Background and Introduction
1. The plaintiff sets out its case against the defendant (the Bank) through a further amended plaint dated 16th September 2020. It acknowledges the bank/customer relationship that existed between the parties and the banking facilities that were extended by the Bank on diverse dates between 1990 and 2005. These facilities are particularized at paragraph 5 (a) to (i) of the plaint.
2. The plaintiff asserts that it initially managed the financial facilities well but later faced challenges in repayment due to excessive and unlawful variations in interest rates, totaling Kshs.36,425,406.96. Consequently, the Bank resorted to aggressive loan collection tactics, which led to coercion, forcing the plaintiff to accept unfavorable terms and enter into a settlement agreement. They argue that the Deed of Settlement, signed on 28th September 2009, which required them to acknowledge a debt of Kshs. 83 million, was executed under duress and is thus null and void.
3. The dispute before the court is premised on these two main issues, namely the interests applied to the multiple facilities and the process leading to the execution of the deed of settlement dated.
4. On the strength of these facts the plaintiff prays for judgement against the Bank for:
i. A declaration that the deed of settlement dated 28/9/2009 and acts consequent thereupon are illegal, null and void ab initio;
ii. Kshs.36,425,406.96 being the difference between the overcharge and the rebate granted to the plaintiff;
iii. Costs of this suit;
iv. Interest on b) at prevailing commercial rates with effect from 19/10/2009 until payment in full; and
v. Any other relief this Honourable Court may deem just and fit to grant.
5. During the hearing the plaintiff called two witnesses, MR GEOFFREY R. NJUGUNA (PW1) AND MR WILFRED ONONO (PW2), an expert witness. PW1 adopted his witness statement echoing the contents of the further amended plaint and produced the plaintiff’s bundle of documents filed on 2nd November 2012.
6. During cross-examination, PW1 confirmed that he had orally raised concerns with the Bank regarding the exorbitant interest rates. He maintained that the plaintiff had not defaulted on repayment, arguing that if they had, the Bank would have auctioned their assets quickly. He admitted that he had no concrete evidence of the defendant’s threats, as they were mostly conveyed over the phone.
7. PW1 also testified that he executed the settlement on behalf of the plaintiff in 2009 after meetings with the Bank’s recovery manager but did not seek legal advice before doing so. He also confirmed the settlement terms, which required the plaintiff to pay the Bank Kshs. 83 million in exchange for a rebate of Kshs. 17 million.
8. PW2, a certified public accountant and the Managing Consultant of Interest Rates Advisory Centre Limited (IRAC) filed two (2) witness statements dated 16th May 2014 and 5th September 2012. He adopted them as his evidence and produced his interest recalculation report, which was prepared on the plaintiff’s instructions to scrutinise, audit and recalculate interest on its loan accounts and current accounts held with the Bank.
9. According to PW2, the recalculated difference between the alleged outstanding balance as of 4th September 2009 of Kshs. 100,098,028.19, and IRAC’s determined debit balance of Kshs. 52,367,613.31 is Kshs. 47,730,414.88 in favor of the plaintiff. He further stated that though the Bank granted the plaintiff a rebate on interest of Kshs. 17,098,028.19 when the plaintiff accepted a settlement amount of Kshs. 83,000,000/=, an additional rebate of Kshs. 30,632,386.69 is still due from the Bank.
The Defendant’s case:
10. The Bank’s case is set out in its statement of defence dated 28th April 2011. It acknowledges the bank-customer relationship with the plaintiff and confirms that it extended loan facilities to the plaintiff, which were secured by charges over multiple properties. The Bank asserts that the plaintiff defaulted on loan repayments, prompting discussions between the parties. Following a series of meetings, they reached a settlement agreement under which the plaintiff was to repay Kshs. 83 million in exchange for the release of the securities held by the Bank.
11. The Bank argues that the plaintiff voluntarily negotiated, acknowledged, and executed the Deed of Settlement. As a result, the Bank asserts that the plaintiff is contractually bound by the agreement.
12. The Bank categorically denies breaching any agreement or unlawfully varying interest rates, as alleged by the plaintiff. It asserts that any adjustments to interest rates were expressly provided for in the letters of offer and charge instruments governing the parties' relationship. The Bank further contends that the plaintiff deliberately failed to disclose that its claim was based on an IRAC report, which ignored the terms of the agreement and overlooked the plaintiff’s default in loan repayment. Accordingly, the Bank prays for the dismissal of the plaintiff’s suit with costs.
13. The Bank called one witness during the hearing, MR. JOSEPH MULI, The Manager, Corporate Recoveries in the Bank’s Business Support & Corporate Recoveries Department. DW1 adopted his witness statement and produced the Bank’s bundle of documents filed on 10th May 2011 and 4th November 2019.
14. He confirmed that after the plaintiff's default, its account was handed over to the Corporate Recoveries Team, which formally demanded repayment through a letter dated 28th September 2006. After a series of meetings, the plaintiff agreed to pay Kshs.83 million in full settlement of the outstanding liability to the Bank, which was financed by Equity Bank.
15. DW1 emphasized that the plaintiff has no claim against the Bank, as the terms of the liability settlement were mutually agreed upon and finalized through the execution of the Deed of Settlement. He stated that the Deed is binding on both parties and supersedes any prior agreements.
Analysis and Determination
16. The parties filed their respective written submissions which I have carefully considered together with the pleadings, authorities and evidence.
17. I have distilled the following issues for determination:
i. Whether the Deed of Settlement dated 28th September 2009 is illegal, null and void ab initio;
ii. Whether the Defendant is guilty of overcharging interest.
iii. Whether the Plaintiff is entitled to the reliefs sought; and
iv. Who should bear the costs of the suit.
18. The settlement agreement dated 19th October 2009 is produced at pages 52B to 61 of the Bank’s list of documents dated 9th May 2011. The agreement unequivocally confirms that the parties agreed on a payment of Kshs.83 million in full and final settlement of the loan arrears owed by the plaintiff to the Bank.
19. Clause 3.1 states as follows:
“The Debtor and Guarantors for good and valuable consideration hereby release and discharge the Bank and its employees, agents, representatives, successors and assigns (collectively the “released parties”), from and against any and all claims, causes of action, actions (if any), debts, judgements (if any), damages, rights, obligations and liabilities, whether known or unknown, accrued or unaccrued, which any of the Debtor and/or Guarantors ever had, now has or may hereafter have against the Released Parties with respect to, arising out of or based on or related in any way to:
(1) any indebtedness, acts, transactions, omissions or failure to act with respect to or in connection with the banking relationships between the Debtor and the Bank; or
(2) any arrangements, transactions, omissions or failure to act with respect to or in connection with any of the matters connected with the BBK Debt or any other matter whatsoever and howsoever arising.”
20. Clause 3.3 of the settlement agreement further states:
“Each party acknowledges that it has had the opportunity to consult with legal counsel and have received advice from legal counsel with respect to the effect of this Agreement and have executed this agreement with the intent to be legally bound.”
21. Clause 10 states:
“The transaction documents together constitute the entire agreement between the Bank, the Debtor and Guarantors about this subject matter and any previous agreements, undertakings, representation, warranties and negotiations (“prior representations”) on that cease to have any effect. Each party confirms that it has not relied upon any prior representations and waives any rights which it may have in respect of such reliance if it in fact occurred.”
22. Following the execution of the settlement agreement, the settlement amount plus interest amounting to Kshs.84,171,096/- was paid by Equity Bank to the Bank and the Bank in turn discharged the charged properties to enable Equity Bank register charges over them. The Bank acknowledged receipt of the amount and confirmed that the plaintiff’s liabilities were marked as settled in its books. This is evidenced by the letter dated 21st January 2010 produced on page 66 of the Bank’s bundle of documents.
23. Regarding the claims of fraud and coercion raised by the plaintiff, I rely on the Court of Appeal’s decision in Kinyanjui Kamau V George Kamau, [2015] eKLR where it was held:
“… It is trite law that any allegations of fraud must be pleaded and strictly proved.
See Ndolo V Ndolo, (2008) 1 KLR (G&F) 742 wherein the Court stated that:
‘... We start by saying that it was the respondent who was alleging that the will was a forgery and the burden to prove that allegation lay squarely on him. Since the respondent was making a serious charge of forgery or fraud, the standard of proof required of him was obviously higher than that required in ordinary civil cases, namely proof upon a balance of probabilities; In cases where fraud is alleged, it is not enough to simply infer fraud from the facts.’
… To succeed in the claim for fraud, the appellant needed to not only plead and particularize it, but also lay a basis by way of evidence, upon which the court would make a finding. In the present appeal, there is no such evidence, and the courts below rightly came to the conclusion that the appellant had not made out a case for the grant of the orders he sought.”
24. Equally, in Vijay Morjaria V Nansingh, Madhusingh Darbar & Another, [2000] eKLR where the Court of Appeal stated:
“... It is well established that fraud must be specifically pleaded and the particulars of fraud alleged must be stated on the face of the pleading. The act alleged to be fraudulent must of course be set out and then it should be stated that these acts were done fraudulently. It is also settled law that fraudulent conduct must be distinctly alleged and distinctly proved and it is not allowable to leave fraud to be inferred from the facts.”
25. In light of the judicial pronouncements above, I note that at paragraph 11 of the further amended plaint, the plaintiff set out the following particulars of fraud, coercion or undue influence:
(a) Insisting on execution of the deed without regard to the plaintiff’s inability to pay;
(b) Calling the plaintiff’s directors/management incessantly insisting on payment or else face the dire consequences;
(c) threatening to hand over the plaintiff’s banking and credit record to the Credit Reference Bureau Limited “CRB”;
(d) Threatening to realize the securities if full payment was not made as soon as possible;
(e) Threatening to withhold the rebate of Kshs.17 million offered unless the plaintiff agreed that the outstanding balance on account was Kshs.83 million and was settled before 3/11/2009.
(f) Literally threatening the Plaintiff and its directors with dire and “damnifying” consequences in the event the securities were incapable of covering the outstanding debt.
26. Although these have been particularized, no evidence was led during trial to substantiate them. The plaintiff also claimed undue influence and duress. On these two issues I am further guided by the decision in Hussein Dairy Limited V Southern Credit Banking Corporation Limited & Another, [2020] eKLR where the Court cited National West Minister Bank PLC V Morgan, [1985] IAC 686. The Court observed as follows:
“There, the House of Lords held, inter alia, that the principle that justified the setting aside a transaction on the ground of undue influence was the victimization of one party by another; and that evidence of mere relationship of the parties was not sufficient to raise the presumption of undue influence, without, also, evidence that the transaction itself had been wrongful in that it had constituted an advantage taken of the person subject to the influence, which failing proof to the contrary, was explicable only on the basis that undue influence had been exercised to procure it.”
27. Additionally, in Pao & Others V Lan Liu & Another, [1979] 3 All ER the Privy Council stated that:
“Duress, whatever form it takes, is a coercion of the will so as to vitiate consent. Their Lordships agree...that in a contractual situation commercial pressure is not enough. There must be present some fact on which could in law be regarded as a coercion of his will, so as to vitiate his consent. ... In determining whether there was a coercion of will such that there was no true consent, it is material to inquire whether the person alleged to have been coerced did or did not protest; whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy, whether he was independently advised; and whether after entering the contract he took steps to avoid it.”
28. In this case, the plaintiff sought refinancing from another financial institution to pay the outstanding amount with the Bank. I have not been shown any evidence that this was done out of coercion by the Bank. In any case, there is also no proof that the Bank was even involved in the negotiations between the plaintiff and the other financial institution over the refinancing. This is corroborated by the plaintiff’s letters dated 8th February 2008 at page 74 and 24th September 2008 at page 76 in which the plaintiff explains the reasons for its inability to repay the loan.
29. Further, on page 87 of the plaintiff’s bundle, is a letter dated 12th August 2009 whereby the plaintiff voluntarily confirms to the Bank that:
“As per our subsequent discussions in your offices, we have agreed for a full and final settlement of Kshs.83 million. …”
30. During his testimony, PW1 testified that they had the Deed of Settlement for two months and he had meetings with the Bank before executing it. In re-examination, PW-1 testified that he sought independent financial advice so that he could understand the figures. I note further that the settlement agreement was witnessed by the plaintiff’s counsel, one Samuel Maina Karanja.
31. After reviewing the correspondence leading to the signing of the agreement and the settlement agreement, I am of the view that the plaintiff participated in negotiating for a settlement agreement and for a rebate and that he had legal representation. It can be inferred from the conduct between the plaintiff and defendant that the plaintiff was not only fully aware of the terms of the settlement agreement but consented to its terms. The plaintiffs have not provided any evidence that they protested to the settlement.
32. To the contrary the plaintiff willingly entered into the settlement agreement and proceeded to obtain refinancing from Equity Bank in order to fully and finally settle the loan arrears it had with the defendant bank. Therefore, in the absence of any proof of fraud, coercion, or undue influence that could invalidate the agreement, the plaintiff remains legally bound by its terms.
33. As aptly stated in the landmark decision of National Bank of Kenya Ltd V Pipeplastic Samkolit (K) Ltd, [2002] 2 EA 503,
“A court of law cannot rewrite a contract between parties. The parties are bound by the terms of their contract, unless coercion, fraud or undue influence are pleaded and proved.”
34. That said, another critical question remains: Should this court disregard the submission that the settlement agreement contravened Section 44 of the Banking Act? The provision incorporates the in duplum rule, which limits the amount a bank or financial institution can recover from a non-performing loan.
35. The plaintiff takes issue with the Bank for having violated the rule, even as it extended a rebate to them. This court cannot ignore the fact that a contract that violates statutory provisions is inherently unenforceable, regardless of whether it was entered into by mutual consent. To hold otherwise would amount to sanctioning an illegality under the guise of party autonomy, effectively allowing this court to facilitate a breach of the law. This court cannot and should not be used as an instrument to validate an unlawful agreement.
36. The burden of proof rested on the plaintiff to present evidence that there was a breach of the in duplum rule by the Bank. Upon carefully reviewing the testimony, witness statements, and reports presented by PW2 alongside those of the Bank, I find that PW2’s evidence raises several concerns. Notably, he did not have access to all the relevant bank statements when recalculating the interest rates, casting doubt on the reliability of his findings.
37. He further confirmed that he was aware of the applicable penalty rate of 15.5% upon default and acknowledged that this was a contractual rate. Despite this, the recalculation by IRAC failed to account for the agreed default interest rate for the restructured facility, which undoubtedly contributed to the discrepancies in the recalculated figures. Regarding Account No. 1435718, PW2 admitted that he was unaware of the default, which would have triggered an increase in interest rates.
38. My interpretation of Section 44A is that a bank may apply a contractual interest rate, provided that the interest accrued after default does not exceed the principal amount outstanding at the time of default.
39. Section 44A of the Banking Act provides that:
“(1) An institution shall be limited in what it may recover from a debtor with respect to a non-performing loan to the maximum amount under subsection (2). The maximum amount referred to in subsection (1) is the sum of the following—
(a) the principal owing when the loan becomes non-performing;
(b) interest, in accordance with the contract between the debtor and the institution, not exceeding the principal owing when the loan becomes non-performing; and
(c) expenses incurred in the recovery of any amounts owed by the debtor.”
40. Further, the reference point for applying the in duplum rule is the date when a loan becomes non-performing. Once any of the facilities reached this status, if indeed they did, the Bank was required to comply with the provisions of the Banking Act. However, the IRAC report fails to clearly indicate when each loan account became non-performing for purposes of Section 44A.
41. In light of this omissions, I find the recalculated figures by IRAC to be unreliable. Consequently, the plaintiff has failed to meet the required standard of proof to establish that the Bank breached the in duplum rule.
Disposition
42. The upshot of this is that the plaintiff’s suit lacks merit and is dismissed with costs awarded to the defendant.
DATED, SIGNED AND DELIVERED IN NAIROBI
THIS 21ST DAY OF FEBRUARY 2025.
F. MUGAMBI
JUDGE