Sameh Textiles Industries Limited v Oriental Commercial Bank Limited [2017] KEHC 9826 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

COMMERICIAL AND ADMIRALTY DIVISION

CIVIL CASE NO. 2186 OF 2000

SAMEH TEXTILES INDUSTRIES LIMITED............................PLAINTIFF

VERSUS

ORIENTAL COMMERCIAL BANK LIMITED......................DEFENDANT

JUDGEMENT

The Pleadings

1. The Pleadings in this matter have been amended on several occasions and now rest with the further Amended Plaint dated 21st October 2008 and the further Amended written Statement of Defence of 12th November 2008. Both are lengthy and will be abridged.

2. Oriental Commercial Bank (The Bank) is a successor in title to Delphis Bank Limited (Delphis). Sameh Textile Industries Limited (Sameh) was at the times material to this suit a customer of Delphis and enjoyed various Credit facilities in the years 1993 to 2000. It maintained two accounts at the Mombasa Branch of Delphis being Account No.20013**** and 20013****.

3. By a letter of 11th March, 1995 Delphis offered to Sameh the following facilities:-

(i) Overdraft with a limit of Ksh.15,000,000/=

(ii) Bills discounting facility upto Khs.3,000,000/=

(iii) Letters of credit upto Khs.2,000,000/=

Then through another letter of 19th November 1997 the Bank offered Sameh the following credit facilities:-

a) Overdraft with a limit of Kshs.20,000,000/=

b) Loan of Kshs.20,000,000/=

c) Bills discounting facilities of Kshs.3,000,000/=

d) Letters of credit of Ksh.5,000,000/=

4. It is the case for Sameh that the monies set out in the said letters were never advanced and the said letters are null and void for lack of consideration.

5. Sameh further avers that the Defendant induced it and parties associated with it to execute Guarantee and Charge documents as security for the proposed facilities. These securities include charges over property known and described as Mombasa/Block xxx/111/30, Mombasa Block xxx/111/12 and LR No. 9122/5 Mtwapa. As well taken as security was a debenture for Kshs.50 million over Sameh’s assets. That Debenture is dated 11th July 1997.

6. Sameh’s other grievance is that from August 1993, the Bank charged unlawful penal interest of 10% p.a over and above the commercial rate levied. On advise of the Interest Rates Advisory Centre Limited (IRAC), an Independent Rates Recalculator, Sameh states that it has suffered debits of unlawful interest and penalties which amounts were excessive, oppressive and unconscionable. A report by IRAC shows that in Account No.200138023 the Bank had overcharged Sameh to the tune of Kshs.682,397. 33 as at 31. 7.2001 and Kshs.612,667. 44 in Account No.10102****/20013****. There is also an allegation that the Bank charged illegal banking charges amounting to Kshs.3,823,636. 00 which breached the provisions of the Banking Act, Cap 488 Laws of Kenya.

7. On the basis that the Sameh’s Account was in debit, which Sameh denies, the Bank refused to honour cheques issued by the Sameh to Premised Savings and Finance Limited with the result that the said financing Institution sold off Sameh’s property (sub-division 540 VMN) valued at Kshs.60 million at a throw away price of Ksh.32. 5 million. It is also on this property that Sameh’s manufacturing Plant stood and the sale led to the closure of the factory.

8. On 22nd January 2009, the Bank recalled what Sameh considered to be a non-existent loan of Kshs.55 million. Upon advice of the Bank, Katsira Holdings Limited transferred Sameh’s property (Plot No.12 Section 38) which had been charged to the Bank. The Plaintiff maintains that the said transfer was illegal and tainted with fraud for the reason that the Directors of Katsira Holdings Limited and the Directors of the Bank were the same.

9. Similarly, Sameh avers that the Bank forced it to sell 50% share holding in African Cotton Industries Limited at Kshs.28,000,000/- to settle an non-existent overdraft facility.

10. Notwithstanding all these repayments, Sameh avers that the Bank is claiming the sum of Kshs.25,206,165. 00 as at 30. 9.2000 which amount comprises arrears of interest and penalty charged unlawfully and debited by the Bank against its Bank account.

11. On another front, Sameh avers that the Bank failed to offer them proper financial advice and did not advise them to seek Independent Legal and Financial advice prior to executing the purported documents. And that the Documents were executed due to economic pressure exerted on them by the Bank. That, at any rate, the documents together with other letters signed by Sameh or on their behalf was made in the mistaken behalf that the sums claimed by the Bank were rightly due to it.

12. In paragraph 37 of its Pleadings, Sameh set out charges of fraud and misrepresentation which it avers has been conducted by the Bank. They are:-

a. Fraudulently and knowingly misrepresenting to the Plaintiffs that the 1st Plaintiff would be charged penal and excessive interest against the said accounts.

b. Fraudulently and knowingly misrepresenting to the Plaintiffs that they would follow the proper banking practices and procedures.

c. Fraudulently and knowingly debiting the said accounts with monies not rightly due to the Defendant.

d. Fraudulently and knowingly charging interest on the said unlawful debits.

e. Representing to the Plaintiff that the credits would be issued for the next interest charged. All of which representations were relied upon by the Plaintiffs to their detriment and the Defendant ought to be penalized by way of an ward for punitive damages by reason of its fraudulent conduct.

13. Two of the charged properties being Mombasa/Block xxx111/12 and Mombasa/block XXX111/30 have been sold by the Bank in exercise of is Statutory Power of sale. Sameh avers that those sales are a nullity for at least three reasons. That the Notices sent out by G.A Datoo & Co. (the Auctioneers) are a nullity as they contravene the express and mandatory provisions of the Auctioneers Act. Secondly, that no Statutory Notice was issued as required by the then existing Registered Lands Act (Cap 300). The sale was without a legal basis as Sameh does not owe the Bank Kshs.25,206,165/= as demanded or any sum at all.

14. Ultimately Sameh seeks the following Multiple Prayers:-

1. A declaration that the Defendant is not entitled to charge and claim from the 1st Plaintiff the said interest charges and arrangement and management.

2. An order that accounts be taken to determine the amounts paid by the 1st Plaintiff to the Defendant by way of excessive interest penalty interest management and arrangement fees and interest thereon..

3. An order that the defendant pays to the Plaintiffs the value of the following properties at the prevailing market price of approximately Khs.15,500,000/-.

i. Mombasa/Block XXX111/30

ii. Mombasa/Block XXX111/12

iii. Sub-Division 540 VMN

iv. Plot No.12 Section 38

v. 50% shares in African Cotton Industries Limited

4. An order that the Defendant pays the amount debited in the Plaintiffs’ account as a result of the illegal bank charges.

5. The sum of Khs.80,295,064. 77 under paragraph 19 hereabove.

6. The sum of Khs.3,823,636. 04 under paragraph 20 hereabove.

7. Damages at the rate of 20% of the value of all the properties namely Mombasa/Block XXX111/30, and Mombasa/Block XXX111/12, sub-division 540 VMN and Plot NO.12 Section 38.

8. General damages

9. Punitive damages

10.  Exemplary damages

11. Costs of this suit

12. Interest at 20% on prayers 5 and 6 above at court rates on costs and damages.

13. Such further or other relief as this Honourable Court may deem proper.

15. The Bank denies each and every allegations made by Sameh and asserts that the alleged cause of action relating to claims for the period February 1993 to 10th December 1994 are time barred by the Limitation of Actions Act Cap 23 Laws of Kenya.

16. Sameh opened Accounts with the Bank which the Bank states were subject to the General terms and Conditions of the Bank and the terms and conditions contained in the facility letters. These include that:-

(a) Interest, additional interest (penal interest) and bank charges were payable as determined by the Defendant.

(b) Additional interest at the Defendant’s prevailing rate from time to time was payable over and above the prevailing commercial bank rate or interest on any amount that exceeded over the limit of the facilities granted in Overdraft Account No. 1.

(c) Commercial Bank rate of interest as well as additional interest was payable on the entire amount overdrawn in Overdraft Account No.2.

17. In respect to the facilities contained in the letter of offer, it is the case of the Bank that it offered those facilities and the same were duly secured by certain Debentures, charges and Guarantees. The Bank also explains that the facility letters of 11th March 1995 and 19th November 1997 merely set out increased limits of credit facilities utilized by the borrower. In other words the Credit facilities were increased to and not by the amounts stated in the facility letters.

18. The Bank denies ever failing to open any letters of Credit requested by Sameh.

19. The Bank asserts that all interest including additional as well as Bank charges raised were lawfully payable by Sameh and in accordance with the contractual terms agreed between Sameh and the Bank and were all in conformity with Banking Practice and Custom in Kenya and The Central Bank of Kenya Act and the Banking Act. The Bank further avers that the Plaintiffs are fully aware of and accepted the same.

20. On the sale of the two charged properties, the Bank avers that the amount of Khs.25,206,165. 00 claimed was lawfully due to it from Sameh and it was within its Legal rights to sell the properties in exercise of its Statutory Power of Sale. The Bank states that it has served lawful Statutory Notices upon Sameh.

The Evidence

21. Rajen Chunilal Savani (PW1) is a Director of Sameh. The Plaintiff opened an account with the Bank on 5. 3.1993 and simultaneously deposited Khs.2,822803. 70 and 3,001,000/- in a Fixed Deposit. At that time, as well, the Bank gave the Company Credit facilities with no limit but charged penal interest on the whole sum. Thereafter, in May 1993, all Directors of the Plaintiff executed Guarantees of Ksh.5 million each.

22. The Plaintiff Company received its first letter of offer dated 11th March 1995. On offer were the following facilities:-

(i) Overdraft of Khs.15 million

(ii) Bill discounting Khs.3 million

(iii) Letters of credit Ksh.2 million

Sameh gave the following securities:-

i) Guarantee of 20 million by the three directors, Kenya Textile Limited, Changamwe Holdings Limited & Samji Kala. All these given in May 1995. (Pgs. 8-16 vol.2).

ii) Charge over Msa/Block XXXIII/30 in the name of Chunilal Mohanlal Savani for Kshs.5. 8 million given on 16th March 1995. (Pg 153-Vol.1).

iii) Charge over plot No.9122/5 Mtwapa in the name of Chunilal Mohanlal Savani for Kshs.20 million given on 30th November 1994. (Pg 86. Vol 1).

23. On 11th December 1995, Sameh received a letter demanding full and timeous payment of the entire outstanding amount. Amounts demanded were Kshs. 34,999,501. 55 on overdraft and Bill Discounting at Ksh.10,529,423. 40/=.

24. Sometime in November/December 1996, Plot No.9122/5 Mtwapa was sold and funds injected to reduce the overdraft amount.

25. On 19th November 1997, the Plaintiff received another Letter of Offer from the Bank in which the following facilities were offered:-

i. Overdraft of Kshs.20 million

ii. Loan of Kshs.20 million

iii. Bill discounting of Kshs.3 million

iv. Letters of credit of Kshs. 5 million

P.W.1’s testimony was that these facilities were never given.

26. The witness otherwise, in evidence in chief, reiterated the contents of the Company’s Pleadings.

27. The witness was subjected to lengthy cross-examination. He accepted that an agreement binds parties and would cast obligations on them. He told Court that the duration of the overdraft was initially not clear but was later made annual. He conceded that at the beginning, Sameh did not complain of interest but was unhappy when it was charged penalty interest. That the Guarantee of Khs.5 million each executed by the Directors were to back the overdraft.

28. The arrangement with the Bank was at first informal as there was an element of Trust. That the Branch Manager of the Bank promised the witness and the witness’s father that the informal facilities would be validated. In the meantime the manager indicated that the Interest Rate would be 3% - 4% over the Bank’s Rate and that was acceptable to the Company. So, they were taken back by the penalty interest. He complained about it in 1993. It was a verbal complaint.

29. He confirmed that the Company did not respond to the Bank’s letter of 8th September 1993. That letter advised on the increase of the Bank’s Base Rate and of a penalty fee of 10% per annum on any overdraft in excess of the agreed limit. And that whilst they did not agree with the penalty rate, the Company continued to enjoy the facilities as the Manager promised that it would be reversed on formalization of the facility.

30. There was again another letter of 12th November 1994 from the Bank to Sameh and yet another one of 7th March 1995. The Company did not respond to these. The evidence by the Plaintiff was that they did not do so as they had assurances from the Manager although none of the assurances were documented.

31. In respect to the letter of offer of 11th March 1995, the witness stated that the Company accepted the penalty rate applicable therein. By this time their account had already been drawn by 27 million.

32. His further evidence was that the securities were perfected in July 1997 because the Company had to comply with the letter of offer.

33. Wilfred Abincha Onono (PW2) is the Managing Director Consultant of Interest Rates Advisory Centre Ltd (IRAC). He explains that the firm specializes in financial consultations and undertakes Objective and Independent Audit of borrowing contracts and interest recalculations. Sameh instructed him to carry out a re-calculations of its Accounts with the Bank. He carried out the instructions and produced a recalculations report dated 25th September 2007.

34. The report shows that the recalculations difference in Account No.200138023 on 31st July 2001 is Khs.682,397. 33 in favour of Sameh, while in Account No.01027556/200138007 it is 79,612,667. 44 again in favour of Sameh.

35. In cross-examination the witness made some comments on the law. When asked to comment on the provisions of Section 52(3) of the Central Bank Act, he stated that he could not remember whether there was a claim by the Bank for recovery. On the applicability of the Amendment to Section 44 of The Banking Act, he conceded that the Provisions were only applicable to a small portion of the facility (say 8 months). The witness also told Court that he had removed some charges imposed by the Bank as he took it that all rates were done without the approval/permission of the Minister. He also told Court that he did not see all Statements but that was captured in the Report. But then he assumed that all entries were correct and in that way interest rates can be inferred.

36. Wilfred Machini (DW1) is a Credit Manager with the Bank. He confirmed that Sameh opened an account with the Bank in or about February 1993. That account would be subject to the General Terms and Conditions of the Bank. That, as no credit facilities were fixed, the basic commercial rate of interest was chargeable on any amount overdrawn. This would be in terms of the normal trade practice and usage in Banks.

37. Following a request for more formal facilities, the Defendant made the offer of 11th March 1995 and another of 19th November 1997. These letters merely set increased limits of the Credit facilities to be utilized by Sameh. On the overdraft account the Bank’s prevailing rate of Interest was payable over and above the Commercial Bank rate of Interest on any amount that exceeded the time facility. However, no such additional Interest was charged on the loan Account.

38. It was the evidence of DW1 that Sameh continually exceeded the limits of its overdraft Account and was therefore charged additional interest on the excess amounts. He gave details of that default. That immediately prior to the revised facilities, the debit balance was Kshs.42,465,198. 89 and attracted additional interest on the amount drawn over the overdraft limit of Kshs.15,000,000/=.

39. The loan facility granted to the Sameh was applied towards reducing the overdraft. But even then there remained a debit balance of Kshs.22,465,198. 89 as at 2nd December 1997.

40. In respect to the securities, the testimony of DW1 was that the charge and further charge over Mombasa/XXX VIII/12 was transferred by the Defendant at the request of the Plaintiff to one Katsria Holdings Limited and the charge and further charge over Plot No.9122/5 discharged. Also at the request of Sameh. In cross-examination he stated that the Shareholders of Katsira were related to the shareholders of the 1st Defendant but denied that Mukesh Shah was a Director of the Bank. Sameh is said to have still over stepped the limits of the overdraft and therefore became liable to pay additional interest on the over drawn amount. The case for the Bank is that it discounted local bills presented to it by Sameh and paid cheques drawn by it provided payment thereof would not exceed the limits of the Credit facilities.

41. The Bank did not accept responsibility for the failure of letter of Credit in favour of Ramsfal (Australia) PTY.

42. That inspite of granting Sameh various requests to pay off the amount overdrawn, Sameh failed to do so. A further request was made by Sameh to transfer the debit balance from the overdraft Account to the loan Account to avoid payment of additional interest. This was acceded to by the Bank and on 3rd September 1998 the debit amount of Khs.32,177,576 was transferred from the overdraft account into the loan account and the loan amount now stood at Khs.49,510,904. 00.

43. This was not paid by Sameh and so the Bank demanded for it. At the request of Sameh there was transfer of the Mombasa Plot NO. XXX111/30 to Katsira upon payment of Ksh.45,000,000 which was credited to the Company’s loan account. The residual balance of Khs.4,000,000 was credited into the Bank overdraft Account no.200138023. In addition, and on 5th February 1999, a second overdraft account was opened by the Bank to enable Sameh access temporary credit facilities thereof of Khs.1,500,000/- but on strict understanding that it would not be drawn beyond its limit of Khs.1,500,000 and would be paid off within three months of opening. Sameh defaulted and as at 31st December 2000 the overdraft was Ksh.5,131,891. 16.

44. The witness testified that properties and shares were sold by the Company to meet its obligations to the Defendant and other lenders. A Defence by the Bank is that Sameh owed the Bank a sum of Ksh.21,765,98. 49 as at 31st December 2000 which continued to attract interest at 22% p.a from 1st January 2001 and Kshs.5,131,891. 16 on Account No.01027556/200138007 together with interest thereof at the rate of 38% p.a from 1st January 2001.

45. On the Auction of Mombasa/Block XXX111/12 and Mombasa Block XXX111/30, the Bank’s witness stated that this was done after persist default by Sameh. It is said that Azad Datoo and Azad Ali Hassanali is one and the same person, an auctioneer, and that the Bank through its Lawyers C.B. Gor instructed Azad Datoo to sell the property.

46. That pursuant to the said instructions Azad Datoo served a 40 day Notice upon Chunilal Savani (the owner to the two properties) as required by Rule 15(d) of The Auctioneers Act and whilst the said Notice was typed on a letter head of G.A Datoo & Co. Limited, it was signed by Mr. Datoo as the Auctioneer.

47. In cross-examination DW11 contended that for there to be an excess there must be a limit fixed. But he was unable to tell the limit of the informal facility granted to Sameh. He also conceded that the Letter of Offer of 11th March 1995 does not refer to the earlier facilities. The same is of the Letter of 19th November 1997.

48. As to the two properties sold by auction, the witness was aware that they were sold after the commencement of this suit but the witness is not aware of the sale price. The sales were in 2000.

49. Although he was shown a letter appointing Shashikant Chandubhhai Patel as a Receiver of Sameh, he was not aware that the Bank had indeed appointed a Receiver. Further, he was not aware of what happened to the Receivership. He was not aware of any extract of accounts prepared by the Receiver nor of the sales of the Plaintiffs Assets.

50. The witness was not agreed with the Net Book Value given to the fixed Assets of the Company by Accounts prepared for the year ended 30th June 1997 which stood as Kshs.125,013,465/=. Although he pointed out that the report showed that the Company was making huge losses.

51. After the taking to evidence, Counsel for the parties herein filed written submissions. Both sides identify and agree on three issues for determination by Court:-

a) Whether the Defendant overcharged the Plaintiff for facilities granted prior to 11th March 1995.

b) Whether the Defendant charged interest rates and charges on facilities exceeding the maximum prescribed by Central Bank of Kenya act and the Banking Act.

c) Whether the Defendant has fully accounted for the realized securities.

Both sides agree that the issues flow from the pleadings and facts of the case.

52. As I turn to consider the issues in the context of the evidence and arguments by the parties, I make one observation. Paragraph 3 of the Defendants pleading is as follows:-

“The Defendant avers that the alleged cause of auction relating to the claims for the period February 1993 to December 1992 did not come within six years before the commencement of this auction and is therefore time barred by the Limitation of Actions Act, Cap 22 Laws of Kenya”.

53. Neither of the parties identified the issue of Limitations as an issue for determination and this Court takes it that this line of Defence was abandoned by the Bank.

54. The date of 13th March 1995 is of significance to the protagonists herein. It was on this day that Sameh returned an executed a Letter of Offer of 11th March 1995 in which the Bank made a formal offer of certain facilities. The uncontested evidence is that prior to this, commencing from or about February 1993, Sameh was enjoying short term overdraft and bill discounting facilities.

55. The facilities granted from February 1993 upto 11th March 1995 were informal. The witness for the Plaintiff states that:-

“when the account was opened, the Plaintiff deposited funds simultaneously in an FDR account for Khs.2,822,803. 70 and 3,001,000/=. The Bank at the time gave the Plaintiff no limit on the Credit facilities and was charging Penal interest on the whole sum”.

56. In his evidence DW1 testified,

“Prior to 1995 the Plaintiff did not enjoy formal facilities, they were temporary”

57. There is concession that prior to 11th March, 1995, the Bank granted to Sameh informal facilities. Sameh’s case is that the facilities were informal because, inter alia, no tenure and limit had been agreed or fixed. PW1 argued that because of this the Bank should not have charged it a penalty fee or interest. PW1 argued,

“when we started with the Bank there was no limit. So how do we exceed it? So figures on penalty were not correct?”

58. On the part of Bank, DW1 stated,

‘when a facility is informal/temporary it attracts excess or penalty charges,,,,, the rate was about 36% or thereabouts”.

Later, the witness concedes:-

“For there to be an excess there must have been an informal limit fixed. I am unable to tell the limit from the statement”.

59. Sameh made it clear that its only complaint for the period preceding March 1995 was the penalty interest charged; it was agreeable to a normal rate of interest to be worked on 3% - 4% over the Bank’s Rate. PW1 said,

“The Manager said that the interest would be 3%-4% over the Base Rate. That was acceptable to us”.

If there was any doubt, the witness also stated,

“The issue was never the interest but the penalty fee in interest”.

60. On the penalty interest, the grievance was that it should not have been charged because there was no limit fixed which the customer was capable of breaching. This is consistent with Sameh’s pleadings that,

“The 1st Plaintiff avers that the Defendants started charging the 1st Plaintiff unlawful penal interest at 10% p.a (over and above the commercial rate charged) on its account from August 1993 without any lawful justification, cause or any basis whatsoever”.

61. No other reason is given as to why the penalty interest would have been unlawful. And given the pleadings and the evidence, Sameh does not question the legality of the other interest charged between 1993 and 11th March 1995.

62. On the penalty interest, the Bank has submitted that the penalty was charged on trade usage that would be implied into the relationship between it and Sameh. It was further urged that the facility letters executed on 11th March 1995 and 19th November 1997 had the effect of formalizing the contractual relationship between the two.

63. In respect to the submission on Trade Usage, the Plaintiff retorts that the Bank does not elaborate on how the doctrine was applicable. On the facility letters it is submitted that:-

“The said letters do not at all refer to any ‘re-structuring’ and a plain reading of the same was that the Plaintiff would get the facilities mentioned therein as they do not even refer to the previous facilities purportedly being increased. The Plaintiff expected as is evident from its letter at page 85 of exhibit 1 to receive the full facilities in the said letter which it did not but was charged interest for and securities taken to secure the same”.

64. Sameh admits accepting the Letter of Offer of 11th March 1995. PW1 says of this acceptance,

“We accepted the terms of the letter. We had asked for 48 million but were given 20 million. At this time …..was about 27 million”.

65. Coming before this letter was a written request dated 13th May, 1994 by Sameh to the Bank with a reference “BANKING FACILITY”. In the opening three paragraphs of the letter Sameh writes:-

“It was a pleasure meeting yourself and Mr. Barnes on 31st March, 1994, when we discussed the possibility of obtaining full banking facilities from the Dephis Bank Limited, for our two Companies namely Sameh Textile Industries Limited and Samji Kala and Company Limited.

We are at present baking with Standard Chartered Bank Kenya Limited, who have provided us with all our banking facilities for approximately the past 70 years. However, due to major changes in the financial sector in recent times and hence the effect of the bank’s policies, we are currently considering transferring the above two companies’ entire banking facilities to another bank where our needs are met not only adequately but with efficiency and understanding.

With this in mind, we would like to take the opportunity to ask yourselves if you could like to take the opportunity to ask yourselves if you could provide us with our requirements against proper securities given to you. At present we are running a short-term overdraft and bill discounting facility with yourselves and would now like to incorporate that as party of full banking facilities consisting of long-term loans, overdraft, bill discounting, letters of credit and guarantees”.

Later the facilities requested for Sameh are set out.

a) Loan Account repayable over a period of 5 years Ksh.22,000,000/=

b) Overdraft facility – Kshs.20,000,000/=

c) Bill discounting facility – Khs.3,000,000/=

d) Letters of Credit – Kshs.2,000,000/=

e) Guarantees – Khs. 500,000/=

Total Kshs.47,500,000/=.

66. What is unequivocal about the request, and which is relevant here, is that Sameh was asking the Bank to ‘incorporate the ‘short-term overdraft’ and ‘Bill discounting facility’ it was enjoying as part of a more formal arrangement. When one recalls the evidence of PW1 that Sameh asked of Ksh.48 million but was given 20 million (through the Letter of Offer of 11th March 1995) and ties it with their Letter of 13th May 1994 asking for 47. 5 million, then one sees the connection between the request for 13th May 1994 and the Letter of Offer of 11th March, 1995.

67. The Court would have to infer that although the Letter of Offer of 11th March 1995 does not refer to a restructuring of existing facilities, it was in reaction to Sameh’s request that the existing informal facilities be incorporated into a more formal arrangement. This Court accepts the version of the Bank that the offer contained in the Letter of 11th March 1995 was made pursuant to Sameh’s request of 13th May 1994.

68. The significance of this finding is that having accepted the Letter Offer of 11th March, 1995, Sameh accepted the incorporation of the existing facility into the formal arrangement without reservation. Sameh should not have accepted the offer if it did not acquiesce to the penalty charges levied on its facilities prior to this date. Any grievance on the penalty charges levied between February 1993 and 13th March 1995 when the Letter was returned duly executed was compromised on the execution of the Letter of Offer. The first issue for determination is resolved in favour of the Defendant. I find and hold that the Defendant did not overcharge the Plaintiff for facilities granted prior to 11th March 1995.

69. The second issue to be determined is whether interest rates and charges on the facilities exceeded the maximum prescribed by Central Bank of Kenya and The Banking Act. Looking at the pleadings and the submissions by Sameh, the period for which this question is posed is from the date of acceptance of the Letter of Offer dated 11th March, 1995. The acceptance being on 13th March 1995.

70. The current regime of Interest Rate capping is not the first time of Interest Rates controls or regulation. Prior to the repeal of Section 39(1) of The Central Bank of Kenya Act through the Central Bank of Kenya (Amendment) Act 1996, (Act No. 9 of 1996), The Central Bank could in consultation with the Minister (for the time being on change of Finance) determine and publish the maximum rate of Interest to be charged by Banks or specified Financial Institutions for deposits and charges for loans or advances. The repealed Provision read:-

“The Bank may from time to time acting in consultation with the Minister determine and publish the maximum rate of interest which specified banks or specified financial institutions may pay for the deposits and charge for loans or advances.”

71. There were two formal facilities granted by the Bank to Sameh. The facilities offered through Letters of 11th March 1995 and of 19th November 1997. The facility of 11th March 1995 comprised of :-

a) Overdraft…… Ksh.15,000,000/=

b) Bills discounting… Kshs.3,000,000/=

c) Letters of credit…..Kshs.2,000,000/=

72. The term of the facility was to end on 31st March 1996. In other words, the term of the facility was for a year. The agreed interest rate for the overdraft was the base rate in force from time to time and a margin 6%. The base rate at the date of the letter was 21% and so the interest charged was 27% pa. There was then an excess penalty fee of 10% p.a in the event that the overdraft facility exceeded the limit. The Bills discounting attracted a discount rate of 26% p.a(comprised of the discount rate in force and a margin of 6%). There was a commission of the letter of credit at, “0. 5% flat for the first three months and 1. 25% for every subsequent quarter or part thereof for sight and 1% flat for the first 90 days for usage and 0. 5% for subsequent period.

73. The second facility comprised of,

Overdraft …………..Ksh.20,000,000/=

Loan…………………… Kshs.20,000,000/=

Bill discounting ……Kshs.3,000,000/=

Letters of Credit……Kshs.5,000,000/=

The loan was for a period of 60 months at interest of 37% p.a.

74. It was the submission of the Plaintiffs that at the time of issue of the Letter of offer dated 11th March 1995, the interest rates were regulated by Gazette Notice 4939 of 1989 dated 27th March 1990. The Gazette Notice would have been published by the Governor of Central Bank pursuant to the then existing Section 39 (1) of the Central Bank Act. I take it that Counsel for Sameh meant Gazette Notice No. 4939 of 1989 a copy of which was attached to the written submissions of Sameh.

75. Gazette Notice No. 4939 of 1989 revoked the previous Gazette Notice no. 1690 of 1989. This Notice (No.4939) was dated 16th October, 1989 and published on 19th October 1989. And it is true as submitted by Counsel that the Notice prescribed a maximum rate of 16. 5% p.a chargeable for loans and advances whose term did not exceed. That Gazette Notice was in turn replaced by Gazette Notice NO. 1617 of 1990 dated 2nd April, 1990. The rates in the two Notices were the same and the only difference is that the latter Notice clarified that it superseded all the earlier Gazette Notices.

76. The history of Gazette Notices published under the Repealed Section 39(1) did not end there. By Gazette Notice No. 3348 of 1991 dated 23rd July 1991 and published on 26th July 1991, the Governor revoked Gazette Notice No. 1617 of 1990. Of significance is that the Governor did not publish any maximum rates of interest to replace those that had been prescribed by Gazette Notice No.1617 of 1990. Eventually, the Central Bank of Kenya (Amendment) Act 1996 (Act No. 9 of 1996) which commenced on 18th April, 1997 repealed the provisions of Sections 39(1) of The Central Bank Act.

77. From this history it becomes clear that Central Bank of Kenya did not invoke its powers to prescribe maximum rates of interest after 23rd July 1991. Eventually, the power was taken away on 18th April, 1997 by The Central Bank of Kenya (Amendment) Act 1996 (Act No.9 of 1996). Importantly therefore no interest rates were prescribed when the offer of 11th March 1995 was made.

78. The Court’s attention turn to the alleged infraction of Section 44 of The Banking Act which reads:-

“No institution shall increase its rate of banking or other charges except with the prior approval of the Minister”.

Worth noting is that these provisions were operational by 11th March 1995 when the first formal offer was made to Sameh and is still effective todate.

79. The argument by the customer is that the Bank increased its rate of interest beyond the amount specified in the Letters of Offer without obtaining prior approval of the Minister pursuant to Section 44 of The Banking Act, Cap 488.

80. The Bank thought that the provisions of Section 44 were inapplicable because the provisions dealt with increase in rate of Banking and not interest rates the former being distinguished as rates such as mobilization charges, commitment fees, ledger fees as opposed to interest. This argument, attractive as it may seem, has to fail in view of the Court of Appeal decision in Margaret Njeri Muiruri vs. Bank of Baroda (Kenya) Limited [2014] eKLR in which it held,

“The Banking Act came into commencement on 1st November 1989. By virtue of Section 44 of The Act, it was incumbent upon the Respondent to seek approval from the Minister before it raised any interest to be charged on the outstanding amount. There is no evidence that the approval to increase the Interest charged was sought. On the face of it therefore, the Interest rate increases were not in accordance with the law”.

This Court finds that any increases in both rates of Interest or other charges beyond what was specified in the Letters of Offer of 11th March 1995 and 19th November 1997 required the prior approval of the Minister.

81. In respect to the alleged contravention of Section 44 of the Banking Act, it was upon the Customer to first demonstrate that there were increases of the rates of Interest or charges beyond the rate specified in the facility Letters of 11th March 1995 and 19th November 1997. Only then would the onus shift to the Bank to prove that the increase was approved by the Minister.

82. Of this burden of proof by the Bank, the Court of Appeal in Margaret Njeri Muiruri and Bank of Baroda(Kenya) Ltd (cited by the Counsel for Sameh) stated,

“Under Section 112 of the Evidence Act, when any fact is especially within the knowledge of any party to those proceedings, the burden of proving or disproving that fact is upon him”.

In the appeal before us, it was the respondent bank which fell within Section 112 and which had a duty to demonstrate that it had indeed sought approval to increase the interest rate because this would be a fact that would be within its knowledge. We find and hold therefore, that the burden remained on the bank to prove that the rate of interest that was being charged was charged with the consent of the Minister. This is especially so because Section 44 of the Banking act places the burden on the bank to seek the approval. How would the applicant be able to tell if indeed the bank had sought approval from the Minister?

To illustrate this point, we find persuasive authority in the High Court case of John Gatu Nderitu v. Kenya Commercial Bank Ltd [2011] eKLR (Civil Case NO. 55 of 2001) where Sergon J found that it was the bank that is enjoined to provide documentary evidence to the Court to the effect that it had complied with Section 44 of the Banking Act. A failure to do so would attract the presumption that the bank did not comply with the Statutory requirement to increase the interest rate. To our knowledge, the principle stated in that High Court decision was not challenged on appeal.”

83. Before turning to the evidence, if any, in respect to the controversy around the approval required by Section 44 of The Banking Act, let me detour for just a moment. Prior to the Decision of Margaret Njeri Muiruri (Supra) being brought to my attention, I had held a view (see for example in Nrb Commercial No. 658 of 2012 Jimmy Wafula Simiyu Vs. Fidelity Commercial Bank Ltd) that a party complaining about breach of Section 44 of The Banking Act needed to lay a firm basis of his/her apprehension that the Bank had not obtained the required approval before the onus shifted to the Bank, by dint of Section 112 of the Evidence Act to disprove. The firm basis could be laid by the customer showing that it had made inquiries from the Bank or Minister as to whether the rate complained of had received the required sanction. This information should be available to the customer as a matter of contractual right from the Bank and Statutory right from the Minister. And currently the information ought to be more easily reachable with the help of The Access to Information Act and provisions of Article 35 of The Constitution on Access to Information. This Court would have thought that, only upon showing a difficulty in accessing that information would the onus shift to the Bank. But this Court is bound by the holding in Margaret Njeri Muiruri (Supra) which enjoins the Bank to show compliance with the provisions of Section 44 as soon as the Customer, without more, raises it as a complaint in a suit.

84. In respect to the 1995 facility, there is evidence that the interest rates were increased on two occasions. On 9th August 1995 (P Exhibit page 19), the base rate was increased from 21% tp 26% p.a. Again on 18th November 1995 (P Exhibit page 20), the base rate was increased upwards to 27. 5% pa. The Bank on its side did not provide any evidence that it had sought and obtained approval before effecting these increases.

85. The 1997 facility tells an entirely different story. The letters from the Bank of 9th January 1999, (P Exhibit page 96), 15th May 1999 (P Exhibit page 97), 28th December, 1999, (P Exhibit page 103), 6th March 2000 (P Exhibit page 107), 28th July 2000 (P Exhibit page 108) and 3rd October 2000 (P Exhibit page 109) shows a continuous decrease of the interest rates. However a letter of 10th December 1999 (P Exhibit page 102) shows an increase of interest rate on overdraft from 25. 5.% (in the letter of 29th June 1999) to 29%. That said, the increase rate was below the rate of 30% per annum that was provided in the Letter of offer of 19th November 1997. Because of that I would hold that increase did not require intervention of the Minister by way of sanction.

86. On the second question posed for determination, this Court finds that only in two instances (as set out in paragraph 84 of this decision) has Sameh proved that the interest charged was not in conformity with the provisions of Section 44 of The Banking Act.

87. Did the Defendant fully account for the realized securities? In the submissions the Plaintiff enumerates the securities as follows:-

i) Charge dated 30th November, 1994 and Further Charge dated 3rd August, 1995 over L.R No.9122/6 for an aggregate sum of Kshs.30,000,000/-.

ii) Charge dated 24th July, 1998 and Further Charge dated 8th September, 1998 over Mombasa/XXXVII/12 for an aggregate sum of Kshs.80,000,000/=.

iii) Charge dated 16th March, 1995 and Further Charge dated 3rd September, 1997 over Mombasa/XXXIII/30 for an aggregate sum of Khs.8,500,000/=.

iv) Charge dated 3rd September, 1997 over Mombasa/XXXIII/12 for Khs.12,500,000/-

v) Floating Debenture dated 17th July, 1997 and a Supplementary Debenture dated 8th September, 1997 for an aggregate sum of Shs.80,000,000/=.

vi) Guarantees dated 19th May 1995 and 7th September 1998 by Samji Kala & co ltd for Kshs.20,000,000/= and 80,000,000/- respectively.

88. In respect to LR No.9122/6 the Plaintiff submitted that the property was sold at a gross undervalue, after valuation by the Banks Valuer at Kshs.30,000,000/=. This Court makes no finding at all on this issue because it was not raised in the Plaint. It was not pleaded.

89. There is then LR. Mombasa/XXXIII/12. On 24th January 1991 Delphis transferred this title as a charge to Katsira Holdings Limited for the sum of Khs.45,000,000/=(P Exhibit page 1966). This amount was credited into the Plaintiff’s account to reduce its debit balance. The Plaintiff submits that Katsira Holdings Limited was owned by Mukesh Shah who was one of the Directors of the Bank and because of this apparent conflict of Interest Sameh instituted High Court case NO.508/2000 against the said company and Mukesh Shah. Accepted by both sides was that the said suit was settled by Consent.

90. Sameh however complains that,

“It is to be noted from the said consent Your Lordship that in period of less than two years the said Katsira Holdings Limited was to be paid Khs.65,000,000/= for the property if a purchaser was to be found or an outright transfer to it. Thus the said company and its shareholders who included directors of the Bank would make a profit of at least shs.20,000,000/= within two years.

Again the amount at which the property was transferred out is way less that what it was mortgaged for (shs.80,000,000/=). The real market value is always higher than the mortgage value”.

The Court has had a difficulty following this argument and wonders why any grievance in respect to the transfer of that property to Katsira must be reopened after the entering of the consent in HCC No. 508 of 2000.

91. This Court turns to two properties namely Mombasa/XXXIII/30 and Mombasa XXXIII/12. It is common ground that the two properties were sold while this matter was pending in Court. As stated earlier the Plaintiffs complaints are threefold:-

a) That no valid statutory Notice for the exercise of the Power of Sale was served as required by Section 74(2) of the now repealed Registered Land Act.

b) The purported Notification of Sale for the properties dated 21st October 2010 and issued by G.A Datoo & Co contravened the mandatory provisions of Section 14(30 of The Auctioneers Act.

c) There was no due debt from the Sameh to the Bank.

92. In Defence to the charge that the Bank had not served the Notices under Section 79(2) of The Repealed act, the Defendant had pleaded,

“iv. In exercise of its statutory powers of sale under the charges created by the 2nd Plaintiff, the Defendant has served lawful notices to the Plaintiffs for the sale of Mombasa/Block XXX/12 and Mombasa/Block XXXIII/30.

iv) Since the serving of the said Statutory Notices, payment have been made into the 1st Plaintiff’s accounts thereby reducing the outstanding amounts due”

This pleading it must be remembered was made on 8th January 2001 before the amendments thereto.

93. Simultaneously with filing this suit Sameh sought to injunct the sale of the two charged properties. What Counsel Sheth (for Sameh) told Court on 13th February 2001 when he appeared for the argument of the Application for Injunction, is telling. In addressing Mbaluto J. there was an admission by Counsel for Sameh that the Statutory Notices of 5th January 1997 (D Exhibit) had been served but the grievance was that fresh Notices needed to be served by the Bank even after service of these Notices.

94. In a Ruling dated 20th July 2001 in which Mbaluto J. dismissed the Application he remarked,

“If I may therefore summarize the position in law – is that the mortgage does not have to reissue a fresh notice every time he accepts a proposal or a payment from the mortgage. Once there is default and a 3 months’ notice has been served, the mortgagee’s statutory power of sale arises and the mortgagee is entitled to sell the mortgaged property provided that the default has continued and the sale is done within a reasonable time after the expiry of the notice. As far as this case is concerned, I find that the respondent was entitled to proceed with the intended sale of the mortgaged property pursuant to the statutory notice issued on 15. 1.1999”.

95. It is now disingenuous and perhaps dishonest to maintain that no Statutory Notices were served as required by the law.

96. The Court must also make short thrift of the criticism of the Notification for Sale dated 21st October 2000 issued by G.A Datoo & Co. Ltd. It is common ground that the sale for which the Notice was granted did not proceed. The defect of that Notice, borrowing the words of Mbaluto J. would now be otiose there being no issue raised in respect to the Notification for Sale that eventually led to the sales that were done after 2001. This Court does not find any illegality or irregularity of the sales in respect to these two properties.

97. In the written submission by Sameh, this Court is also asked to find that kshs. 73,641,870. 90 ought to be credited to Sameh on account of proceeds of sale of its assets by the Receiver appointed by the Bank. The Court need not because the matter was neither pleaded nor proved. In addition no finding can be made for General Damages, Punitive damage or Exemplary damage as no basis was laid for their grant. In fact as to Punitive and Exemplary Damages no facts upon which they were relied were pleaded as required by the law.

98. The significant finding that the Court has made in favour of the Plaintiff is that there was an overcharge of interest on the facility of 11th March 1995 on the basis of the increases introduced by the letters of 9th August 1995 and 18th November 1995. The impact of these unlawful increase in the rate of interest on the overall debt of the Plaintiff must be understood so that the Court makes its final orders in the matter. Unfortunately the expert opinion provided by PW2 has not helped this Court as it was based on other alleged breaches of the law which the Court has found were not proved.

99. So as to make its final orders, the Court directs that the parties to jointly appoint an Accountant for purposes of working out the amount overcharged by the bank and to report on its overall impact on Sameh’s Debt. These shall be undertaken within 30 days hereof.

Dated, Signed and Delivered in Court at Nairobi this 6th day of November, 2017.

F. TUIYOTT

JUDGE

PRESENT;

Wetangula h/b Koech for Plaintiff

Kadima h/b Chacha for Defendant

Alex – Court clerk