[2021] KEMSET 419 (KLR)

REPUBLIC OF KENYA

IN THE MICRO AND SMALL ENTERPRISES TRIBUNAL AT NAIROBI

MSET MOMBASA 4 OF 2021

CANVA TRADING KENYA LTD MOMBASA........................................................CLAIMANT

VERSUS

HANNIER IGWO SIMEI................................................................................. RESPONDENT

JUDGEMENT

Introduction.

This claim dated 26thday of April 2021,was filed under certificate of urgency at the Tribunal’s registry in Mombasa Law courts. The claimant,Canva Trading Kenya Limited Mombasa was represented by the Managing Director Ms Eunice Ogal who described the claimant as “a small& micro finance giving soft loans to small business to buy motorbikes for riders on hire purchase”.The claim was for recovery of Ksh 57,600 being the accumulated amount of loan, accrued interest and penalties, incurredby the Respondent who borrowed Ksh 12000/= and failed to pay. The respondent was introduced as an employee of Longitude Finance located within CBD Mombasa County.

Background

The cause was certified urgent and heard exparte in the first instance on 7th May 2021 where orders were given as follows;

1. THAT the Claimant files additional/ further documents by Monday 10th May 2021.

2. THAT the Claimant serves the claim and all the documents upon the Respondent by Monday 10th May 2021.

3. THAT the Respondent files and serves the Response within fourteen days of service of service of claim and in any case by 24th May 2021.

4. THAT the claimant files and serves the reply to Response within seven days of service of the Response and in any case by 31st May 2021.

5. THAT the Cause shall be mentioned on 3rd June 2021 to confirm compliance and fix it for hearing.

The matter subsequently came up before this Tribunal for virtual hearing on 22nd June 2021. Both the Claimant and the Respondent were present and they were given time to briefly highlight their respective positions on the matter.

The claimant stated that a loan of Ksh 12000/= was approved and disbursed to the respondent whohad failed to pay and now 19 months down the line, the loan, interest thereon and penalties had accumulated to Ksh.57,600/=thus necessitating the filing of this claim.

The respondent who had not filed a written response, admitted to having borrowed Ksh 12,000/=in September 2019from the claimant, and explained that he immediatelyfell into hard times financially, thusfailing to keep up with repayments of the said loan. He said he has however managed to pay Ksh 6000/= so far and requested to be given more time to negotiate with the claimant on how to continue repaying the loan. Theclaimant was not opposed to the respondent’s request. The Tribunal encouraged both parties to try and find consensus before the 2/7/2021when the matter was slated for hearing in the event that they failed to agree.

Physical hearing on 2nd. July 2021

Following the parties’ failure to agree,the matter came up for physical hearing at Mombasa Law Courts on 2/7/2021 where the Claimant and the Respondent were heard.

The Claimant’s Case.

1. The claimant avers that the respondent applied for a soft loan of Ksh 12,000/=from the claimant, theCanva Trading Kenya Ltdwhich was approvedand disbursed on 2ndSeptember 2019. The respondent was given grace period of one month and was to begin repayments as from 4/10/2019.

2. That the loan was disbursed to the respondent subject to a charge of 20% interest per month.

3. As at the time of filing this claim,19months on, the respondent had not repaid the loan as per the payment programme, thus attracting interest and penalties to a tune of Ksh 57,600/=

4. That the Respondent absconded for sometimes and when he finally resurfaced, he said he would only repay a total of Ksh 19,000/=and would not pay Ksh57,000/=asdemanded by the claimant.

5. The claimant said she had reduced the claim toKsh 30,000/=only, the respondent however still insisted on paying back a total ofKsh.19,000/=

6. It is the claimant’scontention that the respondent is still working at Longitude Finance company and according to his application for the loan, hisdeclared salary was ksh.32,000/= and therefore he was able to raise the demanded amount.

7. She finally submitted thatthe claimant is entitled to costs of this cause as it had incurred more expenses while trying to locate the respondent toserve him with the claim.

Respondents Reply

1. In his response, the respondent admitted that he had borrowed Ksh 12,000/=from the claimant, he maintained that after receiving the said amount, he fell into hardfinancial times and failed to meet his obligations to repay the loan.

2. That he acted in good faith by visiting the claimant’s office to inform them of the challenges that made him default in repaymentsand to request that the claimant to stop further accruals of the interest. He saidthe claimant kept on charging 20%interest on the loan and penalties throughout the period.

3. The respondent further stated that the 20%interest on the loan of was too much, andbeyond his ability to pay.

4. The respondent told the Tribunalthat he did not intentionally refuse to pay the loan as has in fact paid Ksh 6,000/=and lately added Ksh 4,000/=thus making it a total of KSh 10,000/=

5. That out of the Ksh 30,000/=,the claimant wasdemanding, he could only payKsh 19,000/=.

6. The respondent further stated that he was willing to produce his payslip to demonstrate his financial constraint as he only earns Ksh 15,000/=at the moment and was only able to pay the remaining balance of Ksh 9,000/=in 3instalments.

Issues for Determination

Arising from the claim and responses of both parties respectively, the following issues presented themselves for the determination of this Tribunal;

1. Whether the 20%interest charged by the claimant on the borrowed amount of

Ksh 12,000/=was justified.

2. Whether theclaimantCanva Trading Kenya Limited-Mombasa was entitled to demandas it did the Ksh 30,000/=being an accrued number of interests and penalties charged onthe borrowed principalsum of Ksh 12,000/=,

3. Whether the respondent’s act of visiting the office of the claimant to request for defermentor stoppage of the accrual of the loan, should have been considered by the claimant.

4. Whether the respondent’s decision to pay only Ksh 19,000/=as total repayment of the loan is justified.

5. Who bears the cost of this claim?

Determination;

The Tribunal while considering the claim herein and the respondent’s reply was concerned that the debt seemedto have exponentially mounted from KSh 12,000/=principal amount to Ksh 57,600/=in 19 months period, thus triggeringa pertinent concern in the Tribunal’s mind that this claim has uncanny resemblance with the facts in the case ofPius Kimaiyo Lagat v Co-operative Bank of Kenya Limited[2017] eKLRwhich was captured by the Court of Appeal in the following words;

“There is a perennial vexing nightmare for borrowers who take a relatively small loan from a lending institution, but few years down the line, the institution drops a bombshell of a demand for the immediate payment of a colossalsum, literally bankrupting the borrower, if not confining him/her to a hospital bed due to depression. The main bones of contention are invariably; uncertainty of lending terms and documentation, fluctuating rates of interest, penaltyinterest, defaultcharges, interests on arrears, additional interest,commissions,bank charges,Bank statements or lack of them,among others which may or not have been part of the written contract”

We have perused through the statement of claim,the attached application form which contains the loan agreement and found that Paragraph 6 of the Form titled “LOAN AGREEMENT” remains unfilled.

Upon further scrutiny the Tribunal was unable to find any indication that the respondent in the Loan agreement is bound to pay 20%interest on the loan and in default to pay penalties thereon.

Nothing on the face of the application form showed the term limit of the Loan or attendant penalties for defaulting in repayment in order to entitle claimant to expect monthly repayment of 20% intereston the principal amount. There was an obvious lacuna on the face of the Loan agreement.

The Tribunal notes that it is not for the court to rewrite a contract for the parties. But where a contract between parties is unconscionable,unfair and oppressive, courts have not been shy to interfere as held in the Court of Appeal inthe case ofNational Bank of Kenya Ltd Vs.Pipeplastic Sankolit (K)LtdCivil Appeal No.95 of 1999. Where it was held that “a court of law cannot rewrite a contract with regard to interest as parties are bound by the terms of their contract. Nevertheless, courts have never been shy to interfere with or refuse to enforce contracts which are unconscionable,unfair or oppressive due to procedural abuse. ”

We hold view that any penalties on the loan could only be charged if expressly provided forin the contract.This contract attached to the filed claim has been found wanting and cannot sustain the claimants demand for 20% interest for 19 months because for some unexplained reason was not disclosed on the application form.

In the case of Danson Muriuki Kihara-v-Amos Kuthua Gatungo (2012) eKLR

“the plaintiff/appellant filed a claim for Ksh.40,000/=plus interest at 50% per month. The matter proceeded to full hearing and the learned trial magistrate entered judgement for Ksh 40,000/= plus cost and interests at court rates. Theappellant appealed against the Judgement on ground that the interest payable was reduced from 50% per month to court rates. The court held that the interest rate of 50% was unconscionableand upheld the decision of allowing interest at Court rates.”

Thus, clearly showing that the Court can interfere even where parties have agreed on a rate of interest as long as it is shown that the rate is illegal, unconscionable or fraudulent. Thenon-disclosure by the claimants of the interest rates and the computations of penalties can only be interpreted to be mischievously done to take advantage of the respondent’s failure to pay.

As regards the second issue, theTribunal was disconcerted to find that respondent’s debt did exponentially mount from the principal Ksh 12,000/=to the current Ksh57,600/=before this claim was filed.

It was apparent that the claimants demanded more than 4 times the principal amount borrowedby the respondent, even if the claimant has reduced demanded amount to KSh 30,000/=, it was still more than double the principal amount.

Therefore,in order to make a just determination of this issue, theTribunalhad to stand by Section 44A of the Banking Act which provides statutory application to the In duplum rule. For clarity, we cite the Court of Appeal in Kenya Hotels Ltd Vs.Oriental Commercial Bank Ltd (Formerly Known as Delphis Bank Limited) (2019)eKLR,which stated that the rule is to the effect that interest ceases to accumulate upon any amount of loan owing once the accrued interest equals the amount of loan advanced...’’

It was observed by the court of appeal quoted above, that the principle of In duplumhas been applied by the courts with reasonable degree of consistency citing the following cases;

1. Lee G. Muthoga V.Habib Zurich Finance (K) Limited (2016)

2. Mwambeja Ranching Company limited & another V.Kenya National Capital Corporation (2019)eKLR, just to cite a few where the In duplum rule has been invoked.

The rationale for this rule was elucidated in the latter decision of the said court in the following passage. ‘’ the In duplumrule is concerned with public interest and its key aim was to protect borrowers from exploitation by lenders who permit interest to accumulate to astronomical figures. It was also meant to safeguard the equity of redemption and safeguard against banks making it impossible to redeem a charged property.”

An analysisof the foregoing rule and its safeguards, leadsthe Tribunal to make a determination of this claim guided by the provisions of S.44A of the Banking Act which sets the maximum amount of money a banking institution that grants a loan to a borrower may recover on the original loan.

Since the claimants by their own description consider themselves small and micro finance institution, we are of the considered view that the claimant herein should also abide by the In duplumrule as required of any financial institution.

This Tribunal is therefore persuaded that the claimant is not entitled to the ksh.30,000/- since this amount is more than double the principal amount it disbursed to the respondent. It has also not demonstrated the computation used to charge penalties on the interest of 20% after the respondent defaulted in repayment of the principal loan

The third issue is whether the respondent’s act of visiting the office of the claimant could be considered sufficient to defer or stop the accrual of the loan. The answer is no.The formal way that the respondent used to apply for the loan was through filling an application form.Which he did.In the same sense the correct and formal way expected of the respondent to apply for deferment or stopping of the accrual was by writing to the claimants formally. It appears to the Tribunal that the claimants did not understand the reason for Respondents visit to their offices thus they did not stop or defer the accruals.

The fourth issue for consideration of this Tribunal was whether the respondent’s insistence to repay the Loan up to a total Ksh 19,000/=is justified.

In his submissions the respondent said that he was now earning Ksh 15,000/= and would find it impossible to pay the claimants. Though he had declared in the application form that he earned Ksh 32,000/=per month, the respondent insisted that his actual salary was 15,000/= as of now and was willing to show his payslip. TheTribunal observed that according the attached application form, therespondents’ loan was secured by 50’’ Hisense Tvworth 50,000/=and unnamedhome theatre systemworth 36,000/=

A further perusal of the application form showed that the respondent had a credit history with the claimants and therefore it can safely be assumed that he was not a stranger to the Claimant’s loan lending terms and conditions. In fact, this was the respondent’s 4th Loan from the claimants, therefore he cannot be allowed tostate his own terms without any clear criteria as he said.

In this regard, it will be in the interest of justice to balance the rights of the parties by making appropriate findingsthat;

(a) The Respondent’s offer to pay only Ksh 19,000/= is disallowed.

(b) TheTribunal finds and holds that the claimant be awarded Ksh.24,000/=less any amount already paid by the Respondent andaccrued interest pegged at Ksh. 12,000/=

(c) Costs of Ksh 10,000/= to be borne by the Respondent.

Those then are the Orders of the Tribunal.

Dated delivered and signed on this 15th Day of July 2021

J. BETT......................................................................................................[CHAIRMAN]

R. KATINA.............................................................................................. [VICE-CHAIR]

J. WERE …………………..............................[MEMBER]

A. GIKUYA...................................................................................... [MEMBER}

A. KIBET..................................................................................... [MEMBER]

Judgement delivered virtually in the presence of:

1. Eunice for Claimant 2. Hannier Igwo Simei