NATIONAL BANK OF KENYA LIMITED v KWANZA HOUSE LIMITED (Civil Appeal 236 of 1996) [1998] KECA 31 (KLR)
The bottom line
#Kenya's Court of Appeal ruled a bank cannot keep a charge on property when the loan facility it promised never materialised.
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 charge over the respondent's property could be discharged on the ground that the consideration for it, namely the grant of a letter of credit of Kshs.75 million to Kwanza Motors Ltd., had totally failed
- 2.Whether the charge secured existing and future loans rather than the contemplated letter of credit
- 3.The effect of section 28 of the Registered Land Act on the charge, including whether rectification under section 143(1) was available
- 4.Whether the learned Judge of the superior court misdirected himself by disregarding certain evidence at trial
- 5.Whether the respondent could validly create the charge without a directors' resolution to guarantee Kwanza Motors Ltd.'s liabilities
Key legal issues
#Failure of consideration for the charge
The charge was created solely to secure the establishment of a Kshs.75 million letter of credit for Kwanza Motors Ltd.; the bank never established it, so the consideration totally failed and the charge had to be discharged.
The court analysed the correspondence, particularly the bank's letter of instructions of 15th September 1994 to its advocates, which showed the charge was limited to Kshs.75 million for the letter of credit. The bank's own advocate confirmed the charge was prepared because letters of credit had been applied for. Post-charge correspondence showed no debit connected to any letter of credit. The trial judge's finding, based on evidence he preferred, was amply supported.
Effect of section 28 of the Registered Land Act (indefeasibility)
Although the registered charge was not liable to be defeated except as provided in the Act, the court could still compel the bank to relinquish its interest; and had cancellation been sought, rectification under section 143(1) would have been granted because the registration was made through a mistake.
Section 28 indefeasibility does not bar relief where the registration was obtained by fraud or mistake. The bank's officer, Mr. Mutua, was mistaken in asserting the charge secured existing and future loans; that was not within the contemplation of the parties. The court stopped short of finding fraud but held the mistake ground satisfied, though the issue was not crucial to the determination.
Alleged misdirection on evidence by the trial judge
The submissions that the judge disregarded evidence were unsubstantiated; a scrutiny of the judgment showed he considered all the evidence and was entitled not to believe Mr. Mutua.
The proposals suggesting the motor graders were the security for the letter of credit were never accepted; what was agreed was contained in the letter of instructions of 15th September 1994. The correspondence produced by the bank related to other transactions and did not affect the agreement. An appellate court will not disturb a trial judge's assessment of witness credibility absent demonstrated error.
Legal principles established
#- Where a charge over property is created to secure a specific facility (a letter of credit) which the chargee fails to establish, the consideration for the charge has failed and the chargor is entitled to have the charge discharged.
- The true scope of a charge is determined by the surrounding circumstances including the instructions giving rise to it, and general or wide wording in the charge cannot disguise the real agreement between the parties.
- A registration obtained through mistake, as opposed to fraud, may be rectified or cancelled under section 143(1) of the Registered Land Act notwithstanding the indefeasibility conferred by section 28.
Court orders
#- 1.The appellant's appeal is dismissed
- 2.Costs of the appeal awarded to the respondent
The bench
#One judgment of the whole court — no separate or dissenting opinions.
- On appeal from
- High Court of Kenya at Nakuru
- H.C.C.C. No. 303 of 1995
- Jurisdiction invoked
- First appeal to the Court of Appeal against a decree of the High Court (no specific constitutional/statutory provision quoted in the judgment)
Relief refused
#Determination of whether the respondent could validly create the charge without a directors' resolution to guarantee
The court found the judge's conclusion on failure of consideration sufficient to support the judgment, making the issue unnecessary to decide
Costs
The appellant's appeal is dismissed with costs to the respondents.
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 the result, the appellant's appeal is hereby dismissed with costs to the respondents.
what the charge was all about, was the granting of banking facilities to Kwanza Motors Ltd. by way of a letter of credit up to the amount of Kshs.75 million and nothing more
Whilst we do not wish to go as far as to say that the registration of the charge of the respondent's property was made by fraud, it can be said that it was made through a mistake.
If the general and wide working employed in the charge in describing the kind of financial facilities to be affected by the charge was intended to disguise the real position, this was not achieved.
the consideration for which the respondent's property was charged to the appellant namely, that the appellant would open a letter of credit to the value of Kshs.75 million, and this not having been done by the appellant, entitled the respondent to have the charge discharged by the appellant
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "NATIONAL BANK OF KENYA LIMITED v KWANZA HOUSE LIMITED (Civil Appeal 236 of 1996) [1998] KECA 31 (KLR)", Case Analysis (1998). Civil Appeal 236 of 1996. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/1998/31/eng@1998-03-06
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.