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Court of AppealDismissedCivil Appeal No. 340 of 2012· [2018] KECA 606 (KLR)

Nicholas Mahihu Muriithi v Barclays Bank Kenya Limited [2018] KECA 606 (KLR)

Court of Appeal
11 May 2018
DMD.K. MusingaWilliam OukoW. OukoPKP.O. Kiage
4,513 words in judgment
View original judgmentRead on Kenya Law Watch case
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The bottom line

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Kenya's Court of Appeal confirmed that a bank can seize money from your other accounts to repay a written-off debt.

What this practically means

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Executive summary

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The appellant, trading as the sole proprietorship Kirinyaga Supply Stores, obtained loan and overdraft facilities from the respondent bank at its Karatina Branch, secured by charges over three of his properties. After failed attempts to realize the securities, the bank wrote off the debt in July 2005 as a loss under the Central Bank Prudential Guidelines. On discovering the appellant held a Prestige Plus account at another branch, the bank debited that account to set off the outstanding debt of Kshs. 3,300,359.80. The appellant sued, claiming the debits were unauthorized and seeking reversal, injunctions, damages and discharge of the charges; the High Court (Mutava, J.) dismissed the suit with costs. On appeal, the Court of Appeal, comprising Musinga, Ouko and Kiage JJ.A in a single judgment of the court, re-evaluated the evidence as a first appellate court and dismissed the appeal with costs. It held that liability for the facilities remained with the sole proprietorship since Kirinyaga Supply Store (K) Limited never assumed the debts, applying the Salomon principle of separate corporate personality; that the bank was contractually entitled to combine accounts and set off the debt under the loan agreement and charge, even after the write-off; that a write-off is merely an internal accounting procedure that does not extinguish the debtor's liability; and that the claim was not statute-barred, the debits having occurred within twelve years of accrual and shortly after the appellant's written acknowledgement of the debt. The decision affirms the bank's right of set-off and recovery after write-off.

Key legal issues

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01

Whether the appellant remained liable for the debts of Kirinyaga Supply Stores despite incorporation of Kirinyaga Supply Store (K) Limited

Holding

Liability remained with the sole proprietorship; no novation or takeover of liabilities was proved.

Reasoning

The appellant only exhibited the certificate of incorporation and memorandum and articles of the company. There was no resolution or communication showing the company assumed the debts, and the lender, being a vital party, was never informed. Applying the Salomon principle of separate corporate personality, the court held the facilities were extended to, and liability remained with, the sole proprietorship.

p. 3
02

Whether the bank was entitled to set off the debt against the appellant's prestige account

Holding

Yes; the loan agreement and clause 18 of the charge expressly authorized combination of accounts and set-off.

Reasoning

The contractual terms authorized the bank to apply any credit balance in reduction of sums due and to combine accounts without notice. Relying on its earlier decision in Barclays Bank of Kenya Ltd v Kepha Nyabera and Paget's Law of Banking, the court held the right of combination applies even where accounts are at different branches and could be exercised even after the debt was written off.

p. 4
03

Whether a written-off debt extinguishes the debtor's liability

Holding

No; a write-off is an internal accounting and taxation measure only.

Reasoning

Debts classified as loss under Central Bank of Kenya Prudential Guidelines are written off for bookkeeping purposes where recovery is unlikely, but the creditor's substantive claim survives. Citing Mohammed Gulamhussein Farzal Karmali v C.F.C. Bank and the Indian Supreme Court in Salim Akbarali Nanji v Union of India, the court held that if the debtor's financial status improves, the creditor may pursue and recover the debt.

p. 4
04

Whether the claim was statute-barred under the Limitation of Actions Act

Holding

No; the debits of 23 October 2006 were within the twelve-year period accruing from 16 March 1999, and the debt was acknowledged in October 2006.

Reasoning

Section 19(1) gives twelve years from accrual for a debt secured by a mortgage or charge; accrual was dated from the first auction attempt on 16 March 1999. Section 23(3) operates to restart time upon acknowledgement, which occurred on 3 October 2006, twenty days before the debits. The court also endorsed the principle that each debiting of interest gives rise to a fresh cause of action.

p. 5

Legal principles established

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  • A write-off of a debt by a bank is an internal accounting procedure and does not extinguish or absolve the debtor from liability; the bank may still pursue recovery if the debtor's circumstances improve.
  • A bank is entitled, under the loan agreement and charge instruments, to combine or consolidate a customer's accounts and set off credit balances against debts owed to it, even where the debt has been written off.
  • Merely incorporating a company with a similar name does not transfer liabilities of a sole proprietorship to the company absent a novation to which the lender is a party, per the principle in Salomon v Salomon.
  • For a debt secured by a charge over land, limitation under section 19(1) of the Limitation of Actions Act runs for twelve years from the date the right to receive the money accrued, and an acknowledgement of the debt restarts the period under section 23(3).

Court orders

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  1. 1.The appeal is dismissed with costs to the respondent

Authorities

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Legislation

  • Limitation of Actions ActSection 19(1)
  • Limitation of Actions ActSection 19(4)
  • Limitation of Actions ActSection 23(3)
  • Evidence ActSection 176
  • Central Bank of Kenya Prudential Guidelines

Cases cited (9)

  • Kenya Ports Authority V Kusthon (Kenya) Limited
    [2009] 2EA 212
  • Deposit Protection Fund V. Rosaline Njeri Macharia & Another
    HCCC No. 399 of 2005
  • Parr's Banking Company Limited V. Yates
    (1898) 2 QBD 460
  • Salmon Vs Salmon & Co. Limited
    (1897) A.C.
  • Barclays Bank of Kenya Ltd V Kepha Nyabera & 191 Others
    Civil Appeal No. 169 of 2007
  • Mohammed Gulamhussein Farzal Karmali and Another V C.F.C. Bank Limited and Another
    (2006) eKLR
  • Salim Akbarali Nanji V Union Of India & Ors
    Civil Appeal No. 6715 of 2004
  • Afrofreight Forwarders Limited V African Linear Agencies
    Civil Appeal No. 25 of 2007
  • Shire V. Thabiti Finance
    [2000] LLR 1455 (CAK)
On appeal from
High Court of Kenya at Nairobi
HCCC No. 604 of 2006
Jurisdiction invoked
First appeal to the Court of Appeal under the Court of Appeal's appellate jurisdiction (constitutional/statutory basis not stated in the judgment)

Key timeline

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Practical implications

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Frequently asked questions

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Later judgments citing this (7)

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Judgments in the corpus that rely on this one. Where the Court said how it treated the authority, that is shown.

Cite this brief

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Cite this brief

Caselaw, "Nicholas Mahihu Muriithi v Barclays Bank Kenya Limited [2018] KECA 606 (KLR)", Case Analysis (2018). Civil Appeal No. 340 of 2012. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2018/606/eng@2018-05-11

Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.