Commercial International Bank (CIB) Kenya has lost a bid to compel a merchant firm, Azofco General Merchants Limited to attach a parcel of land as new security for a Sh167 million loan provided by the lender.
CIB Kenya had moved to court seeking an “informal charge” order to attach a parcel of land owned by the firm in Nairobi as collateral, pending the hearing and determination of a suit on the debt.
An "informal charge on land" refers to a legal agreement where a property owner pledges their land as security for a loan, but this agreement is not formally registered with the land registry, meaning it is not officially documented and recognised by the government.
Such an agreement is, however, still considered a valid charge between the involved parties though a court order is required to enforce it.
“I find that the Plaintiff has not proved its case to the required standard…. By attempting to seek an order for the creation of an informal charge over a property that falls outside the ambit of the letter of offer and charge instrument, the Plaintiff, therefore, seeks this court to rewrite the terms of the contractes,” ruled High Court Judge Helen Namisi.
In May 2021, CIB Kenya gave Azofco - an export and import company, a loan of $1,400,000 (Sh180 million). The loan was secured by the creation of a charge over land parcel and a credit life protection cover with an insurance company. Additionally, Azofco put up as security a lien over a fixed depot for Sh5 billion in its name that was to be held in favor of CIB Bank.
CIB Bank told the court that as of April 2024, Azofco had defaulted to pay its loan, which now stands at Sh167,209,956.
The bank sued Azofco General Merchants, seeking court orders to declare that the company had created an informal charge by depositing the title deed with the bank as security. The bank also sought leave to sell the said piece of land.
The judge ruled that CIB Kenya had failed to provide sufficient evidence proving that an informal charge had been created over the second property.
The bank said it had faced challenges in enforcing the sale of the initial land.
In its defense, Azofco argued that the bank was seeking to extend its contractual mandate beyond the terms of the loan agreement.
The company added that the statutory power of sale could only be exercised over a property formally charged under the loan agreement and that enforcing a charge on a different property would violate contract law and property rights under Article 40 of the Constitution of Kenya, 2010.
The court noted that while the bank had established a formal charge over the land parcel as security for the loan, there was no clear evidence indicating that the second property was also provided as security.
While relying on section 79 of the Land Act, which governs informal charges, the judge observed that for an informal charge to exist, the borrower must have a clear written intention to acknowledge the use of the property as security.
In this case, the bank merely stated that the defendant had previously deposited the title deed without demonstrating that it was done as security for the loan.
“The plaintiff has left many gaping holes, expecting the court to play guessing games to fill in the blanks,” Justice Namisi said, adding that granting such a request would amount to rewriting the contract between the parties.