[2022] KEHC 13705 (KLR)

Momentum Credit Limited v Kabuiya (Civil Appeal E035 of 2022) [2022] KEHC 13705 (KLR) (Commercial and Tax) (7 October 2022) (Judgment)

Neutral citation: [2022] KEHC 13705 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts)

Commercial and Tax

Civil Appeal E035 of 2022

DAS Majanja, J

October 7, 2022

Between

Momentum Credit Limited

Appellant

and

Teresia Nduta Kabuiya

Respondent

(Being an appeal from the Judgment and Decree of Hon. K. G. Odhiambo, RM/Adjudicator delivered on 11th March 2022 in SCC COMM E. 550 of 2021 at the Small Claims Court, Milimani)

The in duplum rule is not applicable to non-deposit taking money lending institutions.

The appeal arose from a decision of the Small Claims Court in which the respondent was successful in proving that a loan granted to it by the respondent had interest rates that were exorbitant and unconscionable. The appellant contested the decision on grounds that it was not a financial institution that would be legally bound by the in duplum rule under section 44 of the Banking Act. The High Court held that for an organization to be clasiffied as a financial institution, it had to accept deposits from members of the public and employ that money or part of it for lending or investment as contemplated under the Act.

Reported by John Ribia

Financial Law– money lending instituions - classification - regulation – applicability of the in duplum rule – where a money lending instituion that did not take deposits lended money on terms which went against the in duplum rule - whether the in duplum rule was applicable to non deposit taking money lending institutions - whether a microfinance institution that was a micro lending and non-deposit taking institution met the definition of a bank, a financial institution, or a mortgage finance under the Banking Act to warrant regulation under the Banking Act - whether a microfinance institution that was a micro lending and non-deposit taking institution under the Microfinance Act was subject to the supervision and regulation of the Central Bank of Kenya - whether interest rate caps applied to microfinance institutions, specifically micro-lending and non-deposit-taking institutions – Banking Act (CAP. 488) sections 2 and 44; Central Bank of Kenya Act, (CAP. 491), section 4A(1)(c).

Brief facts The appellant advanced the respondent a loan facility of Kshs. 1,300,000. 00 on November 11, 2020 on the strength of a motor vehicle (the motor vehicle) as collateral. When the respondent defaulted on repayment of the loan, the appellant repossessed and sold the motor vehicle for Kshs. 1,500,000. 00 against an outstanding amount of Kshs. 2,050,328. 00 due and owing as at April 27, 2021. The appellant therefore claimed Kshs. 731,722. 00 made up of Kshs. 681,722. 00 being the principal sum with interest, penalties and costs and legal costs of Kshs. 50,000. 00. The respondent denied the claim and urged the court to dismiss. The respondent contended that the motor vehicle which was originally valued at Kshs. 2,800,000. 00 was undervalued at auctioned. The respondent contended that the appellant changed the terms of the loan facility from 14% per annum to 10 % per month without informing her and that the interest was extremely high, unconscionable, illegal and usurious and contrary to the prevailing lending rates and standards set by the Central Bank of Kenya.The Small Claims Court dismissed the appellants claim and held that the loan was disbursed and when the respondent defaulted, the appellant repossessed and sold the motor vehicle. The court held that the Banking Act and Central Bank of Kenya Act applied to the appellant hence the interest rates and penalties charged by the appellant were exorbitant and unconscionable.Aggrieved the appellant filed the instant appeal. The appellant contended that the interest charged by the appellant was not exorbitant and unconscionable. It contended that as a microfinance institution it was not limited to the strictures of the in duplum rule (limited the amount a bank or financial institution could recover from a non-performing loan) under section 44 of the Banking Act.

Issues

Whether the in duplumrule was applicable to non deposit taking money lending institutions.

Whether a microfinance institution that was a micro lending and non-deposit taking institution met the definition of a bank, a financial institution, or a mortgage finance under the Banking Act to warrant regulation under the Banking Act.

Whether a microfinance institution that was a micro lending and non-deposit taking institution under the Microfinance Act was subject to the supervision and regulation of the Central Bank of Kenya.

Held

The position of the trial court that, since the appellant did not adduce evidence to show that the Banking Act and Central Bank of Kenya Act did not regulate it, and because the appellant described itself as a financial institution, then some legislation had to regulate its conduct, was erroneous. The issue of unconscionable and excessive interest was raised by the respondent hence the respondent had the burden of proving that the appellant was regulated as alleged. The legal burden of proof lay upon the party who invoked the aid of the law and substantially asserted the affirmative of the issue. That was the purport of section 107(1) of the Evidence Act.

Section 44 of the Banking Act incorporated the in duplum rule which limited the amount a bank or financial institution could recover from a non-performing loan. Section 2 of the Banking Act defined an institution to mean a bank or financial institution or mortgage finance company. A financial institution was described to mean a company other than a bank which carried on or proposed to carry on financial business and included any other company which the minister could by notice on the gazette, declare to be a financial institution for the purposes of the Banking Act.

For purposes of section 44 of the Banking Act, it had to be established that the appellant was a bank or financial institution. The appellant was neither a bank nor a mortgage finance company. In order to qualify as a financial institution, the appellant had to either be gazetted as such by the Minister or be one that carried on or proposed to carry on financial business as defined under the Banking Act. To qualify as a financial institution, it had to accept money on deposit from members of the public and employ that money or part of it for lending or investment as contemplated under the Act. The appellant was not a deposit taking institution.

The finding by the trial court that by describing itself as a financial institution, the appellant brought itself under the ambit of the regulation under the applicable statutes was rejected by the instant court. The issue whether the appellant was regulated was not a matter of pleading or choice. The trial court failed to consider whether the appellant was subject to section 44 of the Banking Act. Section 44 did not apply to the relationship between the appellant and the respondent. The rate of interest in the circumstances was governed by contractual provisions which were not disputed.

A court of law could not rewrite a contract with regard to interest as the parties were bound by the terms of their contract. Nevertheless, courts could interfere with or refuse to enforce contracts which were unconscionable, unfair or oppressive due to procedural abuse during formation of the meaningful choice for the other party. An unconscionable contract was one that was extremely unfair. Substantive unconscionability was that which resulted from actual contract terms that were unduly harsh, commercially unreasonable, and grossly unfair given the existing circumstances of the case.

The substantive unconscionability relied on by the respondent was based on breach of section 44 of the Banking Act was not applicable to the instant case.

Appeal allowed.

Orders

The judgment of the subordinate court dated March 11, 2022 was set aside and substituted with a judgment for the appellant against the respondent for Kshs. 731,722. 00.

The respondent was to pay costs of the subordinate court and of the instant appeal. The costs of the appeal were assessed at Kshs 25,000. 00.

Citations CasesKenya Kenya Commercial Finance Company Ltd v Kipng'eno Arap Ngeny & another [ 2002] 1 KLR 106 - (Explained)

Mati, John Munuve v Returning Officer Mwingi North Constitutency & 2 others Election Appeal 5 of 2018; [2018] KECA 700 (KLR) - (Explained)

Muiruri, Margaret Njeri (Being the Administrator of the Estate of the Late Joseph Muiruri Gachoka (Deceased)) v Bank of Baroda (Kenya) Limited Civil Appeal 282 of 2004; [2014] KECA 319 (KLR) - (Explained)

Wambugu, Francis Mbaria v Jijenge Credit Limited & another Civil Case 145 of 2019; [2020] KEHC 2586 (KLR) - (Explained)

StatutesKenya Banking (Amendment) Act, 2016 (Act No 25 of 2016) section 33B - (Interpreted)

Banking Act (cap 488) section 44 - (Interpreted)

Central Bank of Kenya Act (cap 491) section 4A(1)(c) - (Interpreted)

Evidence Act (cap 80) sections 59, 60, 107(1) - (Interpreted)

Finance Act, 2019 (Act No 23 of 2019) In general - (Cited)

Microfinance Act, 2006 (Act No 19 of 2006) In general - (Cited)

Small Claims Court Act, 2016 (Act No 2 of 2016) section 38(1) - (Interpreted)

AdvocatesMs Wenene instructed by Wenene and Andama Advocates for the AppellantMs Nyamu instructed by Daniel Henry and Company Advocates for the Respondent

Judgment

1. This is an appeal from a judgment of the Small Claims Court dismissing the appellant’s claim seeking judgment for Kshs 731,722. 00 against the respondent.

2. The facts leading up to this appeal are set out in the respective pleadings. The appellant’s case in its Statement of Claim dated November 8, 2021, was that it advanced the respondent a loan facility of Kshs 1,300,000. 00 on November 11, 2020 on the strength of motor vehicle registration number KBP 252A (‘’the motor vehicle’’) as collateral. When the Respondent defaulted on repayment of the loan, the appellant repossessed and sold the motor vehicle for Kshs 1,500,000. 00 against an outstanding amount of Kshs. 2,050,328. 00 due and owing as at 27th April 2021. The appellant therefore claimed Kshs. 731,722. 00 made up of Kshs 681,722. 00 being the principal sum with interest, penalties and costs and legal costs of Kshs 50,000. 00.

3. The respondent denied the claim and urged the court to dismiss it in its response to the Statement of Claim dated December 8, 2021. She stated that there was no evidence that the motor vehicle was sold and that if it was, it was transferred without her knowledge and consent. Further, that the motor vehicle which was originally valued at Kshs 2,800,000. 00 was auctioned at an undervalue. She stated that the appellant changed the terms of the loan facility from 14% per annum to 10 % per month without informing her and that the interest was extremely high, unconscionable, illegal and usurious and contrary to the prevailing lending rates and standards set by the Central Bank of Kenya.

4. At the hearing each party called one witness. The adjudicator considered the evidence and submissions and came to the conclusion that the loan was disbursed and when the respondent defaulted, the appellant repossessed and sold the motor vehicle. The court held that the Banking Act (chapter 488 of the Laws of Kenya) and Central Bank of Kenya Act (chapter 491 of the Laws of Kenya) applied to the appellant hence the interest rates and penalties charged by the appellant were exorbitant and unconscionable. The court further held that the interest rate applied by the appellant was unconscionable in light of the decision in Kenya Commercial Finance Company Ltd v Ngeny and another [2002] 1 KLR and Margaret Njeri Muiruri v Bank of Baroda (Kenya) Limited [2014] eKLR and concluded as follows:Even though parties freely entered into the loan agreement, the exorbitant interest and penalties charged call upon the court to intervene to protect the respondent from a bad bargain. The vehicle was repossessed two months after the loan default. It was sold in the month of April at 1,500,000. 00. The amount received from the loan was less the value of the vehicle but as that may be the case, it was sufficient and reasonable in offsetting the loan amount considering the period of default. The claimant’s claim is untenable in light of the exorbitant and unconscionable interest rates charged. Subsequently, the court does dismiss the claimant’s claim. Each party to be their own costs.

5. It is the judgment that has precipitated this appeal whose grounds are set out in the memorandum of appeal dated March 22, 2022. The appellant attacks the judgment on the basis of several errors of fact and law. Before I consider the grounds and parties’ written submissions, it is important to recall the extent of this court’s jurisdiction. In determining this appeal, I am cognizant of the fact that under section 38(1) of the Small Claims Court Act, 2016 an appeal to this court is limited to matters of law only. Accordingly, the court is not permitted to substitute the subordinate court’s decision with its own conclusions based on its own analysis and appreciation of the facts unless the findings are so perverse that no reasonable tribunal would have arrived at them (John Munuve Mati v Returning Officer Mwingi North Constituency & 2 others [2018] eKLR).

6. The basic facts of the case are not disputed and indeed the adjudicator found as a fact the respondent accepted the loan but defaulted in repayment whereupon the appellant repossessed and sold the motor vehicle. It is the balance which the appellant claimed from the respondent that the court held was cancelled out by the exorbitant interest. As the conclusions by the adjudicator show, the basis of the judgment is whether the interest charged by theappellant was exorbitant and unconscionable. This is a question of law as it concerns the interpretation and application of statutory provisions.

7. In its submissions, the appellant raised four issues for determination upon which the parties submitted. First, whether the appellant is a financial institution regulated by the Banking Act and whether the in duplum rule applies to it. Second, whether the interest rate cap applies to the appellant as a microfinance institution. Third, whether the interest charged by the appellant was justified and in accordance with law and last, whether the interest was unconscionable.

8. Although the response to the claim was not clear or did not plead with particularity the basis of its challenge to the contractual interest, the parties litigated and submitted on the matter on the basis the defence was based on the provisions on the Banking Act. The adjudicator held that the appellant did not adduce evidence to show that the Banking Act and Central Bank of Kenya Act did not regulate it but since the appellant described itself as a financial institution then, “some legislation must regulate it conduct’’.

9. The adjudicator’s approach was erroneous since the issue of unconscionable and excessive interest was raised by the respondent hence the respondent had the burden of proving that the appellant was regulated as alleged. Generally, the legal burden of proof lies upon the party who invokes the aid of the law and substantially asserts the affirmative of the issue. That is the purport of section 107(1) of the Evidence Act (chapter 80 of the Laws of Kenya), which provides:107. (1)Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.

10. Further, the court was entitled to take judicial notice of the fact that the provisions of the law in line with sections 59 and 60 of the Evidence Act (chapter 80 of the Laws of Kenya) which provide that no fact of which the court shall take judicial notice need be proved while section 60(1) sets out matters which the courts shall take judicial notice including all written laws and all laws in force in Kenya.

11. The respondent’s case before the trial court hinged on the application of section 44 of the Banking Act. This section incorporates the in duplum rule which basically limits the amount a bank or financial institution may recover from a non-performing loan. The provision states, in part, as follows:44A.Limit on interest recovered on defaulted loans.1. An institution shall be limited in what it may recover from a debtor with respect to a non-performing loan to the maximum amount under subsection (2).2. The maximum amount referred to 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. [Emphasis mine]

12. Both parties have submitted on the meaning of “institution”. In resolving this appeal, the court’s attention must turn to the definition of an institution under the Banking Act. The following definitions in section 2 are relevant and are as follows:‘’institution’’ means a bank or financial institution or mortgage finance company.‘’financial institution’’ means a company other than a bank which carries on or proposes to carry on financial business and includes any other company which the minister may by notice on the gazette, declare to be a financial institution for the purposes of this Act.‘’financial business’’ means -a.The accepting from members of the public of money on deposit repayable on demand at the expiry of a fixed period or after notice andb.the employing of money held on deposit or any part of the money by lending, investment or in any other manner for the account and at the risk of the person so employing the money.

13. For purposes of section 44, it must be established that the appellant is a bank or financial institution. It is not in dispute that the appellant is neither a bank nor mortgage finance company. In order to qualify as a financial institution, theappellant must either be gazetted as such by the Minister or be one that carries on or proposes to carry on financial business as defined under the Banking Act. In order to qualify as a financial institution, it must accept money on deposit from members of the public and employ that money or part of it for lending or investment as contemplated under the Act. The appellant’s witness clearly stated on cross-examination that the appellant was not a deposit taking institution while the respondent did not provide evidence to the contrary or show that it is gazetted under the law in order for it to fall under the ambit of the Act.

14. The respondent argues that even if the appellant is a micro lending and non-deposit taking institution, then under the Microfinance Act, 2006 it is subject to the supervision and regulation of the Central Bank of Kenya which has the mandate of licensing and regulation under section 4A(1)(c) of the Central Bank of Kenya Act. The respondent further points to section 33B of the Banking (Amendment) Act, 2016 which gives the Central Bank Powers to regulate all financial institutions and business. While it is true that a micro-finance institution is regulated by the Central Bank of Kenya such regulation is subject to the law. In this respect, the regulation of interest rates is governed by section 44 of the Banking Act which I have shown is very specific as to its application which does not include the Appellant. Further section 33B of the Banking Act was repealed by the Finance Act No 23 of 2019.

15. the respondent has referred to Francis Mbaria Wambugu v Jijenge Credit Limited and another KBU No 145 of 2019 [2020] eKLR where the court seemed to suggest that a microfinance institution operating under Microfinance Act is not exempt from section 44 of the Banking Act. The court stated as follows, “The 1st respondent though a registered as a microfinance institution [see annexure JCL 1] under the Microfinance Act to operate as a financial institution is on the face of it not exempt from the provisions of section 44A of the Banking Act”. I use the word suggest advisedly because the matter before court was an application for an interlocutory injunction and the court was not making a conclusive determination on the matter hence the use of the phrase, “on the face of it”. Further, the court did not consider the wording of both statutes to make the determination.

16. The adjudicator held that by describing itself as a financial institution, the appellant brought itself under the ambit of the regulation under the applicable statutes. I reject this finding as the issue whether the appellant is regulated is not a matter of pleading or choice. It is therefore clear that theadjudicator failed to consider whether the appellant was subject to section 44 of the Banking Act. On my part and having considered the applicable law, I find and hold the said section 44 aforesaid does not apply to the relationship between the appellant and the respondent. The irresistible conclusion is that the rate of interest in the circumstances is governed by contractual provisions which are not disputed.

17. The respondent and the trial court relied on the decision of the Court of Appeal in Margaret Njeri Muiruri v Bank of Baroda (Kenya) Limited (supra) where the court observed as follows:It is not for the court to rewrite a contract for the parties. As this court held in National Bank of Kenya Ltd vs Pipeplastic Sankolit (K) Ltd Civil Appeal No 95 of 1999 “a court of law cannot rewrite a contract with regard to interest as the 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 the/a procedural abuse during formation of the meaningful choice for the other party. An unconscionable contract is one that is extremely unfair. Substantive unconscionability is that which results from actual contract terms that are unduly harsh, commercially unreasonable, and grossly unfair given the existing circumstances of the case.

18. I agree with the statement of law explained by the Court of Appeal. The substantive unconscionability relied on by the respondent was based on breach of the section 44 of the Banking Act which I have found is not applicable to this case. I therefore allow the appeal and set aside the judgment of the trial court. Since the respondent did not deny the loan agreement and its terms and the fact that she had defaulted, the appellant shall have judgment. In the absence of any special circumstances, the costs of the suit and this appeal shall follow the event.

19. I allow the appeal and order as follows:a.The judgment of the subordinate court dated March 11, 2022 is set aside and substituted with a judgment for the appellant against the respondent for Kshs 731,722. 00. b.The respondent shall pay costs of the subordinate court and of this appeal. The costs of this appeal are assessed at Kshs 25,000. 00.

DATED AND DELIVERED AT NAIROBI THIS 7TH DAY OF OCTOBER 2022. D. S. MAJANJAJUDGECourt Assistant: Mr M. Onyango.Ms Wenene instructed by Wenene and Andama Advocates for the Appellant.Ms Nyamu instructed by Daniel Henry and Company Advocates for the Respondent.