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ALN Kenya: Banks’ Right to Set Off Allowed against Accounts held by Related Companies

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By Sonal Sejpal and Wangui Kaniaru, Partners | ALN Kenya | Anjarwalla & Khanna, Kenya’s Member firm of ALN, An Alliance of Leading Corporate Law Firms with 74+ Partners and 290+ Lawyers in 16 Countries.

Banks often have standard terms and conditions with borrowers which entitle them to set off a borrower’s debts against amounts held in different accounts of the same borrower. The right to set off is typically provided for in well drafted loan documents but it is also an implied right that bankers have under banking law. In the context of a bilateral loan agreement, the implied right of set off does not extend to the bank accounts of anyone other than the borrower. This is also consistent with the common law principle of privity of contract which essentially means that a contract cannot bind anyone other than the parties who made the contract.

In a recent landmark ruling in the case of Embakasi Management Limited & 8 others v Imperial Bank Limited (In Receivership) & another [2022] KECA 7 (KLR), the Court of Appeal applied a rather interesting exception to the doctrine of separate legal personality and privity of contract. It held that a bank may exercise rights of set off against related companies on the basis of common directorship and common shareholding, even though the related companies are not parties to the set off agreement between the bank and the borrower. The precedent-setting case reflects a dramatic departure from the standards applied when piercing the corporate veil. Previously, fraudulent or improper conduct was used as the trigger for piercing the corporate veil. This alert examines the Court’s ruling and considers its impact on corporate borrowers.

Background Facts
The nine Appellants were private limited liability companies which were related to Farm Africa Mills Investments Limited (the Borrower) by virtue of common shareholding and directorship, and held various current and fixed deposit accounts with Imperial Bank (in Receivership) (the Bank). The Borrower took out a hire purchase facility with the Bank. At the time of taking out the hire purchase facility, a Director of the Borrower (who was a common director and shareholder in all the related companies) signed a set off form allowing the Bank to set off any debts due from the Borrower, against the accounts of its related companies. The nine related companies were not party to the agreement with the Bank and other directors and shareholders in those companies claimed that they had never expressly agreed to the same.

The Borrower later defaulted on its payment obligations and because of the set off provision, the Bank proceeded to set off the Borrower’s debts against balances held in the accounts of the related companies. The related companies sued the Bank and the High Court ruled in favour of the Bank. The matter subsequently proceeded to the Court of Appeal.

The Appellants sought to have the High Court’s ruling struck out at the Court of Appeal. The basis of the Appellant’s argument was that the High Court had no legal grounds for upholding the Bank’s decision to set off the amounts due to it by combining and consolidating the accounts held by the related companies.

In a precedent setting decision, the Court of Appeal upheld the High Court ruling in favour of the Bank. We summarize some of the key insights from the decision below:

  1. In a case where a set off form is signed by one company which confirms that monies held by other related companies can be applied towards the debt due from it to the bank, the bank can go behind the corporate veil of the borrower to determine who controls it and which other companies are controlled by the same person(s).
  2. Further, the Appellants’ argument that they were not party to the set off agreement because they never signed it could not be allowed to stand, as they were expressly committed to the said agreement by their common director and shareholder. This is despite the fact that he was not the sole director or shareholder of the companies. The Court stated that the Appellants could not rely on the corporate veil to avoid their legal and contractual obligations having been found to be related companies to the Borrower.
  3. The Court of Appeal reiterated the cardinal principle that a company is distinct and separate from its shareholders citing the famous case of Salomon vs Salomon and Co. Ltd (1897) AC 22 HL but went on to qualify this position by stating that the corporate veil can be lifted if there is evidence that it is being used to shield fraud or improper conduct by the shareholders or controllers of a company. However, the decision of the Court of Appeal in the Embakasi case does not refer to any fraud or improper conduct on the part of any person, with the consequence that this ruling is a precedent from the position that the mere non-payment of debt by a borrower is sufficient to lift the corporate veil.

Conclusion
This decision is precedent setting and will send shockwaves in the debt and security market in Kenya. Even though the Court of Appeal’s rationale was premised on the fact that the set off agreement contained an express provision allowing the Bank to set off any debts due from the Borrower against the accounts of its related companies, it did not consider the absence of agreement of the related parties to the set off provision as relevant. The only fault of the Borrower here appears to be a failure to pay as there is no reference in the ruling to there being any evidence of fraud or other misconduct. The case, therefore, presents uncertainty for borrowers, as well as a significant increase in the risk of related corporate borrowers.

In the past, the Courts have been reluctant to lift the corporate veil unless it is found that the company was a mere instrumentality or alter ego of its directors and/or shareholders in any misconduct or if it was found that maintaining the corporate veil would sanction fraud or injustice.

The Court of Appeal, in this case, said that the Appellants could not argue that they were not party to the loan and set-off arrangement between the Borrower and the Bank because of the common director and shareholder, alluding to the analogy that it was akin to alleging that the right-hand does not know what the left hand is doing yet they are part of the same body and mind.

The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter. Follow this link to read the Original Article published in the ALN Website. The Copyright © for the article belongs to ALN and the Authors. For any further information or clarifications on the above matters, please contact: Sonal Sejpal or Wangui Kaniaru

 

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Law Firms

A Toolkit for Customers on accessing Financial Services in Kenya

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Financial service providers such as banks, SACCOS and other institutions offer customers products and services that empower them to manage and grow their financial resources. As part of our Initiative to raise Financial awareness during Global Money Week, 2024 we have summarized some of the matters Customers should consider when accessing financial services:

  1. Tariffs and Commissions

As with any business, Financial Institutions charge customers for their products and services. These charges, more commonly known as Tariffs and Commissions, are levied on the Institutions offerings, and are not limited to fees charged on transactional accounts, loan accounts, credit cards and the various channels customers transact across. Financial institutions are required to advise their customers about applicable tariffs they will pay for day-to-day running of the account. Customers should be aware that it is best practice for these Financial Institutions to notify their customers at least 30 days in advance or before material account changes are effected.

  1. Loans and Change of Interest or Profit Rates

Interest Rates that are charged when a customer secures a Loan with a Financial Institution may from time to time be reviewed by their Financial Institution. In such an event the Financial Institution should inform their consumer on the change the interest rates on accounts and should provide notice in line with standard notification practice. For Islamic banking customers on the other hand term “Interest” does not apply but rather Profit and as per Shari’ah Principles, once a contract of financing has been signed between the bank and the customer, none of these parties has the right to change the profit rate, regardless of the fluctuation of rates in the market.

  1. Rights to accurate reporting and confidentiality

In as much Customers do make a lot of effort to repay their Loans there are circumstances under which some Customers have often found that their details have been inaccurately published by the Credit Reference Bureau therefore being detrimental to any future borrowings. Customers however have the right to dispute any inaccurate information published by the Credit Reference Bureau, including incomplete or inaccurate information and there are laws and regulations on how to settle these disputes.

  1. Closure or Freezing of Accounts

Some Customers may experience the closure of freezing of accounts. It should be noted that unless there are exceptional circumstances, a bank should not suspend or close an account without giving the account signatory at least a 14 day notice. However, if the Bank is required to freeze the account in compliance with statutory requirements or legal obligation, a post freeze notice should be given to the customer promptly.

  1. Reporting on Unclaimed Financial Assets

Lastly, Financial service providers such as banks are required on an annual basis to hand over to the Unclaimed Financial Assets Authority any unclaimed deposits (cash, cheques, and other assets of financial value) that have not been accessed by the customer in over 2 years. Therefore, customers must ensure that they transact on their accounts so as to prevent their account from falling dormant. In conclusion, Article 46 of the Constitution of Kenya (2010) sets out laws and acceptable practices that the providers of goods and services should adopt when engaging consumers. In addition to the Constitution, the Consumer Protection Act 2012 prevents unfair business practices in consumer transactions. Both Financial Institutions as well as their customers should familiarise themselves with these laws.

About the Author: HMS Africa Advocates LLP is among the foremost innovative and full-service Law Firm in Kenya. The firm serves clients in diverse sectors and areas including Banking and Financial Sector, Real Estate and Construction, Corporate and Commercial Sectors and Litigation and Dispute Resolution. The firm  clients extend across the globe with a presence in Kenya, Tanzania, Uganda, Ghana and Egypt. 

This article is for general informational purposes only, it is not, and is not intended to, constitute legal advice. Should you require any further information, please do not hesitate to contact HMS Advocates LLP at info@hms.africa.

HMS Africa Advocates LLP is considered the foremost innovative and full-service Law Firm in Kenya. Our Clients navigate and transact in diverse sectors with new and evolving opportunities. Our services to our Clients extend across the globe with a presence in Kenya, Tanzania, Uganda, Ghana and Egypt. In a constantly changing environment, we apply a bespoke approach to resolving the legal challenges posed across industries and jurisdictions ensuring the best possible results for our clients.

Our Firm was founded in 2016 by leading independent Legal minds and industry professionals who are united by a shared vision and dedicated to achieving excellence legal practice. We nurture a forward thinking mindset, collaboration and corporate responsibility and are committed to creating a better future for our clients and the communities around us.

We are achieving our Firm’s vision through an inclusive outlook which guarantees tailor made solutions for our valued Client’s and our team has developed expertise in the following areas: Banking, Financial Services & Insolvency, Corporate and Commercial Law, Employment and Labour Relations Law, Tax Law, Real Estate and Construction Law, Immigration, Litigation & Dispute Resolution, Intellectual Property and
Technology, Media and Telecommunications (TMT).

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Top 25 Law Firms in Kenya 2024: Githuku & Githuku Advocates LLP

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GITHUKU & GITHUKU ADVOCATES LLP

Established in 2016| Partners: 2 | Principal Office: Nairobi

Contacts: Kose Heights, 3rd Floor, Apartment F 3.4, Argwings Kodhek Road, Hurlingham, Nairobi, Kenya.

Telephone: (+254) 725 759 887 / (+254) 723 634 410

Email: info@githukuadvocates.co.ke; githukuadvocates@gmail.com

Website: www.githukuadvocates.co.ke

Download: Githuku & Githuku Advocates LLP Profile (PDF)

The Firm

Githuku & Githuku Advocates LLP is a full-service law firm that constitutes of several advocates, legal consultants and a number of paralegal and administrative staff. The firm was established in April 2016 by the founding partners Hannah Wangui Githuku and Dianah Wanjeri Githuku. The firm’s vision is to provide legal services to all businesses, institutions or persons, to offer practical solutions to our clients and to be universally recognized as a full-service law firm.

The firm undertakes to embrace client’s needs and address them soundly by offering turn-around time, to enable them make informed decisions. The firm has a reputation for providing exceptional legal services. The firm lawyers are renowned for their commitment to excellence and for ability to find innovative solutions to the most complex of legal problems which clients recognize and value.

The firm currently has offices in the prestigious environs of Hurlingham area at Kose Heights Building 3rd Floor Suite F3.4 located on Argwings Kodhek Road, Nairobi. It has associate lawyers and consultants to enable the firm deal with matters across the country under one umbrella. The firm stands out for its resolve to provide amicable and effective solution-oriented services in a timely manner to its clients and offers the full spectrum of legal service and aid to a diverse clientelle base.

Practice Areas

Githuku & Githuku Advocates LLP offer a diversity of expertise in all areas of major practice. The firm lawyers offer a full complement of Legal Services in the following practice areas: Property and Conveyancing Law, Corporate and Commercial Law, Tax Law, Constitutional/ Administrative Law, Competition Law, Contracts Law, Labour and Employment Law, Insurance Law, Intellectual Property Law, Notarial Practice, Family Law, Administrative and Public Law, Banking and Finance Law, Energy Law, Legal and Governance Audit, Probate, Succession and Trusts, General Litigation/Alternative Dispute Resolution, Consultancy on matters of law and Entertainment Law.

Firm Partners

Hannah Wangui Githuku is an Advocate of the High Court of Kenya of 15 years standing and the Partner in charge of Legal Research, Conveyancing and Commercial Department. She holds a Masters Degree in International Studies from the University of Nairobi, a Bachelors of Laws Degree from the University of Nairobi and a Post Graduate Diploma in Law from the Kenya School of Law and one in Human Resource Management from the Institute of Human Resource Management. She is also a qualified Tax Agent. She has extensive high-level experience in Commercial matters, Conveyancing, Civil and Criminal litigation, Company Secretarial and Preparation and Reviews of Agreements for Sale, Leases, Transfers, Charges, Discharges of Charge, Chattel Mortgages, Debentures and Registration of Documents. She has recognized as one the top 100 lawyers in Real Estate and Finance Law in Kenya.

Dianah Wanjeri Githuku is the Partner in charge of Litigation, Consultancy, Taxation and Legal Audit Department, an Advocate of the High Court of Kenya of 14 Years standing, a Tax Agent, a Patent Agent, a Notary Public and Commissioner of Oath. She holds Bachelors of Law Degree from Catholic University of Eastern Africa (CUEA), a Post Graduate Diploma in Law from the Kenya School of Law and is pursuing her Masters in Leadership and Governance. She has broad experience in litigation and commercial law gained working for leading firms and the legal department of Kenya Revenue Authority (KRA) where she prosecuted complex and high value tax cases on behalf of KRA in Commercial, Constitutional and Judicial Review Divisions and Tax Appeal Tribunal. She has vast training and exposure in negotiation, drafting and management of contract, oil and gas contracting and trial advocacy.

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Top 25 Law Firms in Kenya 2024: John Bwire & Associates

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John Bwire & Associates Advocates

Established in 2016

Number of Partners: 3

Number of Associates: 3

Principal Office: Mombasa

Download PDF: John Bwire & Associates Advocates Law Firm Profile

Practice Areas and Expertise

John Bwire & Associates Advocates is one of the most vibrant and well-established upcoming law firms in Kenya with rich diverse legal practices and a highly knowledgeable and experienced legal team. The firm specializes in Real estate law, International law, Matrimonial and family law, Personal injury and medical malpractice, Debt collection, Tax services, Aviation law, Commercial law, Insurance law, Conveyancing, Appellate Litigation, Law Tort and General negligence, Human rights law and practice, Employment and Labour Law and Practice, Arbitration and alternate dispute resolution, Admiralty and Maritime law and Judicial review of administrative and government action. The firm also offers specialist legal services including Patents and Copyrights, Trademarks, mining and prospecting, tax planning and establishment and registration of pension and provident funds.

John Bwire & Associates Advocates provides a comprehensive range of legal services to all its clients that spans across various sectors. The firm’s expertise spans across a number of industries and sectors, including leading corporate, banking and financial institutions, government parastatals and regulators, as well as high net-worth entrepreneurs.

John Bwire & Associates Advocates is structured into two departments – The Litigation Department which deals with all litigation and The Commercial and Conveyancing Department which deals with all non-litigation work. Clients’ work is allocated and supervised by the partner in charge of the Department in which the work is done. Where the client wishes to have a contact partner to whom all their work is referred in the first instance, the firm is glad to arrange for that.

The Firm’s Approach and Facilities

John Bwire & Partners Advocates is always driven by the commitment to ensure excellence in provision of legal services and strives to provide a complete legal and advisory solution to clients through tailormade insights and experience. John Bwire & Associates Advocates keeps close contact with clients to reman connected to them and intimately understand their individual and business legal needs to offer added value.

The firm has also built enviable connections with local regulators and accumulated wealth of experience of and insights in dealing with and handling local issues, regional and cross-border legal services in all business aspects across jurisdictions using a “one-stop shop” approach. In addition, the firm lawyers have cultivated commercial legal skills in specialist areas to serve local and international clients better at national, regional and global stage.

The has modern office facilities that include computerized word processing and accounting systems. The firm has invested to take advantage of the digital revolution and remote access and is accessible online and offline in maintaining the advocate-client relationship. The firm’s clientele entails local, regional and international businesses including listed companies, banking and financial institutions, insurance companies, private equity funds, venture capital and institutional equity investors, telecommunication companies, project developers and financiers, multilateral lenders, industrial and commercial companies, real estate developers, professional firms as well as government and public organizations.

The Firm’s People

John Bwire & Associates Advocates team comprises Managing partner and three (3) senior partners supported by 3 legal assistants and about a dozen support staff. The Managing Partner Hon John Bwire previously he worked as a partner at Kithi and Company Advocates and as an associate at the firm of Iseme, Kamau & Maema Advocates and the firm of Nchogu, Omwanza & Nyasimi Advocates. His practice mainly focuses on Civil and Commercial litigation in the Court of Appeal, High Court, Employment and Labour Relations Court, Subordinate courts, Business Premises Rent Tribunal and quasi-judicial bodies with a bias in land matters, labour /employment disputes, public law, banking and commercial disputes, insurance and personal injury claims, arbitration, family and succession and admiralty, maritime and shipping claims. The Other Partners of the firm are Patience Tumaini Lugo and Daniel Chokaa Muliro.

Contact John Bwire & Associates Advocates

Physical Address: Palli House, 4th Floor Nyerere Avenue

Postal Address: P.O Box 98731-80100 Mombasa

Telephone: +254 412 222 035 | +254 (0) 722 629 941

Cellphone: +254 (0) 726 003 750

Email: info@jblaw.co.ke / bwire@jblaw.co.ke

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