The High Court has stopped the appointment of joint administrators to take over operations of a tea export firm, Swafi Foods Limited, over a defaulted bank loan.
Swafi Foods has sued Equity Bank Kenya, Kamal Anatroy Bhatt, Jamal Kamal Bhatt, and Anant Bhatt LLP, claiming the appointment notices were issued without following proper procedure.
Justice Florence Wangari also issued a temporary order restraining the respondents from taking over the administration or management of Swafi Foods Ltd.
She issued the orders pending inter-partes' directions on September 17, when the case will be mentioned.
Administration is a process through which a third party - an administrator - is appointed to take over the affairs of a company in distress to improve its financial situation for the benefit of its creditors or auction its assets as a last resort to protect the interest of creditors.
In its case, Swafi Foods Ltd says Equity Bank has at all material times provided it with financial services, including loan and overdraft facilities.
It says on or about January 23, 2018, May 17, 2021, and June 29, 2022, it entered into a financial arrangement with Equity Bank for a loan, which was secured by all asset debentures and corporate guarantee.
The tea exporting company said that the credit were aimed at financing working capital to facilitate purchase, packaging, and shipment of teas for export, and would be liquidated with income generated from tea export. It did not reveal the size of loan tapped.
According to the company, it observed its obligations under the existing letters of offer and fulfilled each one of them.
It says that on or about August, the defendants capriciously issued notices of appointment of administrators while the loan was still performing.
“The plaintiff avers that no event has arisen or occurred to warrant the appointment of administrators and no notices were issued in accordance with the law,” the company argues.
It further says that the notice of appointment of administrators’ demand was therefore unlawful, null and void.
Swafi Foods Ltd also claims that Equity Bank, acting through its agents and officers, shared its (Swafi Foods Ltd) information with other banks with a view to having them (banks) cancel or demand immediate repayment of the loan, thereby frustrating its operations.
The tea exporting company argues that the bank has breached its fiduciary duty by demanding payment for banking facilities despite Swafi Foods being up to date with its repayments.
“The plaintiff has suffered significant financial distress, exacerbated by mismanagement of the loan restructuring process, and has faced potential foreclosure due to the defendant’s exploitative practices,” the case documents state.
Swafi Foods Ltd contends that it was coerced into entering into financial agreements and subsequent contracts under duress, particularly during the Covid-19 pandemic, when financial constraints left it with no meaningful alternative but to accept Equity Bank’s demands.
The company also claims that the interest rates charged by Equity Bank exceeded the statutory or reasonable limits, were punitive and unjust, leading to its deepened financial difficulties.
“Despite vigorous efforts to pay off the loan, the same has been made intolerable by the actions and exorbitant interest rates charged by the defendant, where all payments go to interest alone,” argues Swafi Foods Ltd.
The company claims that the exorbitant interest rates charged are designed to make repayment of the loan impossible, resulting in the appointment of an administrator to take over its affairs.
The company says that, unless the court intervenes, it will suffer irreparable damage and lose clientele. It adds that the business goodwill it has established over the years cannot be compensated for by an award of damages or quantified.
Swafi Foods Ltd wants a declaration that the notices issued by the defendants for the appointment of administrators are unlawful and thus null and void.
The company also wants a permanent injunction to be issued to restrain the defendants from repossessing, advertising, selling, disposing of, offering for sale or otherwise alienating any of the plaintiff’s properties, assets, machinery, stock, working capital or equipment.
Furthermore, the tea exporting company wants a permanent injunction to be issued to restrain the defendants from listing it with any credit reference bureau or taking any adverse action, including freezing accounts or escalating the loan terms.
