The National Bank of Kenya (NBK) has been ordered by the High Court to pay eight customers a total of Sh711 million for illegally selling their land after a botched sugar import deal.
The court found that the lender had sold the properties in Malindi despite no money having been advanced to the affected clients, whose intention to obtain a loan to facilitate the shipment of sugar to Mombasa failed to materialise.
Justice Alfred Mabeya ordered the bank to pay the borrowers a sum of Sh711,207,000, which is the market value of the properties.
He stated that it was unlawful for the bank to transfer the parcels of land, for which the title deeds had been submitted to the lender as collateral, to a third party in the face of a collapsed loan transaction.
“The transaction for which the titles were offered having collapsed, the bank had no right to continue charging the suit properties, leave alone to sell or transfer them to any third party. The transfer of the suit properties was without any basis, was unlawful, and infringed on the plaintiffs’ proprietary rights,” said the judge.
The borrowers — Koit Developers Limited, Saman Developers, Kenete Enterprises, Gilera Limited, Nasole Enterprises, Baia Enterprises, Marimio Enterprises and Lingala Enterprises — had submitted the titles to their respective parcels of land situated in Malindi as security for a Sh160 million loan facility in December 1994.
They intended to enter into a joint venture arrangement with Bethlehem Trading Company Ltd for the importation and sale of sugar.
Under the arrangement, Bethlehem was responsible for the opening of Letters of Credit with the bank and handling the importation of sugar. In return, the eight companies were to provide security for the credit by allowing charges to be registered over their properties, which were valued at Sh205 million at that time.
They contended that they had expected that the proceeds from the sugar sale would be used to clear the debt, after which the suit properties would be discharged and titles returned.
However, after the letters of credit were opened and the charges were created over the titles, the joint venture arrangement failed when the bank cancelled the loan advance.
They said the titles were not to be used for any other purpose since the intended transaction had collapsed. Despite this, the bank failed to return the titles.
In November 2022, the companies discovered that the bank had transferred the properties to Orascom (K) Ltd in unclear and suspicious circumstances.
They sought court redress on the grounds that the transfer was unlawful and had caused them substantial financial loss.
Sammy Boit Arap Kogo, a witness, testified that the bank had sold the properties without issuing any courtesy notices to them.
They produced official searches that demonstrated that the properties were registered in the name of Orascom (K) Limited.
This evidence was not challenged by the bank, Justice Mabeya noted, while ruling in favour of the companies.
“In commercial transactions, a creditor is only entitled to enforce a charge only where there is an outstanding obligation secured by that charge. There was no evidence that there was any transaction that was secured by the suit properties after the letters of credit lapsed,” ruled the judge.
“Accordingly, the bank had no legal basis to continue holding the properties or to dispose of them. The court notes that the bank did not call any witnesses to support its defence,” he added.
He stated that no evidence had been produced to justify transferring the properties in question to a third party.
“There is no evidence that any funds were disbursed before the expiration of the letter of credit. Furthermore, Bethlehem Trading Company, through its director, acknowledged that delivery of the sugar did not take place due to technical issues with the supplier. Given these facts, the court is convinced that the bank had no legal right to retain the plaintiffs’ properties under the registered charges,” he stated.
The court rejected the bank’s explanation that it retained the titles and the subsequent disposal because Bethlehem Trading Company owed it a debt.
“The defendant contended that Bethlehem Trading Company still owed it funds. This in the view of the court is a spurious and baseless claim. Firstly, there was no evidence to rebut the testimony that the titles were strictly offered for the purposes of the letter of credit and nothing else. There was no evidence that the defendant advanced any loan to Bethlehem Trading Company and that loan was sanctioned by the plaintiffs or the plaintiffs agreed to give security for the same,” the court said.
In defence, the bank denied that the credit was cancelled and contended that the same expired upon the lapse of its validity period due to Bethlehem Trading Company’s failure to deliver the sugar by March 17, 1995.
It also denied that it had unlawfully refused to discharge the charges and maintained that the suit properties could not be released until the loan facility was fully settled.
