[2021] KEMSET 664 (KLR)

Canva Trading Kenya Ltd Mombasa v Kahindi (Tribunal Case 24 of 2021) [2021] KEMSET 664 (KLR) (12 November 2021) (Judgment)

Neutral citation: [2021] KEMSET 664 (KLR)

Republic of Kenya

In the Micro and Small Enterprises Tribunal

Tribunal Case 24 of 2021

J.Bett, Chair, R.Katina, Vice Chair, J.Were, A Gikuya & A Kibet, Members

November 12, 2021

Between

Canva Trading Kenya Ltd Mombasa

Claimant

and

William Kazungu Kahindi

Respondent

Judgment

1. The Claimant, Canva Trading Kenya Limited Mombasa, represented by the Managing Director Ms Eunice Okal filed this claim dated 15thJune 2021, at the Tribunal’s registry in Mombasa Law courts under Certificate of Urgency.In the statement of claim, she described the Claimant as “a small & micro finance giving soft loans to small business to buy motorbikes for riders on hire purchase.”

2. The respondent is introduced as “an employee of Teachers’ Service Commission (TSC) stationed in Kwale County at Ndavaya Secondary School’’The claim was for recovery of Ksh69,000/= being the accumulated amount of accrued interest and penalties on a borrowed loan of ksh15,000/=, which the claimants states the respondent acquired and failed to repay.

3. The Tribunal noted that the respondent had not filed any response to the claim, and during the preliminary mentions for directions and confirmation of compliance the Respondent or his counsel on record were not consistent in attendance. The cause was mentioned on 31st August, 10th September, 24th September, 6th October, 15th October before the hearing on 22nd October. During the hearing, only the claimant attended. The matter was finally heard in the absence of the respondent.

THE CLAIMANT’S CASE 4. The Claimant avers that the Respondent applied for a soft loan of Ksh15,000/= from the Claimant, the Canva Trading Kenya Ltd which was approved and disbursed on 9thDecember2019. The Respondent was to repay by 10thJanuary 2020.

5. In addition, the Claimant avers that the loan was disbursed to the Respondent subject to a charge of 20% interest per month. Further, that as at the time of filing this claim the Respondent had not repaid the loan as per the payment schedule, thus attracting interest and penalties to a tune of Ksh69,000/=.

ISSUES FOR DETERMINATION 6. Arising from the claim and the oral evidence the Tribunal has framed the following issues necessary for determination.a.Whether the Respondent was served with the claim.b.Whether the Respondent was advanced and received a loan of Ksh. 15,000/= from the Claimant.c.Whether the 20% interest charged by the Claimant on the borrowed amount of Ksh15,000/= was justified.d.Whether the claimant was entitled to demand as it did the Ksh69,000/= being the principal sum, accrued interests and penalties charged on the borrowed principal sum of Ksh15,000/=.e.Who bears the cost of this claim?

DETERMINATION AND FINAL ORDERSThe right to be heard 7. The first issue is whether the Respondent was granted the right to be heard:This is only after the claimant presented affidavit of service to show she had taken all the necessary steps to inform the respondent including using his email address kazben88willy@gmail.com that a claim had been filed before the Micro and small Enterprises Tribunal.

8. The Tribunal observed that the said service by email was sent on 8th September 2021 at 1:23Pm which was acknowledged by the respondent five minutes later at 1:38 pm, the respondent however did not file any Response. On 24th September, Mr. Lutta, Advocate recorded appearance on behalf of the Respondent. He requested the Tribunal for a further mention in 14 days to allow him file a comprehensive Response on the matter. He also expressed optimism that the parties would reach a compromise. The request was granted by the Tribunal. It was clear during the mention on 6th October that the parties had not come to a compromise nor agreed on a consent. The Tribunal then directed that the parties comply with the earlier directions (issued on 30th July 2021) relating to the filing and service of the Response. No explanation was given for failure to file the Response. Further, no explanation was given for failure to attend the hearing of this suit by the Respondent or his Advocate on record.

9. The Tribunal was alive to the fact of the right to be heardis a fundamental right and therefore sacrosanct as was held by the Supreme Court of India in Sangram Singh v Election Tribunal Koteh1955 AIR 425thus:-“[T]here must be ever present to the mind the fact that our laws of procedure are grounded on a principle of natural justice which requires that men should not be condemned unheard, that decisions should not be reached behind their backs, that proceedings that affect their lives and property should not continue in their absence and that they should not be precluded from participating in them. Of course, there must be exceptions and where they are clearly defined they must be given effect to. But taken by and large, and subject to that proviso, our laws of procedure should be construed, wherever that is reasonably possible, in the light of that principle.”

10. Every party in a case has a right to be heard and subsequently, that right should not be denied unless there are very good reasons for doing so. The Tribunal having considered the facts and prevailing circumstances as aforesaid was convinced that Respondent was properly served with the claim and given reasonable time to accordingly Respond but failed to so respond. It cannot therefore be said that the Respondent was denied the Constitutional right to be heard.

11. In allowing this suit to proceed to formal proof hearing, the Tribunal was also guided by the Constitutional principles of the right to be heard and the reasoning of the appellate court in James Kanyiita Nderitu & Another [2016] eKLR, where the Court of Appeal stated as follows:“From the outset, it cannot be gainsaid that a distinction has always existed between a default judgement that is regularly entered and one which is irregularly entered. In a regular default judgement, the defendant will have been duly served with summons to enter appearance or to file defence, resulting in default judgment.

12. This point is further emphasised by Ojwang, J (as he then was) in Mungai –vs- Gachuhi and Another [2005] eKLR cited with approval in the case ofSignature Tours & Travel Limited -V- National Bank of Kenya Limited [2017] eKLR when he stated as follows:“a court decision stands as a final decision only when a proper hearing has taken place and the parties and those who ought to be enjoined as parties have been fully heard and their representations concluded, unless they elect to forgo the opportunity.”

13. The Tribunal, guidedby the cited cases and Constitutional principles of the right of a party to be heard and having found that there was proper service, decided there was no justification not to proceed to hearing (in the absence of the respondent).

Loan advanced 14. As to whether the Respondent obtained a Ksh. 15,000/= loan from the Claimant, the Claimant relied on a loan agreement dated 9thDecember 2019. The agreement was signed by the Respondent on same day. Other terms of the contract including the 20% interest rate payable per month were set out. The form was marked in red ink “disbursed 15,000/=.” No evidence was presented to the contrary. That matter therefore remained unopposed.

Interest charged 15. The Tribunal considered the question of interestand was concerned that the principal sum of Ksh.15,000/=disbursed by the claimant had attracted interest and penalties to the tune of Ksh. 69000/= binding the Respondentto pay 20% interest on the loan per month. It noted that the interest on the principal sum has increased exponentially and stood at Ksh. 69,000/= against the principal sum of Ksh. 15,000/= in 18 months. It was also noted by the Tribunal that on the face of the Loan agreement and Loan application, there was no time limit indicating when penalties would ensue.This Concerned the Tribunal that the claimant’s penalties on the 20% interest was unconscionable, unfair and oppressive.

16. We cite the case in Pius Kimaiyo Lagat v Co-operative Bank of Kenya Limited [2017] eKLR, the Court of Appeal was confronted with a related challenge and ruled thus:“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 colossal sum, 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, penalty interest, default charges, 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”

17. We have perused through the statement of claim, the attached application form which contains the loan agreement. The relevant part is paragraph 6 titled “LOAN AGREEMENT” with the following relevant clauses:a.“(1) In pursuance of the said agreement and in consideration of the promises of the agreement and of the loan application form duly filled by the borrower and whose details have been duly approved by the lender and annexed as a schedule hereto, the lender HEREBY ADVANCES the borrower the sum of Ksh. 15,000/= (hereinafter referred to as the loan amount receipt whereof hereby acknowledged.b.(2) The loan amount is subject to interest being charged at a flat rate of 20% per month.c.(8) I hereby authorise Canva Trading Ltd to deduct the fee from the loan request and disburse the balance.”

18. The Tribunal notes that whereas it is not for the court to rewrite a contract for the parties, where a contract between parties is exploitative, courts have not been shy to interfere as held by the Court of Appeal in the case of National Bank of Kenya Ltd Vs. PipeplasticSankolit (K)LtdCivil Appeal No.95 of 1999. The court held as follows:“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...”

19. We hold the view that whereas the parties are bound by their agreements and terms thereto, such terms should apply in accordance with the law and where it is determined to be unfair, unconscionable and oppressive, we should not hesitate to re-state the law so as to protect the interest of the parties and by extension advance the public interest.

20. On the question of time limit on the interest charged, we find that without clarity on time limit upon the determination that the loan is non-performing is unmerited and unconscionable to compound the interest. In the case of Danson MuriukiKihara-v-Amos KuthuaGatungo (2012) eKLR, the court addressed a related issue thus:-“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.”

21. 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 oppressive. We therefore find that the parties were at liberty to agree on the interest rate chargeable for a determinable period of time and that once the loan is non performing, it shall be subject to the limitations set out under the in duplum rule.

Amount due and interest payable 22. As regards the third issue, the Tribunal was concerned by the finding that the Respondent’s debt rose exponentially from the principal sum of Ksh15,000/= to the current Ksh,69,000/= before this claim was filed.

23. It was apparent that the Claimant demanded more than 2 times the principal amount borrowed by the Respondent.

24. Therefore, in order to make a just determination of this issue, the Tribunal had to rely on the principles of lending by financial institutions drawn from Section 44A of the Banking Act which provides statutory application of the Induplum 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) e KLR, 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...’’

25. It was observed by the Court of Appeal that the principle of Induplum has been applied by the courts with reasonable degree of consistency citing the following cases;SUBPARAGRAPH 1.

Lee G. MuthogaV.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.

26. Similarly, in the most recent case, the Court of Appeal in Housing Finance Company of Kenya Limited v ScholarsticaNyaguthii Muturi & Another [2020] e KLR reiterated the application of the rule thus:“As we have shown section 44A of the Banking Act came into force on the 1st May, 2007. That provision of law sets up the maximum amount of money a banking institution that grants a loan to a borrower may recover on the original loan. The banking institution is limited in what it may recover from a debtor with respect to a non performing loan and the maximum recoverable amount is defined as follows in section 44A(2):“The maximum amount referred 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; andc.Expenses incurred in the recovery of any amounts owed by the debtor.By that provision if a loan becomes non -performing and the debtor resumes payment on the loan and then the loan becomes non performing again the limitation under the said paragraphs shall be determined with respect to the time the loan last became non performing.”

27. The rationale for this rule is therefore to safeguard the interests of the parties against any form of injustice, oppression or exploitation as they perform their contractual obligations. Despite their right to freely contract, they must at all material times put themselves into an inquiry on the existence and the potential application of the rule.

28. An analysis of the foregoing rule and its safeguards, leads the 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 the borrower. 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 Induplum rule as required of any financial institution.

29. This Tribunal is therefore persuaded that the Claimant is not entitled to the ksh.53,600/= since this amount is more than double the principal amount it disbursed to the Respondent. The Tribunal is equally persuaded that the 20% interest rate chargeable is only applicable for a determinable period subject to the in duplum rule set out above.

Costs 30. On the issue of costs, the Tribunal observed that the Claimant did not pray for costs of this claim in her oral pleadings but, the finds that it is fair and just to award costs to the Claimant.

Orders 31. The Tribunal award as follows; the Respondent shall pay the Claimant:-a.Principal sum of Ksh. 15,000/=b.Interest on (a) above of Ksh. 15,000/=c.Costs of the suit of Ksh8,000/=Those then are the Orders of the Tribunal.

Dated delivered and signed on this 12 Day of November, 2021J. BETT …… ........................................ [CHAIRMAN]R. KATINA… .................[VICE-CHAIR]J. WERE …………… ……..............................[MEMBER]A. GIKUYA…………… ……………………..............................................[MEMBER}A. KIBET.....................................................................................................[MEMBER]Judgement delivered virtually in the presence of:SUBPARA 1. Ms Eunice for ClaimantSUBPARA 2. Mr. William KazunguSUBPARA 3. Mr. Isaac KapalikineiSUBPARA 4. Ms ZulekhaJudgment-Mombasa MSET No. 24 of 2021-Canva Trading Kenya Ltd Vs- William Kazungu Kahindi pg. 12