Leasing Finance CompanyLimited v Wade Adams Piling and Foundation & Others (Appeal 7 of 2015) [2017] ZMSC 108 (30 June 2017)

ii IN THE SUPREME COURT OF ZAMBIA APPEAL NO.07/2015 HOLDEN AT NDOLA (Civil Jurisdiction) BETWEEN: LEASING FINANCE COMPANY LIMITED APPELLANT AND WADE ADAMS PILING AND FOUNDATION MAZEMBE TRACTOR COMPANY LIMITED (Being sued as lessee of Stand no. 4065, Kitwe) 1ST RESPONDENT 2ND RESPONDENT MWILA JOHN MULENGA (being sued as Guarantor of the 1st Respondent) 3 RESPONDENT MARGRET K. LOMBE MWILA (being sued as Guarantor of the 1st Respondent 4th RESPONDENT Coram: Hamaundu, Malila and Kaoma, JJS on 3rd June, 2015 and 30th June, 2017 For the Appellants : Mr. H. Chinene, Messrs Lumangwe Chambers For the Respondents: Mr. N. Yalenga, Messrs Nganga Yalenga & Associates JUDGMENT HAMAUNDU, JS, delivered the Judgment of the Court - •_s Cases referred to: J2 1. Attorney General v Achiume[1983] ZR1 2. Zulu v Avondale Housing Project Limited [1982] ZR 172, 3. Union Bank (Zambia) Limited v Southern Province Co-operative Marketing Union [1995-1997] ZR 66 4. Kanjala Hills Lodge Limited & Another v Stanbic Bank Zambia Limited [2012] 2 ZR 285 5. Credit Africa Bank Limited (In Liquidation) v John Dingani Mudenda[2003] ZR 66. This is an appeal against a judgment of the High Court which ordered a re-computation of the sum and interest paid by the respondents. The facts giving rise to this appeal are these: On 30th March, 2012, the 1st respondent borrowed from the appellant a sum of K2,700,000 for the purpose of purchasing earth moving equipment. The loan was to be paid back in 24 monthly instalments of K184,500 beginning 30th April, 2012 and ending on 30th March, 2014. There was to be interest charged on any overdue amount, instalment or payment at 60% per annum, compounded. The loan was secured by a third party mortgage on the property belonging to the 2d respondent and guarantees by the 3rd and 4th respondents. On the date that the final instalment was due, the 1st respondent was in arrears, prompting the appellant to write to the 1st respondent to confirm that it was in arrears on the loan in J3 the sum of K2,254,831 (rebased) as at 31st March, 2014, by signing on the letter. The 1st respondent signed the second page of the letter, as acknowledgment that it owed the said sum of money. On the 11th September, 2014, the appellant commenced this action, seeking payment of the sum of K1,958,543.00 or, in the alternative, foreclosure on the mortgaged property. In its affidavit in support, the appellant contended that interest was agreed at 60% per annum on the unpaid balance, to be compounded monthly. In its affidavit in opposition, the 1st respondent contended that infact the interest was a fixed monthly sum of K72,000 and that the rate of 60% interest was only to be applied on any overdue amount, instalment or payment. The 1st respondent contended that the interest on overdue instalments was penal and therefore illegal. It was the appellant's contention that, applying the normal interest, the 1st respondent was to pay back a sum of K4,495,500 in 24 months; that in actual fact the respondent paid a sum of K4,969,769 meaning that there was an excess paymentO of K474,269 which was due to the appellant's imposition of penal interest. J4 After doing some mathematical calculation on the sum borrowed, the monthly instalments and the period of repayment, the trial court found that infact there was an interest of K72,000 in every monthly instalment, which translated to 32% per annum. The court also found that the parties had agreed that interest of 60% per annum be charged on any overdue amount, but held that this flew in the teeth of Regulation 10 of the Cost of Borrowing regulations under the Banking and Financial Services Act. The court held that the penal interest charged must be disregarded and struck out. The court, however, found that during the loan term the 1st respondent had constantly been in arrears with regard to payment of the instalments, which entitled the appellant to continue charging interest at 32% on the overdue payments. The court ordered a recalculation of the loan account, excluding penal interest, and that any amount found to be due should be set off against any excess payments, whereupon the 1st respondent would be entitled to the balance, if any: The appellant filed three grounds of appeal. These are: "1. (cid:9) That the learned judge in the court below misdirected himself J5 in law and fact when he held that the appellant shall recover, by way of set off against payments made into the loan account in excess of what was agreed in accordance with Clause 7(i) of exhibit "AR1-6" and the loan amortization schedule, exhibit "HCS1 ", interest at the agreed rate of 32% per annum of the principal loan amount of ZMW2,700,000 for a period of 144 days from the 31st day of March, 2014 to the 21St day of August, 2014. 2. That the learned judge in the court below misdirected himself in law and fact when he held that the appellant imposed penal interest under clause 7(b) of the loan facility letter, exhibit "AR1-6" instead of what is clearly stated in the facility letter. 3. That the learned judge in the court below misdirected himself in law and fact when he dismissed the appellant's claim as endorsed on the originating summons in it's entirety and described the appellant at page J20 of the judgment as having cunningly made the respondent sign a document." On behalf of the appellant, Mr Chinene, learned counsel, argued the first ground of appeal on two points, namely: (i) what the parties agreed, and, (ii) the meaning of overdue payment. J6 On the first point, counsel referred us to a clause in the agreement which stipulated repayment of 24 monthly instalments of K184,500 each from 30th April, 2012 to 30th March, 2014. Counsel referred us to the court's finding that the 1st respondent did not, at any time, pay the agreed monthly instalment but instead paid higher amounts at irregular intervals. Learned counsel argued that, to the contrary, the evidence showed that the 1st respondent only made the first payment; and a lesser amount at that. On the second point, counsel submitted that the repayment schedule meant that whenever the respondents failed to make payment of an instalment when it fell due, that instalment became an overdue payment on which the appellant was entitled to charge compound interest as agreed at 60% per annum. It was argued that it was, therefore, a misapprehension of the facts for the court to hold that the interest rate was 32% per annum for a period of 144 days from the 31st March, 2014 to the 21st August, 2014. According to counsel, the import of this holding or finding is that the appellant was to do nothing even if the respondents chose not to pay anything during the duration of the agreement until after the 24 months had elapsed. On the authority of the cases of Attorney General v J7 Achiume(') and Zulu v Avondale Housing Project(2), counsel urged us to reverse the findings of fact made by the court below. In the second ground, of appeal, Mr Chinene submitted that the parties had agreed to a re-payment schedule of 24 monthly instalments of K184,400 each from the 301h April, 2012 to 30t11 March, 2014. According to counsel, if that schedule had been religiously followed, there would be no further payments or consequences. It was submitted that, in this case, the parties agreed further that a rate of 60% per annum compounded at the end of every month would be payable on any amount, instalment or payment that was overdue. Mr Chinene argued that the Banking and Financial Services (Cost of Borrowing) Regulations, 1995. (S.!. No. 179 of 1995) permits the charging of interest on overdue payment. He cited Regulation 10 thereof to support that argument. Counsel also cited the case of Union Bank (Zambia) Limited V Southern Province Co- operative Marketing Union(3) and argued that both cases are authority to support the argument that compound interest is chargeable if agreed upon. With those arguments, counsel submitted that the court below misunderstood compound interest for penal interest, thereby misdirecting itself completely. J8 In the third ground of appeal, Mr Chinene raised issue with the harsh words that the court below used when it said that the appellant cunningly made the 1st respondent sign a document to acknowledge its indebtedness in respect of penal interest. It was submitted that infact the document which the 1st respondent signed was its statement of account with the appellant as at that date and was prepared pursuant to the agreement as contained in the facility letter. Learned counsel submitted further that on the authority of the case of Kanjala Hills Lodge Limited & Another V Stanbic Bank Zambia Limited(4), the appellant was entitled to pursue its remedies of foreclosure, possession and sale, concurrently. Counsel, therefore, argued that it was contradictory for the court to give orders that demanded a re-calculation of the repayments in order to determine what was due or in excess and at the same time order that the appellant's claim as endorsed on the originating summons had been dismissed in its entirety. With those arguments, Mr Chinene urged us to allow this appeal. ig In response, Mr Yalenga, learned counsel for the respondents, argued the first and second grounds together. Counsel pointed out that the respondents had borrowed the sum of K2,700,000 and were to pay a total sum of K4,428,000. The payment itself, counsel observed, was in monthly instalments of K184,500. Counsel argued that simple arithmetic will reveal that the interest on the whole loan was 32%; or, in other words, K72,000 per month. It was further argued that, although the respondents appear to have agreed to the charging of 60% interest on any instalment that was overdue, such interest was illegal because it was outlawed by Regulation 10(1) of the Banking and Financial Services (Cost of Borrowing) Regulations. We were referred to the case of Credit Africa Bank Limited (In Liquidation) v John Dingani Mudenda 5 . Counsel argued further that, while charging of compound interest is allowed where there is express agreement by the parties, in this case what the appellant made the respondent agree to was a penalty of 60% on an overdue instalment on which 32% interest had already been charged, thereby making the effective interest rate at 92%. In response to the appellant's arguments in the third ground, Mr Yalenga argued that it was not a contradiction by the court below to order a re-calculation of the monies paid and at the same time dismiss the whole action because the court had already found that, but for the charging of penal interest, the respondents had essentially repaid the loan. It was argued that the appellant could not have been granted an order to foreclose when there was no longer any debt in existence. We were, therefore, urged to dismiss this appeal. We discern a lack of appreciation on the part of counsel on both sides, especially counsel for the appellant, of the distinction between "compound interest" and interest which is imposed as a penalty. Blacks Law Dictionary, Eighth edition explains the compounding of interest as: "To compute interest on the principal and the accrued interest". Indeed, as we said in Southern Province Co-operative and Marketing Union v Union Bank and also in Credit Africa Bank Limited v John Dingani Mudenda, such computation of interest is unusual. However, it is permissible where there is express agreement by the parties or where it is a custom to do so. By its I definition, therefore, charging of compound interest will have the effect of raising the amount of interest due from the one that is expected. This is because where one defaults on the principal and its ordinary interest, the next interest due will be calculated by applying the ordinary rate on the principal as well as the interest due. Onerous as it may sound, such interest is merely compound; it is not penal. Regulation 10(1) of the Banking and Financial Services (Cost of Borrowing) Regulations, Chapter 387 of the Laws of Zambia provides: "A bank or financial institution shall not impose on a borrower any charge or penalty as a result of the failure by the borrower to repay or pay in accordance with the contract governing the loan other than--- (a) Interest on an overdue payment;" We believe that this provision is the source of the appellant's misunderstanding. The Regulation banned the imposition on a borrower of anything which is in the form of a penalty for his failure to repay the loan or for defaulting on his repayment schedule. It is immaterial whether the financial institution describes that penalty as "compound interest" or whatever other name. As long as it is to J 12 be imposed on account of failure or default, then it is a penalty and is illegal. On the other hand in Regulation 10(1)(a) the Act permits the interest that has been reserved by the loan agreement to continue being charged on the overdue payment. It should be borne in mind that the overdue payment will have a component comprising interest on the principal. Therefore, by continuing to charge interest on the overdue payment, the financial institution will be applying interest on the principal together with the regular interest already accrued. Hence the financial institution will be "compounding" the interest. It can, therefore, be said that while the above regulation banned the imposition of any penalty for failure to pay or for default in making payments, it allowed the charging of compound interest. Coming to the source of this dispute, we wish to set out the clauses in the agreement that are relevant to this dispute. Clause 3 states: "3. The facility Term loan of K2,700,000,000 (Kwacha Two Billion Seven Hundred Million) only" J 13 Clause 7 states: "7. Repayment arrangements (a) Repayments will be effected as follows: (i) 24 Monthly Instalments of K184,500,000 each from 30th April, 2012 to 30th March 2014" We wish to make a few observations at this point. It is clear from the total sum payable under this clause that the loan was repayable with interest. According to the simple calculations made by the court below, the rate of that interest came to about 32% per annum. The appellant could have easily stated that interest was payable at 32% per annum, compounded. Instead the following is what the appellant provided in the sub-clause that followed: "(b) it is hereby expressly and mutually agreed that the Lender being a registered financial Institution shall by virtue of Regulation 10(1)(a) of the Banking and Financial Services (Cost of Borrowing) Regulations 1995 (Statutory Instrument No. 179 of 1995) be entitled to charge interest at the rate of 60% per annum on any overdue amount, instalment or payment on the loan and such interest shall be compounded at the end of each month" We observe again that, while the ordinary rate reserved by the loan agreement was about 32% per annum, the appellant decided (cid:9) (cid:9) J 14 that, on any amount defaulted, a very high rate of 60% per annum compounded per month would be applied. The appellant stipulated this clause in the mistaken belief that Regulation 10(1)(a) of the Banking and Financial Services (Cost of Borrowing) Regulations permitted it to do so. What the appellant failed to appreciate is that because this high rate of interest was only applicable where there was failure or default in paying, it fell squarely within what the Regulation considered to be a penalty and therefore, illegal. What the Regulation permitted was for the appellant to continue charging interest at 32% per annum even on overdue payments which, themselves, would already contain the regular interest that had been charged. With that explanation, it is our view that the court below was on firm ground when it held that the appellant had charged penal interest. That disposes of the first and second grounds. In the third ground of appeal we must immediately agree with the appellant's contention that it was perhaps premature for the court below to dismiss all of the appellant's claims as endorsed on the originating summons at that stage. The problem in our view is in the third limb of the lower court's order. That paragraph reads: J 15 "3. The plaintiff shall recover, by way of set off against payment(s) made into the loan account in excess of what was agreed in accordance with clause 7(1) of exhibit "AR1-6" and the loan amortization schedule, exhibit "HCS1", interest at the agreed rate of 32% per annum of the principal loan amount of ZMW2,700,000.00 for a period of 144 days from the 31st day of March, 2014 to the 21St day of August, 2014." By this order, the court below appears to have been of the view that interest was merely to be calculated by applying 32% per annum on the principal amount over the number of days by which completion of the repayments was delayed. As a matter of fact, counsel for the appellant raised issue with this approach in the second point of his argument in the first ground of appeal. Counsel argued that, infact, the repayment schedule meant that whenever the respondents failed to make payment of an instalment when it fell due, that instalment became an overdue payment on which the appellant was entitled to charge interest. The only fallacy in the argument by counsel was the contention that the interest to be charged was 60% per annum, compounded every month. We have already shown that that rate was penal and illegal. However, we have also shown that the appellant was entitled to continue charging 32% interest on the overdue payments (which already J 16 contained a component of interest). Therefore, to know the true state of the loan account, a meticulous computation has to be carried out; starting with, as argued by the appellant, the very first default. Since the repayments were monthly, this means that interest on the overdue payments will have to be calculated on a monthly basis. Credit should be given for those other payments that the court below found to have been wrongly debited. But that credit should be given on the exact date on which they were wrongly debited. In the end, there are two possible outcomes: the interest accrued on the overdue payments might well fall below the amount that the respondents are said to have overpaid. On the other hand, even taking into account what is said to have been overpaid, there might still be money owing in terms of interest accrued on overdue payments. In such circumstances, the appellant would still be entitled to enforce the securities secured by the mortgage, no matter what the exact amount owing is. It is for that reason that we agree with the appellant that it was premature at that stage to dismiss the appellant's action in its entirety. J 17 For the foregoing reasons, we set aside the portion of the judgment of the court below, at page J25 from the third bullet onwards. We substitute that portion with the following: 1. There shall be a re-computation by the Deputy Registrar of the loan account at 32% per annum and in accordance with the approach that we have advised above. 2. If it be found that the respondents are still owing on the loan account then they will have 90 days in which to liquidate what is due, failing which the appellant will be at liberty to enforce the securities by way of either foreclosure or sale. The parties shall bear their own costs of this appeal. E. M. Hanundu SUPREME COURTJUDGE _-MT Malila SUPREME COURT JUDGE W M. C. Kaoma SUPREME COURT JUDGE