ACON SYSTEMS LIMITED AND CLEMENT MULWA MASAI VS BANK OF BARODA KENYA LIMITED AND SRC RISK CONSULTING AGENCIES

THE REPUBLIC OF KENYA
IN THE HIGH COURT OF KENYA AT KAJIADO

CIVIL CASE NO. E021 OF 2021

ACON SYSTEMS LIMITED  …………………...……..……….……1^ST PLAINTIFF

CLEMENT MULWA MASAI……………………………………….….2^ND PLAINTIFF

Versus

BANK OF BARODA(KENYA) LIMITED ……...…..............…1^ST DEFENDANT

SRC RISK CONSULTING AGENCIES…..……….………………2^ND DEFENDANT

JUDGMENT

The Plaint

1. By a Plaint dated 28^th September 2021, the Plaintiffs claimed that the Plaintiffs took out various financial facilities. The first loan facility was on 3^rd April, 2013 for Kshs. 45,000,000/. An additional facility was advanced on 17^th March, 2016 for Kshs. 20,000,000/. A further facility was advanced on 8^th June, 2016 for Kshs. 20,000,000/-. The following properties, registered in the name of the 2^nd Plaintiff were used to secure the said loan facilities: L.R No. Kwale/Diani Complex/1609 located in Kwale County; L.R No.913/38 Shushan Hotel located in Makindu Township, Makueni County and Ngong/Ngong/10038 located in Ongata Rongai, Kajiado County (charged properties).
2. The Plaintiffs have claimed that had secured an investor by the name of Secure Capital Investment Limited who proposed to invest Kshs. 1,000,000,00 and sought a letter of comfort from the 1^st Defendant on the strength of that proposal but the 1^st Defendant decline to issue the Plaintiffs with the letter of comfort as a result of which the Plaintiffs’ investment plans stalled rendering them incapable of servicing the loan facilities.
3. They stated that through a letter dated 25^th May, 2021 the 2^nd Defendant served the 2^nd Plaintiff with a demand notice for Kshs. 19,024,933.96/-. That another demand letter on 19^th August, 2021 was issued to the 1^st Plaintiff for a sum of Kshs. 58,433,402.50/-. That through an email dated 8^th September, 2021 the Plaintiffs learned that the 1^st Defendant had initiated auction process over the suit properties.
4. The Plaintiffs accused the 1^st Defendant of the following:
5. Failure by the 1^st Defendant to issue the mandatory ninety (90) day notice as required under the Law.
6. Failure by the 1^st Defendant to conduct a forced sale valuation.
7. Failure by the 2^nd Defendant to issue a forty five (45) day notification of sale prior to the auction process.
8. The Plaintiffs pray for judgement against the Defendants for:
9. An order for permanent injunction restraining the Defendants either by themselves, their employees, agents, servants, assignees or any person working under their express and/or implied instructions or authority from selling by public auction or private treaty, alienating, disposing, entering, leasing, appointing a receiver , trespassing, wasting or in any other way dealing with those parcels of land known as Land  Reference No.913/38 Shushan Hotel Located in Makindu Township, Makueni County; Ngong/Ngong/10038 located in Ongata Rongai, Kajiado County and Kwale/Diani Complex/1609, Jasmine Villas located in Kwale County.
10. Costs of the suit.

Defence

1. The defendants filed a statement of defence dated 26^th October, 2022. They have denied the allegations claimed by the Plaintiffs. They however admitted that they rejected to issue to the Plaintiffs a letter of comfort, stating that they were not obligated to do so. It was their case that theirs was a contractual relationship executed between the Plaintiffs and the 1^st Defendant which did not provide that they would issue the said letter. They further stated that the same could not be issued as the 1^st Defendant is regulated by the Banking Act and Prudential Guidelines provided by the Central Bank which prescribe the limits of conduct of its business and that the statutory framework does not provide for issuing comfort letters.
2. They also stated that the Plaintiffs did not deny the default in repaying the loan and therefore the statutory power of sale arose. They stated that they issued a statutory 90 days’ notice dated 7^th November, 2018. They argued that the Plaintiffs were served with a Statutory Notice to sell dated 17^th February, 2021. They denied that they had instructed an auctioneer and stated that the email dated 8^th September, 2021 was not evidence of appointment of an auctioneer hence no prejudice is occasioned to the Plaintiffs.
3. The |Defendants has stated that the case as filed is a non-starter and should be struck off. They further stated that the Plaintiffs continue to default in payment of the outstanding amount and are non-deserving of the equitable reliefs that they are seeking. They claim that the Plaintiffs have not established a prima facie case with a probability of success to warrant the remedies sought and that the Plaintiffs have not demonstrated that they may suffer irreparable injury that cannot be adequately remedied by damages. 

Evidence

1. This matter proceeded to hearing on 16^th January, 2024. The 2^nd Plaintiff Clement Mulwa Masai adopted his witness statement and list of documents dated 28^th September, 2021. His evidence is that he is the Managing Director of the 1^st Plaintiff and the beneficial owner of the charged properties; that he took a loan facility from the 1^st Defendant totalling Kshs. 85,000,000/; that he last serviced the loan in 2018 and that he did not dispute the debt. It was his case that he sought investors to assist in offsetting the loan; that he required a letter of comfort issued by the 1^st Defendant but the 1^st Defendant declined to issue it.
2. It was his case that the bank never issued him with the requisite notices; that he sought the prayers herein because he was still engaging with the bank during the hard-economic times; that the bank sent auctioneers without any communication to him and that as a result he rushed to court in a bid to buy time for purposes of restructuring the loan.
3. The case for the defendants was supported by the evidence of Alfred Arunga, a Legal Officer of the 1^st Defendant. He adopted his witness statement dated 13^th October, 2023 together with the documents dated 18^th January, 2023. It is his case that the plaintiffs engaged the 1^st Defendant severally and had sought a letter of comfort from the 1^st Defendant which the 1^st Defendant declined to issue; that the reason for declining was that the loan was non-performing.
4. He testified that the 1^st Defendant did not issue instructions to the auctioneers to commence auction process through its email dated 8^th September, 2021. He testified that he was not aware of any forced sale valuation of the charged properties. He confirmed that the 1^st Defendant issued the 90 days’ notice dated 27^th September, 2018 and the 45 days’ notice dated 17^th February, 2021.

Submissions

1. In addition to the evidence, parties filed submissions. The Plaintiffs submissions are dated 29^th March, 2024. They raised the following one issue for determination:

Whether the Plaintiffs are entitled to an order of permanent injunction.

1. They submitted that it is not in dispute that they owe the Defendants but that they are raising issue with the manner in which the statutory power of sale was exercised. They stated that the Land Act 2012 and the Auctioneer Rules 1997 allows for notices to be issued before any statutory power of sale. They raised the issue of the letter of comfort and stated that the denial by the 1^st Defendant to issue that letter halted their investment plans which in turn led to the non-payment of the loan.
2. They argued that this court has powers to issue permanent injunction under sections 1A, 3 and 3A of the Civil Procedure Act. They stated that the 1^st Defendant issued instructions to Keysian Auctioneers who vide a letter dated 15^th February, 2022 issued 45 days’ Notice together with Notification of sale of immovable property dated 16^th February, 2022 and that prior to this the 1^st Defendant failed to issue the mandatory forced valuation as required under section 97(2) of the Land Act. They relied on the Central Bank of Kenya Prudential Guidelines of January, 2013 under clause 3.7(c).
3. They submitted that the mandatory 90 days’ notice was not issued to them and that the letters issued by the 1^st Defendant dated 7^th November, 2018, 27^th September, 2018 and 17^th February, 2021 were not served on them. They stated that this court in its ruling dated 5^th May, 2022 held that the certificate of postage was illegible and therefore service could not be ascertained. They submitted that the amount in the letter dated 15^th February, 2022 of Kshs. 115,306,944/- was unascertained as no evidence was adduced.
4. In support of their case they relied on the case of Simon Njoroge Mburu -vs- Consolidated Bank of Kenya Ltd [2014] eKLR, where it was held that:

“That section now statutorily encompasses the right of the chargor prejudiced by unauthorised, improper or irregular exercise of the power of sale to have a remedy in damages. In my view, such is where the Plaintiff’s remedy lies in this case. In this regard, the Plaintiff would do well to note the powers of the Court in respect of remedies and relief as set out under section 104 of the Land Act, 2012…….

“What is clear is that once a property has been knocked down and sold in a public auction by a chargee in exercise of its statutory power of sale, the equity of redemption of the chargor is extinguished. The only remedy for the chargor who is dissatisfied with the conduct of the sale is to file suit for general or special damages.” 

1. They also relied on the case of Isaiah Nyabuti Onchonga -vs- Housing Finance Company of Kenya Ltd & another [2020] eKLR. 
2. The Defendants’ submissions are dated 21^st May, 2024. It is their submission that the Plaintiffs are not disputing that they took a loan facility from the 1^st Defendant but that the Defendants did not follow the law especially on valuation of the properties and that the statutory notices were not issued to them. They submitted that they complied with the law and issued the requisite statutory notices under section 90(1), (2), (3)(e) of the Land Act 2012 dated 7^th November, 2018 and 27^th September, 2018; that they issued notice to sell dated 17^th February, 2021 and that the notices were issued to the Plaintiffs through registered post. They argued that having issued the statutory notices and the chargee’s notice to sell and the chargor having failed to exercise his right of redemption, they are at liberty to conduct a valuation of the charged properties and thereafter instruct an auctioneer.
3. It was their argument that they had not appointed an auction as alleged by the Plaintiffs; that the issue of conducting a forced sale valuation and issuing a 45-day notification did not apply at this stage.
4. They argued that Plaintiffs breached the terms of the various facilities by failing to pay the outstanding amounts and that this has prejudiced them as it has caused them financial distress. They argued that the Plaintiffs have never serviced the loan facilities due to date.
5. They argued that the Plaintiffs have failed to demonstrate a prima facie case with probability of success as defined in Giella -vs- Cassman Brown & Co Ltd (1973) E A 358. It was their case that the plaintiffs are therefore not entitled to the reliefs sought. They reiterated that the failure of the Plaintiffs to service the loan shows that they have failed to do equity. They relied on Celine Wambui Kigwe -vs- National Bank of Kenya & 2 others[2020]eKLR where it cited the case of Francis J.K Ichatha -vs- Housing Finance Company of Kenya [2005] eKLR where the Court of Appeal held that:

“A plaintiff should not be granted an injunction if he does not have clean hands, and no court of equity will aid a man derive advantage from his own wrong, for the plaintiff seeks this court to protect him from his own default. He who seeks equity must do equity…..”

1. They also relied on the case of New Zawadi Hardware Limited -vs- Bank of Baroda Kenya Limited 2018 eKLR where it was held that:

“The Court of Appeal in the case of Lucy Wangui Gachara v Minudi Okemba Lore [2015] eKLR stated:

“The principles on which the courts will grant an injunction are well known.  This Court restated those principles in

NGURUMAN LIMITED V JAN BONDE NIELSEN & 2 OTHERS, CA NO. 77 OF 2012, together with the mode of their application as follows:

“In an interlocutory injunction application, the applicant has to satisfy the triple requirements to:

(a) Establish his case only at a prima facie level,

(b) Demonstrate irreparable injury if a temporary injunction is not granted, and

(c) Ally any doubts as to (b) by showing that the balance of convenience is in his favour.

These are the three pillars on which rests the foundation of any order of injunction, interlocutory or permanent.  It is established that all the above three conditions and stages are to be applied as separate, distinct and logical hurdles which the applicant is expected to surmount sequentially.  See Kenya Commercial Finance Co. Ltd V. Afraha Education Society [2001] Vol. 1 EA 86.  If the applicant establishes a prima facie case that alone is not sufficient basis to grant an interlocutory injunction, the court must further be satisfied that the injury the respondent will suffer, in the event the injunction is not granted, will be irreparable.  In other words, if damages recoverable in law is an adequate remedy and the respondent is capable of paying, no interlocutory order of injunction should normally be granted, however strong the applicant’s claim may appear at that stage.  If prima facie case is not established, then irreparable injury and balance of convenience need no consideration.  The existence of a prima facie case does not permit ‘leap-frogging’ by the applicant to injunction directly without crossing the other hurdles in between.”

1. On the issue of irreparable loss they submitted that the Plaintiffs have failed to demonstrate how they would suffer such irreparable loss that cannot be adequately compensated by way of damages; that the Plaintiffs understood that by taking out the financial facilities and placing their properties as security the same would be sold upon default and that the suit properties can be assessed and quantified and in case the Plaintiffs succeed in their case on a future date, they can be compensated by an award of damages.
2. In support of their submissions they relied on a number of cases as shown on the face of their submissions including the case of Peter Kamau Munene- vs- Kenya Commercial Bank Limited (2015) eKLR where the court, while citing Bii – vs- Kenya Commercial Bank Ltd (2001) KLR 458 had this to say:

“Is the applicant’s probable injury capable of being adequately      compensated in damages? I have no doubt that it is. The applicant   has known all along that the securities he offered for his charge debt would be realized if default was made in the repayment. As I have said severally, once a property is offered as security, it by the very fact becomes a commodity for sale and there is no commodity for sale whose loss cannot be compensated adequately damages”.

1. They argued that the balance of convenience tilts in favour of the Defendants in that the Plaintiffs have continued to default on the loan repayment. They relied on the case of Maithya -vs- Housing Co of Kenya and Another (2003)IEA 133 as cited with approval in the case of Anthony Muthumbi Wachira & another -vs- Housing Finance Company of Kenya [2015]eKLR and argued that the prayers being sought by the plaintiffs are permanent in nature meaning that they will be bound from ever exercising their statutory power of sale. It was their argument that the Plaintiffs have failed to explain why they are seeking permanent injunction and that parties are bound by their pleadings and cannot depart from them as was stipulated in the case of Njeru & another -vs- Nyakundi (Civil Appeal E021 of 2021) [2022] KEHC 13963 (KLR)(11^th October 2022) where it was held that,

“….it is now trite principle in law that parties are bound by their pleadings and that any evidence led by any of the parties which does not support the averments in the pleadings, or put in another way, which is at variance with the averment of the pleadings goes to no issue and must be disregarded….In fact that parties are not allowed to depart from their pleadings is on the authorities basic as this enables the parties to prepare their evidence on the issues as joined and avoid surprises by which no opportunity is given to the other party to meet the new situation.”

Analysis and Determination

1. I have taken considerable time to read and understand the pleadings of the parties before me. The Plaint seeks a permanent injunction against the Defendants to restrain them from selling by public auction or any other manner or dealing with the Defendants’ charged properties. They are also seeking costs of this suit.
2. To my mind, the singular issue that this Honourable Court should determine is whether the Plaintiffs have met the threshold for grant of a permanent injunction.
3. For a party to persuade the court to grant an injunction, that party must discharge the burden of proof. As submitted by the Defendants, he who alleges must prove. The provisions of section 107 (1) and (2) of the Evidence Act are clear on this issue. From the pleadings and evidence of the parties, it is not in dispute that the Plaintiffs obtained loan facilities from the 1^st Defendant and secured these facilities using the charged properties. They fell into default. The 2^nd Defendant clearly testified that the loan was last serviced in 2018. The default is admitted.
4. In seeking an injunction to stop the other party (Defendant/Respondent) from taking some action aimed at the applicant, the latter must satisfy three conditions as affirmed by the Court of Appeal in Nguruman Limited v Jan Bonde Nielsen & 2 others, CA No. 77 of 2012; [2014] eKLR. The applicant must establish his case only at a prima facie level; the applicant must demonstrate irreparable injury if a temporary injunction is not granted and ally any doubts as to (b) by showing that the balance of convenience is in his favour. The Court in that case specified that it is on these three pillars that the foundation of any order of injunction, whether interlocutory or permanent, rests. These three conditions are to be applied as separate, distinct and logical hurdles which the application is expected to surmount sequentially.
5. This is not the first time the Plaintiffs have moved the court seeking an injunction. They moved this court earlier through Notice of Motion dated 28^th September 2021. In that application they sought to stop the Defendants through a temporary injunction. This court, through a Ruling delivered on 5^th May 2022 found for the Plaintiffs, Applicants in that application, suspended the Notification of Sale of L.R No. 913/38 Shushan Hotel, one of the charged properties and granted temporary injunction pending the determination of this suit.
6. While I found the Plaintiffs in default of servicing the loan, I granted the above orders for reasons that, while the statutory notices under section 90 and 96 of the Land Act had been served on the Applicants, the Respondents had not complied with section 97 of the Land Act by conducting a forced sale valuation.
7. The provisions of section 90(1), (2) and (3) of the Land Act state as follows:

(1) If a chargor is in default of any obligation, fails to pay interest or any other periodic payment or any part thereof due under any charge or in the performance or observation of any covenant, express or implied, in any charge, and continues to be in default for one month, the chargee may serve on the chargor a notice, in writing, to pay the money owing or to perform and observe the agreement as the case may be.

(2) The notice required by subsection (1) shall adequately inform the recipient of the following matters —

(a) the nature and extent of the default by the chargor; (b) if the default consists of the non-payment of any money due under the charge, the amount that must be paid to rectify the default and the time, being not less than three months, by the end of which the payment in default must have been completed;

(c) if the default consists of the failure to perform or observe any covenant, express or implied, in the charge, the thing the chargor must do or desist from doing so as to rectify the default and the time, being not less than two months, by the end of which the default must have been rectified;

(d) the consequence that if the default is not rectified within the time specified in the notice, the chargee will proceed to exercise any of the remedies referred to in this section in accordance with the procedures provided for in this sub-part; and (e) the right of the chargor in respect of certain remedies to apply to the court for relief against those remedies. (3) If the chargor does not comply within ninety days after the date of service of the notice under, subsection (1), the chargee may— (a) sue the chargor for any money due and owing under the charge; (b) appoint a receiver of the income of the charged land; (c) lease the charged land, or if the charge is of a lease, sublease the land; (d) enter into possession of the charged land; or (e) sell the charged land;

1. Further section 96(1) and 2 of the Land Act provides that;
2. Where a chargor is in default of the obligations under a charge and remains in default at the expiry of the time provided for the rectification of that default in the notice served on the chargor under section 90(1), a chargee may exercise the power to sell the charged land.

(2) Before exercising the power to sell the charged land, the chargee shall serve on the chargor a notice to sell in the prescribed form and shall not proceed to complete any contract for the sale of the charged land until at least forty days have elapsed from the date of the service of that notice to sell.

1. Without repeating myself, I wish to reiterate my ruling that the record shows that the Defendants did issue a 90 days’ notice dated 27^th September, 2018 and a 45 days’ notice dated 17^th February, 2021 through registered post although the certificates of postage are not legible. Given that the Plaintiffs’ last repayment was in 2018, it is clear that the 1^st Defendant must have acted towards the recovery of the loan safe for failure to finalize the process as stated in the ruling.
2. The argument by the 1^st Defendant is that they are yet to have forced sale valuation of the charged properties done in accordance with  Section 97(1) and (2) of the Land Act. They argued, further, that once the valuation has been done, they will instruct an auctioneer to proceed as the law requires. In the meantime, the Plaintiffs continue with defaulting in loan repayments. They have tried to buy time but from 2018, a period of 6 years, they have not done anything towards making payments. They instead blame the 1^st Defendant for not issuing them with a letter of comfort.
3. The Plaintiffs are seeking equitable reliefs but have not come to court with clean hands. The Court in Al-Jalal Enterprises Limited v Gulf African Bank Limited [2014] eKLR, cited with approval in Maithya v Housing Finance Co. of Kenya Limited & another [2003] 1 EA 133 stated that:

“... he who comes to equity must do equity. Failure to service the loan or to pay the lender or to pay into court what had been admitted took the Applicant outside the realm of exercise of the court’s discretion.”

1. The Plaintiffs seek a permanent injunction against the Defendants on the charged properties. As already established the Plaintiffs have admitted being indebted to the 1^st Defendant. They have made no effort to repay the debt. A permanent injunction blocks a Defendant permanently from doing anything that is being restrained. In this case, such an injunction will block the 1^st Defendant from recovering the loan from the Plaintiffs who have defaulted.
2. As submitted by the Defendants, backed by various authorities including Amos Wangeera Njoroge & 9 others v Serah Wamuyu Muriuki & another [2014] eKLR:

“Once property is offered as security for a loan to a bank, such property becomes a commercial property which can be offered in the market for sale in case of default in the repayment of the loan and a chargor would be hard pressed to justify that damages would not be adequate remedy to compensate the chargor in the event of what would be considered and/or found to be an irregular and/or unlawful sale by way of realization of the security by the charge. In such cases an award of damages would be an adequate remedy.”

1. It is upon the Plaintiffs to demonstrate that they cannot be adequately compensated with damages should the sale be unlawful. For they are in default and have not taken any steps, no matter how small, to demonstrate their efforts towards servicing the loan. In the case of Showind Industries Vs Guardian Bank Limited & Another (2002) 1 EA 284 the court held as follows: -

“……..an injunction is granted very sparingly and only in exceptional circumstances such as where the Applicant’s case is very strong and straight forward. Moreover, as the remedy is an equitable one, it may be denied where the Applicant’s conduct does not meet the approval of Court of equity or his equity has been defeated by laches”

1. In my considered view, I find that the Plaintiffs have failed to demonstrate they have a prima facie case, that they stand to suffer irreparable damage or that the balance of convenience is in their favour. They have failed to meet the threshold for a grant of an injunction. To grant a permanent injunction against the 1^st Defendant will highly prejudice the bank whose business is to keep safe custody of its clients’ money and will lead to distress on the bank’s side. The result would be that the 1^st Defendant will be permanently barred from pursuing the Plaintiffs to recover their money. It would be tantamount to rewarding a defaulting chargor who sits in comfort without doing all within their power to repay the loan.
2. I appreciate that the 1^st Defendant needs to take certain actions to bring its recovery process within the ambit of the law. Consequently, it is my finding, and I so hold, that the Plaintiffs cannot obtain the orders of permanent injunction they are seeking. It would be a miscarriage of justice if this court were to restrain the 1^st Defendant from recovering the loan advanced to the Plaintiffs who are in default and who have admitted such default. However, such recovery must be conducted within the four corners of the law.
3. As stated by the Defendants, let due process be followed in the recovery process by complying with section 97 of the Land Act and the Auctioneer Rules.
4. The outcome of this determination is that the Plaintiffs’ claim through the Plaint dated 28^th September 2021 stands dismissed with costs. Orders shall issue accordingly.

Dated, signed and delivered this 24^th day of January 2025