Criticos v National Bank of Kenya Limited (as the successor in Business to Kenya National Capital Corporation Limited “KENYAC”) & another
The bottom line
#Kenya's Court of Appeal ordered a bank to pay a guarantor over Kshs. 2.2 billion after selling his property in contempt of court orders and at a gross undervalue.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.What is the nature and extent of the appellant’s liability under the charge and the guarantee?
- 2.Was the sale of the charged property illegal by virtue of existence of injunctive court orders?
- 3.Was the suit property sold at an undervalue?
- 4.Was the appellant entitled to an award of damages for loss of income/profits?
- 5.Was the appellant entitled to costs in HCCC No. 132 of 2009?
- 6.Is the counter-claim valid?
Key legal issues
#Nature and extent of the guarantor’s liability under the charge and guarantee
The appellant’s liability rested with the guarantee only, capped at Ksh. 20 million plus interest; the guarantee was a separate, secondary obligation.
The court construed clause 12 of the charge and the guarantee together. Both instruments contained the same undertaking to pay the loan upon the borrower’s default, and the loan amount equalled the guaranteed sum (Ksh. 20 million). Applying Rajnikantkhetshi Shah and Lalji Karsan Rabadia, a guarantor limited to a fixed sum is liable only to that extent, and liability is secondary to the principal debtor’s.
Unconscionability of the varied interest rate
Raising interest from 19% per annum to 35% per month (420% per annum) was unconscionable, oppressive and usurious and could not be enforced.
Although the charge gave the bank discretion to vary interest, following Pius Kimaiyo Langat and Margaret Njeri Muiruri the court held that such discretion is not absolute. The rate was grossly unfair on its face, compounded the indebtedness, and the bank declined redemption offers. Courts will not lend support to onerous, unconscionable and plainly usurious conduct by lenders.
Legality of the sale in light of injunctive orders
The sale on 5th September 2007 violated valid court orders; counsel for the parties were present when the orders were issued, so the respondents were deemed aware of them.
The trial court had found the content of the interim orders unknown and no evidence of extraction or service. The appellate court, re-evaluating the record under its Rule 29(1) mandate, found the record showed counsel were present when the orders issued, the parties were defendants in that matter, and the sale of 5th September 2007 fell within the period of the orders.
Whether the property was sold at an undervalue and damages payable
The property was sold at an undervalue; the appellant’s uncontroverted valuation report was accepted, with discounts, yielding special damages of Kshs. 2,284,101,000.
The appellant’s valuer testified and was cross-examined; the report was detailed, supported by photographs, and unrebutted by any 2010 valuation. Relying on Stephen Kinini Wang'ondu and Attorney General v Zinj, expert evidence is not trumped but must be weighed; the court discounted the sisal crop value by 50% and the total by a further 10% for the two-year delay in valuation, grounding the award in section 99(4) of the Land Act, 2012.
Validity of the respondents’ counter-claim / recovery suit
The counter-claim was without basis because the recovery suit in HCCC No. 132 of 2009 was misguided; the High Court’s dismissal of the counterclaim was left undisturbed.
Having found the appellant treated in a shabby manner, charged manifestly excessive interest, denied redemption offers, and deprived of the property at a gross undervalue, the court concluded the respondents’ recovery suit was misguided and the counter-claim without basis, while preserving the trial court’s dismissal of the counterclaim for want of locus standi.
Legal principles established
#- Where a guarantee limits the guarantor’s liability to a fixed sum, the guarantor is liable only to the extent of the guaranteed sum and not the entire principal debt, unless otherwise provided.
- A guarantor’s liability is secondary to that of the principal debtor and arises only upon the principal’s default.
- A bank’s contractual discretion to vary interest is not unfettered; courts will not enforce exorbitant, unconscionable or usurious interest rates.
- A sale of charged property effected in violation of subsisting injunctive court orders, where the parties’ counsel were present when the orders were issued, is a violation of valid court orders.
- A person prejudiced by an unauthorised, improper or irregular exercise of the statutory power of sale has a remedy in damages under section 99(4) of the Land Act, 2012.
- Special damages based on a private valuer’s report may be awarded where the report is detailed, proved by its maker, and uncontradicted by any contrary valuation report.
Court orders
#- 1.Judgment and decree of the High Court set aside, save for the dismissal of the counterclaim which was left undisturbed
- 2.Amended plaint allowed: declaration that the plaintiff is discharged and released from all liability under the Legal Charge dated 29th January, 1991 and Guarantee dated 22nd January, 1991
- 3.Declaration that the defendant did not have any legal right to exercise the statutory power of sale in respect of LR No. 5865/2 and that the agreement for sale and transfer dated 5th September, 2007 were executed in contempt of injunctive orders in Milimani HCCC No. 270 of 2007 and HCCC No. 108 of 2006
- 4.Declaration that the sale of LR No. 5865/2 for Kshs. 55,000,000 to the 2nd defendant was a gross under value
- 5.Mandatory injunction compelling the 1st defendant to pay the plaintiff Kshs. 35,000,000 being the surplus realised from the sale of LR No. 5865/2
- 6.Damages of Kshs. 2,284,101,000 for the unauthorised, improper and irregular sale, with interest at court rates from the date of judgment until payment in full
- 7.Costs of the suit awarded to the appellant
- 8.Cross-appeal dismissed for want of merit
- 9.No order as to costs of the appeal
The bench
#One judgment of the whole court — no separate or dissenting opinions.
- On appeal from
- High Court of Kenya at Nairobi
- MCC Civil Suit No. 757 of 2009
- Jurisdiction invoked
- First appellate jurisdiction under the Court of Appeal Rules (Rule 29(1) of the Rules of this Court invoked); appeal against High Court judgment
Relief refused
#Respondents’ cross-appeal (locus standi on counterclaim, HCCC No. 1420 of 1997 claim, costs of dismissed suit)
Dismissed for want of merit; the recovery suit in HCCC No. 132 of 2009 was found misguided
Full claim of Kshs. 3,028,890,000 as pleaded
Damages discounted 50% for sisal crop value and a further 10% because valuation was over two years after the sale
Costs of the appeal to either party
Court made no order as to costs on the appeal
Costs
Costs of the suit awarded to the appellant in the substituted judgment; on the appeal itself, "We make no order as to costs."
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.
We set aside the Judgment and decree of the High Court, save for the dismissal of the counterclaim which we leave undisturbed, substituting therefor an order that the amended plaint is allowed in the following terms;
Damages of Kshs.2,284,101,000 for the unauthorised improper and irregular sale assessed at the market value of the property LR No. 5865/2 together with interest at court rates thereon from the date of this judgment until payment in full.
The cross-appeal is dismissed for want of merit.
We make no order as to costs.
Consequently, we hold the view that the appellant’s liability rested with the guarantee only.
It appears to us, therefore, that the sale of the suit property that took place on 5th September, 2007 was in violation of valid court orders.
Nor should any court lend its support to such onerous, unconscionable and plainly usurious conduct by lenders.
Issues in the judgment
#Arithmetical error in discount figure
Judgment simultaneously finds counter-claim without basis and leaves its dismissal undisturbed while setting aside the judgment
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Criticos v National Bank of Kenya Limited (as the successor in Business to Kenya National Capital Corporation Limited “KENYAC”) & another", Case Analysis (2022). Civil Appeal 80 of 2017. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2022/541/eng@2022-04-28
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.