[2017] KEHC 10040 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

MILIMANI LAW COURTS

COMMERCIAL AND TAX DIVISION

CIVIL CASE NO. 365 OF 2011

ECOBANK KENYA LIMITED.................................................PLAINTIFF

VERSUS

SOLUTION WIZARDS LIMITED................................1ST DEFENDANT

ANANDA PRAKASH MISHRA..................................2ND DEFENDANT

KISHORE PREMJI KERAI..........................................3RD DEFENDANT

JUDGMENT

[1]The Plaintiff herein, Ecobank Kenya Limited, filed this suit on 25 August 2011, seeking that judgment be entered in its favour against the Defendants jointly and severally for:

[a] Kshs. 7,869,971. 20;

[b] Interest on [a] above at the rate of 25. 75% per annum from 1 November 2010until payment in full;

[c] Costs of the suit;

[d] Such further or other relief which the Court may deem fit to grant.

[2] The Plaintiff's cause of action is that on or about 27 June 2008, at the Defendant's own request, it agreed to advance and did advance to the 1st Defendant, overdraft facilities amounting to Kshs. 8,500,000/=, full particulars whereof are well within the Defendant's own knowledge; and that as security for the said facilities, the 2nd and 3rd Defendants executed a Guarantee Instrument dated 24 September, 2008 under which the 2nd and 3rd Defendants respectively guaranteed to the Plaintiff the payment, on demand, of all sums outstanding and due to the Plaintiff on account of the aforesaid overdraft facilities to the 1st Defendant. It was further the contention of the Plaintiff that, in breach of the terms of the agreement, the 1st Defendant defaulted in repayment of the overdraft facility such that a sum of Kshs. 7,869,971. 20 remained due and outstanding from the 1st Defendant as at 31 October 2010, which sum continues to accrue contractual interest at the rate of 25. 75% per annum from 1 November 2010 until full payment. This is the sum that the Plaintiff seeks to recover from the Defendants jointly and severally.

[3] A joint Statement of Defence was filed on behalf of the Defendants by M/s Gathii Irungu & Company Advocates in which the Plaintiff's claim was denied. In particular, the Defendants denied ever requesting the Plaintiff for the said overdraft facilities, contending that the 1st Defendant had already been deregistered by the date of the alleged request. Thus, according to the Defendants, no money was advanced to the 1st Defendant as alleged. They prayed for the dismissal of the Plaintiff's case with costs.

[4] In support of the claim, the Plaintiff relied on the evidence of its Legal Officer, Mr. Jack Kimathi (PW1), whose evidence was that sometimes on or about the month of June, 2008, the 1st Defendant requested the Plaintiff for an overdraft facility in the sum of Kshs. 2,000,000/= in addition to a prior overdraft facility in respect of which the 1st Defendant was indebted to it to the tune of Kshs. 6,500,000/=. It was the evidence of PW1 that the Plaintiff duly acceded to that request and through a Letter of Offer dated 27 June 2008, it offered the facility on terms which were acceptable to the Defendants. A copy of the Letter of Offer was exhibited at Pages 1 to 15 of the Plaintiff's Bundle of Documents, herein marked the Plaintiff's Exhibit No. 1 to show the salient terms thereof and to confirm that the terms were accepted by the Defendants.

[5] It was further the testimony of PW1 that, in addition to confirming the terms of the Letter of Offer, the Defendants also executed the following documents:

[a] A credit Agreement dated 25 September, 2008, which was produced at pages 16 to 19 of the Plaintiff's Exhibit 1;

[b] A General Lien and Set-off Agreement dated 25 September, 2008 (at Pages 20 to 21 of the Plaintiff's Exhibit 1);

[c] A Letter of Guarantee and Indemnity dated 24 September, 2008 (at pages 22 to 28 of the Plaintiff's Exhibit 1);

[d]A Demand Promissory Note dated 24 September, 2008, (at pages 29 to 30 of the Plaintiff's Exhibit 1).

[6] PW1 further testified that the overdraft facility was duly availed to the 1st Defendant upon all the conditions precedent being met; but that in breach of the terms thereof, the 1st Defendant did not repay the same despite repeated reminders and requests from the Plaintiff. In the result, the Plaintiff had no option but to instruct its advocates to issue the demand letters dated 4 November, 2010 to the Defendants, which have been exhibited at pages 31 to 36 of the Plaintiff's Exhibit No. 1. The Plaintiff also exhibited copies of the Statements of Account in respect of the 1st Defendant's Account No. 0010025007144801 (at pages 84 to 86 of the Plaintiff's Exhibit No. 1) and a letter dated 10 October 2014 from the Registrar of Companies, showing the names of the 1st Defendant's directors; and they include the 2nd and 3rd Defendants. It was on the basis of the foregoing evidence that the Plaintiff sought judgment in its favour as prayed for in the Plaint.

[7] The Defendant opted to adduce no rebuttal evidence but relied solely on their Statement of Defence. Accordingly, directions were given as to the filing of written submissions; and in its written submissions filed on 7 April 2017, Counsel for the Plaintiff, M/s Kale Maina & Bundotich, reiterated the evidence of PW1 and urged the Court to find that the Plaintiff had proved to the requisite standard that the Kshs. 2,000,000/= was an additional credit facility to the 1st Defendant and that at Clause 1. 7 of the Letter of Offer, the existing facility of Kshs. 6,258,641. 75 was clearly acknowledged as outstanding as at 26 June 2008. Counsel also made reference to page 38 of the Plaintiff's Exhibit No. 1 to confirm that the account became overdrawn on 20 March 2008 and was never regularized thereafter, hence the cumulative figure of Kshs. 7,869,971. 20 as at 31 October 2010.

[8] It was further the Plaintiff's submission that, on the basis of the Letter of Guarantee and Indemnity dated 24 September 2008, the 2nd and 3rd Defendants committed themselves to settling the debt in the event of default by the 1st Defendant; and that they cannot therefore argue that they were unaware of the liability of the 1st Defendant or that it was premature to call in the Guarantee. Counsel relied on the cases of Kenindia Assurance Company Ltd vs. First National Finance Bank Ltd [2008] eKLR and Kenya Commercial Ltd vs. Mwanzau Mbaluka & Another [1997] KLR 6512 in support of the proposition that the liability of a Guarantor attaches in the event of default by the principal debtor.

[9] Counsel for the Defendants, on the other hand, submitted that the Plaintiff had failed to prove that a request was made by the 1st Defendant for additional overdraft facilities. It was also the contention of the Defendants that the interest rate of 25. 75% that the Plaintiff is claiming was not provided for in the Letter of Offer and is therefore not payable. On the basis of Section 44 of the Banking Act, Chapter 488of theLaws of Kenya and Clause 5. 5 of the Letter of Offer, the Defendants urged the Court to find that the Plaintiff could only vary the rate of interest after advising the Borrower of such variation in writing; and that, in any event, no evidence had been adduced by the Plaintiff to demonstrate that there was such prior approval of the variation of the interest rate by the Minister for Finance. The case of Margaret Njeri Muiruri vs. Bank of Baroda (Kenya) Limited [2014] eKLR was relied on in support of the aforesaid argument.

[10] The Defendants further submitted that from the Statements of Account exhibited by the Plaintiff, it could be deciphered that substantial payments had been made by the 1st Defendant in repayment of the facility and that at page 83, it was evident that the total credit amounts to Kshs. 170,021,774. 43, while the debits were Kshs. 177,891,745. 63; and that the difference is what has been claimed herein. Accordingly, it was the contention of the Defendants that it was not correct for the Plaintiff to say that the facility was not being serviced. Additionally, the Defendants relied on the In Duplum Rule under Section 44A of the Banking Act, in support of their argument that the Plaintiff cannot claim more than double the principal amount advanced in the form of interest. As for the 2nd and 3rd Defendants, the argument advanced was that the variation of interest was not communicated to them, and neither were they privy thereto.

[11] Although both parties were, on the 17 March 2015 directed by the Court to comply with the Practice Directions Relating to Case Management in the Commercial and Admiralty Division of the High Court at Nairobi, Gazette Notice No. 5179 of 25 July 2014, only the Plaintiff complied and filed a Statement of Issues. That Statement of Issues lists a total of 13 issues for determination herein. However, the same can be reduced to the following:

[a] Whether or not the Plaintiff advanced to the 1st Defendant an overdraft facility in the sum of Kshs. 8,500,000/=; and if so, on what terms;

[b] Whether or not the Defendants defaulted in the repayment of the loan on demand by the Plaintiff;

[c] What is the applicable rate of interest?

[a] Whether or not the Plaintiff advanced to the 1st Defendant an overdraft facility in the sum of Kshs. 8,500,000/=; and if so, onwhat terms;

[12] I have given due consideration to the Plaintiff's case, as well as the Defence filed in respect thereof by the Defendants. Whereas the initial Letter of Offer was not exhibited herein, the Letter of Offer dated 27 June 2008 is explicit that it was in respect of additional credit facilities to the 1st Defendant by way of overdraft, more particularly described in the Letter of Offer as "Additional Facility" in the sum of Kshs. 2,000,000/=. The "Existing Facility" for purposes of this matter was defined at Clause 1. 7 thus:

"Existing Facility" means an Overdraft Facility with a limit of KShs. 6,500,000. 00 of which the sum of KShs. 6,258,641. 75 (DR) was outstanding as at the close of business on 26th June 2008. "

And in Clause 1. 8 of the Letter of Offer the "Additional Facility" was in the contemplation of the parties agreed to mean:

"... an Additional Overdraft Facility for Kenya Shillings Two Million Kshs. 2,000,000. 00, which together with the Existing Overdraft Facility make an aggregate overdraft facility for the equivalent of Kshs. 8,500,000. 00 ("the Enhanced Overdraft Facility" details of which are set out in Paragraphs 1, 2, and 3 of this Letter;"

[13]At pages 13 and 14 of the Plaintiff's Exhibit No. 1, are signatures of the Directors of the 1st Defendant, Ananda Prakash Mishra, (the 1st Defendant herein) and Kishore Premji Kerai (the 2nd Defendant) appended to the Memorandum of Acceptance of the terms stated in the Letter of Offer. In addition, the two Directors also signed the Letter of Guarantee and Indemnity at pages 22 to 28 of the Plaintiff's Bundle of Documents marked Exhibit No. 1. They expressly and unequivocally committed themselves to pay the sum of Kshs. 8,500,000/= in place of and on behalf of the Principal Debtor, the 1st Defendant in the event of default. There was no rebuttal evidence to disprove the foregoing evidence. The said directors further committed themselves by way of the Demand Promissory Note dated 25 September 2008 (at pages 29 to 30 of the Plaintiff's Exhibit No. 1) to pay the sum of Kshs. 8,500,000/= to the Plaintiff on demand. Again, this assertion by the Plaintiff was uncontroverted.

[14] Thus, although the Defendants denied the Plaintiff's claim, on the ground that the 1st Defendant was not in existence at the time, not a scintilla of evidence was availed to prove that contention. To the contrary the Plaintiff availed evidence, by way of the letter dated 10 October 2013 by the Registrar of Companies (see the Plaintiff's Supplementary List and Bundle of Documents dated24 October 2013), that the company was in existence at the material time, and as of 10 October 2013 when that letter was written. The letter further confirms that the last annual returns filed by the company was dated 23 October 2009, after the date of the facility. Besides, in the Defendants' written submissions, it was conceded that substantial payments had been made towards servicing the loan facility from March 2008. There would be no need for such payments if no loan had been advanced to them by the Plaintiff in the first place. I am therefore satisfied that the facility in question was advanced to the 1st Defendant as contended by the Plaintiff, in the sum of Kshs. 8,500,000/=.

[15] The facility was granted on terms, and the terms were set out in the Letter of Offer dated 27 June 2008. These conditions included the payment of commitment and appraisal fees at 2%, the submission of the documents and particulars set out in Annexures I and II to the Letter of Offer as conditions precedent to the granting of the facility, including the perfection of securities. The repayment terms as well as events of default were also detailed at Clauses 11 and 12 of the Letter of Offer. One of the events was failure by the 1st Defendant to perform any of its obligations under the Letter of Offer, including failure to repay the loan on demand.

[b] Whether or not the Defendants defaulted in the repayment ofthe loan on demand by the Plaintiff;

[16] The Statements of Account exhibited at pages 38 to 86 confirm that the 1st Defendant's account was indeed overdrawn as at 31 October 2010 to the tune of Kshs. 7,869,971. 20,in respect of an overdraft whose review date was 27 June 2009. Again, there is no rebuttal evidence to displace that evidence. The Plaintiff exhibited the demand letters sent to the three Defendants (see pages 31 to 36 of the Plaintiff's Exhibit No. 1) notifying them of the status of the facility and demanding for the immediate payment of the sum claimed herein. It is therefore manifest that by the time this suit was filed on 25 August 2011, no efforts had been made by the 1st Defendant to pay the debt.

[17] Accordingly, I entertain no doubt that the Plaintiff's cause of action had crystallized for the recovery of the outstanding sum of Kshs. 7,869,971. 20 not only against the 1st Defendant, but also against the 2nd and 3rd Defendants. As was held in Kenindia Assurance Company Ltd vs. First National Finance Bank Ltd [2008] eKLR,once default is proved, liability would attach and the Plaintiff would be within its rights to sue for recovery. Here is what the Court had to say about a Guarantee:

"It is in the nature of a covenant by the Appellant to pay upon the happening of a particular event. It is a form of security of guaranteeing paying by a third party. In such cases, the most important factor to consider before liability can attach is whether there has been default. Once default is established and there has been a formal demand the other conditions are of a secondary nature and may not be used to defeat the security."

[18] The same viewpoint was expressed in Ebony Development Company Ltd v Standard Chartered Bank Ltd[2008] eKLR, thus:

“...The obligation of a guarantor is clear. It becomes liable upon default by the principal debtor. The charge concerning this matter is the second charge updating the indebtedness of the borrower. It is not the guarantor to see to it that the borrower complies with his contractual obligation but to pay on demand the guaranteed sum.”

Similarly, in Halsbury’s Laws of England 4th Edition Vol 20 para 194page 124 the obligation of a Guarantor is said to arise upon default by the Borrower. It states that:

“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 his obligation, without being entitled to require either notice of the default or previous recourse against the principal...”

[19] The decision in Ebony Development Co. Ltd vs. Standard Chartered Bank Ltd (supra) was cited with approval by the Court of Appeal in Mwaniki Wa Ndegwa vs. National Bank of Kenya Ltd [2016] eKLR in which the Court of Appeal proceeded to hold thus:

"...In our view the appellant as mortgagor and guarantor was liable to the 1st respondent under the security documents for the total amount due under the mortgage including interest, and the 1st respondent is not under any obligation to discharge the appellant or apportion the debt arising from the credit facility between the appellant, the 2nd respondent and the Principal Borrower.

[20] It is notable that the Letter of Guarantee and Indemnity has clear and conspicuous warning on the first and last page to the following effect:

"If you sign this document, you will be legally bound by its terms. You will be liable to us instead of, or as well as the Principal Debtor. You should get independent legal advice before signing this document.

It therefore cannot be validly argued, as did the 2nd and 3rd Defendants, that the suit against them is premature.

[c] What is the applicable rate of interest?

[21] The rate of interest claimed in the Plaint herein by the Plaintiff is 25. 75% from 1 November 2010 until payment in full. In his evidence before the Court, PW1 reiterated that posturing, contending that the base rate then was 18. 5%. However, Clause 5. 1 at page 3 of the Letter of Offer, it is stipulated that:

"The Borrower shall pay interest as well after as before demand or liquidation of the Borrower on any amounts for the time being and from time to time outstanding on the approved overdraft facility as follows:

(a) On amounts outstanding up to Kshs. 6,500,000. 00 at Deposit Rate plus 3% p.a. (Current Deposit Rate at 8. 25%)

(b) On amounts outstanding over and above Kshs. 6,500,000. 00 at Base Rate plus 3% p.a. (Current Base Rate at 15% per annum)."

[22] In the premises, the applicable rate herein, for the sum of Kshs. 7,869,971. 20 is 18% and not 25. 75%, and that the applicable base rate was 15% and not 18% as purported by the Defendant. It is not lost on the Court that at Clause 5. 5 of the Letter of Offer, the parties agreed that:

"The Bank may from time to time at its sole discretion revise the applicable rate of interest and will advise the Borrower in writing and/or by a Notice posted on the Notice Board at any of the bank's Branches of any change in the applicable rate. Failure by the Bank to advise the Borrower shall not prejudice the right of the Bank to recover interest charged subsequent to any such change."

[23] Nevertheless, there was no indication or even a hint by the Plaintiff that it varied the interest from what is provided for in Clause 5. 1 to 25. 75%, or that it notified the Defendants of such variation. In any event, it was incumbent upon the Plaintiff to seek the consent of the Minister for Finance for any such variation, pursuant to Section 44 of the Banking Act. In this respect, I find instructive the case of Margaret Njeri Muiruri vs. Bank of Baroda (Kenya) Limited [2014] eKLR, in which the Court of Appeal held thus:

"...the burden remained on the bank to prove that the rate of interest that was being charged was charged with the consent of the Minister. This is especially so because Section 44 of the Banking Act places the burden on the bank to seek the approval."

Thus, on the basis of the evidence on the record, am satisfied that the applicable rate of interest is that which is set out in Clause 5. 1(b) of the Letter of Offer and not 25. 75% as claimed in the Plaint.

[24] In the result, I am satisfied that the Defendant are truly and justly indebted to the Plaintiff and would wholly endorse the expression of Kwach, JA, (as he then was) in Mrao Ltd vs. First American Bank of Kenya Ltd & 2 Others [2003] eKLRwhen he stated that:

I have always understood that it is the duty of any person entering into a commercial transaction particularly one in which a large amount of money is involved to obtain the best possible legal advice so that he can better understand his obligations under the documents to which he appends his signature or seal. If courts are going to allow debtors to avoid paying their just debts by taking some of the defences I have seen in recent times for instance challenging contractual interest rate, banks will be crippled if not driven out of business altogether and no serious investors will bring their capital into a country whose courts are a haven for defaulters.

[25]Accordingly, Judgment is hereby entered for the Plaintiff against the Defendants jointly and severally as follows:

[a] For the sum of Kshs. 7,869,971. 20;

[b] Interest on [a] above at the rate of 18% per annum from 1 November 2010 until payment in full;

[c] Costs of the suit;

Orders accordingly.

DATED, SIGNED AND DELIVERED AT NAIROBI THIS 6TH DAY OF OCTOBER, 2017

OLGA SEWE

JUDGE