clearly to be right. He further submitted that the meaning of the proviso is that if a landlord or mortgagor were to enter into an arrangement under a chattels instrument that arrangement could not be extinguished or prejudicially affected by any subsequent sale, lease, mortgage or other encumbrance executed by him. His argument was that the proviso cannot have any relation to the facts of this case where the defendants base their resistance on a legal mortgage which was executed prior to the execution of the chattels instrument.

It would appear from the correspondence which passed between the parties prior to the suit that the plaintiffs' advocate sought to put

a different construction on this section, and in this connexion I would refer to their letter of the 18th May, 1938, addressed to the defendants, in which they wrote: $-$

"We have asked our clients' agents to let us have the loan of their file with a view to making search for any consent there might be to the Chattels Mortgage by you or your Bank, but we should point out that the existence or otherwise of such consent appears at the moment to be quite irrelevant as the claim is made inter alia under the provisions of section 29 of the Chattels Transfer Ordinance, 1930, which, so far as we are aware, has not been in any way varied by any subsequent legislation."

And again it would appear from their pleadings that they sought for a similar construction of the section, viz. that it meant on the facts of the case that the sale of the property by the defendants under their mortgage, being subsequent to the date of the execution of the chattels instrument, could not extinguish or prejudicially affect their rights under that instrument. In this connexion I would refer to paragraph 8 of their Plaint, where they say:-

"The said instrument was and is in no way extinguished or prejudicially affected by any sale referred to in the said Indenture nor by any assignment therein contained."

Towards the conclusion of the case, after I had heard the submission of Counsel for the defendants as to what section 29 meant. Counsel for the plaintiffs agreed that the meaning of the section was as contended for by Counsel for the defendants.

Three questions were submitted to me for decision on the part of the plaintiffs, and the first which I will now deal with is: Did the defendants discharge and cancel their first legal mortgage on the 25th July, 1937? It is clear to my mind that they did, and it is not denied that they did, but that does not mean that thereupon any rights under the subsequently executed chattels instrument came into being. Were I to hold so I should be flying in the face of the construction. which I have already placed upon section 29 of the Chattels Transfer Ordinance.

The second question is: Have the defendants now any title whatever to the coffee and coffee crops on the Karatina Estate? Subject to the question, with which I will deal later, as to whether the defendants correctly exercised their rights under their mortgage, it seems to me that the defendants have the sole rights in regard to the coffee and coffee crops referred to.

The third question is: Have the plaintiffs a title to such coffee crops by virtue of their chattels mortgage? The answer to the second question negatives their having any such right.

I will now pass to the issue as to whether the defendants by reason of the manner in which they exercised their rights did anything to forfeit those rights. It has been argued for the plaintiffs that the plaintiffs as subsequent mortgagees of the property did not receive from the defendants the three months' notice which is referred to in section 45<sub>A</sub> of the Land and Agricultural Bank Ordinance. The plaintiffs' argument was, inter alia, that the land should have been sold subject to the chattels mortgage. For the defendants it was argued,

and I hold rightly argued, that the sale of the land subject to the chattels mortgage would be a sale prejudicial to the defendants' rights and so contrary to section 29 of the Chattels Transfer Ordinance; but I would say that in any event the plaintiffs are not subsequent mortgagees within the meaning of section $45A$ as will appear clear from the definition of "mortgagee" as including a chargee under the Registration of Titles Ordinance.

It has next been submitted for the plaintiffs that the defendants by. their sale of the land have committed a breach of the fiduciary relationship existing between them and the plaintiffs, but with this I do not agree. As has been frequently stated, a mortgagee's right is to look after himself first, and the argument as to fiduciary relationship could only have any relevancy if there had been any surplus proceeds after paying himself. In the present case the proceeds fell far short of the amount that had been advanced on the first mortgage.

Then again it has been argued for the plaintiffs that the sale was bad by reason of the defendants, the mortgagees, having purchased the property and conveyed it to themselves, the principle invoked being that a mortgagee may not buy the property, for a man cannot sell to himself, and in support of this argument it was submitted that in the case of sales ordered by the Court a mortgagee is rarely allowed to bid. But in my recollection this is not the case. So well as I can remember it is the rule rather than the exception for the Court to allow mortgagees to bid at sales of mortgaged property. It is suggested here that the mortgagee should have obtained leave from the Court, but as I read section 45<sub>A</sub> the intention of the legislature was to confer upon the Land Bank exceptional powers when section 45 $\lambda$ states:

"The Board may without recourse to a Court of law enter upon and take possession of and sell by public auction the whole or any part of the security for the advance upon such terms and conditions as to the Board shall appear in all the circumstances to be just."

In advertising the sale the Land Bank inserted a condition: "The Board through its authorized representative has the right to bid." I cannot see anything extraordinary in the insertion of this condition when one remembers the readiness with which the Court permits a mortgagee to bid at such sales as I have referred to. The argument that the insertion of such a condition is *ultra vires* the powers of the Land Bank does not find favour with me.

And finally it has been argued that the plaintiffs as persons interested in the sale within the meaning of section $45A$ (3) were not sufficiently informed of the intention to sell. All that sub-section states is that the Board shall communicate to persons interested that a sale is intended. Such communication it is admitted was made to the plaintiffs shortly before the sale. The plaintiffs' agent knew of the intention to sell in April, and notice advertising the sale appeared in the May Gazette.

$\tau_{\rm{max}} \gg 1$ On the case as pleaded and argued before me I consider that the defendants are entitled to succeed. The suit will be dismissed with costs.

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