Background
1. Before me for determination is the Originating Summon dated 22nd July 2024 seeking leave to sell all that property known as Flat Number B5 Located at Phase Two, Block B, Second Floor, erected on L.R. No. 37/750 pursuant to the informal charge subsisting between the parties.
2. The Summons is expressed to have been brought under Order 37 Rule 4 of the Civil Procedure Rules, Sections 1A, 1B, 3A, 63(c) and (e) of the Civil Procedure Act and Section 79(9) of the Land Act 2012, and is supported by the Affidavit of 15th May 2024 sworn by SATISH MODI, the Group General Manager of the Applicant.
3. The Applicant's case is that pursuant to a Deed of Settlement dated 17th April 2024, the 1st Respondent undertook to settle its debt of Kshs. 13,430,846.09 owed to the Applicant and arising from the supply of goods by the Applicant to the 1st Respondent’s business, Shamka Electrical Services.
4. It is further the Applicant’s contention that the debt was guaranteed by the 2nd Respondent and also secured by an informal charge dated 17th April 2024 over Flat Number B5 Located at Phase two, Block B, Second Floor, erected on L.R. No. 37/750, owned by the Respondents; as well as the deposit of the original title of the property with the Applicant.
5. It is deponed on behalf of the Applicant that the 1st Respondent also undertook in the said Deed of Settlement, to settle the Creditor’s Advocate’s Legal fees for negotiation and preparation of the said Deed of Settlement, supervision of performance thereof by the parties plus debt collection fees, which fees came to a total of Kshs. 1,343,084.60 which was equally guaranteed by the 2nd Respondent.
6. The Applicant claims that the Respondents have failed to honour their obligations despite several demands and notices and the Applicant now seeks to realize the security.
7. The Respondents, despite having been duly served with the Originating Summons, failed to file any reply thereto and on such the same remained unopposed.
8. The Summons was canvassed by way of written submissions. The Applicant filed its written submissions dated 13th November 2024. No submissions were filed on behalf of the Respondent.
Analysis and determination
9. Having considered the pleadings filed by the Applicant and the submissions filed in support thereof, I find that the only issue for determination herein is whether the applicant has proved the existence of an informal charge and is therefore entitled to sell the subject property.
10. Section 79(6) of the Land Act (2012) deals with the creation of an informal charge and provides as follows; -
“(1) An owner of private land or a lessee, by an instrument in the prescribed form, may charge the interest in the land or a part thereof for any purpose including but not limited to securing the payment of an existing or a future or a contingent debt or other money or money’s worth or the fulfillment of a condition.
(2) The power conferred by sub section (1) shall include the power to create second and subsequent charges.
(3) A charge of a matrimonial home, shall be valid only if any document or form used in applying for such a charge, or used to grant the charge, is executed by the chargor and any spouse of the chargor living in that matrimonial home, or there is evidence from the document that it has been assented to by all such persons.
(4) The power conferred by this section shall be exercisable subject to—
(a) Any prohibition or limitation imposed by this Act or any written law; and
(b) Any restriction contained in an instrument creating or affecting the interest in land that is to be the subject of a charge.
(5) A formal charge shall take effect only when it is registered in a land register and a chargee shall not be entitled to exercise any of the remedies under that charge unless it is so registered.
(6) An informal charge may be created where –
(a) A chargee accepts a written and witnessed undertaking from a chargor, the clear intention of which is to charge the chargor’s land or interest in land, with the repayment of money or money’s worth, obtained from the chargee plus interest as agreed by the chargor and the chargee";
(b) The chargor deposits any of the following –
(i) A certificate of title to the land;
(ii) A document of lease of land;
(iii) Any other document which it is agreed evidences ownership of land or a right to interest in land.
(7) A chargee holding an informal charge may only take possession of or sell the land which is the subject of an informal charge, on obtaining an order of the court to that effect.
(8) An arrangement contemplated in subsection (6)(a) may be referred to as an “informal charge” and a deposit of documents contemplated in subsection (6)(b) shall be known and referred to as a “lien by deposit of documents.”
(9) A chargor shall not possess or sell land whose title documents have been deposited by a chargee under an informal charge without an order of the court.”
11. In the case of Tassia Coffee Estate Limited & Another -vs- Milele Ventures Limited [2013], eKLR, the Court had to determine whether an informal charge had been created by the parties, essentially through a Lien by deposit of documents. The Court held that: -
“...It would appear that the Defendant having deposited his title deed for the suit property with the Plaintiffs, it created an informal charge in favour of the Plaintiffs over the suit property as security for the payment of the balance ... The Plaintiff therefore becomes the Chargee of an informal charge over the suit property and enjoy a lien by deposit of documents ...”
12. Further, in Kingdom Bank Limited v Okotsi (Civil Suit E004 of 2021) [2022] KEHC 12771 (KLR) (30 August 2022), (Judgment) the Court stated as follows regarding the prerequisites of creating a formal charge; -
“10. I discern and consider the provision to create prerequisites for the creation of both formal and informal charges. For informal charges what is required is writing to disclose clear intent to offer the title out laid or an interest in land to secure the payment of a debt whether existing, contingent or future, which instrument is then accepted by the chargee as a written commitment and the deposit of any document agreed to evidence the ownership of the land by the chargor.”
13. In the instant case, I have carefully perused that application and established that by a Deed of Settlement dated 17th April 2024, the Applicant herein and the 1st Respondent (BHARAT SHAMJI MANJI) T/A SHAMKA ELECTRICAL SERVICES entered into an agreement where the 1st Respondent undertook to pay to the Applicant as sum of Kshs. 13,430,846.09 which was then outstanding from the 1st Respondent to the Applicant. The 2nd Respondent guaranteed the 1st Respondent.
14. Further, I note that the parties (Applicant, 1st Respondent & the 2nd Respondent) also executed an Informal Charge, over Flat Number B5 Located at Phase two, Block B, Second Floor, erected on L.R. No. 37/750 as security for the performance of the terms of the deed of settlement. This document was annexed as “SM 2” to the affidavit of Satish Modi in support of the application.
15. While it is indicated in the “Informal Charge” agreement that Flat Number B5 Located at Phase two, Block B, Second Floor, erected on L.R. No. 37/750 is registered in the joint names of the 1st and 2nd Respondents, there is nothing in the application to prove that assertion by the Applicant. I have not sighted any document of title attached to the application in that regard.
16. It is critical to note that pursuant to Section 79(6) of the Land Act; to prove the existence of an informal charge, it is necessary not only to prove that there was a clear intention to charge the chargor’s land or interest thereon, but it must also be demonstrated that the chargor deposited any of the following with the chargee as required under subsection (b) thereof; -
(i) A certificate of title to the land;
(ii) A document of lease of land;
(iii) Any other document which it is agreed evidences ownership of land or a right to interest in land.
17. In this case, the applicant has not demonstrated that the chargor/Respondent deposited with them (the Chargee), any document of title, or any other document evidencing the chargor’s ownership or right to interest over Flat Number B5 Located at Phase two, Block B, Second Floor, erected on L.R. No. 37/750 which is the subject of these proceedings.
18. The Applicant has not, in this case, attached any document evidencing that the Respondent deposited with them any document of title or interest in the subject property.
19. In the premises, I find and hold that the application herein does not meet the threshold set under section 79(6) of the Land Act.
20. Accordingly, the application is hereby dismissed with no orders as to costs.
21. It is so ordered.
SIGNED DATED and DELIVERED IN VIRTUAL COURT
THIS 27TH DAY OF FEBRUARY 2025
ADO MOSES
JUDGE
In the presence of:
Moses – Court Assistant