Queries on due diligence as banks fight over collateral

A rising number of clashes by banks claiming rights over the same property marked for auction has turned the focus on due diligence practices by lenders before accepting such assets as collateral.
Collateral is an asset that a lender accepts as security for extending a loan. If the borrower defaults, then the lender may seize the collateral. Accepting collateral against loans requires a lender to audit such assets for financial safety before entering into a proposed transaction with another party.

In the latest feud, Equity Bank and NCBA Bank are caught in a fierce fight for the sale of a property in downtown Nairobi after the two lenders lost to Co-operative Bank in a similar racket three years ago.
NCBA won the first round of the battle after High Court judge David Majanja rejected Equity’s application to review a ruling made in July, allowing NCBA to auction the property to recover a loan of Sh160 million.

This is the second case in which the two lenders are embroiled in a property fight, incidentally involving some of the parties that were entangled in the duel that Co-operative Bank won in 2019.
In the case pending before the High Court, both Equity and NCBA claim they each granted a loan of Sh160 million to Kinjunje Gardens Ltd.

Forgery claims

Equity Bank claimed that the charge registered by NCBA for a loan that was borrowed in June 2014 was forged. NCBA on its part maintains that its charge is valid but the one presented by Equity is forged. Justice David Majanja, however, rejected Equity’s bid to stop the auction planned by NCBA to recover its money.

The property comprises a hotel and attendant facilities. Kinjunje Gardens had also opposed the sale saying any disruption of the business would be disastrous to the sustainability of the business.
In the ruling, Justice Majanja said it was difficult at this stage to conclude who is telling the truth.

The judge said it is expected that both lenders did due diligence before advancing the money to Kinjunje. Equity went for a review of the earlier decision that a sale agreement tabled by NCBA was a forgery and the discovery of the new facts was significant as it challenges the validity of NCBA’s charge.

The evidence is that Henkam Ltd, which sold the property to Kinjunje allegedly received payment from Equity and not NCBA and that the previous owner never executed the sale agreement dated January 20, 2014, which formed the basis of the sale of the property, financed by NCBA.
In a ruling in July, Justice Majanja noted that NCBA’s charge was registered on July 18, 2014, while Equity Bank’s was registered on October 9, 2014.

He said on the face of it, NCBA’s security must prevail as he declined to stop NCBA from selling the property.
NCBA said there was nothing new in the evidence as claimed by Equity as it was available to all parties from the onset.

“It follows that even if I were to accept that the material and evidence proffered by Equity is new, it is not important because it is not based on what is pleaded and no relief is sought by Equity against the suit property,” the judge said
Evidence produced in court was that Kinjunje approached NCBA for a loan of Sh160 million in June 2014 to purchase the property on Tom Mboya Street.

Loan default

The property was charged to the bank and Kinjunje defaulted on the loan repayment, forcing NCBA to think of auctioning the property.
NCBA said the debt now stands Sh286.5 million as of June 2021. The bank said it was fair and just that it be allowed to exercise its right to sell and proceed with the auction as scheduled.

But Equity claimed NCBA’s claim was invalid because the property was already charged to it when Kinjunje allegedly obtained the loan from Equity.
Equity added as the first ‘chargee’ and under the principle of “the first in time prevails”, its charge ranks higher than that of NCBA in the recovery of dues owed by Kinjunje Gardens.

The judge noted that the parties accused each other of fraud, forgery, and illegalities concerning the title deeds and securities, but all the claims can be determined after a full hearing.
In the case that was settled in 2019, a bench of three judges ruled in favour of Co-op, which was allowed to sell the property owned by Wardpa Holdings, Kinjunje, and some of its directors.

All three banks had given the companies a total of Sh450 million, which was advanced on different dates and charged the same property to secure the loans.
Equity lost the fight for the property at the High Court and failed to pursue the appeal although it was joined in the case by NCBA.

“In the process, the banks are staring at the possibility of losing hundreds of millions of shillings of customer funds. The syndicate, we are told, has also hit other banks in the country, and it is perplexing that none of the perpetrators has been subjected to the criminal process. Perhaps it is a measure of how high the country has soared in the corruption index,” the three judges who heard the case said.

According to the court, the circumstances surrounding the dispute between the three banks are fraught with fraud, which neither of the banks may be strictly responsible for because they all believed they held a first charge on the plot.
Evidence in court showed that on April 8, 2010, Patrick Kangethe & Sons, went to Co-op bank and borrowed about Sh166 million. As security, they deposited the original title to the land, which was registered in the name of Patrick on August 29, 1997.

A legal first charge was duly registered against the title on September 10, 2010, and there were no other encumbrances on the title. The bank still has in its possession, the original documents.
On October 23, 2012, another original title with the same plot number registered in the name of Wardpa Holdings Ltd (WHL) was obtained by the Directors of WHL. They went to CBA on March 24, 2013, and borrowed about Sh100 million on the security of that title and a legal charge was registered against it.

NCBA said appropriate searches were carried out and there was no evidence of any other previous charge on the title. The bank, he said, retains the original documents.
About one year later, in May 2014, yet another original title with the same plot number was obtained in the name of Kinjunje Gardens Ltd.

Legal charge

They went to Equity on December 9, 2014, and borrowed a loan of Sh200 million, and a legal charge was registered against the title on January 23, 2015.
Like NCBA, Equity said it carried out searches and found no evidence of prior encumbrances on the Title. They also retain the original documents.

Environment and Land Court judge Samson Okongo noted that all the loans that were advanced on the security of the plot were given to people who knew each other or were related and were working together in pursuit of the said loans.
On May 20, 2016, Co-op bank instructed Leaky Auctioneers to advertise the sale of the plot, to recover the amount due of more than Sh195 million. It was then that Equity and NCBA moved to court to challenge the planned sale.

NCBA and Equity claimed that the charge held by the Co-op bank was on a fake and parallel title. After hearing the case, Justice Okongo found no reason to stop Co-op bank from exercising its statutory power of sale and set it free to proceed with the auction.

Co-op won the case at the High Court and a subsequent appeal as the courts ruled that there was no evidence of fraud on the part of the Co-operative bank and the lender could go ahead and sell the property.

“In conclusion, we would agree with the finding of the learned Judge that the appellant did not demonstrate a prima facie case of fraud that may lead to the nullification of the charge in favour of the Co-op Bank at the trial or that damages would not be an adequate remedy,” a bench of three judges of the Court of Appeal ruled.

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