Firm's battle to block receiver managers flops

By Wahome Thuku

Kajulu Holdings is a local company involved in quarrying, mining, supply of ballast, limestone and sale of motor vehicle tyres.

In August 2007, Kajulu Holdings applied for a loan of Sh570 million from Commercial Bank of Africa (CBA) and was granted. On December 17, 2007, the loan was increased to Sh705,680,000.

The loan was secured by a debenture, which provided that it was payable on demand and if defaulted, CBA could appoint receiver managers to take over the company.

Following a report on Kajulu’s business performance, the bank recalled the loan. The company did not pay up. On November 22, 2008, the bank appointed receiver managers who took possession of Kajulu’s assets. Two days later, Kajulu Holdings went to court and sought an injunction to have the receiver managers restrained from taking over the company. Commercial Court Judge Muga Apondi granted the injunction and ordered the receiver managers to give up possession of the firm pending the hearing of the case.

"My knowledge of the corporate scene clearly shows that majority of receiver managers in this country have never understood their roles," Apondi remarked. "Most of them believe that if a company is put under receivership, then the only option is for the company to be sent to its grave. To me it would be suicidal to place this company under receivership."

The application for injunction was heard on December 7, 2008, in the presence of both parties. The case was then adjourned to February 16 and 23, 2009. Kajulu Holdings applied for extension of the injunction order, but the bank opposed.

On December 9, 2009, Judge Apondi ruled that the injunction be extended until the company’s application was determined. The following day, CBA lodged a notice to appeal against that ruling.

Interest of justice

Meanwhile, the bank filed an application under Rule 5(2)(b) of the Court of Appeal seeking that Apondi’s December 9 order extending the injunction be suspended and that the receiver managers be put back in possession of the Kajulu Holding’s assets and business pending the hearing of their intended appeal.

The bank claimed the extension of the order was contrary to Order 39 of the Civil Procedure Rules and that there was no basis for granting the injunction in the first place in the absence of one party. The order had compelled the receiver managers to vacate the company’s premises hence giving up control of the assets charged to the bank under the debenture.

The bank lawyers said they feared that the assets would be wasted or disposed before the appeal was heard thereby rendering it useless.

The bank also argued that the debenture was a contract between the parties and that suspending the High Court order would be in the interest of justice.

The company opposed the application saying the Commercial Court was entitled to grant an interim mandatory order under section 3A of the Civil Procedure Act and not under Order 39 of the Court Procedure Rules. The orders could be given in the presence of only one party and also extended beyond 14 days until further orders. Kajulu Holdings claimed the receivers wanted to sell the assets and needed to be stopped because the property was their lifeline. Their lawyer said they had given CBA an undertaking that they would not sell the assets.

They claimed the bank had no arguable appeal and since the company and its assets were still in existence, the intended appeal could not be rendered valid.

The Court of Appeal first ruled that CBA’s application was not frivolous and it was arguable. The judges felt the only recourse open to the bank was the assets covered by the debentures. That was why it had appointed the receivers and managers.

Charged assets

"From the description of the assets, they are nearly all wasting assets and because of their nature, they are all subject to a higher rate of depreciation and should a paralysis in the management persist, it is possible that in the long term the applicant might not have any assets to sell so as to cover the indebtedness or a reasonable amount of it. At the other end, the company could force the bank to pay for the liabilities and loss if it finally won the case. "The reverse is in our view not possible and the bank might find it difficult to make any recovery. To this extent the intended appeal could be rendered nugatory," the judges ruled.

Balancing the parties’ commercial interests basing on the facts of the case, the judges ruled that greater hardship would be caused to the bank than to the company if they declined to grant the orders sought."Since the challenged (Apondi’s) order did not nullify the appointment of the receiver managers, it means that the charge over the assets covered by the debenture has crystallised," the judges held.

"Having crystallised it is far proportionate in our view to remove the stalemate over the management of the assets by reinstating the receiver managers in the interim period before the hearing of the appeal so that they may in turn take care of the charged assets," they added.

On May 13, this year, the Court of Appeal suspended the High Court order of injunction and reinstated the receivers and managers pending the determination of the bank’s intended appeal. The case continues.

—The writer is a court reporter with the Standard Group

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