Background
Court of Appeal Decision
Comment
In the case of Trust Bank Limited v Eros Chemists Limited (Kenya Court of Appeal, Civil Appeal 133 of 1999) the chief justice of the Republic of Kenya assembled a bench of five judges to consider whether a bank mortgagee had served a mortgagor with a valid statutory notice in exercise of the bank's statutory power of sale. A five-judge bench was necessary since two previous decisions of the same court, Russel Company Limited v Commercial Bank of Africa Limited and Trust Bank Limited v Okoth, directly conflict with each other on the issue of the proper form and manner of the serving of statutory notices relating to the exercise of a mortgagee's power of sale. In the Russel Case the court had held that, under Section 69(A)(1) of the Transfer of Property Act of India 1882, it was not mandatory for a mortgagee to state expressly in the notice that the notice was for three months, and that failure to make such a statement did not render the notice invalid. On the other hand, in the Okoth Case the court held that it was mandatory for the mortgagee to specify expressly in the notice that the mortgaged property would be sold upon the expiry of three months' notice.
In Eros Chemists the debtor had mortgaged its property to the bank to secure a loan. On March 24 1999 the bank advertised the property for sale in exercise of its statutory power of sale conferred upon it under the act. The debtor then filed suit for an injunction to restrain the bank from selling its property.
The debtor's application for an injunction, which was heard by the High Court, was based on the allegation that the bank had failed to serve the debtor with the mandatory statutory notice before advertising the property for sale by public auction. It was argued on behalf of the bank that the requisite statutory notice had been served upon the debtor by the bank's advocates' letters, which had given the debtor 14 days to pay the outstanding amount. The High Court held that that the advocates' letters did not constitute a valid statutory notice under the act. The bank appealed.
The Court of Appeal was called upon to decide what constitutes a valid statutory notice under the act by a mortgagee wishing to exercise its power of sale. Before delivering its ruling, the court asserted itself as a final Court of Appeal for the sovereign state of Kenya and compared its position to that of the House of Lords in England. Like the House of Lords, the court conceded that its decisions on issues of law are normally binding upon itself. However, the court observed that where too rigid an adherence to precedent may lead to injustice in a particular case and unduly restrict the development of the law, the court would be free not to follow its previous decision should it appear right not to do so.
The court went on to reconsider its decision in the Russel Case. The court held that although there is no statutory requirement in the act for the three-month period to be expressly set out in the notice, such omission would deny the mortgagor a right conferred upon it by statute to be warned of the intended sale and a right to redeem the property. It was the court's view that such notice is intended to guard the rights of the mortgagor, because once the statutory right of sale is exercised, the equity of redemption is extinguished. Since a three-month period must elapse after service of the notice before the power of sale can be exercised, it was the court's view that for such notice to serve its purpose as intended by the legislature, it must expressly state that the sale will be conducted after three months. Failure to state this in the notice or provision for a shorter notice period will render the notice invalid and the intended sale pursuant thereto unlawful. The court therefore declared the decision in the Russel Case bad law and indirectly reaffirmed the decision in the Okoth Case. The Court of Appeal held that since the Russel decision was erroneous, the court was not bound to perpetuate an error. The High Court decision was therefore upheld and the bank's appeal was dismissed.
The Eros Chemists decision seems to imply that it is mandatory in all circumstances to give the mortgagor three months' notice before the mortgagee's statutory power of sale can accrue under the act. However, this cannot be the case. The act provides expressly that a mortgagor is entitled to exercise its statutory power of sale if some interest under the mortgage is in arrears and unpaid for two months after becoming due, or if there is some breach of any other provision of the mortgage instrument by the mortgagor. It therefore follows that three months' notice to the mortgagor will not be necessary in cases where there is a default in payment of interest for a period of two months or where the mortgagor is in breach of some other condition of the mortgage. However, in the absence of judicial authority secured lenders should act with caution.
For further information on this topic please contact Atiq Anjarwalla or Karim Anjarwalla at Kapila Anjarwalla & Khanna Advocates by telephone (+254 2 337625) or by fax (+254 2 337620) or by email ([email protected] or [email protected]).