The 1982 Court of Appeal judgment in KCB v James Osebe is an apt illustration of the precarious tightrope that must be walked between the oft-usurious and reckless chargee and the often sly and crafty chargor. A chargor whose Ksh 160,000 land was sold for Ksh 20,000 (KCB v James Osebe) deserves our pity. It is stunning that a Ksh 10 million loan escalates to Ksh 316 million in ten years (Pelican Investments Ltd v National Bank).
Conversely, our indignation is aroused by crafty chargors who refuse to part with a cent yet continue obtaining injunctions restraining the exercise of the statutory power of sale (Lavuna v Civil Servants Housing). We are appalled that the darling of equity should be denied enjoyment of his bona fide acquisition by injunctions granted to indolent chargors (Russel v CBA 1985 and Mbuthia v Jimba Credit).
The Court of Appeal has harkened to its notion of justice with consummate flair, in turn dodging or bulldozing through precedents when these fail to serve its contemporary feelings of fairness. One would think that sections 74 and 77 of the Registered Land Act and sections 69, 69A and 69B of the Transfer of Property Act were fairly clear on the nature of the statutory power of sale, statutory notice and the remedies to an aggrieved party. Yet wading through two labyrinthine decades of the Court’s judgments is as fruitful as trying to scrutinise the ageless face of the Sphinx.
The discreditable practice of borrowers refusing to heed repeated notices to repay yet frustrating the realisation of securities offered to chargees by obtaining ex parte injunctions has reached endemic proportions. Concurrently, it has become standard commercial practice for lending institutions, in blatant disregard of common law principles of contract, to impose phenomenal penalties and interest rates that leave borrowers staggering under an ever mounting debt mathematically impossible to repay. In the face of these developments, the higher courts have relied on various red herrings in a breathtaking balancing act so as to do the justice of the moment without sufficient consideration of enduring legal implications.
The courts have granted relief to defaulting chargors based on allegations of fraud (e.g. Russel v CBA 1985, Mbuthia v Jimba Credit), unconscionable interest (Pipe Plastic Samkolit v National Bank), availability of other remedies (National Bank v Mwithukia, Trust Bank v Kiran Ramji), defective period of notice (Trust Bank v Okoth, Trust Bank v Eros), defective service of notice (Trust Bank v Kiran Ramji) or because of a dispute as to the amount due (Ihenya v Barclays Bank). In direct contrast, other courts have denied chargors relief on the same grounds of mere allegations of fraud (Okoth Ocheyo v Konde, Margaret Ochieng v National Bank), excessive interest (Fina Bank v Ronak Ltd), availability of other remedies (Francis Maranya v National Bank, Daima Bank v Samuel Macharia, James Ockotch v EABS, Aberdare Investments v HFCK), defective period of notice (Russel v CBA 1991, Mbuthia v Small Enterprises) defective service of notice (Nyangilo Ochieng v Fanuel Ochieng, First American v Ramadhan) or dispute as to the amount due (Habib v Pop-In, Lavuna v Civil Servants Housing).
In KCB v James Osebe the Kenya Commercial Bank auctioned property for Ksh 20,000 that was shortly thereafter valued and sold at Ksh 180,000. The chargor took out an Originating Summons seeking to set aside the auction and resale. The trial Court instead granted damages. On appeal, while setting aside the award of damages for procedural reasons, the Appeal Court implied a duty to the chargee to obtain a reasonable price for the charged property on exercising his statutory power of sale. To hold otherwise, Hancox J.A. observed, would be “not only unrealistic, but also harsh, oppressive and uncompromising.”
Subsequent Appeal Court benches have adroitly side-stepped such procedural or substantive legal obstacles where they felt it expedient to grant a remedy to a defaulting chargor. Thus in the first of the Russel cases, Russel v CBA 1985, an unprecedented injunction was granted based on an allegation of fraud to restrain a bona fide purchaser duly registered as owner from entering into possession of the property.
However, some months later, the court in Mbuthia v Jimba Credit doubted whether an injunction could be issued to restrain a registered bona fide purchaser from entering into possession. In Mbuthia, a valid contract of sale had been completed but the transfer had not been registered. The bench recognised that under the Registered Land Act (RLA) the equity of redemption is extinguished after completion of a valid contract of sale (i.e. before registration). Yet in a remarkable hair-splitting decision, the court granted an injunction against the registration of a valid sale in order to allow the defaulting mortgagor “to defend himself so as to see that the sale is at a true market value.”
From the scathing dissent of Apaloo J.A. in Mbuthia, a chastened Court of Appeal emerged resolved not to grant indulgence to a defaulting mortgagor. Hence in the second Russel case, Russel v CBA 1991, the bench resoundingly threw out Russel’s appeal against the right of the bona fide purchaser to enter possession. (See also Okoth Ocheyo v Konde). The bench went on to declare that section 69A of the Indian Transfer of Property Act (ITPA) did not require the 3-month statutory period to be explicitly stated in the statutory notice so long as the sale was not exercised within three months of the notice.
Thereafter in Margaret Onyango v National Bank, Lavuna v Civil Servants Housing and Habib Bank v Pop-In, the Appeal Court with Kwach J.A. taking the lead, seemed to have reached a decisive equilibrium: the court would refuse to grant an injunction merely because there is a dispute as to the amount under the mortgage. The court approved a passage in Halsbury’s Laws of England stating, “The mortgagee will not be restrained from exercising his statutory power of sale [inter alia] because the mortgagor objects to the manner in which the sale is being carried out.” This position was clearly repeated in Central Kenya v Trust Bank where it was held, “in the absence of fraud, the title of the transferee acquired after the chargee exercises the statutory power of sale is indefeasible.”
This equilibrium proved to be a deceptive calm. In Ihenya v Barclays Bank, the court restrained a chargor from exercising the statutory power of sale effectively on the basis of a dispute as to the amount under the charge. The court argued that should the substantive suit determine that the chargor had cleared the debt, a prior sale of his property would have resulted in an irreparable loss. It was a reasonable ratio, but in failing to distinguish the emphatic judgments in Lavuna and Habib Bank, the court tossed the law of statutory power of sale into a turbulence that is still to settle.
In Nyangilo Ochieng v Fanuel Ochieng of 1996 the bench required the production of proof of posting to sufficiently discharge the burden of proving service of notice. Then in Trust Bank v Kiran Ramji of 2000 the same court distinguished “posting under certificate of posting” from “registered post” and proceeded to hold that a notice served through the former avenue was not validly served. Then only two months ago in August 2001, the court in First American v Ramadhan upheld a challenged certificate of posting as sufficient proof of posting.
The contradictions in the higher court judgments appear best in the controversy regarding the particulars of the statutory notice. The actual construction of the statutory notice had been a non-issue in a long line of authorities, stretching all the way to Russel v CBA 1991 and Habib Bank v Pop-In (I4-day notice issued). The question of notice period came up in the High Court in George Okoth v Trust Bank of 1998. An injunction was issued against the exercise of the statutory power of sale on the sole ground that the letter of notice stated that payment was due within fourteen days of the date of the notice. Hayanga, J insisted that section 69A of the ITPA must be interpreted strictly as requiring the notice to state that the sale will only become exercisable three months after service of notice. On appeal in Trust Bank v Geroge Okoth, Gicheru J.A. affirmed the decision requiring the 3-month notice period to be stated explicitly on the statutory notice. Bosire J.A. added that the 3-month period must commence at the date of service and not on the date of the notice. In disapproving of Russel, he stated, “It is the notice of intention to sell which is required to run for three months from the date of its service on the mortgagor before the right to sell the charged property can accrue.”
The brewing crisis (see Pelican Investment v National Bank) was defused by a five-judge bench in Trust Bank v Eros Chemists where Russel 1991 was held to have been wrongly decided. The bench recognised the considerable difficulty posed by two openly conflicting decisions of the Court of Appeal. It reasoned, “In our judgment, a notice seeking to sell the charged property must expressly state that the sale shall take place after the three months’ period. To omit to say so or to state a period of less than three months for sale (as in the Russell case) is to deny the mortgagor a right conferred upon him by statute. That clearly must render the notice invalid.” The court then lamely discussed the effect of the Russel decision: “it is unlikely that property rights have been acquired on the basis of the earlier decision and indeed it is the duty of this Court to rectify an erroneous decision.”
The unsettled state of the law regarding statutory power of sale is also evident in the “we respectfully agree but” judgment of the Appeal Court in Trust Bank v Kiran Ramji. Earlier in James Ockotch v EABS the same court had recognised that under section 69A of the ITPA, the invalidity of a statutory notice issued under subsection (a) shall not oust the right of a mortgagee to exercise the power of sale under subsection (b) if interest is in arrears and unpaid for two months. The court in Kiran Ramji however, prefacing its ratio with the portentous “we respectfully agree but” phrase went on to hold that by drafting an elaborate letter of notice the appellant had chosen to proceed under section 69A subsection (a) and not (b). There is a certain irony in that Omolo, J.A. who proclaimed that “there is no estoppel against statute” in Francis Maranya v National Bank only three short years later was part of the bench in Kiran Ramji that effectively found an estoppel against a mortgagee who was proceeding under the same statute.
It arguable that the unsettled law stems from the absence of a suitable remedy for chargors who are charged excessive interest rates under onerous conditions. This issue has occasionally come into direct focus in the Court decisions. In Pipe Plastic Samkolit v National Bank O’Kubasu J (as he then was) exercised his sense of proportion by reducing a Ksh 103 million outstanding sum on a Ksh 21 million loan to Ksh 33 million. Without citing precedent for this arbitrary reduction, he relied on the flimsy ground that it was commercial practice for banks to waive interest rates! In Ronak v Fina Bank Gacheche, Commissioner of Assize (as she then was) granted an injunction to the applicant on the basis that the lender had charged “oppressive and onerous interest” not stated in the contract. This decision was overturned on appeal.
Onyango Otieno, J in Pelican Investment v National Bank directly confronts and admirably analyses the interest rate question in Kenyan law. He rejects the ratio in Samkolit but recognises that an escalation of debt from Ksh 10 million to Ksh 316 million is an excessive and probably unconscionable arrangement. He recognises that under the Duplum Rule in South Africa, interest charged cannot exceed the initial capital. His conclusion accurately unmasks the problem with Kenyan mortgage law today and exposes what Platt, J.A. in Mbuthia called “the unacceptable face of capitalism”:
“I do agree that such a legal proposition might be ideal in this country as it would ensure that the debtors do not suffer the requirements upon them to pay extra large interest caused by the indolence and lapse or deliberate failure by the creditors so as to let the unserviced loans accumulate interest to unimaginable levels. It will protect the debtors as well as ensuring that the creditors get their money back for further circulation and hence the economy will be healthy. However, to introduce this Dutch Law by way of a Judgment or a Ruling into the common law country will in my opinion be too drastic a step to take as it will not be based on any existing legal authority or statute whatsoever in our country. It is law that had better be introduced by way of legislation.”
Cases cited in this analysis:
1. Aberdare Investments v HFCK  LLR 817 (CAK) No. 227/98
2. Central Kenya v Trust Bank  LLR 814 (CAK) No. 222/98
3. Daima Bank v Samuel Macharia  LLR 188 (CCK) No. 628/98
4. Fina Bank Ltd v Ronak Ltd  LLR 3454 (CAK) No. 330/00
5. First American Bank v Ramadhan  LLR 397 (CAK) No. 74/00
6. Francis Maranya v National Bank  LLR 2196 (CAK) No. 60/97
7. George Okoth v Trust Bank  LLR 87 (CCK) No. 1135/97
8. Habib Bank v Pop-In  LLR 291 (CAK) No. 147/89
9. Ihenya v Barclays Bank  LLR 507 (CAK) No.3/97
10. James Ockotch v EABS  LLR 468 (CAK) No.202/96
11. KCB v James Osebe  LLR 66 (CAK) No.60/82
12. Lavuna v Civil Servants Housing  LLR 3021 (CAK) No.14/95
13. Mbuthia v Jimba Credit  LLR 3292 (CAK) No.111/86
14. Mbuthia v Small Enterprises  LLR 705 (CAK) No.54/98
15. National Bank v Mwithukia  LLR 130 (CCK) No.223/98
16. Okoth Ocheyo v Konde  LLR 2661 (CAK) No.104/99
17. Pelican Investment Ltd v National Bank  LLR 173 (CCK) No.570/98
18. Pipe Plastic Samkolit v National Bank  LLR 62 (CCK) No.1078/96
19. Russel v CBA 1985  LLR 1415 (CAK) No.31/85
20. Russel v CBA 1991  LLR 2340 (CAK) No.89/91
21. Trust Bank v Eros Chemists  LLR 1008 (CAK) No.133/99
22. Trust Bank v George Okoth  LLR 1270 (CAK) No.177/98
23. Trust Bank v Kiran Ramji  LLR 2382 (CAK) No.61/00