Receivers:
The Villains of Company Law
In this week's Hot From The Bench, LawAfrica's
Charles Kanjama looks at a recent decision by Justice Ringera
in Showind Industries and Guardian Bank and
its impact on the law relating to receiverships. We have previously
looked at receivership and we feel that the Showind case has
attracted attention back to the contentious issues surrounding
exercise of the power to appoint a receiver under a company
debenture. The principles to be applied, especially in interlocutory
applications, have once again been put into question. Subscibers
will be able to view these cases on www.lawafrica.com.
Just
as criminal law has always had its heroes, company law has always
had its villains. Ironically so, because the company has been
the vehicle for commercial development while the criminal has
been the source of retrogression in society. In Victorian England,
the promoter bore the brunt of criticism: “a character of
dubious repute and antecedents who infests the commercial [world]…
and after rising to affluence by preying on the susceptibilities
of a gullible public, finally retires from the scene in the
blaze of a sensational suicide or Old Bailey trial.” (Gower
on Company Law)
In America before the Great War, the villain was the director
of the great trust corporations who through interlocking directorates
cast a grip so strong that the nation almost choked on its own
progress. Kenyan company law has for long cast about for its
own villain, before settling on the receiver, the doctor-turned-undertaker
of companies. In Jambo Biscuits v Barclays Bank
(2002), Ringera was at his analytical best, “I think it
is a notorious fact of which judicial notice may be taken that
receiverships in this country have tended to give the kiss of
death to many a business.”
Just over one year earlier, in Fina Bank v Spares &
Industries (2000), Justice Tunoi also took a swipe
at the company receiver, “The issue of receivership is an
emotive one and I understand why the respondent had to resort
to litigation. It destroys the business. It is expensive.”
The receiver has not always been so pilloried, nor the debenture
under which he is appointed subjected to such scorching scrutiny.
In Aikman v Muchoki (1982), the receivers appointed
under a debenture instituted a suit, joining the company as
co-plaintiff, seeking to restrain the directors from interfering
with the management of the company. While interlocutory orders
were in force, the directors forcibly took possession of the
company premises and property. On appeal, the court held that
the directors had clearly flouted the law and the balance of
convenience, in an interlocutory application, favoured the receivers’
reinstatement.
Madan, JA criticised the lower court’s decision in favour of
the company directors, “[It] would render totally valueless
the concept of sanctity of contract, security of mortgage debts,
charges and debentures by… leaving the field free for insurgents
to play havoc by perpetrating illegal infringements.”
In Madhupaper International v Kerr & others (1985),
the directors brought a suit in the name of the company seeking
the removal of the receivers. They pleaded that the receivership
would gravely prejudice the company’s investment in its Thika
Plant. The trial judge decided the balance of convenience as
favouring the receiver. The Court of Appeal, after conceding
that the terms of the debenture were draconian, affirmed the
decision. “It is correct law that a debenture holder which
has [a right to appoint a receiver] is under no duty to refrain
for exercising its rights because doing so might cause loss
to the company or its unsecured creditors.”
Lenders and receivers could bask in the afterglow of decisions
that continually upheld sanctity of contract, even while acknowledging
that some debenture terms were draconian. Yet the principle
would not long remain unmolested upon its pedestal. Already
in Hastings Irrigation v Standard Chartered Bank (1987),
the court, by formulating the “seriously oppressive conduct”
exception, was beginning to waver. “Once [receivers are
validly appointed] it does not seem to us appropriate for the
court to interfere in the passage of the receivership unless
it can be shown that the conduct of the receiver/managers is
seriously oppressive, or not in accordance with the recognised
principles of law and of commercial practice.”
In the last two years, the initial doubts of the late 1980s
have sprouted a judicial attitude hardening ever more against
the company receiver. Fina Bank v Spares & Industries
(2000) more than any other decision shows up the judicial angst
that has attended this transformation. The company had been
lent 75 million shillings, secured by various charges valued
at 77 million shillings and a general debenture for 75 million
shillings covering all the assets of the company. Interest was
payable at a variable 31% and an additional 6% as penalty charges
for arrears. The company had been unable to keep up with interest
repayments and the bank elected to appoint receiver/managers
under the debenture.
The company filed suit seeking a declaration that the receivers’
appointment was null and void, on the grounds that the property
under fixed charge was sufficient to satisfy the debt, that
the interest charged was unconscionable and that the bank’s
action was oppressive. The bank contended that there had been
no denial of indebtedness, that the company had contracted to
pay additional interest as penalty and that the directors were
milking the company’s assets.
Justice Shah asserted that the debenture document formed a contract
between the parties and the provision on interest can only be
changed or altered like any other contract. Having executed
the debenture with full knowledge of the consequences, the company
cannot be heard to say that some of its terms were onerous.
“The interest rates probably put the company in difficulties
as regards the repayment of the loans. But that is a moral issue.”
In law, Shylock must have his pound of flesh!
Without expressly rejecting Justice Shah’s ratio, Justices O’Kubasu
and Tunoi granted interlocutory relief to the company based
on the principles enunciated in Giella v Cassman Brown.
On considering the exercise of discretion by the judge, they
declined to find that the trial judge had misdirected himself.
They approved Nyaga v HFCK and held, “Where
a party has a statutory right of action the court will not usually
prevent that right being exercised except that the court may
interfere if there was no basis on which the right could be
exercised or it was being exercised oppressively.” Further,
the balance of convenience dictated that a temporary injunction
ought to be granted.
One year later in Jambo Biscuits v Barclays Bank Ltd
(2002), the debenture and subsequent appointment of
a receiver was subjected to gimlet-eyed scrutiny. On an interlocutory
application to restrain the receivers, it was alleged that the
debenture was invalid because it was not endorsed with the firm’s
name contrary to the Advocates Act. Further, the company argued
that the deed of appointment of the receivers was incomplete
for lack of attestation, that there were illegal debits and
penalty charges and that the demand was invalid. The court concurred
with the company, and also found that the solvency report upon
which basis the bank decided to appoint receivers was unreliable
because it was equivocal and had material disclaimers.
Justice Ringera held that, under the authority of Obura
v Koome, the company had established a prima facie
case with probability of success. He took judicial notice of
the fact that most receiverships tended to cause irreparable
injury to companies and decided the balance of convenience in
favour of the status quo ante.
In the light of the above judicial proceedings, the decision
in Showind Industries Ltd v Guardian Bank has
not just unseated the company director from the pedestal of
judicial admiration, it has toppled the pedestal’s pillar and
reworked the base as well. For while all previous interlocutory
applications have assumed that a restraining injunction will
be granted if the applicant establishes a prima facie case,
Showind has held that a receiver will only
be unseated by a mandatory injunction based on a strong and
straight-forward case.
In Jambo Biscuits, Ringera had stated, “I
find that the company has made out a prima facie case with a
probability of success at the trial that the appointment of
the receivers/managers was illegal and invalid...” In Showind,
the test has been subtly reworked. “The pith and marrow
of [the application] is to seek an order to terminate the receivership
of the Plaintiff… As I understand the law, an interlocutory
mandatory injunction is granted very sparingly and only in exceptional
circumstances such as where the applicant’s case is very strong
and straightforward. Moreover, as the remedy is an equitable
one, it may be denied where it would be inequitable to grant
the relief for the reason, for example, that the applicant’s
conduct does not meet the approval of a court of equity or his
equity has been defeated by laches.”
The courts must resolve the doubt that now surrounds grant of
interlocutory injunction against an already appointed receiver.
As the relevant principles are resolved, perhaps the courts
should also examine the practice of both directors and receivers
bringing proceedings in the company’s name after the appointment
of receiver/managers has taken effect. These issues will need
to be ventilated as the number of receivers appointed under
debentures continues to rise concurrently with growing interest
rates. Will the courts rehabilitate the ‘villains’
of company law? Only time will tell.
Cases cited in this analysis: LLR citation
Aikman v Muchoki [1982] LLR 1213 (CAK)
Madhupaper Int’l v Kerr & others [1985] LLR 2396 (CAK)
Hastings Irrigation v Standard Chartered [1987] LLR 280 (CAK)
Nyaga v HFCK [1987] LLR 2187 (CAK)
Fina Bank v Spares & Industries [2000] 1 EA 57
Geoffrey Obura v Martha Koome [2000] 1 EA 175
Jambo Biscuits v Barclays Bank [2001] LLR 1381 (CCK)
Showind Industries v Guardian Bank [2002] LLR 1478 (CCK)-
to be reported in 2002 1 EA
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