[2017] KEHC 10111 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

MILIMANI LAW COURTS

COMMERCIAL AND ADMIRALTY DIVISION

INSOLVENCY NOTICE NO. IPN 1 OF 2017

DIAMOND HASHAM LALJI..............................................................................DEBTOR

AND

GARGILL KENYA LIMITED........................................................................CREDITOR

AND

PREMIER FLOUR MILLS LIMITED..........1ST PROPOSED INTERESTED PARTY

MAIZE MILLING COMPANY LIMITED...2ND PROPOSED INTERESTED PARTY

MILLING CORPORATION OF KENYA

(2009) LIMITED...............................................3RD PROPOSED INTERESTED PARTY

RULING

On Notice of 15th May 2017

1. This is a Motion of 15th May, 2017 for the following prayers:

1. Spent

2. THAT there be a stay of proceedings pending the hearing and determination of this application.

3. THAT the statutory demand dated 27th April, 2017 be set aside.

4. THAT costs of this Application be awarded to the Debtor.

2. On hearing Counsel for the Parties herein there is consensus to the proposition “that a contract of Guarantee is subject to any qualifications made by the particular instrument, a collateral contract to answer for the debt, default or miscarriage of another who is or is contemplated to be or to become liable to the person to whom the guarantee is given” (Sunbird Plaza Pty Ltd vs. Maloney (1988) HCA 11;166 CLR 245).

3. These insolvency proceedings arise out of the call up of a Guarantee and Indemnity dated 16th January 2017 issued by Diamond Hasham Lalji (The Debtor or Diamond) in favour of Cargill Kenya Limited (The Creditor or Cargill). Pursuant to that Guarantee and Indemnity, Cargill had on 4th April 2017, called upon Diamond to pay the sum of USD 5,218,161. 58 within 7 days.

4. The payment did not happen and on 27th April 2017, Cargill issued a twenty one (21) days statutory Demand against Diamond under the provisions of Section 17(3)(a) of the Insolvency Act (hereinafter the Act). That statutory Demand aggrieves Diamond who has sought to set it aside vide an Application dated 15th May 2017 which falls for my determination.

5. How did the Guarantee and indemnity come to be?

6. Over the years, Cargill, has supplied maize grain to Premier Flour Mills Limited, Maize Milling Company Limited and Milling Corporation of Kenya (2009) for milling purposes. Diamond is a Director of all these three Companies. The Companies fell behind in payment and a plan to pay up the debt owed by the Companies to Cargill became necessary and a Payment Plan Agreement dated 17th March 2016 was entered into between Cargill on the one hand and the Companies on the other.

7. It is said by Cargill and not contended by Diamond, that the Companies defaulted in the payment plans and approached the creditor with fresh proposals. Negotiations took place and culminated in a 2nd contract being the Supplemental Agreement dated 16th January 2017. It was on the same day that Diamond executed a Guarantee and Indemnity Deed.

8. It is argued by Diamond that the calling up of the Guarantee and Indemnity was conditional on the Companies failure to settle the outstanding Balance within the agreed period of eighteen (18) months that is on or before 30th June 2018. Diamond would be looking at Clause 14 of the Supplemental Agreement headed “Enforceability of Personal Guarantee” which reads;-

“if the Debtors shall default in the payment of the Outstanding Balance within the agreed period of 18 months (that is on or before 30th June 2018), then the personal guarantee under clause D (iii) above shall be called in full within thirty (30) days of such default.”

9. The 30th June 2018 has not reached and besides, Diamond avers, the companies have made several payments to the creditor herein and several payment proposals towards offsetting the balance.

10. In addition, it is Diamond’s contention that prior to calling up the Guarantee and Indemnity, Cargill had rescinded the Supplemental Agreement and could therefore not insist on the terms of the Deed of Guarantee and Indemnity which was procured pursuant to the said agreement. This contention stems from clause xii of the Supplemental Agreement which provides;-

“The foregoing clauses notwithstanding, if the Debtors delay in making scheduled payments as per the Payment Plan clause of this 2nd Agreement, and the default persists for a period of more than 30 days, Cargill shall be entitled to rescind this 2nd Agreement and upon such rescission, the full Debt amount and Interest thereon as outlined in this 2nd Agreement shall immediately become payable.”

In the letter demanding payment of the debt and calling up the Guarantee and Indemnity, the lawyer for Cargill has invoked the provisions of this clause.

11. It was a further position of Diamond that the Deed of Guarantee and Indemnity was limited to the sum of USD 4,480,610. 00 and Cargill could not demand a sum in excess thereof as it did in the statutory Demand of USD 5,216,332. 86.

12. Cargill’s answer is that there was default of payment that had been set out in the Supplemental agreement and that as at 4th April 2017 an amount of USD 5,218,161. 52 was due and owing and made up as follows:-

Principal at start of agreement (17/3/2016) USD 4,910,577. 39

Current balance USD. 4,425,422. 42

Payment from start of agreement USD. 485,154. 93

Accrued interest USD. 792,739. 16

That upon that default, Cargill was entitled, as it did, to rescind the Supplemental Agreement with the result that the Supplemental Agreement became inoperative and did not bind any of the Parties. Secondly, the creditor became entitled to make immediate demands to Diamond as Guarantor of the amount assured.

13. Parties herein filed written submissions which were augmented by some oral highlights. Those submissions are considered in the body of this Court’s rendition of the following issues that have presented themselves;-

(i) Having rescinded the Supplemental Agreement, is Cargill entitled to invoke the Guarantee and Indemnity.

(ii) If the answer to (i) is in the affirmative, is the enforcement of the Deed of Guarantee and Indemnity premature.

(iii) If the answer to (ii) is in the negative, is the amount demanded in excess of the Guarantee amount.

14. Clause xii of the Supplemental Agreement provides as follows:-

“The foregoing notwithstanding, if the Debtors delay in making scheduled payments as per the Payment Plan clause of this 2nd Agreement, and the default persists for a period of more than 30 days, Cargill shall be entitled to rescind this 2nd Agreement and upon such recession, the full Debt Amount and interest thereon as outlined in this 2nd Agreement shall immediately become payable.”

15. It was under the terms of these provisions that Cargill rescinded the Supplemental Agreement and demanded USD 5,218,161. 58 from the Companies and in default of its payment in full, enforced the Deed of Guarantee and Indemnity.

16. This Court accepts the proposed definition of the word “recession” as put forward by Diamond and found in Blacks Law Dictionary:-

“A Party’s unilateral unmaking of a contract for a legally sufficient reason, such as the other Party’s material breach, or a judgment rescinding the contract. Recession is generally available as a remedy or defence for a nondefaulting party and is accompanied by restitution of any partial performance, thus restoring the parties to their precontractual position.”

Rescission is the unmaking or unwinding of a Contract or a transaction and, as possible, is to bring Parties to status quo ante.

17. The argument by Diamond is that upon rescission of the Supplemental Agreement, Parties reverted to the position they found themselves post the Supplemental Agreement. A critical position, as I understand, Diamond to be taking, is that there does not subsist any Guarantee or Indemnity to Cargill. In effect, the Guarantee was at an end as the rescission nullified it.

18. Cargill retorts by arguing that it is the Supplemental Agreement that contains the rescission agreement and it is only the Supplemental Agreement that was rescinded. In other words, the Deed of Guarantee and Indemnity survived the rescission.

19. A resolution of this issue must begin with a closer look at the Agreement between the Parties. Prior to the entry of the Supplemental Agreement dated 16th January, 2017, the Companies and Cargill had entered a Payment Plan Agreement of 17th March 2016. In the recital to the Supplemental Agreement, the Payment Plan Agreement is acknowledged as follows:-

(b) The Debtors acknowledge that the 2nd Agreement is made in addition to the Payment Plan Agreement made between Cargill and the Debtors on 17th March 2016. (the 1st Agreement).

(c) Except as expressly provided for in this 2nd Agreement, the 1st Agreement shall continue in full force and effect without amendment waive or substitution of any provisions thereof.

In addition, clause xiii of the Supplemental Agreement expressly provides that the Supplemental Agreement as read together with the Payment Plan Agreement shall constitute the whole of the terms agreed between the Debtors and Cargill.

20. Now the Guarantee Clause in the Supplemental agreement is to the effect:-

“if the debtors shall default in the payment of the Outstanding Balance within the agreed period of 18 months (that is on or before 30th June 2018), then the personal guarantee under Clause D (iii) above shall be called in full within thirty (30) days of such default.”

Here the Supplemental Agreement contemplates that Diamond shall give a personal guarantee in favour of Cargill to secure the payment of the outstanding balance of USD 4,480,610. 00.

21. It has to be observed, however, that although the Deed of Guarantee and Indemnity makes mention of USD 4,480,610. 00 plus interest, fees, commission cost, charges and expenses as the limitation of liability, it does not declare itself as to be securing the terms of the Supplemental Agreement only. In my reading, the Guarantee was a general covenant to secure the payment of the Companies debt to Cargill when it fell due but only limited to USD 4,480,610. 00 plus interest, fees, commission costs, charges and expenses. To that extent therefore, the Guarantee would be available for enforcement in respect to any debt due and not paid subject to the limit by the Companies to Cargill even after the recession of the Supplemental Agreement. Put differently although made in contemplation of the Supplemental Agreement, the Deed of Guarantee and Indemnity did not simply undergrid the Supplemental Agreement but the (Companies debt) subject to the limit imposed on the deed itself.

22. Even if I were to be wrong in my analysis and conclusion above, I would still reach the same result being influenced by the following passage from the judgment of Dixon J. in Macdonald vs. Dennys Lascelles Ltd. (1933) 48 CLR 457 (quoted with approval by Kitchin LJ in Howard Jones vs Tate (2011) EWCA CIV 1330,

“When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not ‘void’ or ‘voidable’ at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executor only and the party in default is liable for damages for its breach”.

The Companies were in default and (Cargill) the innocent Party chose to treat the Contract as discharged, but this would not divest the innocent Party from a Right to Guarantee and Indemnity that had been acquired.

23. Diamond then asked the Court to find that the enforcement of the Deed of Guarantee and Indemnity is premature. Two reasons are cited. First that Cargill has not lodged any recovery proceedings against the Companies and secondly the event upon which the Guarantee and Indemnity is predicated has not occurred.

24. Legal authorities are in legion for the general proposition that in the absence of an express agreement to the contrary, a creditor need not first demand payment from the principal before he can pursue the surety. For example, in Mwaniki Wa Ndegwa vs. National Bank of Kenya Ltd & Another(2016) eKLR where the Court of Appeal approved this passage from Halsburys Laws of England 4th Edition Vol. 20, page 194,

“On the default of the principal debtor causing loss to the creditor, the guarantor is, apart from special stipulation, immediately liable to the full extent of this obligation, without being entitled to require either notice of the default or previous recourse against the principal….”

25. Indeed clause 4. 6 of the Deed of Guarantee and Indemnity embraces this general position when it provided:-

“CKL may in its absolute discretion as it thinks fit and without the consent of the Guarantor and without releasing or reducing or otherwise affecting whatsoever the liability of the Guarantor under this Guarantee or the validity of the security hereby created do any of the following:-

make a demand under or enforce this Guarantee either with or without first restoring to other means of payment or to other securities and with or without making a demand from, `or taking proceedings against, the Principal Debtorsor any co-surety.“

26. Diamond’s insistence that Cargill should first seek recovery of the debt from the companies before turning on him must succumb to the general proposition of the law and the specific provision of clause 4. 6.

27. What event needed to trigger the call up of the Guarantee? In Diamond’s view, this would be found in clause ix of the Supplemental Agreement. This is on the enforceability of the Personal Guarantee. It reads;-

“If the Debtors shall default in the payment of the outstanding balance within the agreed period of 18 months (that is on or before 30th June, 2018, then the personal guarantee under clause D (iii) shall be called in full within thirty (30) days of such default”

Diamond then seeks to make the point that Cargill had granted the Companies up to that date (ie. 30th June 2018) as the time within which to pay the debt. However, clause 2. 1 of the Deed Guarantee and Indemnity provides the consideration upon which the Guarantee is made in the following terms:-

“In consideration of CKL being the Creditor) granting time to the Debtor for so long as it may think fit, the Guarantor hereby unconditionally guarantees to pay to CKL on demand in writing all monies and discharge the Debtor’s obligations without deduction, set off, or counter-claim together with Interest thereon from the date of such demand and together also with Costs and Expenses.”

28. Against this positon is the argument by Cargill that it invoked the express right of termination through the Termination and Default clause in the Supplemental Agreement which reads:-

“The foregoing clause notwithstanding, if the Debtors delay in making scheduled payments as per the payment plan clauseof this 2nd Agreement, and the default persists for a period of more than 30 days, Cargill shall be entitled to rescind this 2nd Agreement and upon such rescission, the full Debt amount and Interest thereon as outlined in this 2nd Agreement shall immediately become payable”. (my emphasis)

29. The payment plan is in clauses IV to VII and is as follows:-

iv. That the Debtors shall pay to Cargill USD 1,000,000. 00 (or Kenya shillings equivalent) on or before 28th February, 2017.

v. That out of the outstanding Balance thereafter, the Debtors shall pay to Cargill USD 1,500,000. 00 (or Kenya Shillings equivalent) as soon as the Agreement for Sale dated 19th August, 2016 is completed and the Gulf African Bank Limited’s facility is finalized; on or before 31st May, 2017, whichever comes first.

vi. That the remaining balance of USD 1,980,610. 00 (or Kenya Shillings equivalent) shall be paid within 18 months from the date of this 2nd Agreement being 30th June, 2018.

vii. That pursuant to Clause D(vi) above, and commencing January, 2017, the Debtors shall pay to Cargill a minimum of Khs. 5,000,000. 00 (or USD equivalent) per month until payment of the remaining balance in full.

That there was breach of this plan is not in dispute. There was default by the Companies of the payment plan. Further it is not contended by Diamond that it was not within the right of Cargill to invoke the right to terminate the Supplemental Agreement and demand the entire debt being USD 4,480,160. 00 and interest thereon from the Companies. This Court does not hear any arguments by Diamond that the Demand by Cargill on the Companies was unwarranted, wrongful, unlawful and premature.

30. It being so, then the Court must look at the assurance that Diamond had given to Cargill in the event that the Companies were in default of payment. This assurance would have to be in the Deed of Guarantee and Indemnity. The covenant to pay is clause 2 and reads:-

“2. 1 In consideration of CKL granting time to the Debtor for so long as it may think fit, the Guarantor hereby unconditionally guarantees to pay to CKL on demand in writing all monies and discharge the Debtor’s obligations without deduction, set-off, or counterclaim together with Interest thereon from the date of such demand and together also with costs and expenses

2. 2 The total amount recoverable under this Guarantee shall be limited to the principal sum set out in the schedule or its equivalent thereof in whatever currency denominated at the date of payment and interest and commission thereon and all costs charges and expenses referred to herein.

2. 3 If any purported obligation or liability of the Debtor to CKL which, if valid, would have been the subject of this Guarantee is not or ceases to be valid or enforceable against the Debtor or any ground whatever, whether or not known to CKL, including, without limitation, any illegality or defect in or want of powers of the Debtor or any irregular exercise of such powers or any lack of authority by any person purporting to act on behalf of the Debtor or any legal or other limitation (whether under the Limitation of Actions Act or otherwise), disability, incapacity or other change in the constitution of the Debtor, the Guarantor shall nevertheless be liable to CKL in respect of that purported obligation or liability as if it were fully valid and enforceable.

2. 4 As a separate and independent obligation, the Guarantor further agrees to pay Expenses to CKL on demand in writing, together with Interest thereon from the date of such demand. ”

31. There is evidence that on 4th April 2017, Cargill through its lawyers Njoroge Regeru & Company, demanded the due sums from the Companies. On the other hand, there is no evidence that the Companies made any payment demanded. There is also evidence that on the same day, Cargill called up the Guarantee. This Court finds that as there was default in payment by the Companies, the event upon which the Guarantee was predicated had happened and Cargill was entitled to call up the Guarantee.

32. In clause 2. 1 Diamond makes a promise to pay, and discharge the obligations but limited to the principal sum set out in the schedule to the Deed and interest and commission thereon and all costs, charges and expenses (Clause 2. 2). The schedule to the Deed provides the Limitation of Liability as follows:-

“The total amount recoverable under this Guarantee shall be limited to the principal sum set out in the schedule or its equivalent thereof in whatever currency denominated at the date of payment and interest and commission thereon and all costs, charges and expenses referred to herein.”

33. The amount demanded by Cargill is USD 5,218,161. 58 and is worked out as follows:-

Principal as at date of agreement (17/3/2016) USD.4,910,577. 35

Current Balance USD.4,425,422. 42

Payment from start of Agreement USD. 485,154. 93

Accrued Interest to date USD. 792,739. 16

TOTAL USD.5,218,161. 58

Diamond does not say that the interest worked out is erroneous or the amount demanded is otherwise not justly due. And one has to remember that he is not only a Director of the Companies but also its Chairman. In paragraph 11 of his affidavit sworn on 15th May 2017 he makes this rather half hearted assertion:-

“That Premier Flour Mills Limited, Maize Milling Company Limited and Milling Corporation of Kenya (2009) Limited have made various payments which have not been disclosed and or factored by the Creditor. The said Companies continue to make payments to the Creditor. There is absolutely no justification for calling up the Guarantee and Indemnity before the agreed period of 18 months, which is before 30th June 2018. I am informed by my Advocates on record that it is settled law that no claim can be brought by the Creditor against the Guarantor until this period lapses.”

He however fails to provide documentary proof in support of this assertion of the payments allegedly made.

34. It was within the express contemplation of the Deed of Guarantee and Indemnity that the Guaranteed sum would include interest. The interest charged has not been faulted and by similar turn, I cannot fault the amount sought in the statutory Demand of 27th April, 2017. The Statutory Demand is not for setting aside and the Motion of 15th May 2017 is hereby dismissed with costs.

On Notice of 18th May 2017

35. The Notice of Motion of 18th May 2017 seeks the following Orders:-

1. THAT Premier Flour Mills Limited, Maize Milling Limited and Milling Corporation of Kenya (2009) Limited, be admitted into these proceedings as Interested Parties.

2. THAT costs of this application be in the cause.

36. The decision in Meme Vs. Republic & another [2004] 1 KLR 637 is now often quoted as setting out the law for joinder of parties in a matter. The Court held,

“The foregoing passage spawns certain principles which are opposite to the joinder of parties in a constitutional reference such as the present one: (i) joinder of a person because his presence will result in the complete settlement of all the questions involved in the proceedings; (ii) joinder to provide protection for the rights of a party who would otherwise be adversely affected in law; (iii) joinder to preempt a likely course of proliferated litigation”

This Court is happy to rely on these parameters in determining the Motion. But I should add this. A Court will not make an Order for joinder where to do so would defeat the matter before Court or unnecessarily distract or obfuscate it. True a liberal approach in determining an application for joinder must be adopted, nevertheless a Court must be alert against frivolous and vexations litigants whose sole aim is to complicate or confuse issues before the Court (Kingori Vs Chege [2002]2 KLR 243).

37. This Court in determining the Motion of 15th May 2017 has made a finding that the calling up of the Guarantee and Indemnity was just and not premature. These Insolvency proceedings are brought on the basis that Diamond has failed to honour the Guarantee and Indemnity. The obligation under the Guarantee and Indemnity is personal and not corporate. There can be no legal basis to allow the joinder of the Companies into these proceedings. If as claimed by the Companies, that they are in a position to settle the outstanding debt, then they should do so and Diamond can provide the evidence of payment in support of an argument that his obligation under the Guarantee and Indemnity is discharged. There would be no need for joinder. Such joinder would merely crowd this matter without adding value to the complete adjudication and settlement of all the questions that are posed by these Insolvency proceedings.

38. The Notice of Motion of 18th May, 2017 is hereby dismissed with costs.

Dated, Signed and Delivered in Court at Nairobi this 3rd day ofNovember, 2017.

F. TUIYOTT

JUDGE

PRESENT;

Ouma h/b Owino for Applicant

Thuo h/b Regeru for Creditor

Alex - Court clerk