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Hot From The Bench

This is a free critical analysis on current legal issues. It can either be a thematic analysis of a topic while referencing relevant cases or analysis of certain authoritative or jurisprudence making cases decided by various courts in the Eastern African region.


Recievership
Date: Tue 5 Oct 2010

Receivers: The Villains of Company Law

 

In this weeks Hot From The Bench, LawAfricas Charles Kanjama looks at a recent decision by Justice Ringera in Showind Industries and Guardian Bank and its impact on the law relating to receiverships. We have previously looked at receivership and we feel that the Showind case has attracted attention back to the contentious issues surrounding exercise of the power to appoint a receiver under a company debenture. The principles to be applied, especially in interlocutory applications, have once again been put into question. Subscibers will be able to view these cases on www.lawafrica.com.

 

Just as criminal law has always had its heroes, company law has always had its villains. Ironically so, because the company has been the vehicle for commercial development while the criminal has been the source of retrogression in society. In Victorian England, the promoter bore the brunt of criticism: “a character of dubious repute and antecedents who infests the commercial [world]… and after rising to affluence by preying on the susceptibilities of a gullible public, finally retires from the scene in the blaze of a sensational suicide or Old Bailey trial.” (Gower on Company Law)

 

In America before the Great War, the villain was the director of the great trust corporations who through interlocking directorates cast a grip so strong that the nation almost choked on its own progress. Kenyan company law has for long cast about for its own villain, before settling on the receiver, the doctor-turned-undertaker of companies. In Jambo Biscuits v Barclays Bank (2002), Ringera was at his analytical best, “I think it is a notorious fact of which judicial notice may be taken that receiverships in this country have tended to give the kiss of death to many a business.”

 

Just over one year earlier, in Fina Bank v Spares & Industries (2000), Justice Tunoi also took a swipe at the company receiver, “The issue of receivership is an emotive one and I understand why the respondent had to resort to litigation. It destroys the business. It is expensive.”

 

The receiver has not always been so pilloried, nor the debenture under which he is appointed subjected to such scorching scrutiny. In Aikman v Muchoki (1982), the receivers appointed under a debenture instituted a suit, joining the company as co-plaintiff, seeking to restrain the directors from interfering with the management of the company. While interlocutory orders were in force, the directors forcibly took possession of the company premises and property. On appeal, the court held that the directors had clearly flouted the law and the balance of convenience, in an interlocutory application, favoured the receivers’ reinstatement.

 

Madan, JA criticised the lower court’s decision in favour of the company directors, “[It] would render totally valueless the concept of sanctity of contract, security of mortgage debts, charges and debentures by… leaving the field free for insurgents to play havoc by perpetrating illegal infringements.”

 

In Madhupaper International v Kerr & others (1985), the directors brought a suit in the name of the company seeking the removal of the receivers. They pleaded that the receivership would gravely prejudice the company’s investment in its Thika Plant. The trial judge decided the balance of convenience as favouring the receiver. The Court of Appeal, after conceding that the terms of the debenture were draconian, affirmed the decision. “It is correct law that a debenture holder which has [a right to appoint a receiver] is under no duty to refrain for exercising its rights because doing so might cause loss to the company or its unsecured creditors.”

 

Lenders and receivers could bask in the afterglow of decisions that continually upheld sanctity of contract, even while acknowledging that some debenture terms were draconian. Yet the principle would not long remain unmolested upon its pedestal. Already in Hastings Irrigation v Standard Chartered Bank (1987), the court, by formulating the “seriously oppressive conduct” exception, was beginning to waver. “Once [receivers are validly appointed] it does not seem to us appropriate for the court to interfere in the passage of the receivership unless it can be shown that the conduct of the receiver/managers is seriously oppressive, or not in accordance with the recognised principles of law and of commercial practice.”

 

In the last two years, the initial doubts of the late 1980s have sprouted a judicial attitude hardening ever more against the company receiver. Fina Bank v Spares & Industries (2000) more than any other decision shows up the judicial angst that has attended this transformation. The company had been lent 75 million shillings, secured by various charges valued at 77 million shillings and a general debenture for 75 million shillings covering all the assets of the company. Interest was payable at a variable 31% and an additional 6% as penalty charges for arrears. The company had been unable to keep up with interest repayments and the bank elected to appoint receiver/managers under the debenture.

 

The company filed suit seeking a declaration that the receivers’ appointment was null and void, on the grounds that the property under fixed charge was sufficient to satisfy the debt, that the interest charged was unconscionable and that the bank’s action was oppressive. The bank contended that there had been no denial of indebtedness, that the company had contracted to pay additional interest as penalty and that the directors were milking the company’s assets.

 

Justice Shah asserted that the debenture document formed a contract between the parties and the provision on interest can only be changed or altered like any other contract. Having executed the debenture with full knowledge of the consequences, the company cannot be heard to say that some of its terms were onerous. “The interest rates probably put the company in difficulties as regards the repayment of the loans. But that is a moral issue.” In law, Shylock must have his pound of flesh!

 

Without expressly rejecting Justice Shah’s ratio, Justices O’Kubasu and Tunoi granted interlocutory relief to the company based on the principles enunciated in Giella v Cassman Brown. On considering the exercise of discretion by the judge, they declined to find that the trial judge had misdirected himself. They approved Nyaga v HFCK and held, “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.” Further, the balance of convenience dictated that a temporary injunction ought to be granted.

 

One year later in Jambo Biscuits v Barclays Bank Ltd (2002), the debenture and subsequent appointment of a receiver was subjected to gimlet-eyed scrutiny. On an interlocutory application to restrain the receivers, it was alleged that the debenture was invalid because it was not endorsed with the firm’s name contrary to the Advocates Act. Further, the company argued that the deed of appointment of the receivers was incomplete for lack of attestation, that there were illegal debits and penalty charges and that the demand was invalid. The court concurred with the company, and also found that the solvency report upon which basis the bank decided to appoint receivers was unreliable because it was equivocal and had material disclaimers.

 

Justice Ringera held that, under the authority of Obura v Koome, the company had established a prima facie case with probability of success. He took judicial notice of the fact that most receiverships tended to cause irreparable injury to companies and decided the balance of convenience in favour of the status quo ante.

 

In the light of the above judicial proceedings, the decision in Showind Industries Ltd v Guardian Bank has not just unseated the company director from the pedestal of judicial admiration, it has toppled the pedestal’s pillar and reworked the base as well. For while all previous interlocutory applications have assumed that a restraining injunction will be granted if the applicant establishes a prima facie case, Showind has held that a receiver will only be unseated by a mandatory injunction based on a strong and straight-forward case.

 

In Jambo Biscuits, Ringera had stated, “I find that the company has made out a prima facie case with a probability of success at the trial that the appointment of the receivers/managers was illegal and invalid...” In Showind, the test has been subtly reworked. “The pith and marrow of [the application] is to seek an order to terminate the receivership of the Plaintiff… As I understand the law, an interlocutory mandatory injunction is granted very sparingly and only in exceptional circumstances such as where the applicant’s case is very strong and straightforward. Moreover, as the remedy is an equitable one, it may be denied where it would be inequitable to grant the relief for the reason, for example, that the applicant’s conduct does not meet the approval of a court of equity or his equity has been defeated by laches.”

 

The courts must resolve the doubt that now surrounds grant of interlocutory injunction against an already appointed receiver. As the relevant principles are resolved, perhaps the courts should also examine the practice of both directors and receivers bringing proceedings in the company’s name after the appointment of receiver/managers has taken effect. These issues will need to be ventilated as the number of receivers appointed under debentures continues to rise concurrently with growing interest rates. Will the courts rehabilitate the ‘villains’ of company law? Only time will tell.

 

Cases cited in this analysis: LLR citation

Aikman v Muchoki [1982] LLR 1213 (CAK)

Madhupaper Int’l v Kerr & others [1985] LLR 2396 (CAK)

Hastings Irrigation v Standard Chartered [1987] LLR 280 (CAK)

Nyaga v HFCK [1987] LLR 2187 (CAK)

Fina Bank v Spares & Industries [2000] 1 EA 57

Geoffrey Obura v Martha Koome [2000] 1 EA 175

Jambo Biscuits v Barclays Bank [2001] LLR 1381 (CCK)

Showind Industries v Guardian Bank [2002] LLR 1478 (CCK)- to be reported in 2002 1 EA

 


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