Faulu Microfinance Bank Ltd v Nightgale Enterprises Ltd & another (Commercial Appeal E095 of 2025) [2026] KEHC 10104 (KLR) (Commercial and Tax) (10 July 2026) (Judgment)

**REPUBLIC OF KENYA** **IN THE HIGH COURT OF KENYA AT NAIROBI** **MILIMANI LAW COURTS** **COMMERCIAL AND TAX DIVISION** **COMMERCIAL APPEAL NO E095 OF 2025** **FAULU MICROFINANCE BANK LIMITED………..…...APPELLANT** **VERSUS** **NIGHTGALE ENTERPRISES LIMITED…………..1ST RESPONDENT** **METROPOL CREDIT REFERENCE BUREAU LIMITED…………………………………………..……….2ND RESPONDENT** ***(Being an appeal from the Judgment of the Chief Magistrate Court of Kenya at Milimani Commercial Law Courts (Honourable Principal Magistrate Becky Cheloti Muema) dated 28th February, 2025, in Civil Suit No. E6943 of 2020)*** **JUDGMENT** 1. This appeal arises out of the judgment of the Principal Magistrate Hon Becky Mulemia delivered on 28th February, 2025, in Civil Suit No. E6943. 2. A brief background to the case is that the 1st Respondent instituted a suit before the trial court against the Appellant challenging a loan facility advanced by the Appellant. The 1st Respondent contended that the account opening documents and loan application forms had been executed using the forged signature of one of its directors, Evelyn Mungai, who maintained that she neither applied for nor authorized the loan facility. It was further alleged that, owing to the forged documents, the loan was fraudulently advanced to the company and the subsequent attempts by the Appellant to recover the outstanding loan balance were unlawful. The Appellant entered appearance and filed a defence. It maintained that the loan facility had been processed and disbursed after the 1st Respondent submitted all the requisite documents, in accordance with its lending procedures. 3. The Appellant averred that the loan proceeds were utilized to purchase two tippers, that the facility was partially serviced before the 1st Respondent defaulted, and that following the default it lawfully repossessed the financed assets. The Appellant consequently filed a counterclaim seeking recovery of the outstanding loan balance after crediting the proceeds realized from the sale of one of the repossessed tippers. 4. Upon hearing the parties, the learned trial magistrate found that the loan had been obtained through fraudulent means, held that the loan and the account documents were invalid and therefore null and void *ab initio*, entered judgment in favour of the 1st Respondent, dismissed the Appellant's counterclaim, and restrained the Appellant from recovering the outstanding loan. 5. Aggrieved by that decision, the Appellant lodged the present appeal vide a memorandum of appeal dated 21st March, 2025. The grounds of appeal have been outlined as follows; 6. ***The Learned Magistrate erred in law and fact in finding that the loan was obtained fraudulently without sufficient evidence.*** 7. ***The Learned Magistrate erred in law and fact by dismissing the Appellant’s Counterclaim despite evidence that the 1st Respondent benefitted from the loan.*** 8. ***The Learned Magistrate erred in law and fact by restraining the Appellant from recovering the outstanding loan thereby unfairly curtailing the Bank’s right to enforce its contractual rights.*** 9. The Appellant seeks orders that; 10. ***The Appeal be allowed and the Judgement delivered on 28th February 2025 be set aside.*** 11. ***The Plaint dated 24th November 2020 be dismissed with costs to the Appellant.*** 12. ***The Counterclaim dated 12th August 2021 be allowed as prayed.*** 13. ***The Appellant be awarded costs of the appeal.*** 14. The appeal was canvassed by written submissions, which I have considered. The Appellant’s submissions are dated 12th February, 2026, whereas the 1st Respondents’ submissions are dated 14th March, 2026. 15. The Appellant submits that the trial magistrate erred in finding that the loan facility had been fraudulently obtained, despite fraud neither being specifically pleaded nor strictly proved as required by law. It argues that the trial court improperly relied on allegations that one of the directors, Evelyn Mungai, had not signed the loan documents, yet there was no evidence that the Appellant participated in, or had knowledge of, any alleged forgery. 16. The Appellant contends that the evidence only suggested that any forgery, if it occurred, was attributable to the company's own co-directors, while investigations remained incomplete and no criminal charges had been preferred. It maintains that it processed and disbursed the loan after receiving all the requisite corporate documents from the 1st Respondent and in accordance with its standard lending procedures. 17. The Appellant further submits that the trial court exceeded its jurisdiction by determining the case on the basis of fraud. It contends that the dispute before the court concerned the contractual obligations arising from the loan facility and that the court improperly introduced and determined an issue outside the parties' pleadings. According to the Appellant, the learned magistrate failed to appreciate the separate legal personality of the 1st Respondent company by treating the alleged forgery of one director's signature as sufficient to invalidate the entire transaction, notwithstanding that the loan was advanced to the company, the funds were utilized to acquire the financed assets, and repayments had initially been made. 18. On the counterclaim, the Appellant submits that the trial magistrate erred in dismissing its claim for the outstanding loan balance and in restraining it from exercising its recovery. It argues that the evidence demonstrated that the loan was duly disbursed, the financed tippers were purchased, repayments were partially made, and, upon default, one repossessed vehicle was sold with the proceeds credited to the loan account while the other remained unsold due to its condition. The Appellant contends that the 1st Respondent failed to rebut this evidence or demonstrate that the company neither received nor benefited from the loan proceeds. It further submits that, even if one director's signature had been forged, such a finding could only affect that individual's personal liability and could not extinguish the company's contractual obligations. 19. The 1st Respondent submits that the trial magistrate correctly found that the loan facility had been fraudulently obtained and that the Appellant's appeal is devoid of merit. It contends that, as a licensed financial institution, the Appellant was under a statutory and regulatory duty to exercise a high standard of care when onboarding customers and advancing credit. In particular, the Appellant was required under the Banking Act and the Central Bank of Kenya Prudential Guidelines to undertake adequate customer due diligence, verify the identities of the company's directors, and ensure that the account opening and loan application documents had been properly executed before disbursing the loan. According to the 1st Respondent, the Appellant failed to discharge these obligations, thereby facilitating the fraudulent acquisition of the loan. 20. The 1st Respondent further submits that the evidence before the trial court established that the account opening and loan application documents had been forged, as one of its directors, Evelyn Mungai, had neither signed the documents nor participated in the loan application process. It argues that the alleged forgery was reported to the authorities, investigated by the police, and supported by documentary evidence produced during the trial. The Respondent further relies on the testimony of the Appellant's own witness, who admitted during cross-examination that the loan documents had been forged and that the matter had been referred for investigation. It therefore maintains that the trial court properly concluded that the loan had been fraudulently obtained. 21. The 1st Respondent also argues that the Appellant's failure to carry out proper customer due diligence amounted to a breach of its legal and regulatory obligations. It submits that the Appellant ought to have verified the identities of the company's directors, examined their identification documents and financial records, and personally engaged them before opening the account and advancing the loan. 22. On the Appellant's counterclaim, the 1st Respondent submits that the trial court correctly dismissed it because the loan was procured through fraudulent means. It argues that the Appellant's own negligence and failure to conduct adequate due diligence disentitled it from recovering the outstanding loan balance from the 1st Respondent. According to the Respondent, it would be unjust to compel it to repay a loan that was fraudulently obtained, and the trial court therefore properly declined to grant the relief sought in the counterclaim. On costs, the 1st Respondent submits that costs follow the event under Section 27 of the Civil Procedure Act. It contends that, since the appeal lacks merit, it should be dismissed with costs awarded to the 1st Respondent. ***Analysis*** 1. I have considered the record of appeal, the written submissions, and the case law relied upon by parties. From the grounds of appeal, the main issue for determination is whether the Appellant has made out a case for setting aside the judgment of the trial court. 2. The Court of Appeal for East Africa set out the duty of the first appellate court in ***Selle –Vs- Associated Motor Boat Co. [1968] EA 123*** in the following terms: - ***“An appeal from the High Court is by way of re-trial and the Court of Appeal is not bound to follow the trial judge’s finding of fact if it appears either that he failed to take account of particular circumstances or probabilities, or if the impression of the demeanour of a witness is inconsistent with the evidence generally.*** ***An appeal to this court from a trial by the High Court is by way of retrial and the principles upon which this court acts in such an appeal are well settled. Briefly put they are that this court must reconsider the evidence, evaluate it itself and draw its own conclusions though it should always bear in mind that it has neither seen nor heard the witnesses and should make due allowance in this respect.*** ***In particular, this court is not bound necessarily to follow the trial judge’s findings of fact if it appears either that he has clearly failed on some point to take account of particular circumstances or probabilities materially to estimate the evidence or if the impression based on the demeanor of a witness is inconsistent with the evidence in the case generally.”*** 1. The Appellant herein has faulted the decision of the trial court which held that the loan disbursed by the Appellant to the 1st Respondent had been gotten through fraud. According to the Appellant the finding was erroneous because fraud had not been pleaded or proved. 2. From the case of ***Vijay Morjaria vs Nansingh Madhusingh Darbar & Another [2000] eKLR, Tunoi, JA****.* (as he then was) stated as follows: ***“It is well established that fraud must be specifically pleaded and that particulars of the fraud alleged must be stated on the face of the pleading. The acts alleged to be fraudulent must, of course, be set out, and then it should be stated that these acts were done fraudulently. It is also settled law that fraudulent conduct must be distinctly alleged and distinctly proved, and it is not allowable to leave fraud to be inferred from the facts.”*** 1. I have examined the plaint filed before the trial court. While the 1st Respondent challenged the validity of the loan transaction and alleged that the signature of one of its directors had been forged, the plaint neither pleaded fraud against the Appellant nor set out the particulars of fraud as required by law. It is trite that parties are bound by their pleadings and the learned magistrate erred in holding that the 1st Respondent had pleaded fraud. 2. On the issue of the forged signature, I note that the 1st Respondent produced a forensic report detailing that the signature was forged and therefore did not participate in the account opening and loan application. In ***Karak Brothers Company Ltd v Burden (1972) All ER 1210*** the Court had this to say about a bank’s contractual duty to its customer:- ***“…. a bank has a duty under its contract with its customer to exercise “reasonable care and skill” in carrying out its part with regard to operations within its contract with its customer. The standard of that reasonable care and skill is an objective standard applicable to bankers. Whether or not it has been attained in any particular case has to be decided in the light of all the relevant facts, which can vary almost infinitely.”*** 1. In view of the above, the main question is whether the alleged forgery had the effect of rendering the entire transaction null and void. According to ***Salomon v A. Salomon & Co. Ltd [1897] AC*** it has been a cardinal principle of company law that a company enjoys a legal personality separate and distinct from its directors and shareholders. Consequently, the rights and obligations arising under a contract entered into by the company are those of the company itself and not of its individual directors. 2. In the present case, can it therefore be said that where there is a dispute on the execution of account opening and loan documents by one director relieve of the company its obligations? The rule in ***Royal British Bank v Turquand (1856) 6 E & B 327,*** commonly referred to as the doctrine of indoor management, protects persons dealing with a company in good faith by entitling them to assume that the company's internal procedures and approvals have been duly complied with. In this case the case, the court held as follows; ***“while persons dealing with a company are assumed to have read the public documents of the company and to have ascertained that the proposed transaction is not inconsistent, therewith, they are not required to do more; they need not inquire into the regularity of the internal proceeding- what Lord Hatherley called “the Indoor Management” and may assume that all is being done regularly. This rule which is based on the general presumption of law, is eminently practical, for business could not be carried on if a person dealing with the apparent agent of a company was compelled to call for evidence that all internal regulations had been duly observed. Thus, where the articles give power to borrow with sanction of an ordinary resolution of the general meeting, a leader who relies on this power need to inquire whether such sanction has in fact been obtained. He may assume that it has, and if he is acting bona fide, he will, even though the sanction has not been obtained, stand in as good position as if it had been obtained”.*** 1. In this instance, whereas the bank has an obligation to ensure that due diligence is done, the documents required by the bank had been availed by the Appellant. The evidence on record shows that the loan facility was indeed advanced to the 1st Respondent company for the acquisition of two tippers. The Appellant's evidence, which was not substantially controverted, was that the loan proceeds were disbursed, repayments were made for a period, and upon default one of the financed vehicles was repossessed and sold with the proceeds credited to the loan account. 2. In this regard, the 1st Respondent company benefited from the facility not withstanding the alleged forgery of one director's signature. In my view, I do not agree with the learned magistrate’s position that once the signature of PW2 was found to have been forged, the entire loan transaction automatically became null and void *ab initio*. This is because in allowing that reasoning, it would be overlooking the principle of separate legal personality of the company. The learned magistrate therefore conflated the issue of the alleged forgery with the distinct question of the enforceability of the loan agreement against the company. 3. On the issue of counterclaim, the court notes that having found that the learned trial magistrate erred in declaring the loan transaction null and void, and in restraining the Appellant from enforcing its contractual rights, it follows that the dismissal of the Appellant's counterclaim cannot stand. The Appellant produced documentary evidence demonstrating that the loan facility was approved and disbursed to the 1st Respondent, that the proceeds were utilized for the acquisition of two vehicles, that repayments were made before the account fell into arrears, and that following default one of the financed vehicles was repossessed and sold with the proceeds credited to the loan account. The Respondent did not adduce evidence disputing the disbursement of the facility or the company's benefit from the loan proceeds. 4. In this regard, I am therefore satisfied that the Appellant proved its counterclaim on a balance of probabilities. The learned trial magistrate erred in dismissing the counterclaim and in issuing injunctive orders restraining the Appellant from recovering the outstanding loan. Those findings cannot be allowed to stand. 5. In the end, I find that the appeal before this Court is merited and the same is hereby allowed in the following terms. 1. **The judgment delivered on 28th February, 2025, and decree issued on 14th March, 2025, in Civil Suit No. E6943 of 2020** **are hereby set aside.** 2. **The Appellant's counterclaim dated 12th August, 2021, is hereby allowed as prayed.** 3. **Costs of the Appeal awarded to the Appellant.** ***Delivered, Dated and Signed virtually this 10th day of July, 2026*** **RHODA RUTTO** **JUDGE** **Court Assistant: Wabwire** **Mr. Alela holding brief for Momanyi for the 2nd Respondent** **Ms. Kimathi for the Appellant** **Mr. Rukwaro holding brief for Mr. Kimani for the 1st Respondent**