Background
1. The plaintiff is a banking institution incorporated in France. The 1st defendant is a limited liability Company incorporated in Kenya and licensed under the Banking Act (Cap 488) (in receivership) (hereinafter Chase Bank). The 2nd defendant is a body corporate established under the Kenya Deposit Insurance Corporation Act, (KDIA), (hereinafter KDIC) and the 3rd defendant is a limited liability company in Kenya licensed under the Banking Act (hereinafter SBM).
2. Vide a plaint dated 14th August 2018, the plaintiff states that pursuant to Trade Credit Agreement No. OM_0116_03_05 dated 27th January 2016, executed between Louis Dreyfus Commodities Kenya (hereinafter LDCK) and Chase Bank, Chase Bank provided a USD trade facility to LDCK.
3. The facility was an irrevocable 180-day usance deferred Letter of Credit (hereinafter LC) No. 0131ULC160340001 dated 3rd February 2016, for up to USD 4,999,888.30 in favor of Louis Dreyfus Commodities MEA Trading (hereinafter MEA-Trading) for the account of LDCK.
4. Under the LC, LDCK had the option to pre-settle its payment obligations within 15 days from the negotiation date, at a discounted rate of six months LIBOR + 3.75% per annum. This payment was to be remitted to Chase Bank’s account at Deutsche Bankers Trust Company in New York, USA (hereinafter DBTC).
5. Chase Bank authorized the plaintiff to claim reimbursement of USD 4,999,888.30 from Chase Bank's account at DBTC upon the LC's maturity on 10th August 2016, to be paid by LDCK.
6. On 17th February 2016, the plaintiff paid USD 4,999,888.30 to MEA-Trading, which was confirmed by MEA-Trading via a swift message on 18th February 2016. On the same date, LDCK repaid USD 4,888,240.79, excluding a pre-payment discount of USD 111,647.51, into DBTC, Chase Bank’s account.
7. Chase Bank’s account at DBTC was credited with USD 4,888,240.79, and by a notification dated 18th February 2016. Chase Bank acknowledged full settlement of LDCK’s obligation under the Trade Agreement.
8. On 3rd August 2016, the plaintiff requested reimbursement of the payments from DBTC. DBTC could not honor the request due to a lack of valid authority under the LC, leading to a direct request to Chase Bank on 10th August 2016.
9. Chase Bank requested a 120-day extension to 8th December 2016. The same was approved by the plaintiff with an interest rate of 4.4% per annum (USD 73,331.70). Upon the second maturity, the plaintiff called for remittance of USD 5,073,220 (bill amount plus 120 days interest), which Chase Bank failed to honor, requesting a further 150-day extension.
10. The plaintiff agreed to the second extension at an interest rate of 6.7% per annum, with compounded interest on the first extension's interest amount payable at the same rate. Chase Bank was unable to honour the bill and requested for an extension of 120 days to 8th December 2016 which was approved by the plaintiff subject to an interest rate of 4.4% per annum, (equivalent to USD 73,331.70).
11. Meanwhile, on 7th April 2016, the Central Bank of Kenya (hereinafter CBK) placed Chase Bank under receivership and appointed KDIC as the official receiver. On 4th January 2018, CBK and Chase Bank accepted an offer from SBM for the acquisition of certain assets and deposits, disregarding the funds held in trust for the plaintiff.
12. The plaintiff claims that the payment by LDCK to Chase Bank under the Trade Agreement and LC created a Quistclose trust, with Chase Bank holding the money for a specific purpose under the Trade Agreement and LC. The plaintiff further argues that the prepayment was an early settlement of payment obligations owed to it for the payment advanced to MEA-Trading under the LC.
13. The plaintiff claims against KDIC and SBM, stating that they previously admitted the pre-payment of USD 4,888,240.79, thereby making the funds traceable to the defendants as funds held in trust for the plaintiff as the confirming bank.
14. The plaintiff discloses that KDIC, at a meeting on 10th April 2018, confirmed that the amounts held by Chase Bank for LDCK were intended for the exclusive repayment of the LC. Acknowledgments by letters dated 7th August 2018 and 3rd June 2019 confirmed that the amounts paid under the Trade Agreement and LC did not constitute general deposits but were intended to ensure the LC was honored in full.
15. The plaintiff contends it is entitled to trace and recover from Chase Bank or any other defendants in possession of the money payable under the Trade Agreement and LC, asserting that the ownership of USD 4,999,888.30 did not pass to any third party. The plaintiff further asserts a resulting trust, arguing that Chase Bank and KDIC received USD 4,999,888.30, traceable to the plaintiff’s assets, and have a duty to account for and refund these assets.
16. The plaintiff argues that Chase Bank and KDIC are liable under a constructive trust, having assisted in the dishonest and fraudulent breach of trust with actual and constructive knowledge. That despite numerous extensions and reminders, Chase Bank breached the Trade Agreement and LC by failing to pay the plaintiff.
17. The 1st and 2nd defendants' Statement of Defence, dated 30th September 2019, acknowledges the contractual obligations under the Trade Agreement and LC but denies that these dealings created Quistclose, resulting, or constructive trusts as claimed.
18. They argue that the prepayment under the Trade Agreement constituted a financial advancement to Chase Bank at an effective rate of six months LIBOR plus 3.75% per annum. The 2 defendants deny failing to honor the LC, stating that their obligations were halted by the imposition of a moratorium on Chase Bank, and that they must treat all depositors and creditors equally under section 50(2) of the KDIA.
19. The defendants contend that the plaintiff is a normal creditor to be paid after settling other ranking liabilities as provided under section 50(9) of the KDIA. KDIC denies all allegations of misappropriation, fraudulent or dishonest breaches, or admissions pleaded by the plaintiff.
20. SBM's Statement of Defence, dated 4th October 2019, admits assuming certain liabilities and acquiring assets from Chase Bank. SBM however clarifies that it did not assume liabilities due to general creditors or sums alleged to be due to the plaintiff. SBM denies acquiring the plaintiff’s account from the 1st and 2nd defendants, and denies any existing trust and contends that the KDIA prevents such a trust.
21. The plaintiff’s reply to the defenses, dated 13th November 2019, reiterates the plaint and contends that the claimed sums are held in trust for the plaintiff and are not part of Chase Bank’s assets under the moratorium.
22. During the trial, each party presented one witness: PW1 ROMARIC AHLIDJA, the plaintiff’s Deputy General Manager and General Secretary; DW1 GEOFFREY O. NYAKUNDI, Chase Bank’s Liquidation Agent and DW2 KEVIN KIMANI, SBM’s Legal Manager.
23. The parties filed written submissions and bundles of authorities. The plaintiff’s submissions and supplementary submissions are dated 7th August 2023 and 6th February 2024, respectively. The 1st and 2nd defendants’ submissions are dated 11th December 2023, and SBM’s submissions are dated 11th December 2023.
Analysis and determination:
24. I have carefully considered the pleadings, testimonies, evidence, authorities as well as the written and oral submissions made by rival parties in support of their cases. In my view, there are four (4) issues that arise for determination by this Court:
i. Whether the principles and doctrines of equity can override express statutory provisions in the KDIA to imply the existence of a Quistclose trust in favour of the plaintiff;
ii. Whether the 1st and 2nd defendants hold the claimed funds in trust for the plaintiff;
iii. Whether the plaintiff has a claim against the 3rd defendant;
iv. Whether the plaintiff is entitled to the reliefs sought.
Issue I: Whether the principles and doctrines of equity can override express statutory provisions in the KDIA to imply the existence of a Quistclose trust in favour of the plaintiff:
25. The plaintiff insists that Article 10(2)(b) of the Constitution elevates the place of equity as a principle of justice and that there exist judicial pronouncements to the effect that doctrines of equity can supersede statutory provisions.
26. The defendants on the other hand vehemently oppose this argument. They argue that the principle of equity under the constitution refers to the concept of fairness and justice and not the English concept of equity. Further that the doctrines of equity can only apply subject to statute noting that to elevate the doctrines would be to subvert the Constitution and our sovereignty and contrary to the Judicature Act.
27. A determination of this question calls for an analysis of the relevant statutory provisions and constitutional principles, specifically Article 10(2)(b) of the Constitution, the KDIA and the Judicature Act.
28. Article 10(2)(b) of the Constitution outlines the national values and principles of governance, which include the principle of equity. These principles are binding on all state organs, state officers, public officers, and all persons whenever they apply or interpret the Constitution, enact, apply or interpret any law, or make or implement public policy decisions.
29. The Judicature Act Cap 8 of the Laws of Kenya governs the application of laws in Kenya, including the principles of common law and doctrines of equity. Section 3(1) of the Judicature Act states that the jurisdiction of the High Court, the Court of Appeal, and all subordinate courts shall be exercised in conformity with the Constitution, all other written laws, and, subject thereto, the substance of the common law, the doctrines of equity, and statutes of general application in force in England on 12th August 1897.
30. The KDIA provides the legal framework for the protection of depositors and the administration of financial institutions placed under receivership or liquidation. Section 3 of the Act provides that incase of any conflict with any other Act with respect to matters relating to the purpose of the Act, the Act shall prevail.
31. Section 50 of the KDIA emphasizes the equal treatment of all depositors and creditors, with subsection (2) mandating that all depositors and creditors be treated equally and without discrimination. This statutory requirement is designed to ensure fairness and order in the distribution of a financial institution's assets during insolvency or liquidation.
32. The issue before the Court is how these provisions ought to be interpreted and applied vis-à-vis a remedy based on trusts, which is a right traceable from the doctrines of equity. The Supreme Court, when considering whether a constructive trust can be applied to a land sale agreement to challenge a registered title, pronounced itself extensively on the dichotomy between Constitutional imperatives and statutory provisions in the context of a doctrine of equity.
33. In Petition No. 18 (E020) of 2022 Arvind Shah & 7 Others V Mombasa Bricks & Tiles Limited & 5 Others the Supreme Court considered sections 25, 26 and 28 of the Land Registration Act which recognizes the rights of a registered proprietor of land to be absolute and indefeasible. The Court noted that these are subject to rights and encumbrances noted in the register and overriding interests which include trusts and subjected these provisions to the limitation of the right to property under Article 24 of the Constitution.
34. In the end the Court held:
“Trust is an equitable remedy which is an intervention against unconscionable conduct. Where the circumstances of the case are such that it would demand that equity treats the legal owner as a trustee, the law will impose a trust. It is imposed by law whenever justice and good conscience require it. On this issue and for the reasons given above, we therefore find that a constructive trust can be imported into a land sale agreement to defeat a registered title.”
35. Aligned with this reasoning is the decision by the Court of Appeal in Willy Kimutai Kitilit V Michael Kibet, [2018] eKLR. The Court considered and applied the doctrines of constructive trust and proprietary estoppel to the Land Control Act and held as follows:
“There is another stronger reason for applying the doctrines of constructive trust and proprietary estoppel to the Land Control Act. By Article 10(2) (b) of the Constitution of Kenya, equity is one of the national values (emphasis supplied) which binds the courts in interpreting any law (Article 10(1) (b)).
Further, by Article 159(2) (e), the courts in exercising judicial authority are required to protect and promote the purpose and principles of the Constitution. Moreover, as stated before, by virtue of clause 7 of the Transitional and Consequential Provisions in the Sixth Schedule to the Constitution, the Land Control Act should be construed with the alterations, adaptations, and exceptions necessary to bring it into conformity with the Constitution.
The word equity broadly means a branch of law denoting fundamental principles of justice. It has various meanings according to the context but three definitions from Black’s Law Dictionary, Ninth Edition will suffice for our purpose:
i. The body of principles constituting what is fair and right.
ii. The recourse to principles of justice to correct or supplement the law as applied to particular circumstances;
iii. The system of law or body of principles originating in the English Court of Chancery and superseding the common and statute law (together called “Law” in the narrower sense) when the two conflict.
Thus, since the current Constitution has by virtue of Article 10(2) (b) elevated equity as a principle of justice to a constitutional principle and requires the courts in exercising judicial authority to protect and promote that principle, amongst others, it follows that the equitable doctrines of constructive trust and proprietary estoppel are applicable to and supersede the Land Control Act where a transaction relating to an interest in land is void and enforceable for lack of consent of the Land Control Board.”
36. The decisions cited from both the Supreme Court and the Court of Appeal underscore that the Judicature Act, enacted in 1967, positions the doctrines of equity as subordinate to statutory law. However, the 2010 Constitution has elevated the status and application of these doctrines.
37. In the new constitutional framework, doctrines of equity are both applicable and enforceable in Kenya. Courts are now required to uphold these doctrines as a constitutional principle of justice when interpreting the law. This requirement stands even if the doctrines of equity seem to override statutory provisions, provided that such doctrines are employed to promote and protect the purposes and principles outlined in Article 10(2) of the Constitution.
Issue II: Whether the 1st and 2nd defendants hold the claimed funds in trust for the plaintiff:
Creation of a Quistclose trust:
38. The concept of a Quistclose trust originates from the English case of Barclays Bank Ltd V Quistclose Investments Ltd, [1970] AC 567. The House of Lords in that decision recognized that funds deposited by a borrower with a lender for a specific purpose (such as repaying a loan) could create a trust in favor of the borrower if the purpose failed.
39. In a much more recent decision in Bellis V Challinor, [2015] EWCA Civil 59 the England and Wales Court of Appeal, per Briggs LJ, at paragraphs 56-58, articulated the basic principles of Quistclose trusts as follows:
“Quistclose-type trusts are a species of resulting trust which arise where property (usually money) is transferred on terms which do not leave it at the free disposal of the transferee. That restriction upon its use is usually created by an arrangement that the money should be used exclusively for a stated purpose or purposes. There must be an intention to create a trust on the part of the transferor. This is an objective question. It means that the transferor must have intended to enter into arrangements which, viewed objectively, have the effect in law of creating a trust: In this respect, Quistclose-type trusts are no different from any other trusts. In particular, they are not presumed to exist unless a contrary intention be proved, as in the case of the traditional type of resulting trust where a person makes a gratuitous transfer of property to an apparent stranger.” [Emphasis Added]
40. In a nutshell, the position is that under a Quistclose trust, if money is provided for a specific purpose and that purpose fails, the money remains the property of the lender. The funds do not become part of the general pool of assets available to other creditors.
41. This is crucial because it distinguishes these funds from a typical credit facility, where the lender’s money becomes part of the borrower’s general assets. Additionally, if the debtor uses the money for any other purpose, it is held in trust for the creditor. Any misappropriated funds can then be traced and returned to the creditors.
Resulting trusts:
42. The Halsbury’s Laws of England, 4th Edition Vol. 48 at paragraph 597 defines a resulting trust in the following terms:-
“A resulting trust is a trust arising by operation of law:
i. Where an intention to put property into trust is sufficiently expressed or indicated, but the actual trust either is not declared in whole or in part or fails in whole or part; or
ii. Where property is purchased in the name or placed in the possession of a person ostensibly for his own use, but really in order to effect a particular purpose which fails; or
iii. Where property is purchased in the name or placed in the possession of a person without any intimation that he is to hold it in trust, but the retention of the beneficial interest by the purchaser or disposer is presumed to have been intended.”
43. This definition was adopted with approval by the Court of Appeal in the case of Kazungu Fondo Shutu & Another V Japhet Noti Charo & Another, [2021] eKLR.
Constructive trusts:
44. The Black’s Law Dictionary, 9th edition defines a constructive trust as: An equitable remedy that a court imposes against one who has obtained property by wrong doing.
45. Further, the Halsbury’s Laws of England, 4th edition, volume 48 at paragraph 690 states as follows on constructive trusts:
“A constructive trust will arise in connection with the legal title to property whenever one party has so conducted himself that it would be inequitable to allow him to deny to the other party a beneficial interest in the property acquired. This will be so where:
1) there was a common intention that both parties should have a beneficial interest; and
2) the claimant has acted to his detriment in the belief that by so acting he was acquiring a beneficial interest. The relevant intention of each party is the intention reasonably understood by the other party to be manifested by that party’s words or conduct notwithstanding that he did not consciously formulate that intention or even acted with some different intention which he did not communicate.
The first question is whether, independently of any inference to be drawn from the conduct of the parties in the course of sharing the property, there has at any time prior to acquisition, or exceptionally at some later date, been any agreement, arrangement or understanding reached between them that the property is to be shared beneficially. Such an agreement will be conclusive.
Where the evidence is that the matter was not discussed at all, the court may infer a common intention that the property was to be shared beneficially from the conduct of the parties. In this situation direct contributions to the purchase price by the party who is not the legal owner, whether initially, or by way of mortgage instalment, will readily justify the inference necessary to the creation of a constructive trust.
Exceptionally the agreement, arrangement or understanding may be arrived at after the date of the original acquisition. Once common intention has been established, whether by direct evidence of common agreement or by inference from conduct, the claimant must show that he acted to his detriment in reliance on the agreement.
The final question to determine is the extent of the respective beneficial interests. If the parties have reached agreement, this is conclusive. Where there is no agreement as to the extent of the interest, each is entitled to the share the court considers fair having regard to the whole course of dealing between the parties in relation to the property.”
46. This scope and purpose of constructive trusts as expounded in the Halsbury’s Laws of England was evaluated and restated in agreement by the Supreme Court in Shah & 7 Others V Mombasa Bricks & Tiles Limited & 5 Others, [2023] KESC 106 (KLR).
Application of the law on trusts in Kenya:
47. As earlier indicated, the Court of Appeal, as well as the Supreme Court have settled the law with regards to imposition of trusts in Kenya. The Court of Appeal in the case of Peter Ndungu Njenga V Sophia Watiri Ndungu, [2000] eKLR succinctly outlined the circumstances under which a court would imply a trust. The Court observed that:
“The concept of trust is not new. In case of absolute necessity, but only in case of absolute necessity, the court may presume a trust. But such presumption is not to be arrived at easily. The courts will not imply a trust save in order to give effect to the intention of the parties. The intention of the parities to create a trust must be clearly determined before a trust is implied.”
48. While discussing the burden of proving trust, the Court of Appeal in the case of Heartbeat Limited V Ng’ambwa Heartbeat Community Children’s Home & Rescue Center, [2018] eKLR stated that:
“Moving on to the pertinent issue of whether there was evidence of a resulting trust in favour of the respondent, we are cognizant that the onus lay with the respondent to prove the same through evidence.”
49. In Juletabi African Adventure Limited & Another V Christopher Michael Lockley, Civil Appeal No. 75 of 2016 (unreported), the Court agreed that the onus lay on the alleging party to prove that an equitable trust existed or is imputed.
50. Similarly, in Twalib Hatayan Twalib Hatayan & Anor V Said Saggar Ahmed Al-Heidy & Others, [2015] eKLR, the Court of Appeal outlined the following basic tenants of trusts:
“In this case, we have a definite property and beneficiary. The purpose/intent for which the property was bought remains in dispute. This negates the existence of an express trust herein. In the absence of an express trust, we have trusts created by operation of the law. These fall within two categories; constructive and resulting trusts. Given that the two are closely interlinked, it is perhaps pertinent to look at each of them in relation to the matter at hand.
A resulting trust is a remedy imposed by equity where property is transferred under circumstances which suggest that the transferor did not intend to confer a beneficial interest upon the transferee ... This trust may arise either upon the unexpressed but presumed intention of the settlor or upon his informally expressed intention. (See Snell’s Equity 29th Edn, Sweet & Maxwell p.175).
Therefore, unlike constructive trusts where unknown intentions maybe left unexplored, with resulting trusts, courts will readily look at the circumstances of the case and presume or infer the transferor’s intention. Most importantly, the general rule here is that a resulting trust will automatically arise in favour of the person who advances the purchase money. Whether or not the property is registered in his name or that of another, is immaterial. ….”
51. The preceding discussion outlines the key factors for determining the existence of trusts, which the plaintiff primarily asserts as being a Quistclose trust. To establish the existence of a Quistclose trust, the first requirement is a clear intention from the parties that the funds were to be used for a specific purpose—in this case, that the funds were intended exclusively for the settlement of the liability under the letter of credit (LC). Secondly, the plaintiff must demonstrate that the purpose for which the funds were intended has failed, which, in this instance, pertains to the settlement of the LC repayment. Lastly, the plaintiff must prove the traceability of the funds to the specific purpose.
52. The terms of the LC were detailed in the Trade Credit Agreement as follows:
"Letter of Credit: An irrevocable 180-day usance deferred Letter of Credit in the Form of Annex A hereto for an amount up to USD 4,999.888.30 (United States Dollars Four Million, Nine Hundred and Ninety-Nine Thousand, Eight Hundred Eighty-Eight Only) to be issued by the Bank in favour of the beneficiary (MEA-Trading) for the account of LC Applicant (LDCK).”
53. Understanding the nature and characteristics of LCs in facilitating international trade is crucial for determining this issue. In my view, the transaction before the Court should be analyzed within the context of established commercial practices to ensure well-contextualized reasoning and a thorough understanding of the underlying principles and standards governing such transactions. This approach will lead to a more informed and accurate adjudication.
54. The operations of LCs in the international sphere are codified by the International Chamber of Commerce through the Uniform Customs and Practice for Documentary Credits (UCP 600), 2007. These guidelines provide a useful reference as they are intended to ensure a uniform interpretation and application of documentary credits.
55. Article 3 of the UCP 600 defines an irrevocable credit (contrasted from a revocable credit) as: "A definite undertaking on the part of an issuing bank and constitutes the engagement of that bank to the beneficiary, or as the case may be, to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with.”
56. As further established in international trade practice, transactions involving irrevocable LCs are guided by principles such as the autonomy of the credit, ensuring that the credit remains independent of any underlying contract of sale or other related transactions. Additionally, the principle of strict compliance mandates that as long as there is a complying presentation, the LC must be honored.
57. The high level of certainty and guarantee of performance associated with LCs, coupled with the irrevocable nature of the obligation, is a clear demonstration operationwise, that funds required to satisfy liability under an LC must always be earmarked. This ensures that the financial commitment is met without fail, providing a secure and reliable mechanism for international trade transactions.
58. By earmarking these funds, parties can mitigate the risks associated with non-performance and uphold the integrity and trust inherent in LC agreements. Having considered the evidence on record, there is more than sufficient indication that the parties involved in the transaction were aware of the isolated purpose of the USD 4,888,240.79.
59. It is not disputed that LDCK made an early repayment to Chase Bank of USD 4,888,240.79 to settle its obligations. The question is whether these funds amounted to deposits held in trust for eventual payment to the beneficiary or for payment to the plaintiff upon maturity of the LC. The plaintiff, in their capacity as the confirming bank, had honored the LC. In my humble opinion, there cannot have been any other intention. The Agreement allowed LDCK to prepay the advanced amount in exchange for a pre-settlement discount.
60. The defendants argue that the pre-settlement monies paid to LDCK were paid in as ‘funding’ to Chase Bank and therefore were normal credits for Chase Bank. They rely on the relevant clause in the Credit Agreement which provides: -
“The discount applicable in respect of a Letter of Credit where the LC Applicant prepays its obligations under the Trade Agreement, whereby the Bank will receive funding at an effective rate of six months libor +3.75 per annum.”
61. I disagree with this submission. In my considered view, any understanding of the prepaid amounts operating as a ‘funding’ of Chase Bank must be read and interpreted within the entire Agreement and the purpose of the LC. I do not agree that the said monies were meant to depart from the general intention expressed by the parties. Chase Bank has not produced an independent agreement between themselves and LDCK that implies any other intention.
62. Even if the funds were at the disposal of Chase Bank as a result of the pre-payment, they ultimately were held for the purpose of ensuring that the LC liability was settled. By that I find that the funds were held in guarantee for the confirming bank (the plaintiff) upon maturity.
63. This clear intention is confirmed by the payment notification dated 18th February from LDCK to Chase Bank, where LDCK confirms that it was making payments under the Agreement and the LC. Chase Bank’s response to LDCK further confirms that the funds, once received, were for the specific purpose of settling the amounts due under the Agreement and, therefore, the LC. It is apt to reproduce the response by Chase Bank:-
"This credit memo shall serve as confirmation that in accordance with your payment notification dated February 18th 2016, upon receipt of the payment value in our designated accounts prior to or with the value as of USD 4,888,240.79, we will credit USD 4,888,240.79 towards the amounts due under your obligation in accordance with the terms of the agreement.”
64. Accordingly, I find that the parties herein, particularly Chase Bank, the plaintiff, and LDCK, acted with the intention at all times that the monies in question were designated to satisfy the obligation under the LC. The irrevocable LC represents a firm commitment by the issuing bank to pay the beneficiary upon presentation of compliant documents. This obligation is separate from the bank's other liabilities and must therefore be honored regardless of the bank's financial status.
65. The fact that the LC failed is also not contested. There is sufficient proof of communication between Chase Bank and the plaintiff, confirmed by the emails dated 1/1/2016, 29/8/2016 16/8/2022 where Chase Bank severally requests the plaintiff for extensions to settle the bill. During this period Chase Bank did not deny that the bill had matured. Subsequently, Chase Bank was placed under receivership, necessitating this suit.
66. The admissions by Chase Bank and several undertakings to pay upon maturity significantly strengthen the argument that the nature of the transaction was not that of a usual credit facility advanced as a normal bank deposit. Therefore, it would be unreasonable to uphold the defendants' submissions that the prepayment was to be applied towards funding Chase Bank as a normal deposit.
67. Accordingly, I am satisfied that the plaintiff has, at the very least, established the existence of a Quistclose trust. Additionally, the elements of a resulting and/or constructive trust have also been proved. The defendants, despite being aware that the funds deposited by LDCK were meant to be segregated to meet Chase Bank’s liability under the LC, acted to the detriment of the plaintiff by their conduct. They did this by failing to pay the plaintiff or account for the sums due under the LC despite knowing that the plaintiff had honored the LC by paying MEA-Trading as the confirming bank.
Issue III: Whether the plaintiff is entitled to the reliefs sought:
68. The question this Court must now answer is what remedies the plaintiff is entitled to and its ranking vis-a-vis other creditors of Chase Bank.
69. In the case of Latoya Mghoi Kaka (Suing on her own behalf and on behalf of the Estate of the Late James Karanja Maina) v. Peter Kahi (as the Administrator, Nakumatt Holdings Limited & Another), [2021] eKLR, this Court (Mabeya J) considered a situation where the application of monies held in trust was at issue in an insolvency proceeding.
70. Upon considering the facts and the evidence, the Court came to the conclusion that:-
“From the foregoing, I find that the plaintiff demonstrated that the claim amount was paid by Kenindia Assurance Limited into an account held by Nakumatt. This was received by Nakumatt in trust for the estate of the deceased. It never formed part of the assets of Nakumatt… I am alive to the fact that the plaintiff does not contend to be a creditor of the company, but rather a beneficiary of trust funds received by the company. It would therefore be unlikely that her claim would be settled in preference to the company’s creditors. Her monies were separate and distinct from the company assets.”
71. Similarly, in the Privy Council decision of Space Investments Ltd v. Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd, [1986] 1 WLR 1072, the Court addressed whether the liquidator of an insolvent bank must prioritize paying the trust deposit accounts over other customers. The Privy Council also differentiated between ordinary credits held by a customer and monies held in trust.
72. It is apt to recount the observations made by Lord Templeman as follows: -
“A customer who deposits money with a bank authorizes the bank to use that money for the benefit of the bank in any manner the bank pleases. The customer does not acquire any interest in or charge over any assets of the bank. The deposit account is an acknowledgment and record by the bank of the amount deposited and withdrawn and the interest earned… If the bank becomes insolvent, the customer can only prove in liquidation of the bank as an unsecured creditor for the amount credited to the account at the date of liquidation.
On the other hand, a trustee has no power to use the trust money for his own benefits unless the trust instrument expressly authorizes him to do so. A bank trustee may only apply trust money in the manner authorized by the trust instrument or by law, for the sole benefit of the beneficiaries and to the exclusion of any benefit to the bank trustee unless the trust instrument otherwise provides. Equity allows the beneficiaries, or a new trustee appointed in place of an insolvent bank trustee, to protect the interests of the beneficiaries by tracing the trust money to all the assets of the bank and recovering it by exercising an equitable charge over all the assets of the bank.
When an insolvent bank goes into liquidation, that equitable charge secures for the beneficiaries and the trust priority over the claims of customers in respect of their deposits and over the claims of all other unsecured creditors. This priority is conferred because customers and other unsecured creditors voluntarily accept the risk of the bank’s insolvency, whereas the settler of the trust and the beneficiaries did not.”
73. The principle espoused in these decisions is simply that property held in trust by an insolvent corporate entity is not treated as its assets. The same principle is supported under section 106 of the Insolvency Act. It provides as follows: -
“Property held by the bankrupt in trust for another person vests in the bankruptcy trustee, who shall assume control of the property and deal with it for the benefit of the beneficiaries of the trust.”
74. While there is no similar express provision relating to companies in the Insolvency Act, it is clear from judicial pronouncements cited that the principle applies to both natural and corporate insolvencies. Additionally, section 2 of the KDIA recognizes the existence and possibility of trust accounts, defining them as monies held on account for the purpose of a trust.
75. The Halsbury’s Laws of England (Volume 48 (2021)), paragraph 126, further supports this view and provides that:-
“Where the debtor is a customer of the bank and the bank receives such a payment in circumstances where it is on notice that the arrangement includes a secondary trust, the bank may not, if the primary purpose fails, apply the payment to discharge a debt owed to it by the debtor; and the money so paid will not form part of the debtor's assets so as to fall within the assets charged to the bank under a floating charge.”
76. Based on the foregoing, I find that the plaintiff's claim should be treated with priority due to the irrevocable and documentary nature of the LC. As a beneficiary of the monies held in trust, it is also my considered view that the plaintiff has a priority claim over the bank's assets compared to general creditors. Additionally, having found that there was a Quistclose trust established, it is my further finding that the sum due to the plaintiff is and was protected from the general pool of assets available to other creditors. The monies do not form part of the assets of Chase Bank.
77. The plaintiff also seeks prayers for the delivery of accounts and tracing of the money due from all the defendants. It is clear that LDCK prepaid the advanced amount to Chase Bank on 18/2/2016, but the funds were not remitted to the plaintiff. Chase Bank subsequently requested three extensions to settle the LC, leading to this suit. To date the monies remain unpaid.
78. Regarding SBM, the plaintiff seeks an order for accounts to ascertain the whereabouts of the funds paid into Chase Bank by LDCK and whether they were taken over by SBM. SBM does not deny taking over certain assets and liabilities of Chase Bank but argues it did not assume the accounts relating to the plaintiff.
79. SBM relies on the orders issued by this Court (Okwany J.) on 9/6/2022, which relate to a temporary injunction restraining the 1st and 2nd defendants from distributing USD 4,888,240.79 as part of the 1st defendant’s assets to creditors. I note that these orders did not apply to SBM’s takeover of Chase Bank’s assets. In other words, the Court did not injunct SBM from taking over the plaintiff’s account with Chase Bank.
80. Accordingly, by Gazette Notice No. 6833 of 2018, SBM took over certain assets and liabilities pursuant relating to Chase Bank. This was pursuant to an Agreement dated 17th April 2018, which was not produced before the Court. During the trial, SBM's Legal Manager struggled to explain the details of the Agreement or takeover including what exactly was included in the takeover. In the absence of evidence from SBM proving that they did not take over the plaintiff’s account from Chase Bank, I find that the plaintiff is deserving of the orders sought against SBM as well.
Disposition
81. Accordingly, the plaintiff’s suit against the defendants is successful. I allow it in the following terms;
i. A declaration is hereby made that the defendants are liable to account to the plaintiff for the sum of USD 4,999,888.30 together with interest as constructive trustees;
ii. The defendants are hereby ordered to provide all necessary accounts and inquiries to enable the plaintiffs to trace and recover the sum of USD 4,999,888.30;
iii. An order is hereby issued for delivery up payment or transfer to the plaintiff of the sum of USD 4,999,888.30 together with interest;
iv. An order is hereby issued compelling the defendants to pay to the plaintiff the sum of USD 73,331.70 being the interest accrued in relation to the 1st extension from 10th August 2016 to 8th December 2016 together with interest thereon at 14% per annum from 8th December 2016 until payment in full;
v. The plaintiff shall have the costs of the suit and interest thereon at 14% per annum from the date of judgment until payment in full.
DATED, SIGNED AND DELIVERED IN NAIROBI
THIS 5TH DAY OF JULY 2024.
F. MUGAMBI
JUDGE