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Court of AppealDismissedCivil Appeal No. 51 of 2000

FINA BANK LIMITED v SPARES & INDUSTRIES LIMITED [2000] KECA 292 (KLR)

Court of Appeal of Kenya
10 November 2000
Philip Kiptoo TunoiTunoiSHShahO'O'Kubasu
1,580 words in judgment
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The bottom line

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Kenya's Court of Appeal stopped a bank's receivership of a borrower's business, ruling courts can intervene when receivers are appointed without basis or oppressively.

What this practically means

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Executive summary

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The Court of Appeal (Tunoi JA, with O'Kubasu JA agreeing) dismissed Fina Bank's appeal against an interlocutory injunction restraining the bank's receivership of Spares & Industries Limited. The bank had advanced a term loan of Shs.20 million and an overdraft of Shs.55 million, secured by legal charges over six parcels of land, a Shs.75 million debenture over all the company's assets, and directors' guarantees, with interest at the bank's sole discretion (initially 31% per annum). After demanding Shs.90,505,556.02 on 31 October 1999, the bank appointed two Receivers and Managers under the debenture; the company sued the following week and Mulwa J granted an injunction, holding the appointment oppressive and without basis. On appeal, the Court accepted that a debenture holder is under no duty to refrain from appointing a receiver merely because loss may follow (In re Potters Oils, applied in Madhupaper), but equally that a court may intervene where such a right is exercised without basis or oppressively (Godfrey Nyaga). Because this was an interlocutory appeal, conflicts of evidence could not be resolved: the company's unchallenged claims of substantial payments and continued repayments up to 2 November 1999 - the day before receivership - supported the judge's finding of no mismanagement. The judge had correctly applied the Giella v Cassman Brown principles and his discretion would not be disturbed. The Court dismissed the appeal with costs, ordered the Receivers and Managers to vacate forthwith, restrained them from interfering with the business, required them to render accounts within 30 days, and directed that the suit be set down for hearing on a priority basis.

Questions the Court framed

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The issues the Court set itself to decide, in its own words.

  1. 1.Whether the appellant's right to appoint a Receiver had become exercisable under the terms of the Debenture dated 3rd July, 1997, issued pursuant to the credit facilities agreement.
  2. 2.Whether the learned Judge gravely misdirected himself in granting a mandatory injunction where a default under the Debenture was said to have occurred and the interest rate was the only issue in dispute.
  3. 3.Whether the appointment of the Receivers and Managers was oppressive, inequitable or without any basis, given the alleged exorbitant and unconscionable interest rates and the respondent's continued payments.
  4. 4.Whether issues of repayments, mismanagement and the adequacy of the securities could properly be determined in an interlocutory appeal without the benefit of a trial.

Key legal issues

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01

Whether the appellant's right to appoint a Receiver had become exercisable under the Debenture dated 3rd July, 1997.

Holding

The Court declined to decide the point definitively at the interlocutory stage. The respondent's unchallenged averments that it had paid Shs.63 million and built a business worth Shs.210 million, together with continued repayments up to 2nd November, 1999 (the day before receivership), supported the trial judge's view that there was no mismanagement warranting the appointment of Receivers and Managers.

Reasoning

The respondent's averments of substantial payments and an expansive business network were not seriously challenged. The statements of account showed repayments continuing to 2nd November, 1999, a day before the Receivership. Because this was an interlocutory appeal, the Court could not resolve conflicts of evidence; the respondent's assertion 'may well be true', in which case the judge could not be faulted for holding that the appointment was not made to enable the bank to recover its money. Determination had to await trial.

p. 3
02

The limits of a debenture holder's contractual power to appoint a receiver.

Holding

A debenture holder with a right to appoint a receiver need not refrain from exercising it because loss may be caused to the company; but the Court may interfere where the right is exercised without any basis or oppressively.

Reasoning

The Court endorsed the principle in In re Potters Oils Ltd, previously applied by the Court in Madhupaper International Ltd v Kerr, that a debenture holder is under no duty to refrain from exercising its rights merely because the company may suffer loss, remarking of counsel's submission 'Mr. Fraser so far is right.' It balanced this with the 'correct law' from Godfrey Nyaga v Housing Finance Co. of Kenya Ltd that the Court may intervene where the right is exercised without basis or oppressively. On the interlocutory record, whether the exercise was oppressive turned on unresolved facts.

p. 2
03

Whether the trial judge's discretion in granting the temporary injunction should be disturbed on appeal.

Holding

No. The judge acted in accordance with the principles in Giella v Cassman Brown & Co. Ltd, exercised his discretion correctly and judicially, and the Court found no fault or misdirection in his ruling.

Reasoning

The Court regarded the consequences of receivership - destruction of the business, expense, and the possibility that receivership may not improve the financial position - as legitimate considerations for a temporary injunction, and was satisfied these observations were in the judge's mind when he acceded to the application. An appellate court does not interfere with a discretion exercised judicially; the Court found no ground to fault the judge and dismissed the appeal with costs.

p. 3
04

The proper scope of an interlocutory appeal.

Holding

An interlocutory appeal cannot resolve conflicts of evidence or pronounce on intricate and complicated points of law not adjudicated below; issues of repayment, mismanagement and the adequacy of securities fall for trial.

Reasoning

The Court held that the appellant's grounds required it to pronounce on intricate and complicated points of law that had not been adjudicated by the trial judge, and that issues of repayment, mismanagement and securities could not be determined without the benefit of a trial. The Court also observed that the appellant had adequate security for its loans without relying on the debenture, but allegations that securities were overvalued or undervalued were likewise matters for trial.

p. 3

Legal principles established

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  • A debenture holder with a right to appoint a receiver is under no duty to refrain from exercising that right merely because doing so might cause loss to the company.
  • A court will not usually prevent a party from exercising a right of action, but may interfere where there is no basis on which the right could be exercised or where it is being exercised oppressively.
  • An interlocutory appeal cannot resolve conflicts of evidence; issues of repayment, mismanagement and the adequacy of securities must await trial.
  • The destructive, expensive and potentially financially ineffective nature of receivership is a legitimate consideration in deciding whether to grant a temporary injunction against receivers.

Court orders

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  1. 1.The appeal is dismissed with costs.
  2. 2.The Receivers and Managers appointed by the appellant do vacate the respondent's business premises forthwith.
  3. 3.The Receivers and Managers are restrained from interfering with, dealing with in any manner, or closing down the respondent's business.
  4. 4.The Receivers and Managers shall render accounts of the business for the entire period they have been operating the respondent's business, within 30 days.
  5. 5.The superior Court is directed to set down the hearing of the suit on a priority basis.

The bench

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One judgment of the whole court — no separate or dissenting opinions.

Philip Kiptoo Tunoi
majority

Wrote the judgment

SH
majority
O'
majority
On appeal from
High Court of Kenya at Nairobi
H.C.C.C. 2106 of 2000
Jurisdiction invoked
Not stated in the judgment. The appeal was brought to the Court of Appeal at Nairobi from an interlocutory order of the High Court; no constitutional or statutory provision conferring jurisdiction is cited.

Relief refused

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The appellant's appeal against the interlocutory injunction restraining the receivership

The Court found no fault or misdirection in the ruling of Mulwa J, who had exercised his discretion correctly and judicially in accordance with the Giella v Cassman Brown principles.

p. 3

A definitive pronouncement on the intricate points of law raised by the appellant, including the exercisability of the power to appoint a receiver and the effect of the disputed interest rates

Those points had not been adjudicated by the trial court and could not be determined in an interlocutory appeal without the benefit of a trial.

p. 3

Validation of the appointment of the Receivers and Managers and their continued operation of the respondent's business

The orders of the Court required the Receivers and Managers to vacate the premises forthwith, restrained them from interfering with the business, and required them to render accounts.

p. 3

Costs

Appeal dismissed with costs (the appellant to pay the respondent's costs of the appeal).

Quotable passages

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Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.

a Debenture holder which has a right to appoint a receiver is under no duty to refrain from exercising its rights because doing so might cause loss to the company
p. 2Rights of a debenture holder to appoint a receiver
where a party has a statutory right of action the Court will not usually prevent that right being exercised except that the Court may interfere if there was no basis on which the right could be exercised or it was being exercised oppressively
p. 2Court's power to restrain exercise of a contractual or statutory right
This being an interlocutory appeal it is not possible for this Court and the Court below to resolve conflicts of evidence.
p. 3Limits of interlocutory appeals
It destroys the business. It is expensive. The appointment of Receivers and Managers may not necessarily improve the financial position of the business.
p. 3Effects of receivership relevant to temporary injunction
Indeed he acted in accordance with the principles laid down in Giella v Cassman Brown & Co. Ltd [1973] EA 358 and came to the correct decision.
p. 3Temporary injunction principles applied
The upshot of this is that I find no fault or misdirection in the ruling of the learned Judge. I would dismiss this appeal with costs.
p. 3Disposition - appeal dismissed
I would order that the Receivers and Managers appointed by the appellant do vacate the respondent's business premises forthwith.
p. 3Final orders - vacation of receivership
They shall render accounts of the business for the entire period they have been operating the respondent's business.
p. 3Final orders - accounts by receivers
The superior Court is directed to set down the hearing of the suit on a priority basis.
p. 3Final orders - expedited trial

Issues in the judgment

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minor

The coram lists three Judges of Appeal (Tunoi, Shah & O'Kubasu) but the judgment records the concurrence of only O'Kubasu JA; no position is recorded for Shah JA.

minor

Counsel's surname is spelled inconsistently within the judgment ('Fraser' and 'Frasser').

Key timeline

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Practical implications

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Frequently asked questions

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Later judgments citing this (25)

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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, "FINA BANK LIMITED v SPARES & INDUSTRIES LIMITED [2000] KECA 292 (KLR)", Case Analysis (2000). Civil Appeal No. 51 of 2000. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2000/292/eng@2000-11-10

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