[2023] KEHC 25859 (KLR)

I & M Bank Limited v Omolo (Civil Case 11 of 2020) [2023] KEHC 25859 (KLR) (21 November 2023) (Judgment)

Neutral citation: [2023] KEHC 25859 (KLR)

Republic of Kenya

In the High Court at Kisumu

Civil Case 11 of 2020

RE Aburili, J

November 21, 2023

Between

I & M Bank Limited

Plaintiff

and

Nelson Asino Omolo

Defendant

Judgment

1. This Judgement determines the Originating Summons dated 25th August 2021, brought under the provisions of Order 37 Rule 4 of the Civil Procedure Rules, Section 3A of the Civil Procedure Act and Section 79 (6) of the Land Act 2012.

2. Vide directions given on the 17. 11. 2020, the aforementioned Originating Summons was deemed to be a plaint. The replying affidavit was deemed to the defence.

3. The plaintiff I & M Bank, a financial institution regulated by the Central Bank of Kenya and established under the Banking Act seeks the following orders:a.An order granting leave to the Chargee/Plaintiff to sell the immovable property, Kisumu/Dago/1104 to recover the outstanding balances on account of the borrower.b.That the Chargee/Plaintiff is entitled to vacant possession of immovable property, Kisumu/Dago/1104 to facilitate the exercise of its statutory power of sale.c.That the chargor/defendant by himself, tenants/servants and/or agents or any other occupants do forthwith deliver and give vacant possession of immovable property; Kisumu/Dago/1104 to the chargee/plaintiff and/or is appointed its agent/s.d.The chargor/defendant bear costs of this application.

4. The Originating Summons was supported by the affidavit of Andrew Muchina, the legal manager of the plaintiff sworn on the 25th August 2020.

5. The plaintiff’s case against the defendant is that the defendant applied for credit facilities from the plaintiff Bank and vide a letter of offer dated 22nd November 2006, the plaintiff approved the application and advanced the defendant Kshs. 4,000,000 on the strength of an informal charge over property title No. L.R. No. Kisumu/Dago/1104 that was registered in the defendant’s name.

6. The Plaintiff asserted and deposed that the defendant defaulted in his repayments forcing the plaintiff to issue a 14 days’ notice on 4th February 2020 but that the said notice did not elicit any response from the defendant.

7. The plaintiff stated that it was desirous of disposing of the property by public auction/private treaty to recover the outstanding debt that amounted to Kshs. 1,601,625. 70 as at 19th August 2020 and further that it was apprehensive that continued non-payment of the loan will result in the debt outstripping the value of the security.

8. The plaintiff’s case was further supported by the testimony of PW1, Doreen Otieno, the plaintiff’s legal officer who adopted her witness statement dated 2nd December 2020 and filed in court on the 11th January 2023, substituting the statement of the initial witness who had since left the plaintiff’s employment, but reiterating the depositions of Andrew Muchina.

9. In cross-examination, PW1 restated her testimony in chief and further stated that she was not an employee of Giro Bank when it issued the facility to the respondent. She stated that at the time of the offer, the outstanding amount was Kshs. 4,776,676. 01 although the offer letter did not state that the overdraft was part of the Kshs. 4,776,676. 01.

10. PW1 further stated that when one takes an overdraft facility, one is given a loan account number that is the link to the overdraft facility. She stated that this account was opened on 1. 1.2013 from Giro Bank and taken over by the applicant Bank on the 1. 4.2017 after the plaintiff Bank acquiring the Giro Bank.

11. In re-examination, PW1 reiterated that the bank statements reflected the true position from the takeover of Giro Bank by the plaintiff bank.

12. The defendant filed his statement of defence dated 18th March 2021 and filed on the 24th March 2021. It was the defendant’s contention that before perfection of the security and before receiving the overdraft of Kshs. 4,000,000, Giro Commercial Bank Limited experienced severe problems culminating in its acquisition in 2017 by the plaintiff by which time, the debt on the current account was Kshs. 549,350. 66.

13. The defendant testified as DW1 and adopted his witness statement dated 28th March 2021. The defendant also filed a letter from I & M Bank dated 4th February 2020 and produced it as DEX1. He also filed a letter dated 8th May 2020 and produced it as DEX2.

14. The defendant further averred that in February 2020, without any prior notice, the plaintiff demanded payment from the defendant the sum of Kshs. 804,919. 50 with no explanation as to how the debt had increased by 146. 5% in 3 years.

15. In cross-examination, the defendant stated that he never took a loan of Kshs. 4,000,000 from the Bank in respect of his property LR. Kisumu/Dago/1104. He admitted that he was aware that I & M Bank bought and took over from Giro Bank. The defendant further confirmed receiving two demand letters from I & M Bank but stated that he did not owe the Bank any money. He further stated that the money he took from Giro Bank was secured by his two Motor Vehicles and the title to his land which was still held by the Bank.

16. In re-examination, the defendant testified that the earlier facility he took from Giro Bank was Kshs. 750,000 by way of overdraft and the security provided were his two vehicles KAE 276Y Subaru Sedan and KAG 353H of which he received the demand Notice. The defendant further testified that the 4 million for which he signed an acceptance letter, was never advanced to him as Giro Bank went into liquidation immediately and a moratorium was declared on all loans. It was his testimony that there was no document supporting the manner in which the 4 million was advanced to him, not even by cheques and as such, the claim for Kshs. 4,000,000 was a mystery to him.

17. When questioned by the court as to whether he only know of Kshs. 750,000 and whether this amount was also caught up by the moratorium or he had repaid it, the defendant stated that he had not repaid the Kshs. 750,000 and that his logbooks were still held by the Bank. The defendant testified that he was ready and willing to repay this amount with a repayment plan.

18. The parties filed written submissions.

The Plaintiff’s Submissions 19. It was submitted that the Letter of Offer dated 22. 11. 2006 together with Title No. Kisumu/Dago/1104 evidenced an intention to create an informal charge as provided for under Section 79 (6), (7), (8) and (9) of the Land Act.

20. The plaintiff further submitted that whilst there had not been exhibited any document to show how the document of title was deposited, there was a demonstration in the Letter of Offer to show the intention to charge the property to secure the payment of Kshs. 4,000,000 that would be availed to the defendant in the form and nature of a temporary overdraft. Reliance was placed on the case of Jamii Bora Bank v Wapak Developers [2018] eKLR.

21. It was submitted that at no time did the defendant dispute the amount claimed by the plaintiff whereas he blatantly ignored two demand notices dated 4. 2.2020 and 8. 5.2019 and further that a dispute as to the amount owing was a question to be determined upon production of evidence at full trial to enable the Court interrogate the contract.

22. It was the plaintiff’s submission that it was entitled to realize the security offered to guarantee payment of the debt due.

The Defendant’s Submissions 23. It was submitted that the letter of offer produced as Exhibit P-1 showed the facility to have been an overdraft limit of an amount of Kshs. 4,000,000 that were held before this facility was provided, including liens on fixed deposits of an aggregate Kshs. 3,680,863. 35 and chattels mortgages over two motor vehicles. The defendant submitted that the plaintiff’s witness made no mention at all of the plaintiff having exercised its right to set off or consolidated securities for other liabilities.

24. The defendant submitted that there must be default in respect of the debt or facility for which the informal charge was created for realization of security to arise as was held in the cases of Lincoln Kivuti Njeru v Insurance Company of East Africa [2017] eKLR, Jamii Bora Bank Limited v Wapak Developers [2018] eKLR and Kingdom Bank Limited v Okotsi [2022] KEHC 12771 (KLR).

25. It was submitted that the plaintiff had failed to prove that the defendant was in default of repayment of the loan/overdraft facility of Kshs. 4,000,000. 00 that he disputed for the reason that Giro Commercial Bank Ltd suffered liquidity problems and declared a moratorium on all lendings after the loan/overdraft facility was approved and before it was provided to the borrower.

26. The defendant submitted that PW1’s reference to the letter of offer stating that at the date of the letter of offer the borrower had a debit balance of Kshs. 4,776,676. 01 is a historical detail of no aid to the plaintiff as, applying the principle in the Kingdom Bank Limited case, it would only be with reference to bank statements issued after the provision of the loan/overdraft facility, and not merely after its approval, that default and indebtedness would be shown therein.

27. It was submitted that where a chargee seeks to exercise rights under an informal charge to recover debts separate from those expressly stipulated in the agreement by which the informal charge was created, then it must ‘enter into further charges or agreements in the event that [it wants] security provided for any other monies that may be found to be owed’ as was held in the case of Lincoln Kivuti Njeru supra.

28. The defendant submitted that the only agreement for the loan/overdraft facility was the letter of offer of the 22nd November 2006 and unless and until there was a further agreement for the creation of a charge over the suit property for the purposes of the separate and earlier facilities, then the security of the suit property could not be available to the plaintiff except for the recovery of the loan/overdraft facility, which the plaintiff had shown evidence was approved but cannot prove was provided.

29. It was submitted in the circumstances that the plaintiff’s suit seeking orders for the possession and sale under statutory powers of the suit property as the subject of an informal charge must fail for the reason that no default of payment, of the facility of the loan/overdraft of Kshs. 4,000,000 for which the informal charge was created, had been shown.

Analysis and Determination 30. I have considered the pleadings, the oral testimonies as well as the submissions as filed. The issue for determination is whether the plaintiff has made out a case for the orders sought and on a balance of probabilities.

31. The legality of an informal charge is recognised by Section 79(6) of the Land Act. In the case of Jamii Bora Bank supra, the Court held as follows:“Section 79(6) recognizes an informal charge which may be created where a chargee accepts a written and witnessed undertaking from a chargor, the clear intention of which is to charge the chargor’s land or interest in land with the repayment of money or monies worth obtained from the charge. Section 2 of the land Act envisages the definition of an Informal Charge. The legality of such agreements is clearly spelt out in section 79 of the land Act which provides as under:“Informal charges.79 (6)An informal charge may be created where –(a)a chargee accepts a written and witnessed undertaking from a chargor, the clear intention of which is to charge the chargor’s land or interest in land, with the repayment of money or money’s worth, obtained from the chargee;(b)the chargor deposits any of the following-(i)a certificate of title to the land;(ii)a document of lease of land;(iii)any other document which it is agreed evidences ownership of land or a right to interest in land.(7)A chargee holding an informal charge may only take possession of or sell the land which is the subject of an informal charge, on obtaining an order of the court to that effect.(8)An arrangement contemplated in subsection (6) (a) may be referred to as an "informal charge" and a deposit of documents contemplated in subsection (6) (b) shall be known and referred to as a "lien by deposit of documents.(9)A chargee shall not possess or sell land whose title document have been deposited with the chargor under an informal charge without an order of the Court. “Section 2 of the Land Act of the Land Act further defines a charge as follows:“Charge” means an interest in land securing the payment of money or money’s worth or the fulfillment of any condition, and includes a subcharge and the instrument creating a charge, including –(a)an informal charge, which is a written and witnessed undertaking, the clear intention of which is to charge the chargor’s land with the repayment of money or money’s worth obtained from the chargee….”As regards creation of an Informal Charge I wish to place reliance on Tassia Coffee Estate Limited and Another v. Milele Ventures Limited (2014) eKLR in which the court stated that by depositing the title deed with the Plaintiff, the Defendant created an informal charge in favour of the Plaintiff over the suit property as security for payment of the balance of purchase of purchase price and other parcels of land. The Plaintiffs became chargees of an informal charge over the suit property and enjoyed a lien by deposit of the documents.”

32. There is no dispute regarding the existence of the Letter of Offer – For Regular Overdraft Limit of Ksh. 4. 0.M dated 22nd November 2006. A copy of the said Agreement appears as Annexture “PEX2”. This Agreement was duly executed by Fairsure Insurance Brokers Ltd as the borrower, and Giro Commercial Bank Ltd (as acquired by the Plaintiff herein) as the Financier. The agreement provides for an amount of Kshs. 4 million as the overdraft limit and also provides for outstanding amount as at 22. 11. 2006, the date of the offer, at Kshs. 4,776,676. 01. At page 2 of the offer letter, the agreement provides for existing securities provided by the defendant and other directors of the borrower, Fairsure Insurance Brokers Limited, including the property, Kisumu/Dago/1104, registered in the defendant’s name and further goes on to provide for additional securities.

33. The defendant did not only accept those terms but also furnished the requisite security to the satisfaction of the bank. In this way I find that an informal charge was created over the property Kisumu/Dago/1104.

34. It was the defendant’s case that unless the plaintiff showed that there was a further agreement for the creation of a charge over the suit property for the purposes of the separate and earlier facilities, then the security of the suit property could not be available to the plaintiff except for the recovery of the loan/overdraft facility, which the plaintiff had shown evidence was approved but cannot prove was provided.

35. In signing the letter of offer dated 22nd November 2006, the defendant consented to his properties listed therein at Paragraph 7, existing securities and additional securities to act as collateral for the overdraft. It is also noteworthy that the amount secured by the agreement as per paragraph 3 amounted to the present outstanding sum as at 22. 11. 2006 of Kshs. 4,776,676. 01.

36. In the case of Ibrahim Seikei T/A Masco Enterprises v Delphis Bank 2004 eKLR the court stated that:“We must protect the intention of the parties so that every party adheres to his contractual duty to the other. The appellant was advanced the money on the strength of the security he provided to the bank and had an obligation to repay the monies under the terms agreed. Banks do not give monies as gratuity or love for human kind. I cannot issue an injunction against a party wanting to exercise its statutory power of sale merely because the amount due is in dispute.”

37. From the evidence adduced, I am satisfied that the Letter of Offer dated 22. 11. 2006 covered all the funds owed by the defendant to the plaintiff hence the need for specific paragraphs on existing securities and additional securities as the parties recognized the increase in risk in undertaking the agreement and thus there was need for additional collateral for the same.

38. The defendant averred that he did not receive the funds stated in the overdraft as at the time the letter of offer was executed, for reasons that the financier was placed on a moratorium and all loans were stopped. However, it is noteworthy that an overdraft does not mean that one is credited with funds but rather it is a loan arrangement that enables individuals or businesses to borrow up to an agreed limit without prior approval.

39. Halsbury’s Laws of England 4th ed. Vol. 3 paragraph 155 defines an overdraft as:“A customer may borrow from a banker by way of loan or by way of overdraft. A loan is a matter of special agreement. In the absence of agreement, express or implied from a course of business, a banker is not bound to allow his customer to overdraw. An agreement for an overdraft must be supported by good consideration, and it may be express or implied.Drawing a cheque or accepting a bill payable at the banker’s where there are not funds sufficient to meet it amounts to a request for an overdraft.”

40. It is public knowledge that the plaintiff herein acquired all the assets and liabilities of Giro Commercial Bank Ltd as was evidenced by the Kenya Gazette Notice No. 1301 Vol CXIX – No. 19 dated 13th February 2017 and adduced as PEX4.

41. The plaintiff claims that the facility fell into arrears and that despite notice/demands issued to the defendant, the default persisted. The defendant or guarantor is liable to pay the debt owed by the Borrower. On the basis of the above, I am satisfied that the plaintiff is entitled to sell the collateral property in order to recover the amount due to it.

42. The plaintiff has also prayed to be granted vacant possession of the collateral property to enable it sell the same in order to recover the monies due to it. In the Jamii Bora Bank (supra), the Court further held as follows:“Under Section 79(9) above, a Chargee holding an informal charge may only take possession or sell the land which is the subject of the informal charge on obtaining an order of the Court. The Plaintiff herein is seeking consent of the court to proceed to exercise the remedies envisaged under Section 90 of the Land Act, No. 6 of 2012. The charger deposited title documents with the Chargee which will be held by the Chargee as a lien for security. That in case there is a default in the repayment of the loan amounts, the Chargor may move to Section 90 of the Land Act with the consent of the Court. It is trite that a contract that the parties have agreed to perform, the Court will not interfere unless that contract is tainted with illegalities, fraud, is against public policy, misrepresentation etcetera. In that respect, the parties are expected by the Court to be able to perform their part of the bargain.Its indeed trite law for this Court to uphold the sanctity of lawful commercial transactions to give effect to the intentions of the parties. I consider the effect of a contract of a mortgagor and mortgagee to be of such a nature that it is protected under the nuances of constructive trust. The mortgagors interest in the land is acquired upon the contract formation by signing of legal or informal charge enforceable as equitable mortgage. In the instant case the defendant action of conveyance and deposit of titles to the suit land retained the legal title while the Plaintiff obtained equitable beneficial title to the properties.The question at stake can be succinctly answered by the dictum in the case of Ibrahim Seikei T/A Masco Enterprises V Delphis Bank (2004)eKLR where the Court held “we must protect the intention of the parties so that every party adheres to his contractual duty to the other. The appellant was advanced the money on the strength of the security he provided to the bank and had an obligation to repay the monies under the terms agreed. Banks do not give monies as gratuity or love for human kind. I cannot issue an injunction against a party wanting to exercise its statutory power of sale merely because the amount due is in dispute.” With the leave of the Court the plaintiff has the backing of the law to proceed accordingly to enforce the mortgage contract.”

43. Accordingly, I find and hold that the plaintiff is entitled to realize the security offered to guarantee payment of the debt due to it. Before it does that, leave of this court is mandatory and the usual processes for such realization must be followed to the letter.

44. In the end, I find and hold that the plaintiff has proved its case against the defendant on a balance of probabilities. I allow the claim and order as follows:a.I grant leave to the Plaintiff herein I&M Bank to put in motion the legal process of selling the immovable property, Kisumu/Dago/1104 to recover the outstanding balances on the account of the borrower/ respondent herein.b.I order that the plaintiff is entitled to vacant possession of immovable property, Kisumu/Dago/1104 to facilitate the exercise of its statutory power of sale.c.I order the Defendant by himself, tenants/servants and/or agents or any other occupants do forthwith deliver and give vacant possession of immovable property, Kisumu/Dago/1104 to the plaintiff and/or its appointed agent/s.d.As the suit herein was for this court to pronounce itself on the law as it is, I order that each party shall bear their own costs of this suit.e.Decree to issue.f.This file is accordingly closed.

DATED, SIGNED AND DELIVERED AT KISUMU THIS 21STDAY OF NOVEMBER, 2023R.E. ABURILIJUDGE