“Upon perusal of the provisions of Section 104(1) of the Land Act, it is apparent that an application for leave to sell a charged property by public auction at a value below its forced sale value ought to be filed before the property is sold. Section 104(2) (d) of the Land Act, however grants Courts the power to ratify such a sale in the event that it was conducted before leave of the Court was sought… This Court finds that it is in the interest of justice and for the parties herein, to issue an order ratifying the auction sale conducted on 22nd August, 2023.” – Hon Lady Justice Njoki Mwangi in Manguo Development Company Limited Vs. I&M Bank & Another
Introduction
Hon Lady Justice Njoki Mwangi has pronounced herself ex cathedra and has granted reprieve to financial institutions who find themselves at crossroads in selling securities at/above the forced sale value in exercise of the statutory power of sale. The Judge has sanctioned the applicability of Section 104 of the Land Act granting lenders an avenue to sale charged properties by public auction below the forced sale value when circumstances permit.
In her ruling, the learned judge concisely held that Section 104 (2) (d) of the Land Act grants courts power to ratify a public auction where the charged property is sold below the forced sale value prior to seeking leave of the Court.
Brief background of the case
- Our client, a financier to the construction of a shopping mall, advanced to Manguo Development Co Ltd/ the borrower a facility sanctioned at a maximum of Kshs. 450,000,000.00.
- The borrower executed various Letters of Offer and duly accepted all the terms and conditions therein. As continuing security for the payment of the loan, a legal Charge over the property was created.
- The Borrower defaulted in servicing the loan facility and failed to rectify the default leading to the issuance of the statutory notices.
- Having failed to remedy the default, the Bank issued all the required statutory notices. Upon issuance of the notices and the Borrowers having failed to comply with the same, the Bank instructed auctioneers to sell the security by public auction. All the previous public auctions were unsuccessful as the bids were below the forced sale value.
- On 22nd August 2023, the charged property was sold at the best reasonably obtainable price, which value was slightly below the Forced Sale Value.
- This prompted the borrower to lodge an application seeking injunctive orders to restrain the Bank from transferring the charged property to the purchaser. The Borrower also sought an order to nullify the sale by public auction.
- The Bank opposed the application and further filed an application seeking for an Order sanctioning and/or ratifying the public auction for sale below the forced sale value.
- The application was primarily hinged on Sections 104 [1] [a] of the Land Act, 2012, which gives power to courts to grant orders/remedies reasonably necessary to prevent reduction in the value of the charged land or to reverse any such reduction.
- The application for ratification of the public auction was premised on the following salient grounds:
- The Bank was unable to sell the property at forced sale value despite making several attempts.
- The loan had outstripped the value of the security.
- It would be in the interest of justice that the court ratifies the auction sale noting the several attempts made in realizing the security.
- The Bank was willing to retain the highest possible recovery sum in the auction sale and write off the remainder of the loan amount.
- In addition, the Bank had satisfied the conditions under Section 104 of the Land Act, 2012 wherein the court has the powers to grant any relief against the operation of a remedy that the circumstances of the case require.
Findings & Key legal principles set out by the Court
It is trite law that financial institutions can approach the court under Section 104 (2)(d) seeking an order for ratification of a public auction where the sale is below the forced sale value.
A Chargee ought to meet the following conditions:
- A chargee ought to exercise a duty of care in exercise of the statutory power of sale as stipulated under Section 97 (1) of the Land Act;
- A chargee must comply with the dictates of Sections 97(2) of the Land Act by conducting a current valuation Report before conducting an auction sale;
- The Chargee must demonstrate the numerous failed attempts to sell the charged property by public auction at/above the forced sale value;
- The outstanding loan amount has outstripped the value of the security;
- The borrower has not attempted or taken steps to settle the outstanding amount
- A public auction sale below the forced sale value is the only viable option to recover the monies owed and reduce further exposure;
To this end, the Court, while upholding the decision in MZS Versus Gulf Bank Limited & 2 Others (2015) eKLR, held that the powers under Section 104 (2) of the Land Act are not limited to the powers set out therein but are expansive and can be exercised depending on the circumstances of each case. Accordingly, and based on the circumstances at hand, the Learned Lady Justice Njoki Mwangi held that it was in the interest of justice and for the parties to ratify the auction sale.
However, chargees should not misuse this avenue to the detriment of borrowers. Chargees should always prioritize seeking leave of the Court to realize the security below its forced sale value.
This article is provided free of charge for information purposes only; it does not constitute legal advice and should be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary as set in the article should be held without seeking specific legal advice on the subject matter. If you have any query regarding the same, please do not hesitate to contact Litigation Department at Litigation@wamaeallen.com
About the author
Preston Ndombi Wawire is an experienced litigator of over 10 years standing and has perfected his art in civil and commercial litigation. He has vast experience in banking and recoveries litigation, insurance and malpractice law, and securities enforcement. Prestone has been involved in some of the most ground breaking litigation in injunctive matters and medical malpractice. Prestone is an active member of the Law Society of Kenya, Environment and Land Court Bar Bench Committee.
His main areas of practice include: Employment and Labour Law, Human Rights Law, Banking and Finance Law Conveyancing and Alternative Dispute Resolution Commercial Law
Academic Qualifications
ATP (Postgraduate Diploma), Kenya School of Law, 2019
LLB (Hons), Moi University, School of Law, 2018
Professional Qualifications
Member, Law Society of Kenya
Nadio George is a dedicated Advocate of the High Court of Kenya, passionate about legal excellence, societal progress, and environmental stewardship. Admitted to the Roll of Advocates in 2023, he combines deep legal expertise with a strong commitment to making meaningful contributions to both the legal profession and the community.
Denis Mutugi specializes in Commercial Litigation and Alternative Dispute Resolution.
Denis graduated with a Bachelor of Laws, LLB (Hons) from The University of Nairobi in 2021 and was admitted to the Roll of Advocates of the High Court of Kenya in the year 2023.
Denis has amassed a considerable wealth of experience in conducting legal research on various complex legal matters touching on Commercial, Insurance, Employment and Insolvency law and bankruptcy.
