Standard Bank Limited v Mehotoro Farm Limited & 2 Others [1972] KECA 1 (KLR)
The bottom line
#Kenya's Court of Appeal voided a company's charges and guarantees used to help buyers purchase its shares, even though everyone acted honestly.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.Whether the old debt of Shs.203,309/95 was tainted by section 56 of the Companies Act through being merged in the purchase price of the shares
- 2.Whether the cause of action in respect of the old debt was properly pleaded, given that it was raised in the reply to the defence
- 3.Whether there was consideration for the guarantees executed by Mr and Mrs Kamau
Key legal issues
#Whether the transaction offended section 56 of the Companies Act (financial assistance for purchase of shares)
The Company gave financial assistance within the meaning of section 56 by charging its immovable assets to secure the loan of Shs.660,000 by upstamping the charges; the old debt of Shs.203,309/95 was merged in the purchase price and the charges and guarantees were void for illegality.
The purchase price of Shs.660,000 was paid partly in cash and partly by releasing the directors from their guarantees of the old debt and substituting the fresh guarantees of Mr and Mrs Kamau, secured by upstamped charges. The old debt thus became an integral part of the transaction. The statute prohibits any direct or indirect financial assistance for the purchase of shares, and innocence of the parties is immaterial because public policy requires enforcement of the prohibition.
Pleading of the cause of action on the old debt
No separate pleading was required; the court may in such a claim hold that only so much of the claim is proved and the rest void by statute, and there was no inconsistency between the plaint and the reply.
The plaint claimed a total sum advanced over a number of years, and it was not necessary to plead each advance as a separate cause of action. The court has power under Order 6 rule 18 of the Civil Procedure (Revised) Rules 1948 to allow amendment at any stage, and an inherent jurisdiction under section 97 of the Civil Procedure Act to allow amendments necessary for the ends of justice.
Whether there was consideration for the guarantees of Mr and Mrs Kamau
There was no consideration: the sum of Shs.203,309/95 was a pre-existing debt and there was neither an undertaking to forbear nor actual forbearance.
The appellant argued that forbearance to call in the old debt constituted consideration for the guarantees. The court rejected this: the debt was pre-existing and not incurred by reason of the guarantees, and no undertaking to forbear nor actual forbearance existed, so the guarantees lacked consideration to that extent.
Legal principles established
#- The expression 'financial assistance' in section 56 of the Companies Act covers any transaction where money, security, guarantee or indemnity is provided by a company to enable a person to purchase or acquire its shares.
- A transaction prohibited by section 56 of the Companies Act is void even where all parties acted innocently and in good faith.
- It is not necessary to plead separately each advance as a separate cause of action in a claim for advances made over a period of years, and the court has power to allow amendment at any stage.
- A pre-existing debt does not supply consideration for a guarantee, absent an undertaking to forbear or actual forbearance.
Court orders
#- 1.Appeal dismissed
The bench
#One judgment of the whole court — no separate or dissenting opinions.
Wrote the judgment
Wrote the single judgment of the court holding that the old debt of Shs.203,309/95 was merged in the purchase price of the shares, that the Company thereby gave financial assistance prohibited by section 56 of the Companies Act, that the upstamped charges and guarantees were void for illegality and that there was no consideration for the guarantees.
In my view the Company gave financial assistance within the meaning of section 56 of the Companies Act and therefore the charges upstamped by the two instruments of variation each dated 1st November, 1968 to secure the repayment of shs.660,000/= (which includes shs.203,309/95) and the instruments of guarantee executed by Mr. and Mrs. Kamau on 20th November, 1967 and 5 January, 1968, respectively, are void for illegality.p. 5
- On appeal from
- High Court of Kenya at Nairobi
- Civil Case No. 354 of 1970
- Jurisdiction invoked
- Appeal from a judgment and decree of the High Court of Kenya at Nairobi
Relief refused
#Recovery of the old debt of Shs.203,309/95 and enforcement of the upstamped charges and guarantees to that extent
The old debt formed part of the purchase price and the Company thereby gave financial assistance prohibited by section 56 of the Companies Act; the securities were void for illegality and there was no consideration for the guarantees.
Costs
Not stated in the judgment.
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
In my view the Company gave financial assistance within the meaning of section 56 of the Companies Act and therefore the charges upstamped by the two instruments of variation each dated 1st November, 1968 to secure the repayment of shs.660,000/= (which includes shs.203,309/95) and the instruments of guarantee executed by Mr. and Mrs. Kamau on 20th November, 1967 and 5 January, 1968, respectively, are void for illegality.
However, the Act has prohibited this kind of transaction and I am unable to see how the courts can fail to enforce the prohibition even though the transaction was innocent.
In the circumstances I would dismiss the appeal.
It seems to me that it covers any transaction where not only money but also security or guarantee and indemnity, is provided by a company in order to enable a person to purchase or acquire its shares.
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Standard Bank Limited v Mehotoro Farm Limited & 2 Others [1972] KECA 1 (KLR)", Case Analysis (1972). Civil Appeal No. 54 of 1972. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/1972/1/eng@1972-12-20
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.