The High Court of Kenya (the “court”) recently issued a judgment in the case of Commercial International Bank (CIB) Kenya Ltd (the “Bank”) v Azofco General Merchants Limited (the “Borrower”). This judgment has major implications for lenders in Kenya as it sets a precedent for thorough due diligence on titles presented by borrowers as security for loans.
In 2021, the Bank advanced a loan of USD1,400,000 to the Borrower, secured by a formal charge over a property registered as Land Reference Number 9363/85/3 (the “Property”). When the Borrower defaulted on the monthly payments, the Bank attempted to exercise its statutory power of sale over the Property but was unable to do so due to disputes regarding the Borrower’s title legitimacy. The Bank sought a declaration from the court that the Borrower had created an informal charge over another separate property, Land Reference Number 25401(the “Second Property”) by depositing the certificate of title with the Bank. The Bank therefore sought leave from the court to exercise its statutory power of sale on the Second Property to recover the loan amount.
In its decision, the court dismissed the suit on the basis that the Bank had failed to discharge the burden of proving the existence of an informal charge over the Second Property. The court held that an informal charge cannot simply exist by virtue of a borrower depositing ownership documents with a lender. An informal charge needs to be in line with section 79 of the Land Act, (Cap. 280) (the “Land Act”).
What Constitutes a Valid Informal Charge?
For an informal charge to be valid, it should meet the following requirements:
- It should be in writing and provide a clear intention of the borrower to create a charge in favour of the lender over the given property.
- The borrower should also deposit the ownership documents of the property, such as certificates of title, or a document of lease or any other document which is agreed as evidence of ownership of the land or a right to interest in land with the lender.
Additionally, the court agreed with the Borrower that if it allowed the Bank to create an informal charge over a property that falls outside the ambit of the security document, it would open a Pandora’s box, enabling lenders to unilaterally alter the terms of security.
What Does This Judgment Mean for Lenders?
- Statutory power of sale upon default by a borrower can only be exercised over property originally charged securing the particular loan advancement and cannot crystallise over new property that was not presented as security under the security document.
- For informal charges to be enforced by the courts, they need to align strictly with the prerequisites set under section 79 of the Land Act.
This judgment serves as a call to lenders to conduct thorough due diligence on titles presented as security for loans by borrowers.
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Read the original publication at ENS
