The
Baffling Statutory Power of Sale
In this week's Hot From The Bench, LawAfrica's Charles Kanjama
tackles the law relating to Statutory Power of Sale with his
usual 'take no prisoners' attitude. The length of the result
(which we apologise for) is the product of a 23 case analysis.
Admittedly the single most litigated point of law, the Lawafrica
database continues to receive precedents that reflect the confusion
in this important area of law. All these cases are available
on www.lawafrica.com to subscribers of LawAfrica Law Reports.
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 [1998] LLR 817 (CAK)
2. Central Kenya v Trust Bank [1998] LLR 814 (CAK)
3. Daima Bank v Samuel Macharia [1998] LLR 188 (CCK)
4. Fina Bank Ltd v Ronak Ltd [2000] LLR 3454 (CAK)
5. First American Bank v Ramadhan [2000] LLR 397 (CAK)
6. Francis Maranya v National Bank [1997] LLR 2196 (CAK)
7. George Okoth v Trust Bank [1997] LLR 87 (CCK)
8. Habib Bank v Pop-In [1989] LLR 291 (CAK)
9. Ihenya v Barclays Bank [1997] LLR 507 (CAK)
10. James Ockotch v EABS [1996] LLR 468 (CAK)
11. KCB v James Osebe [1982] LLR 66 (CAK)
12. Lavuna v Civil Servants Housing [1995] LLR 3021 (CAK)
13. Mbuthia v Jimba Credit [1986] LLR 3292 (CAK)
14. Mbuthia v Small Enterprises [1998] LLR 705 (CAK)
15. National Bank v Mwithukia [1998] LLR 130 (CCK)
16. Okoth Ocheyo v Konde [1999] LLR 2661 (CAK)
17. Pelican Investment Ltd v National Bank [1998] LLR 173
18. Pipe Plastic Samkolit v National Bank [1996] LLR 62
19. Russel v CBA 1985 [1985] LLR 1415
20. Russel v CBA 1991 [1991] LLR 2340
21. Trust Bank v Eros Chemists [1999] LLR 1008
22. Trust Bank v George Okoth [1998] LLR 1270
23. Trust Bank v Kiran Ramji [2000] LLR 2382
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