Lincoln Kivuti Njeru v Insurance Company of East Africa [2017] KEHC 3062 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT AT MACHAKOS

CIVIL CASE NO. 45OF 2014

LINCOLN KIVUTI NJERU ……............................................PLAINTIFF

VERSUS

INSURANCE COMPANY OF EAST AFRICA...................DEFENDANT

JUDGMENT

The Claim

The Plaintiff has sued the Defendant seeking judgment that the Defendant be ordered to execute a discharge of charge against NGONG/NGONG/6149 (herein after referred to as ‘the suit property’), and that the Defendant be ordered to release the title documents for the property.

The context of the said claim is that that the Plaintiff was employed as the investment manager of the Defendant prior to 2006, and is the registered owner of the suit property. In the course of his employment, the Plaintiff got into debt with the Defendant, and upon acknowledging being in debt, he gave the Defendant the suit property to charge as security for the money. The Plaintiff claims in his Plaint dated 18th September 2014 that he cleared the debt but that despite so settling, the Defendant has refused to discharge the property and release the title documents of the property to him.

The Plaintiff testified during the trial as PW1, and stated that the debt he owed the Defendant at the time of leaving its employment in June 2006 was Kshs 10, 352,953/=, of which KShs. 2,630,127/- was paid from his benefits, and he undertook to pay KShs. 200,000/- per month with effect from 15th June, 2006, which arrangement he said continued until the year 2007 when the Defendant instituted criminal and civil proceedings against him. He further testified that he continued making the payment due to the despite the said proceedings and settled the debt on 23rd August, 2011. However, that upon request the Defendant ignored and refused to discharge the charge over the suit property and/or release the title documents to the suit property.

The Plaintiff produced copies of the agreement for acknowledgment of debt entered with the Defendant on 2nd June 2006 as an exhibit, as well as various correspondences with the Defendant.

The Response

The Defendant on the other hand in its Defence dated 19th January 2015 admitted the acknowledgment of debt and security given for the debt by the Plaintiff, but denied that the Plaintiff has fully settled the debt and has therefore not been discharged. It was alleged that the Plaintiff in executing his duties during his employment with the Defendant was negligent, and led to the Defendant incurring further loss and damage leading to the institution of Nairobi HCCC No. 474 of 2010, in which the Plaintiff was sued as one of the Defendants for the following sums:

a. Kshs. 2,860,000/- against the 1st 2nd and or 3rd defendants therein whether jointly or severally together with interest at 18% per annum from 30th March, 2005 until payment in full.

b. Kshs. 12,000,000/- against the 1st 2nd and or 3rd defendants therein whether jointly or severally together with interest at 18% per annum from 9th December, 2005 until payment in full.

c. Kshs. 62,704,835/- against the 1stand 3rd defendants therein whether jointly or severally together with interest at 18% per annum from 1st October, 2005 until payment in full.

d. Kshs. 39,300,038/- against the 1st and 3rd defendants therein whether jointly or severally together with interest at 18% per annum from 1st January, 2002 until payment in full. KShs. 7,827,966. 55 /- against the 1st and 3rd defendants whether jointly or severally together with interest at 18% per annum from 1stOctober, 2005 until payment in full.

It is contended by the Defendant that it was fair and in the interests of justice that this suit awaits the outcome of Nairobi HCCC No. 474 of 2010, and that in filing this suit, the Plaintiff did not disclose the existence of Nairobi HCCC No. 474 of 2010.

The Defendant called Francis Kiarie Kamau who is an auditor, to testify on its behalf as DW1. DW1 stated that he was called to a meeting on 9th February 2007 after the Plaintiff had entered into an agreement acknowledging his of debt with the Defendant, where the Defendant’s Managing Director reported an incidence of another suspected fraud involving the Defendant and asked DW1 to carry out an audit of the Defendant’s investments.

Further, that he carried out the audit which covered the period 1st January 2003 to 31st December 2006, and he produced the audit report dated 14th June 2007 which established that a total of Kshs 62,704,835/60 was paid to Nyaga Stockbrokers from the sale of the Defendant’s securities, arising from instructions from the Plaintiff when he was in the Defendant’s Investment Manager. However, that the said amounts which were paid out of the Defendant’s accounts, were never received by the Defendant nor accounted for. DW1 testified that the loss and damage thereby incurred by the Defendant prompted it to file a suit in Milimani HCCC No. 474 of 2010 against the Plaintiff and the other parties he acted within the said transactions.

The Determination

The parties were directed to file and exchange written submissions on their respective claims, and Muoki & Company Advocates for the Plaintiff filed submissions dated 13th April 2017. It was contended therein that the matter  before the Court is  on an agreement between the Plaintiff and Defendant in which the Plaintiff gave his title to guarantee a specific sum. Therefore, that the  charge was not a general charge for any amount that may arise in the future, nor did the debt acknowledgement envisage a future debt, and since the amount charged for is fully paid, the charger must discharge the charge.

Further, that the matter in Nairobi HCCC No 474 of 2010 is about lost monies and involves other parties and has no nexus with the present case to obligate the Plaintiff to disclose its existence. Lastly, that the Defendant admitted in its evidence that the money secured by the charge was fully paid by the Plaintiff.

The Defendant’s counsel, Waweru Gatonye & Company Advocates, filed submissions dated 4th April 2017 wherein it was urged that the Plaintiff entered into an Agreement with the Defendant , where he acknowledged he owed Kshs. 10, 352, 953/= and undertook to repay the money to the Defendant in installments of Kshs.200,000 .00 per month. In addition, he gave title to his property L.R. No. Ngong/Ngong/6149 to act as security for the said debt.

However, that after entering into the above Agreement, it came to the knowledge of the Defendant upon further investigations that the amount which the Defendant had lost during the Plaintiff's employment and due to his negligence and breach of contract, was more than Kshs.10,352,953/= which had been acknowledged. This is what informed the Defendant to file the above Nairobi H.C.C.C. No. 474 of 2010 against the Plaintiff and two others, and that judgment in default was entered against the Plaintiff in the above case of Nairobi H.C.C.C. No. 474 of 2010 which has never been set aside and hence showing admission of liability on the part of the Plaintiff.

The Defendant thus submitted that the Agreement entered into was tainted by fraud at the time it was made because the Plaintiff failed to disclose the full amount that he owed the Defendant, despite knowing that he had misappropriated more than the Kshs. 10, 352, 953/= agreed to and which formed the basis of the Acknowledgment of Debt Agreement, and which would have been captured in the acknowledged by the Plaintiff as a debt.

According to the Defendant, fraudulent misrepresentation renders a contract voidable and entitles the innocent party to avoid the contract. Various judicial authorities were cited by the Defendant in support of this position includingEsther Ndegi Njiru&Another vs Leornard Gatei [2014] eKLR,where the 2nd defendant therein had allegedly caused the suit land to be fraudulently transferred to the 1st defendant, and the Court held that the 1st Defendant had obtained the title to the suit property by fraud and misrepresentation and that it was therefore invalid and ordered its cancellation.

The Defendant also submitted that the charge that was created as security for payment of the debt amount is regarded as an equitable or informal charge under section 79(6) of the Land Act, and according to the decision inTassia Coffee Estate Limited & another v Milele Ventures Limited [2014] eKLR,and is the Kenyan equivalent of the English equitable mortgage, which does not restrict holding title of a property to a specific agreement.

Further, that since the equitable charge is a creation of equity; the party seeking to enforce it must also do equity and must come to the court with clean hands. Therefore, to discharge the charge, the Plaintiff should pay the full amount he owes the Defendant as he is still in debt to the Defendant by virtue of the case in Nairobi H.C.C.C. 474 of 2010 where judgment in default was entered against him.

The issues raised by the parties herein are therefore firstly, whether the agreement entered into between the Plaintiff and Defendant dated 2nd June 2006 is valid; and if so, secondly, what is the legal effect of the said agreement; and lastly if the Plaintiff is entitled to the reliefs sought.

On the validity of the agreement dated 2nd June 2006, the Defendant claims that the same is vitiated by fraudulent misrepresentation and therefore rendered the contract voidable. It is in this regard notable at the outset that there was no counterclaim filed by the Defendant seeking to rescind or void the said agreement and therefore this Court cannot make any such order in these proceedings.

In addition, the Defendant claims that the silence or non-disclosure by the Plaintiff as to the misappropriation of more money when entering into the said agreement amounted to fraudulent misrepresentation. G.H. Treitel in his text on The Law of Contract, Sixth Edition at page 252 states that misrepresentation allows a person to claim relief if he or she is induced to enter into a contract by a misleading statement, and summarized the applicable rules as follows:

“In the first place the representation must be of a kind which the law recognizes as giving rise to liability: this excludes “mere puffs” and certain statements of law or of opinion, or as to the future. A number of general conditions of liability must next be satisfied: the representation must be unambiguous and material, and must have been relied on by the representee. If these requirements are satisfied the representee may be able to claim damages or to rescind the contract or to do both these things”

It is in this respect noted that a representation must therefore essentially be a statement of an existing fact. Therefore any misrepresentations alleged to have occurred by the Plaintiff must be with respect to existing facts at the time of making of the agreement. The subject of the agreement dated 2nd June 2006 as shown in clause 1 of the said agreement was the debt of the sum of Kshs, 10,352, 953/=, which both parties testified was the debt established to have been owed by the Plaintiff as at the time of making of the agreement.

According to DW2, the knowledge of other monies owed by the Plaintiff came to light later upon the completion of the audit report dated  14th June 2007, and could not therefore have been capable of inducing the Defendant to enter into the agreement dated 2nd June 2006. In addition, the course of action consequently taken by the Defendant was to file Nairobi HCCC No 474 of 2010 against the Plaintiff and other parties for the recovery of the said money.

No evidence of the pleadings in the said suit, or any decrees or orders finding the Plaintiff culpable for the said debt were produced in evidence by the Defendant. The allegations by the Defendants are therefore still statements of opinion yet to be established, and are not expressly admitted by the Plaintiff.

The sum total of the foregoing is that this Court finds that the agreement dated 2nd June 2006 is still valid and was not vitiated by any misrepresentation on the part of the Plaintiff.

As regards the legal effect of the agreement, this Court notes that the terms of the agreement in clauses 1 – 3 it covered three rights and obligations. These were firstly, the terms of payment of the debt of Kshs 10,352,953/= owed by the Plaintiff to the Defendant, and secondly, the charge of the property known as Ngong/Ngong/6149 as security for the debt, and lastly the remedies due to the Defendant upon default of payment.

The legality of such an agreement is provided for under section 79 of the Land Act which provides as follows:

(1) An owner of private land or a lessee, by an instrument in the prescribed form, may charge the interest in the land or a part thereof for any purpose including but not limited to securing the payment of an existing or a future or a contingent debt or other money or money's worth or the fulfillment of a condition.

(2) The power conferred by subsection (1) shall include the power to create second and subsequent charges.

(3) A charge of a matrimonial home, shall be valid only if any document or form used in applying for such a charge, or used to grant the charge, is executed by the chargor and any spouse of the chargor living in that matrimonial home, or there is evidence from the document that it has been assented to by all such persons.

(4) The power conferred by this section shall be exercisable subject to—

(a) Any prohibition or limitation imposed by this Act or any written law; and

(b) Any restriction contained in an instrument creating or affecting the interest I n land that is to be the subject of a charge.

(5) A formal charge shall take effect only when it is registered in a prescribed register and a chargee shall not be entitled to exercise any of the remedies under that charge unless it is so registered.

(6) An informal charge may be created where –

(a) a chargee accepts a written and witnessed undertaking from a chargor, the clear intention of which is to charge the chargor’s land or interest in land, with the repayment of money or money’s worth, obtained from the chargee;

(b) The chargor deposits any of the following-

(i) A certificate of title to the land;

(ii) A document of lease of land;

(iii) Any other document which it is agreed evidences ownership of land or a right to interest in land.

(7) A chargee holding an informal charge may only take possession of or sell the land which is the subject of an informal charge, on obtaining an order of the court to that effect.

(8) An arrangement contemplated in subsection (6)(a) may be referred to as an "informal charge" and a deposit of documents contemplated in subsection (6) (b) shall be known and referred to as a "lien by deposit of documents."

Section 2 of the Land Act further defines a charge as follows:

“charge” means an interest in land securing the payment of money or money’s worth or the fulfillment of any condition, and includes a subcharge and the instrument creating a charge, including –

(a) an informal charge, which is a written and witnessed undertaking, the clear intention of which is to charge the chargor’s land with the repayment of money or money’s worth obtained from the chargee; and

(b) a customary charge which is a type of informal charge whose undertaking has been observed by a group of people over an indefinite period of time and considered as legal and binding to such people”

There is no provision of law which applies the principles on equitable mortgages to informal charges under section 79 of the Land Act, and in any event section 80 specifically provides for the effects of any charges under the Act as follows:

“(1) Upon the commencement of this Act, a charge shall have effect as a security only and shall not operate as a transfer of any interests or rights in the land from the chargor to the chargee but the chargee shall have, subject to the provisions of this Part, all the powers and remedies in case of default by the chargor and be subject to all the obligations that would be conferred or implied in a transfer of an interest in land subject to redemption.

(2) In the case of the charge of a lease, the chargee shall not be liable to the lessor for rent or in respect of the covenants and conditions contained or implied in the lease to any greater extent than would have been the case if the charge had been by way of a sublease.

(3) Every charge instrument shall contain-

(a) the terms and conditions of sale;

(b) an explanation of the consequences of default; and

(c) the reliefs that the chargor is entitled to including the right of sale.”

It is notable in this respect that an equitable mortgage under English law involves the transfer to the creditor of equitable ownership subject to a proviso for redemption, and therefore while every equitable mortgage is also an equitable charge the converse is not true as a mortgage goes further than a charge and operates as a transfer of ownership of the beneficial interest in property that is the subject matter of the security. This effect is expressly prohibited as regards charges in Kenyan law by the foregoing provisions of section 80 of the Land Act.

It is also evident from the applicable provisions of law that informal charges must be by way of an instrument and therefore evidenced in writing, and the Defendant must therefore enter into further charges or agreements in the event that they want security provided for any other monies that may be found to be owed by the Plaintiff.

In conclusion on this issue, in the present case it is not disputed that the Plaintiff has undertaken his obligations under the agreement of paying the amount owed of Kshs 10,352,953/=. In addition, the only rights accorded to the Defendant under the agreement and under sections 90 to 100 of the Land Act as regards the realization of the suit property, can only arise upon default of payment of the sum secured, which is inapplicable in this instance.

On the last issue as whether the Plaintiff is entitled to the relief sought, section 102 of the Land Act is specific as to the course of action that should follow once a chargee has paid any sum due any time before sale of the security as follows.

“ (1) At any time before the charged land is sold, or withdrawn from sale, the chargor or any other person entitled to discharge the charge may discharge the charge in whole or in part by paying to the chargee all money secured by the charge at the time of payment.

(2) If payment is made under subsection (1), the chargee shall deliver to the chargor—

(a) a discharge of the charge in the prescribed form over the whole or that part of the charged land to which the payment relates; and

(b) all instruments and documents of title held by the chargee in connection with the charged land.”

The Defendant is therefore legally obligated to deliver a discharge of charge and all instruments and documents of title it holds with respect to the agreement dated 2nd June 2006, upon payment by the Plaintiff of the debt that was secured by the agreement, which payment is not disputed.

It is accordingly ordered as follows:

1. The Defendant shall execute a discharge of charge against Ngong/Ngong/6149 within 30 days of the date of this judgment, and upon default the Deputy Registrar of Machakos High Court shall execute the said discharge.

2. The Defendant shall forthwith release the title documents for Ngong/Ngong/6149 to the Plaintiff within 30 days of the date of this judgment.

3. The Defendant shall meet the costs of this suit.

Orders accordingly.

Dated, signed and delivered in open court at Machakos this 11th day of September 2017.

P. NYAMWEYA

JUDGE