Muturi Njoroge & 2 others v Barclays Bank Of Kenya Limited [2017] KEHC 3591 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

COMMERCIAL  & ADMIRALTY  DIVISION

CIVIL CASE. 141 OF 2017

MUTURI NJOROGE………..............................1ST PLAINTIFF/APPLICANT

SUSAN NYAMBURA KASINGA………....…..2ND PLAINTIFF/APPLICANT

TASSELS ENTERPRISES LIMITED…….…..3RD PLAINTIFF/APPLICANT

VERSUS

BARCLAYS BANK OF KENYA LIMITED……………...……...DEFENDANT

RULING

Introduction

1. This is a case of customers suing their banker for an alleged breach of a contractual engagement. The complaint is that the defendant bank is intent on disposing of the Plaintiffs’ property yet the Plaintiffs have fully liquidated their indebtedness by way of a promissory note. The Plaintiffs by their application dated 3 April 2017 consequently seek injunctive orders to restrain the Defendant from disposing of the Plaintiffs’ property.

2. At this intermediary stage, the core question therefore is whether the Plaintiffs have established, through affidavit evidence, a prima facie case with a probability of success to enable the court exercise its discretion and grant an injunction restraining the Defendants from disposing, transferring and or dealing in any way with the Plaintiffs property known as title Nos. Ruiru/ Kiu Block 2/10788 and Ruiru/ Kiu Block 2/10789   (jointly “the suit property”).

Narrative

3. The factual background of the dispute is largely a common cause. As made out in the Plaintiffs’ founding papers, the narrative may be summarized as follows.

4. At the request of the Plaintiffs, in September 2015, the Defendant granted banking (credit) facilities to the Plaintiffs. The amount advanced aggregated Kes. 94,726,600/=. In consideration of the advances, the Plaintiffs issued non-possessory securities to the Defendant in the form of first legal charges over the suit property as well as personal guarantees by the 1st and 2nd Plaintiffs. Additionally, the Defendant accepted a fixed and floating Debenture over the 3rd Plaintiff’s movable and immovable property. The Plaintiffs were later to default leading to various demands for payment being made by the Defendant. As of March 2017 the amount outstanding and due to the Defendant was Kes. 110,646,492/70 or thereabouts.

5. Consequent upon the Plaintiffs’ default, on 18 August 2016 the Defendant also issued the Plaintiffs with a statutory notice under s.90 of the Land Act No. 6 of 2012. Payment of the full outstanding amount was demanded. The Plaintiffs did not heed the demand. As the Defendant’s agents prepared to realize the security, the 1st Plaintiff caused to be delivered to the Defendant a promissory note No. DMN-017 dated 28 March 2017. The delivery was made on 29 March 2017 and duly acknowledged. The promissory note was for the full amount demanded of Kes. 110,646,492/70 but was payable by monthly installments of Kes. 20,000/=. The Promissory note was issued and drawn by the 1st Plaintiff.

6. With the Defendant still determined to realize its security by way of sale of the suit property, the Plaintiffs launched the instant suit.

The Plaintiffs’ complaint

7. The Plaintiffs’ case is straightforward.

8. The Plaintiffs admit having been indebted to the Defendant. The Plaintiffs also, albeit reluctantly, admit receipt of the statutory notice. The Plaintiffs however insist that the delivery and acceptance by the Defendant of the promissory note issued by the 1st Plaintiff redeemed the debt due to the Defendant and consequently extinguished the Defendant’s rights in the suit property. According to the Plaintiffs, pursuant to the provisions of the Bills of Exchange Act (Cap 27) Laws of Kenya (“ the Act”), the Defendant having not raised any objection to the promissory note and having not taken out proceedings in court concerning the Plaintiffs’ liability, the Plaintiffs have been fully discharged of their indebtedness to the Defendant.

9. In consequence, the Plaintiffs contended that they have exhibited a prima facie case with chances of success and deserve an injunctive order to restrain the Defendant from disposing of the suit property pending full hearing.

The Defendant’s response

10. The Defendant advanced the following arguments to sustain its resistance to the reliefs sought by the Plaintiffs.

11. First, the Defendant disputed that the Plaintiffs liability had been discharged and security redeemed. Second, the Defendant averred that the Plaintiffs’ indebtedness is not denied. Placing reliance on the case of Orion East Africa Ltd v Ecobank Kenya Ltd [2015]eKLR,the Defendant contended that an injunction could not issue as the Plaintiffs were not before the court with clean hands. In the Defendant’s view, no discharge was possible unless there was payment of the amount due. Finally, the Defendant contended that it would be subjected to undue hardship and prejudice as it would take more than 450 years for the Plaintiffs to pay off the debt if the promissory note was allowed to substitute the securities held by the Defendant.

Determination

12. I have considered the application. I have carefully perused the affidavit evidence.  I have also considered the submissions made by both Mr. Nyaberi for the Plaintiffs and Mr. Kigata for the Defendant. Both counsel largely transubstantiated their respective client’s narratives. I now hold the following view and position.

13. There is no controversy that the Plaintiffs were advanced various amounts by the Defendant. There is also no controversy that as at March 2017, the Plaintiffs owed the Defendant the aggregate amount of Kshs. 110,646,492/70 which continued to accrue interest.

14. The indebtedness is evident when one peruses the various correspondence exchanged between the parties as well as between the parties’ respective advocates. In a letter to the Defendant’s counsel dated 11 November 2016, M/s Moronge & Co Advocates, then acting for the Plaintiffs, acknowledged the Plaintiffs’ indebtedness and further stated that the Plaintiffs had negotiated with and secured a financier who was “going to take over the charge and pay in full the loan amount and arrears incurred thereto”. The Plaintiffs’ counsel then sought the Defendant’s indulgence for a period of two months to enable the new financier come on board. The letter was copied to the Plaintiffs.

15. The Plaintiffs’ indebtedness, in my view, is also evident in the promissory note issued by the 1st Plaintiff on 28 March 2017. I will return to this promissory note shortly.

16. Additionally, there is also no controversy that the securities issued in favour of the Defendant by the Plaintiffs in the form of personal guarantees, formal legal charges and fixed/floating debenture are not the subject of any contest and are indeed valid.

The Promissory Note argument

17. It is however the Plaintiffs’ contention that the promissory note of 28 March 2017 rid the Plaintiffs of liability, redeemed the pledged securities and effectively satisfied the Plaintiffs’ indebtedness to the Defendant. In support of their argument, the Plaintiffs placed reliance on Section 87(1) of the Act which reads as follows:

“87(1).Where a note payable on demand has been endorsed, it must  be presented for payment within a reasonable time of endorsement, and if be not so presented the endorses is discharged”.

18. If I understood the Plaintiffs’ case well, their contention was that the promissory note created an entirely new obligation that novated the security agreement in its entirety. By security agreement is meant the loan agreement and the collaterals ( i.e. the legal charge and the personal guarantees as well as the debenture). The question would then be whether on a prima facie basis the Plaintiffs have shown that the promissory note novated the old obligations and rights of the parties.

19. It is apposite to quickly state what a “Promissory Note” is before contextualizing the Plaintiffs’ arguments vis-à-vis Section 87(1) of the Act and the circumstances of this case.

20. A promissory note is a financial instrument which contains a written promise by one party (the issuer or drawer) to pay to another party (the payee or bearer) a definite sum of money either on demand or at a specified future date. The maker issues the instrument and also assumes the primary obligation to pay it. This basic description comports well with s.84 (1) of the Act which reads as follows.

“A promissory note is an unconditional promise in writing made by one person to another signed by the maker engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order of a specified person or to bearer”.

21. Effectively, a promissory note is an acknowledgment of a debt coupled with a promise or an undertaking to pay the debt: see Muir v Muir [1912] 1 SLT 304. In their treatise Ellinger’s Modern Banking Law “(4th Ed, Oxford Press, 2006), E.P Ellinger, et al, comment at page 405 that:

“Although promissory notes conceptually resemble bills of exchange, they serve an entirely different function. Promissory notes are principally issued to secure the payment of installments due under lending agreements and other types of commercial transaction. The note which is issued to cover a given installment can be discounted by the payee or kept in portfolio. In the latter case, it provides an effective means for instituting an action to recover the amount for which the note is issued. Its advantages in this respect are that the action can be instituted in summary procedure and that not all defences based on the underlying transaction can be raised against the action on the note, even where the Plaintiff is the immediate payee.”[emphasis mine]

22. It would appear that a promissory note does not substitute or replace a debt. Rather, it avails additional comfort for payment of the debt. It can only be an additional assurance. It would also appear that the drawer is not discharged save that payment is conditional on the presentment of the promissory note at the specified place: see s.88 of the Act.

23. I now return to the instant case and the Plaintiffs’ arguments that they have been discharged.

24. The instant promissory note was drawn by the 1st Plaintiff. He issued the note, signed it and in compliance with s. 85 of the Act delivered it. The payee was stated as the Defendant. The 1st Plaintiff obliged himself to pay to the Defendant a monthly amount of Kes. 20,000/= towards settlement of the debt of Kes.110,646,492/70.

25. S.87(1) of the Act  which the Plaintiffs have copiously relied upon provides for the discharge of an endorser where the note is not presented for payment within a reasonable time. Where the note relates only to the drawer and the payee there can be no issue of discharge. The debt as admitted in the note, in my view, subsists by virtue of the acknowledgment therein. Likewise, any installment off the primary transaction assured by the note is also not discharged.

26. There is no evidence that the Defendant subsequent to its receipt endorsed the note to another bearer. There is consequently no third party payee or even payor. My reading of s.87(1) of the Act would not allow an inference that the debt was discharged. Neither can it also be inferred that the Plaintiffs have been discharged of their liabilities to the Defendant.

27. My view, at this stage, is that the promissory note only provided additional comfort to the Defendant in the form of being an assurance of the Plaintiffs’ indebtedness. In the absence of any clear, cogent and unequivocal evidence that the Defendant intended to substitute its existing rights with a new agreement, the promissory note should not be taken to mean substitution and discharge but rather that the Defendant merely obtained additional liquid proof of its claim against the Plaintiffs. The onus was always on the Plaintiffs to lay evidence before me that the Defendant intended to substitute the agreement but the Plaintiffs have failed to do so.

28. I need also add that the law has this far been clear that where a  secured creditor has multiple securities at his disposal, he also has the option to chose which remedy or security to pursue: see Aberdare Investment Ltd vHousing Finance Company of Kenya Limited & another [1999] 2 EA 1 (CAK). I am also aware that with regard to a chargee’s remedies under s.90(3) of the Land Act, the court may where appropriate substitute a different remedy to the one applied for or proposed by the chargee: see s.104(2)(c) of the Land Act.

29. In the instant case, the Defendant has, as security, the personal guarantees of the 1st and 2nd Plaintiffs at its disposal. The Defendant also has the 1st Plaintiff’s promise to pay. Additionally, the Defendant has the non-possessory securities in the form of the legal charges and the debenture. It is up to the Defendant to make its choice. In the circumstances of this case, I have found no reason to interfere with the choice it has made which is to realize the suit property.

Conclusion and disposal

30. I am satisfied on the basis of the affidavit evidence currently before the court that the Plaintiffs are in mora. I am however not satisfied that the Plaintiffs have shown on a prima facie basis that the parties intended to substitute and discharge the indebtedness of the Plaintiffs for the promissory note. The indications appear to the contrary. The Defendant must be at liberty to pursue its remedies as a secured creditor.

31. I come to the now rather obvious conclusion that the Plaintiffs have not made out a prima facie case with a probability of success. I thus need not venture into an investigation as to whether the Plaintiffs will suffer irreparably.

32. The application dated 3 April 2017 only warrants a dismissal order. It is dismissed with costs to the Defendant.

Dated, signed and delivered at Nairobi this 17th day of July, 2017.

J.L.ONGUTO

JUDGE