WAMAE & ALLEN QUARTERLY

Wamae & Allen

QUARTERLY

Issue 001 July - September 2018

Inside

In Duplum Law Needs to Cover All Borrowers

The Unclaimed Financial Assets Dilemma

Digitization of Records

Legal Opinion: Banks Freezing Accounts

EDITORIAL

ALLEN W. GICHUHI

C.Arb | Senior Partner | allen@wamaeallen.com

Greetings!

I am delighted and excited with the inaugural launch of my firm’s quarterly newsletter, whose aim is to inform our esteemed clients and friends about the latest developments in practice. The firm also celebrates my election as the President of the Law Society of Kenya, 2018 - 2020. Running my firm and the National Office, creates a synergy of diverse ideas. As a transformative leader, I always believe in setting achievable targets that are to be implemented within strict timelines through teamwork. Shared knowledge enhances the professional skill that we cherish.

Karibuni, and enjoy reading.

CHIEF EDITOR Caxstone Kigata CONTRIBUTING EDITORS Kevin Kokebe Virginiah Gichuhi Hellen Nyaboke Andrew Kabugu Leah W. Muhia Ruth Khanali Ambrose Waigwa 2

WAMAE & ALLEN QUARTERLY | Issue #001 | July 2018

All material in this publication, both written and illustrated, is copyrighted. Reproduction in part or whole is strictly forbidden without the written permission of the publisher. All images and information is collated from extensive research and is published in good faith. Although the authors and publisher have made every effort to ensure that the information in this publication was correct at press time, the authors and publisher do not assume and hereby disclaim any liability to any party for any loss, damage or disruption caused by errors or omissions, whether such errors or omission result from negligence, accident or any other cause.

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CONTENTS

04

05

In Duplum Law Needs to Cover All Borrowers

The Unclaimed Financial Assets Dilemma

14

10

Guarantees

15

The Laws Governing Evictions in Kenya Spousal Consent Under the New Legal Regime Legal Opinion: Banks Freezing Accounts Digitization of Records

18

23

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Issue 001 July - September 2018

WAMAE & ALLEN QUARTERLY | Issue #001 | July 2018

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Allen GICHUHI

Senior Partner

Emmanuel MUEKE

In Duplum Law Must Be Expanded to Cover All Borrowers

Associate

accrued to KES 103 million to KES 30 million.

Creditors love defaulting borrowers, they are the best source of profits. A borrower takes a KES 21 million loan which having failed to service, balloons to the sum of KES 103 million by the time the creditor initiates recovery. However, in respect of banks, effective 1st May 2007, the in duplum rule through Section 44A of the Banking Act protected borrowers from exorbitant interest accumulations on loan facilities. Simply put, the in duplum rule limits the amount recoverable by a bank on a defaulted facility to the principal owing when the loan became non-performing plus contractual interest not exceeding the principal owing when the loan becomes non-performing plus recovery expenses i.e. Principal + Interest + Expenses = 2*Principal + Expenses.

While bank borrowers have found reprieve, majority of borrowers are still suffering under oppressive and exploitative credit arrangements daily. As per the 2016 finances Household Survey conducted by the Kenya National Bureau of Statistics, Central Bank of Kenya and FSD Kenya, Mobile Financial Services (MFS), informal financial services, and insurance financial services, accounted for an average of, 70%, 41%, and 23% of financial services used by Kenyans.

This is comparable to 39% of Kenyans who access financial services from banks. In recent years we’ve seen an exponential growth in the number of mobile money lenders with such services as Tala, Branch, M-Shwari, KCB M-Pesa, just to name a few coming into the mobile finance space.

While the growth of mobile lending and informal This rule provided much needed reprieve for bank financial services is commendable, the facilities ofcreditors in eliminating exploitation by ensuring fered have interest rates as high as 15% per month. banks were motivated to recover debts owed at the This translates into an effective rate of 600% per anearliest and were limited in how much they could num, meaning a KES 10,000 loan could accumulate recover. For context purposes, it is important to re- arrears in the space of a year totalling to KES 70,000 member that prior to the rule becoming Kenyan law, on simple interest! the situation was so dire, one judge seized of what he felt was unconscionable exploitation unsuccessfully Good laws balance public interests with commercial attempted to reduce a KES 21 million loan that had interest equitably to ensure that though the freedom 4

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UNCLAIMED FINANCIAL ASSETS Caxstone to contract that underpins a Phelix Kigata capitalist society is respectSenior Associate - Litigation ed, it is not at the expense of the populace. It is for this reason that the author petitioned Parliament to consider enacting amendBACKGROUND ments to the Consumer Protection Act to expand The Unclaimed Financial Assets Act (No. 40 of 2011) the scope of the in duplum rule to all credit arrangeprovides a legislative framework for dealing with ments, be they formal or informal, oral or written, unclaimed financial assets. It is estimated that unand with individuals or organizations. claimed financial assets in the form of: a) forgotten cash accounts, The proposed amendments would apply the in dub) unpaid dividends, plum rule guided by the following principles; one, c) pensions, they would limit recovery to the principal debt owing d) life assurances and investments, at default plus interest and expenses. Second, they e) fixed deposits and certificates of deposit curwould limit the interest and expenses recoverable to rently exceed Sh10 billion, with financial institutions the principal owing at default i.e. Principal + (interest mainly enjoying this undisclosed wealth. + expenses) = 2*Principal. Third, interest would automatically stop accruing once it is equivalent to the A financial asset is considered unclaimed when: unpaid principal on the facility. Fourth, any payments (a) no claims have been made; made after default would first be applied to the ac(b) no transactions have been performed; or crued interest arrears before the principal. Lastly, in(c) no instructions have been given with respect terest accrued on a facility would not lose its characto the asset for a period of time. ter as interest through recapitalization. The import of the last principle is to ensure that the principal owing Therefore, the law relates to financial assets considis not increased through recapitalization of the interered dormant, unclaimed and abandoned when: est accrued. (a) Contact with the owner or his heirs and personal representatives is lost over an extended The above principles mirror those successfully enperiod. acted and implemented in South Africa though their (b) Untimely death being the most common National Credit Act of 2005. It is imperative that reason for the assets not being claimed. the National Assembly do consider and enact these (c) Long illnesses of the owner, amendments so as to ensure all creditors and bor(d) name changes after marriage, rowers are protected under the law. Further, the (e) divorce, situation presently obtaining is inequitable as only (f) Unreported changes of address, banks are limited in their recovery by the in duplum (g) incomplete or illegal records and rule. Lastly, in similar fashion with Section 44A of the (h) fast pace of emigration Banking Act, these amendments should be made (i) One individual using multiple names to hide retrospective in effect. Ordinarily, retrospective aphis wealth from the tax authorities. plication of the law is inequitable as it requires comAll of the above contribute to the assets being forpliance with laws that were neither in existence nor gotten. contemplated at the time of contracting. However, the Banking Act had an elegant solution to this issue, When rightful owners fail to claim these forgotbeing the recapitalization of the accrued interest as ten assets over a specified number of years known at the date of coming into force of Section 44A. This as ‘dormancy period’ these abandoned funds held effectively capped the principal recoverable and conby banks, stock-brokers, utilities, employers, life insequently the interest that could accrue on such a fasurance companies and the Government normally cility. The amendments shall enhance consumer protransfer these assets into “suspense accounts” or tection as enshrined in our constitution by creating trust accounts in a legal process known as ‘escheat.’ safeguards for all borrowers while ensuring that the In most cases of forgotten assets, thousands of ownentrepreneurial spirit that underpins our economy is ers or family members are or remain ignorant or unprotected. aware of their entitlement to collect or make aclaim on behalf of a deceased relative. It is estimated that

The Unclaimed Financial Assets Dilemma

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one third of insurance policies are not paid because family members were not aware of the policy or the insurance company was not notified and no effort is made to find the reason for dormancy of the financial asset.

The Act is thus aimed at establishing a dedicated mechanism and resources to help locate property owners and/or beneficiaries to facilitate claims. The Act provides for: (a) How institutions should report and deal with unclaimed financial assets; (b) The establishment of a new regulator called the “Unclaimed Financial Assets Authority (UFAA)”; and (c) The establishment of the Unclaimed Financial Assets Trust Fund.

The law established a Trust Fund to hold and invest unclaimed assets being aware that these funds are subject to inflation. Parliament’s rationale for the law was thus that many financial institutions had no incentive to re-establish contact with people who had funds they had forgotten about, or whose heirs they couldn’t trace. Some institutions suspended these accounts and continued to levy charges until the sums they held were depleted. Parliament therefore chose to regulate unclaimed financial assets as a social justice measure, and to reduce the perverse incentive that resulted in unjust redistribution of income by both private firms and utilities firms.

UFAA has the mandate to receive unclaimed financial assets from the holders, safeguard and re-unite the assets with their rightful owners. The Act further establishes the Unclaimed Financial Assets Authority and its objects and functions are to enforce and 6

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generally to administer the provisions of the law and act as trustee to the Unclaimed Assets Trust Fund, created for the control of unclaimed assets. The list of unclaimed assets now is fairly well defined DETERMINATION OF UNCLAIMED FINANCIAL ASSETS Here are the conditions outlined in the Act that are required for an asset to be presumed as being unclaimed (page 6). The law imposes a duty on the holder of the assets to make all “reasonable efforts” to locate and trace the owner and to notify the owner about those assets with financial institutes being required to make reports to the Authority and thereafter, if not claimed, these assets have to be delivered to or vested in the Authority. Upon payment or delivery of assets to the Authority in good faith the Authority assumes custody and responsibility for the safe keeping of the assets and exonerates and discharges the holder of the unclaimed assets from all claims and liabilities.

CONSEQUENCES OF NOT CLAIMING FINANCIAL ASSETS Deductions will be made by the Authority against the asset. The law provides the Authority with the right to deduct: (a) Costs related to the sale of the abandoned assets; (b) Costs of mailing and publication in connection with the abandoned assets; (c) Reasonable service charges; (d) Costs incurred in examining records of holders of assets and in collecting the assets from the holders.

The owner is entitled to receive from the Authority CONTINUED ON PAGE 8 Responsive

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UNCLAIMED FINANCIAL ASSETS Asset

Duration of Abandonment

Conditions

1. Traveller’s cheque 2 years from the date • Owner has not communicated in writing to the 2. Money order or similar of issuance issuer concerning it written financial/ monetary • Must have been purchased in Kenya; or instrument • Issuer has its principal place of business in Kenya and the records of the issuer do not show the country in which the financial/monetary instrument was purchased; or • The issuer (e.g. bank / financial institution) has its principal place of business in Kenya 3. Cheques, drafts or similar instruments

Outstanding for more • Bank or financial institution must be directly than 2 years after it liable; was payable or after • Owner has not communicated in writing to the its issuance issuer or indicated an interest within the preceding two years; • Holder cannot deduct any charge unless imposed by a written contract

4. Demand, savings, matured time deposit, funds paid towards the purchase of a share, mutual investment certificate, any other interest in a financial institution

5 years

5. Life or endowment Insurance policy or annuity contract 6. Assets as a result of demutualization of an insurance company

2 years after the • Policy must have matured or terminated funds become due and payable 2 years after the date • The funds remain unclaimed; of the demutualiza• Owner has not communicated with the holder tion (bank/ financial institution) or agent

7. Deposit for utility services e.g. electricity, water, etc.

8. Order by a court for refund by holder

2 years after termina- • Deposit unclaimed for more than two years after tion of the services termination

9. Ownership interest

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• Owner has not increased or decreased the amount of the deposit or presented a statement of the account (or passbook) or other evidence of the deposit; or • Owner has not communicated in writing with the financial institution concerning the assets; • Owner has not indicated an interest in the assets; or • Owner has not had another relationship with another financial institution

2 years after it be• Sum remains unclaimed by the owner for more came payable accordthan two years after the sum became payable ing to the order 3 years • Interest in the entity is owned by a person who has not claimed a dividend, distribution or other sum payable as a result of the interest; • Has not communicated with the entity regarding the interest or dividend, distribution or other sum payable;

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UNCLAIMED FINANCIAL ASSETS Asset

10. Assets from dissolved business entity

Duration of Abandonment

2 years

11. Assets held in a fiducia- 2 years after they ry capacity become payable

12. Gift certificate, gift card 5 years or credit memo/note

13. Unpaid wages 14. Assets held in safe deposit box or repository 15. Assets held by a court or a Government department.

16. Further classes of assets

• The entity does not know the whereabouts of the owner at the end of the three year period • Assets distributable in the course of dissolution of a business entity remain unclaimed by the owner for more than two years after the date specified • Assets held for the benefit of another person; • Owner not increased the deposit or accepted any payment in that respect, within 2 years after they have become payable; • Owner has not communicated concerning the assets or indicated any interest • The certificate, card or memo is not claimed or used for a period of five years after becoming payable or distributable; • The certificate, card or memo was used or claimed one or more times without exhausting its full value, but was not subsequently claimed or used for an uninterrupted period of five years

1 year after they become payable

• Unpresented payroll cheques, allowances, bonuses and terminal benefits owing in the ordinary course of the holder’s business 2 years after the • Lease of rental period on the box or other reposlease or rental period itory lapses on the box or repository has expired 1 year after they • Assets held for the owner for more than one become payable or year are presumed abandoned. distributable To be prescribed by • May include such other requirements as the Cabthe Cabinet Secretary inet Secretary may deem necessary

CONTINUED FROM PAGE 6 any dividends, interest or other income realized from the assets at or before liquidation or conversion of the assets into money. Sale of the assets by the Authority - The Authority is empowered to sell the abandoned assets not later than three years after receipt of the abandoned assets to the highest bidder at a public auction. The sale shall be preceded by at least one publication of notice at least three weeks in advance of sale in at least one newspaper of national circulation.All securities presumed abandoned and delivered to the Authority shall be sold within one year (no later than three years) of their receipt unless the Authority otherwise decides. The purchaser of the assets at a sale conducted by the Authority 8

Conditions

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shall take the assets free of all claims of the owner or previous holder of the assets and all persons claiming through or under the owner or previous holder.

PROCEDURE FOR FILING A CLAIM A person claiming an interest in any assets paid or delivered by their financial service provider to the Authority may file with the Authority a claim on as prescribed by the Authority. The Authority shall consider each claim within 90 days after it is filed and shall give a written notice to the claimant of its decision. Where a claim is allowed, the Authority shall pay over or deliver to the claimant the assets or the amount the Authority actually received or the net proceeds if it has been sold by the Authority. It Responsive

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UNCLAIMED FINANCIAL ASSETS should be noted that UFAA requires that all the holding institutions should declare unclaimed assets and surrender those assets to the Authority on the first day of November every year. Thus every financial institution is required to submit a report on unclaimed financial assets, even if their unclaimed financial asset balance is nil. The Authority is also required to disclose the non-compliant institutions and take legal action against them in order to demonstrate the seriousness of this offence. Swift action by institutions to comply with the law will protect them from possible future penalties resulting from non-compliance with provisions of the UFA Act. In developed countries such as the USA and United Kingdom, the key to success in the management of unclaimed financial assets can be attributed to comprehensive laws governing the management of the assets, stringency in implementation of the same laws and transparency on utilisation of these assets by the state or its authorities.

GOOD FINANCIAL PRACTICE FOR BANK CUSTOMERS Banks require their customers to routinely update their records as a matter of basic good financial practice. This up-to-date contact record enables your bank to communicate to you about important matters associated with your bank account. At a minimum, the bank should have the Customers: (a) Current cell phone number (b) Current mailing address (post office box) (c) Email address that the Customer check regularly (d) Current residential address and permanent address information

CHALLENGES IN THE IMPLEMENTATION OF THE ACT Surprisingly, a majority of Kenyans are not well informed about proper channels enshrined in the law for retrieving unclaimed assets. The existence and mandate of the Unclaimed Financial Assets Authority (UFAA) also appears to be little known to most Kenyans and financial institutions. The law has its challenges in that it is not synchronised with the Succession Act, the Banking Act, the Companies Act and the Public Trustee Act and many Kenyan habits of hiding assets have not been provided for. The question therefore is, are holders of unclaimed assets moving in tandem and fulfilling the law mandated? One of the reasons financial institutions find it difficult to remit unclaimed assets to the authority is the fear of asset owners emerging to claim their assets at a later date.

It is no surprise to find that as a result of large amounts of data, some of these institutions have significant reconciliation backlogs evidenced by suspense accounts.For example, in commercial banks, some financial assets such as cheques, drafts or similar instruments are deemed unclaimed if they are outstanding for more than two years from when they are payable or after they are issued.

i) However, how does a commercial bank explain to clients that their assets are no longer held by the bank due to lapse of time? What will be the evidence that the bank took to perform all the necessary steps in trying to contact individuals before transferring the assets to the authority?

ii) Does the bank face legal or reputation risks from dissatisfied clients whose assets have been transferred to the authority without their consent?

In addition, banks expect customers to transact on iii) Have the institutions published the perithe accounts which they own. This ensures that the ods that suggest the classification of an unclaimed accounts do not fall dormant and in accordance with asset for the different types of instruments and asthe new Unclaimed Financial Assets Act would be sets? transferred to the Unclaimed Financial Assets Authority.

The other reason for non-compliance is the challenging task of determining which assets can be classiTo keep the Customer’s financial assets from being fied as unclaimed assets for different organizations. deemed unclaimed the Customer should: Some organisations do not have sufficient data or (a) Check your bank statements regularly even technical resources to undertake the task of (b) Promptly notify your bank/brokerage firm/ accurately determining to what extent some of their insurance provider about changes in your contacts clients assets can be deemed unclaimed. In most cas(phone, email & postal address) es, it may even be necessary to engage legal and risk (c) Routinely check with your bank/brokerage teams together with finance, technology and data firm or insurance provider on the status of paid out and analytics experts to embed data mining princidividends/ premiums ples and analysis of an organisation’s data to accu(d) Officially advise the financial service provider rately determine the assets that should be classified about your next of kin as unclaimed.

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UNCLAIMED FINANCIAL ASSETS It is also important to keep a trail of these assets surrendered to enable the institutions original customer identify the information sent to the UFAA in case of a future claim. There exists also Janeirene a clear disparity between the amounts MAINA surrendered by organisations and Associate amounts claimed by Kenyans, this can be mainly attributed to lack of awareness about the existence of mechanisms for individuals to claim their assets.

Since UFAA is bound by the regulatory policy to verify legal claims of an applicant, not every claim will result in payment, but the pace of ensuring that the assets are being recycled back to their owners is appallingly slow. While parliamentary records show legislators were concerned that assets held by banks, brokerage firms and corporations were virtually unrecoverable, the performance of the UFAA so far means it will take centuries to resolve the fund.

Further, considering that the average claim is about Sh40,000, the procedures for processing the claims must be questioned. It ought to be possible to settle claims very quickly, especially given that the cost of making claims and the waiting required could be another means for eroding the value received. The Board and Executive officers of UFAA bear a great fiduciary responsibility, but the pace of processing claims suggests that there are deep institutional inefficiencies. What exists is a perpetual investment fund in the control of the State, with heirs and others whose assets are missing being the losers. The UFAA should therefore open itself to more financial and operational scrutiny because it is not meeting its grand policy objective of preventing firms from keeping the money of their clients. So far it has become just another fund accumulating funds for unknown reasons.

Esther KIMANI

Guarantees

A contract of guarantee is an undertaking to perform the promise or disAssociate charge the liability of a third person in case of his default. The person who gives the guarantee is called the “surety”, the person in respect of whose default the guarantee is given is called the “Principal-debtor” and the person to whom the guarantee is given is called the “creditor”. In the case of Mwaniki Wa Ndegwa –Vs- National Bank of Kenya Limited & Another HCCC No. 86 of 2000 a guarantee was defined as an undertaking by one or more persons to another person or persons to be liable and make good the liability or obligation of another person or persons. The consideration usually is in the form of some benefit accruing principal-debtor whose liability is being guaranteed. This is a covenant which attaches to the person natural or juridical who gives the undertaking or guarantee.

A guarantee obligation is secondary and accessory to the obligation the performance of which is guaranteed; the guarantor undertakes that the principal debtor will perform his (the principal debtor’s) obligation to the creditor and that he (the guarantor) will be liable to the creditor if the principal debtor does not perform. Therefore, the guarantor’s liability for the non-performance of the principal debtor’s obligation is co-extensive with that of the principal debtor’s. If the principal debtor’s obligation turns out not to exist, or is void, diminished or discharged, so the guarantor’s obligation. In a banking context, it is an undertaking given by the guarantor to the banker accepting responsibility for the debt of the principal debtor should there be a default.

THE ESSENTIALS OF A CONTRACT OF GUARANTEE The following are the essentials of a contract of guarantee: 1.

There must be an existing debt which should be recoverable.

2.

Existence of three parties ie. Principal debtor, creditor and surety.

3.

There must be a distinct promise, oral or written, by the surety to pay the debt in case of default committed by the principal debtor.

4.

The principal debtor must be primarily liable.

The surety’s liability is secondary, ie. the surety’s liability only arises in case of default of the principal debtor.

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5.

There should be some consideration.

6.

The liability must be legally enforceable.

7.

The contract of guarantee must have all the essentials of a contract. A contract of guarantee like any other contract, for its validity requires: i) an agreement, ii) between the parties to create a legal relationship, iii) having the capacity to contract iv) supported by consideration express or implied and free from vitiating factors.

note from the above, the distinction between a limited and unlimited guarantee is that in the former the guarantor is only liable with respect to a single transaction while under an unlimited the guarantor is liable for all the debts of the principal debtor.

DURATION OF AN UNLIMITED GUARANTEE? According to Halsburys Laws of England 4th Edition Vol 12 on Interpretation of Deeds and Non- Testamentary Instruments, the duration of the guaranPERSONAL AND CORPORATE GUARANTEES tor’s liability depends upon the terms of the GuarPersonal guarantees are guarantees issued by indi- antee. Some guarantees are intended to cover a viduals to secure borrowing by the principal debtor. single credit or transaction only while others, called Corporate guarantees on the other hand are guaran- “continuing guarantees are framed so as to apply to tees issued by a company to secure the borrowing of a series of credits or transactions. In the case of a another company. single credit or transactions the guarantor’s liability extends only to the one credit or transaction agreed LIMITED AND UNLIMITED GUARANTEES upon, while in the case of a continuing guarantee the Limited Guarantee is a guarantee in which the guar- liability endues until the credits or transactions conantor’s liability is specific to the amount stated in templated by the parties and covered by the Guaranthe guarantee and is only applicable to that partic- tee have been exhausted or until the Guarantee itself ular advance and it ceases on the repayment of that has been revoked. amount. The liability of the guarantor does not exceed a certain limit.

In Surgipharm ltd v Awuondo, the court stated that a guarantee can either be discharged by notice if it is An unlimited Guarantee on the other hand has no for a definite period of time and there is provision to limit/cap and is designed to cover a fluctuating or determine it or by payment as per its terms. running account and it secures the debit balance at any time irrespective of payments which clear past “Law of Guarantees”, third edition by Geraldine Anadvances. Under an unlimited guarantee, the guar- drews and Richard Millet reiterates the position in antor is obligated to answer for all debts of the pri- the case aforesaid and provides that since the purmary obligor in respect of the guaranteed obliga- pose of a guarantee is to secure the performance of tions, whereas a limited guarantee limits the amount the principal’s obligations towards the creditor, the of the liability assumed by the guarantor. As you will surety will be discharged from his liability under the Innovative

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GUARANTEES guarantee if the principal pays the debt or performs the obligation which the surety has guaranteed, or if the principal’s liability is forgiven.

Long term projections – Borrowers are able to make long term projections for their businesses due to the flexibility that comes with unlimited guarantees.

HOW COURTS INTERPRET GUARANTEE CONTRACTS Guarantees are governed by the Law of Contract Cap 23 of the Laws of Kenya. Therefore, the principles of construction governing contracts in general apply equally to contracts of guarantee. Courts interpret every case depending on the construction of the actual words in which the promise is expressed, since the parties may exclude or vary any of their mutual obligations which would otherwise result from its being classifiable as a guarantee.

DISADVANTAGE OF UNLIMITED GUARANTEE Ambiguity – Unlimited Guarantees tend to be ambiguous as they lack clarity as to the amount of debt secured. However, in the case of ambiguity, courts interpret a guarantee contra proferenteum that is, against the bank or it may use the recitals to control the operative part where it is possible. Nevertheless, courts ensure that the guarantor is not made liable beyond the terms of engagement.

In case of ambiguity when all other rules of construction fail, the courts interpret the guarantee contra proferentem, that is, against the drafter of the contract (in this case the Bank). The cardinal rule is that the guarantor must not be made liable beyond the terms of his engagement. Chitty on Contracts, Volume 2, 28th edition (1999) at page 1324 provides as with respect to issues of ambiguity arising out of contracts of guarantee: Difficult questions frequently arise as to the extent of the liability which the surety has undertaken. These are essentially questions as to the true construction of the contract in each particular case, and it is sufficient here to indicate the general approach of the courts to these questions and to draw attention to some of the principle types of difficulty which have arisen. Despite contradictory dicta in the cases, the general approach seems to be that contracts of this kind must be strictly construed in favour of the surety and that no liability is to be imposed on him which is not clearly and distinctly covered by the contract…. the reasons for this strict construction are that, in general, the surety receives no benefit from the contract which is, so far as he is concerned, gratuitous; and secondly, that in most cases these days, the contract is drafted by the creditor and in accordance with the contra proferentem maxim, is accordingly to be construed in favour of the surety in cases of doubt.

It may be that where these reasons are inapplicable, the court would not construe the contract so strictly.

Exposure to the bank – in instances where only a guarantee is issued and no other security has been offered to the bank, the bank may be exposed in the event that the borrower’s liabilities exceed the worth/ assets of the Guarantor. S. N Gupta in his book “Law Relating to Guarantee” at page 170 writes as follows: The creditor must have done something for the benefit of the principal-debtor to sustain the validity of the contract of guarantee. Anything done or any promise made for the benefit of the principal-debtor must be contemporaneous to the surety’s contract of guarantee in order to constitute consideration thereof. A contract of guarantee executed afterwards without any consideration is void. The word “done” in section 127 of the Indian Contract Act, 1872, is not indicative of the inference that past benefit to the principal debtor can be good consideration. [AIR A940 Oudh 346, dissent from]. It was held that no consideration qua the principal-debtor passed from the creditor at the time of execution of document nor was anything done for his benefit on that day. The contract of guarantee, therefore, was one without consideration.

The above extract which was the holding in Ram Narain vs. Lt. Col.Hari Singh points out to the fact that a Contract a Guarantee should constitute of present consideration.

DO GUARANTEES PROVIDE GOOD SECURITY TO BANKS? The banks will ordinarily or as part of their requirements for lending purposes require that the principal ADVANTAGES OF AN UNLIMITED GUARANTEE borrower should furnish security by providing a guarFlexibility & Convenience – Unlimited Guarantees antor. This is a common method by which bankers provide a flexible source of finance. Less time and seek to protect themselves against loss on advances. cost is involved as the Guarantors do not have to be In most instances, guarantees are utilised as addicalled upon to execute the Guarantee documents ev- tional security for financial accommodation extendery time an additional facility is procured. ed by the bank to a borrower. Banks should avoid 12

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GUARANTEES obtaining guarantees as sole securities as the bank stands to lose in instances where the validity of the guarantee is challenged.

TERMINATION OF GUARANTEES According to Sweet and Maxwell in their book the Laws of Guarantees a continuing guarantee will continue until notice of cancellation as given by the surety to the creditor (that is until the surety notifies the creditor that he will no longer be liable for the debts of the principal). However, cancellation for whatever reason will not affect rights that have accrued to the creditor prior to the termination of the guarantee. In other words, cancellation is not the same as discharge; cancellation allows the surety to escape potential liability of which may arise in the future, but not liability which arose before the time of cancellation.

DISCHARGE OF SURETY The liability of a surety should not extend beyond his engagement. According to Halsbury’s Law of England a surety is discharged under the following circumstances: i) ii) iii) iv) v)

Fulfillment of purpose of guarantee; Discharge by Agreement; Death of parties; Change of Parties and Discharge by operation of law.

KEY: Base of Distinction Indemnity Guarantee 1. Purpose To save indemnifier from loss To provide necessary security to the creditor.

2. Number of parties Two parties Three parties 3. Nature of liability Primary liability is of the indemnifier.

It arises immediately after loss from the collateral event 4. Consideration It has consideration.

It has not direct consideration to surety.

5. Commencement of liability The liability of indemnifier arises after the happening of the collateral event.

The liability arises after default by the principal debtor.

6. Discharge from liabilities The indemnifier discharges after paying indemnity to A guarantor has certain rights which must be care- the indemnity holder. fully observed if the contract is to remain binding. The surety discharges when the creditor discharge or Before the guarantor signs the guarantee, he/she he fulfils the debtors’ liability. should be afforded an opportunity ask any relevant questions such as, the principal-debtors account and 7. Nature of contract financial position which questions must be answered It has contingent nature. by the bank truthfully. If the guarantor is a customer It has general nature. in the same bank, greater care should be employed.

8. Right to reimbursement GUARANTEES AND INDEMNITY: DIFFERENCES The indemnifier has no right of reimbursement of the Obtaining of guarantees and indemnities are a com- amount paid to the indemnity holder. mon way in which creditors protect themselves from The surety has the right of reimbursement of the loss that may result from default by a borrower. As amount from the principal debtor, which is paid to earlier defined, a contract of guarantee is a contract the creditor. to perform the promise or discharge the liability of a third person in case of default. A contract of Indemni- 9. Number of promisor ty on the other hand is a contract by which one party Indemnifier is only one promisor. promises to save the other from loss caused to him. Principal debtor and Surety both are promisor.

The main differences between an indemnity and a guarantee have been set out in Halsbury’s Laws of En- 10. Scope gland, 4th Edition Vol.25 paragraphs 22 – 23 and are It has limited scope. summarized as hereunder: It has broader scope.

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LAWS GOVERNING EVICTIONS IN KENYA

Virginiah N. GICHUHI

Kevin KOKEBE

A Paradigm Shift on the Laws Governing Eviction in Kenya

The Land Laws Amend- RELIEF FOR THE TENANT ment Act 2015, inserted • A tenant who has received an eviction notice may section 152A to 152G to the Land Act No. 6 of 2012 make an application to the Court for relief against to provide for eviction. Unlawful occupation of prithe eviction notice. vate, community or public land is now expressly pro- • The court in its discretion may confirm the notice hibited. The Act sets out a procedure for eviction for and order the person to vacate; cancel or alter or any unlawful occupants of such property. make additions to the notice on such terms as it deems equitable and just; suspend the operation PROCEDURE OF EVICTION of the notice for any period which the court shall The mandatory procedure for eviction as provided determine; or order for compensation. for under the Act is as follows:• An eviction notice of not less than 3 months be- CONCLUSION fore the date of the intended eviction must be As much as the law now provides for eviction, evicserved on the unlawful occupant by the owner or tion must be carried out in accordance to the Constiany of the persons in charge of the property. tution 2010 and more specifically in a manner that • The Eviction Notice must be in writing and in a upholds human dignity, right to life and property.

National and Official language.

Therefore minimum force should be used by the per• If the eviction notice is addressed to a large group sons conducting the eviction. If at all force is used of persons the Notice should be published in a there should be respect to principles of necessity and least two daily Newspapers of nationwide circu- proportionality. lation.

• The Notice must specify expressly any terms and conditions as to the removal of buildings or harvesting of crops as the case may be. Persons affected by eviction should be given priority to remove and savage their buildings.

• The Notice must be served on the deputy county commissioner in charge of the area as well as the officer commanding the police division of the area.

• Persons carrying on the eviction must be properly identified.

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Janeireri MAINA Associate

Ruth K. OGOLA

Trainee Advocate

Unpacking Spousal Consent Under the New Legal Regime Section 79(3) of the Land Act 201 provides that a charge on a matrimonial home, shall be valid only if any document or form used in applying for such a Charge, or to grant the charge, is executed by the Chargor and any Spouse of the Chargor living in that matrimonial home, or if there is evidence from the document that it has been assented to by all such persons. Section 93(3) of the said Act further bestows an obligation on a Lender to obtain Spousal Consent for a sale/disposition of matrimonial property. This section was however amended by the Section 31 of Land Laws (Amendment) Act, 2016, which is to the effect that, if a Spouse obtains an interest in land during the subsistence of a marriage for the co-ownership and use of both Spouses, such property shall be deemed to be matrimonial property and shall be dealt with under the Matrimonial Property Act, 2013.

The Matrimonial Property Act,2013; the Land Act, 2012; the Land Laws(Amendment) Act, 2016 and the Land Registration Act, No. 3, 2012 inter-alia bestows an obligation on a lender to obtain Spousal Consent for a sale/disposition of matrimonial property. A number of legal issue therefore arise inter-alia: (a) Whether Spousal Consent can be implied by the conduct of a spouse; (b) Whether one requires Spousal Consent for a Charge created before marriage; (c) Whether one requires Spousal Consent for a Further Charge, in instances where the first Charge lacked Spousal Consent; (d) Whether all wives of a polygamous Chargee occupying a matrimonial home, are each required to give Spousal Consent when the home is being charged; and (e) Whether Spousal Consent is necessary from The Matrimonial Property Act, 2013 as the governa Widow or a Widower where the estate of the de- ing law on this matter envisages that both Spouses ceased spouse is yet to be determined. should give consent in the case of any alienation of Innovative

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UNPACKING SPOUSAL CONSENT matrimonial property, whether by way of sale, gift, retrospectively but it is subject to Section 162 of the lease, charge or otherwise during the subsistence of Land Act which in his views exempts prior Charges a marriage. where rights had accrued before the coming into force of the Land Act from the provisions of Part VII Under Section 12(5) of this Act, any sale, lease or of the Land Act mortgage of matrimonial home without the written and informed consent of both spouses is invalid.

The Court went ahead to state that Section 79(3) of the Land Act cannot apply to prior Charges taken priIt is therefore correct to state that by law Spousal or to the coming into force of the Land Act 2012. FurConsent should be in writing and duly executed by ther, that a Chargee of a matrimonial property under the Spouse for the banks to be fully secured against a prior Charge will be taken to have accrued a right future actions by a spouse seeking to invalidate the over the charged property without the requirement charge. of Spousal Consent and would in terms of Section 162 of the Land Act 2012 be entitled to have the benIn the case of Mary Nyambura Kinyanjui Njehia vs. efit of the rights and interest conferred by the prior National Bank of Kenya Limited (2016) eKLR, the 1st Charge notwithstanding the absence/lack of SpouRespondent’s Advocate implied that by virtue of the sal Consent as envisaged under Section 79(3) of the Applicant’s position as the Co-director of the com- Land Act 2012. pany together with her husband, she ought to have known of the creation of the Charge over their matri- This position had been earlier upheld by the Court monial property and as such by her not disapproving in the case of Elizabeth Nthenya Wambua vs. Philthe same, she consented to it. The court in address- ip Wambua Masila & 3 Others 2013 eKLR, wherein ing the issues at hand, noted that the Applicant has Court stated that a Chargee could not be penalized executed a valid Consent and discounted the notion for failing to obtain Spousal Consent when the same of Spousal Consent by conduct as had been earlier on was not required by the law at the time of perfection alluded too. of the security.

From the foregoing therefore, the concept of spousal consent by conduct is foreign to our Courts and a Spouse has to execute a Written Spousal Consent to validate the Charge.

WHETHER ONE REQUIRES SPOUSAL CONSENT FOR A CHARGE CREATED BEFORE MARRIAGE This question brings about the concept of retrospective applicability of Land Laws as was provided under the Section 78(1) of the Land Act,2012 with respect to the General Provisions on Charges contained in Part VII of the Act. Nevertheless, the Savings and Transitional Provisions contained in Section 162 seek to protect the vested rights that accrued pursuant to transactions commenced before the Act came into force. As such, any securities created prior to the Land Act’s commencement date of 2nd May 2012, continue to be governed by the law applicable at the time of their creation and any rights vested pursuant thereto are not affected by the Land Act. In the Case of J.M Mutungi in Barclays Bank of Kenya Limited vs. Attorney General & Another 2015 eKLR, the Court declined to grant the declaration sought in the petition and dismissed it on the grounds that Section 78(1) applies Part VII of the Land Act 2012 16

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In view of the foregoing, a Charge created prior to 2nd May 2012 cannot be validly challenged on grounds of failure to obtain Spousal Consent and in retrospect, one does not require Spousal Consent for a Charge created before marriage even though they may be currently married.

WHETHER ONE REQUIRES SPOUSAL CONSENT FOR A FURTHER CHARGE, IN INSTANCES WHERE THE FIRST CHARGE LACKED SPOUSAL CONSENT From the above discussion, any Charge created after the coming into force of the Land Act, the Land Registration Act and the Matrimonial Property Act is bound by the laws stipulated therein. As such, Section 12 of the Matrimonial Property Act, as read with Section 31 of the Land Laws (Amendment), where there is of co-ownership and use of land by both Spouses, their individual consent is mandatory.

It is with no doubt that a Further Charge, as long as the first Charge required Spousal Consent, it shall as well require Spousal Consent if it is created during the subsistence of a marriage and the property meets the criteria laid down in the case of Stella Makira Matara vs. Thaddues Mose Mangenya & another (2016) eKLR, as to whether it is a matrimonial Responsive

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UNPACKING SPOUSAL CONSENT property/home. The Court laid down the following factors: (a) The existence of a home on the suit property; and (b) Whether the borrower and his/her Spouse are occupying the suit premises as their home.

Section 57 (1) of the Land Registration Act, 2012 is the statutory basis for the above position and it provides as follows with respect of creation of subsequent securities: “A proprietor whose land or lease is subject to a charge may create a second or subsequent charge in the same manner as the first charge and the same provisions shall apply…”

making of a disposition on the matrimonial property or dwelling home. It is in relation to the requirement of spousal consent provided for under Section 12(1) of the Act and further provides that where the Chargor is polygamous, his wives should give consent before a matrimonial property is charged. However, this only applies to Chargor’s spouses who has an interest in the said matrimonial property and the same can be proved.

Hon. J.M Mutungi in the case of ENW vs. PWM & 3 Other (2013) eKLR, further observed that the concept of Spousal Consent by Spouses as per the Land Registration Act 2013 was meant to cure instances whereby one of the Spouses (wives) may claim a remedy against the Chargor who intends to exercise Therefore, it would be proper to conclude that ob- its Statutory Power of Sale of the Matrimonial proptaining a Spousal Consent for First and Further erty offered by the Chargee as security for a loan, afCharges is a pre-requisite. Failure to obtain a spousal ter he has defaulted in the repayment of the same, consent with respect to further facilities could result on grounds that she was not aware nor consulted into a spouse claiming that their consent to the issu- when the Charge was taken. ance of further facilities was not obtained.

Similarly, the Court in the case of David Ngungi WHETHER ALL WIVES OF A POLYGAMOUS CHARGOR Ngaari vs. Kenya Commercial Bank Ltd (2013) eKLR, OCCUPYING A MATRIMONIAL HOMESTEAD, ARE inferred the need for Spousal Consent from the EACH REQUIRED TO GIVE SPOUSAL CONSENT WHEN Chargee’s Spouses by citing the earlier case of Julius THE HOME IS BEING CHARGED Mainye Anyega vs. Eco-Bank Ltd (2014) eKLR, which Section 12(2) of the Matrimonial Properties Act pro- stated that no sale of a matrimonial property will be vides that: carried through without giving the necessary notices “A spouse in a monogamous marriage, or in the case to the Spouse or Spouses of the Mortgager. of a polygamous marriage, the man and any of the man’s wives, have an interest in matrimonial prop- In the circumstances, noting the provisions of the erty capable of protection by caveat, caution or oth- law and the above-mentioned case law, the lenders erwise under any law for the time being in force re- should ensure that all Spouses occupying a matrimolating to the registration of title to land or of deeds.” nial homestead intended to be charged to secure a loan advanced to the Chargor, should give Spousal This remedy is available to a Spouse or Spouses Consent, if they have an interest in the said property. whose consent was not obtained in the creation or Each of the spouses should swear an Affidavit separately, each declaring that they have an interest in the property and expressly give their individual consent to the charging of the property. Failure to which, the Chargee faces the risk of invalidation of the security documents entirely, leading to them losing their right of redemption.

WHETHER SPOUSAL CONSENT IS NECESSARY FROM A WIDOW OR A WIDOWER WHERE THE ESTATE OF THE DECEASED SPOUSE IS YET TO BE DETERMINED As stated above, under Section 12 of the Matrimonial Properties Act, Spousal Consent is required during the subsistence of the marriage when a spouse wants to sale, gift, lease, charge or otherwise. Where one Innovative

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UNPACKING SPOUSAL CONSENT Allen W. Spouse dies, the Law of GICHUHI Succession Act, Cap.160 Senior Partner provides that a marriage is terminated, and as such, there is no need for Spousal Consent when one intends to deal in the matter.

CONCEPTUALIZING FREEZING

The Law on Freezing of Accounts by Banks

The term freeze is defined by the Black’s law Dictionary, 9th Edition, at page 737 to include causing something to be fixed and unable to increase. When a bank freezes a customer’s account, the customer will not access the account. This means that the customer will not withdraw funds or draw a cheque on the frozen account. In the same breath, deposits Where the property was held jointly by the Spouses, should not be accepted especially in cases involving the concept of survivorship provides that it automat- suspicion of money laundering as will be elaborated ically passes to the surviving spouse. Such a property below. bypasses the estate of the deceased and hence it will not be considered for distribution. Where the prop- BANKER-CUSTOMER RELATIONSHIP erty is held by the deceased and others together as The nature of a bank-customer relationship has been tenants in common, the death of the spouse does said to be that of debtor-creditor with the customer not automatically vest the property to the co-own- being the creditor and the bank being the debtor. As er or co-owners but instead the deceased’s share such, a contractual relationship is birthed on a cuswould flow to his estate for distribution. Even so, tomer depositing his or her funds in a bank account.

Spousal Consent is still not necessary as the marriage Further, the customer being the creditor is to be rebetween the deceased and the surviving spouse no paid his money on demand hence the contentious longer exists and the law does not provide for Spou- issue of freezing which in essence is a refusal by bank sal Consent by the widow or widower. to honour a demand to repay from its creditor.

Nevertheless, it is important that one pays attention to details about the property in question especially, whether the property was held by the deceased jointly with his wife or whether the property was held together with others as tenants in common.

CONCLUSION From the above discussion, we can conclude as follows: (a) It is not safe for the Lender to assume that Spousal Consent can be implied by the conduct of a Spouse as the same is not recognized under our laws hence the Lender will be putting itself in a great risk for not obtaining a written and duly executed Spousal Consent in creation of a Charge over matrimonial property/home. (b) Spousal Consent is not necessary where a Charge was created before the subsistence of a marriage. (c) A subsequent or Further Charge shall be bound to the requirements under the First Charge. (d) Where a matrimonial homestead is being charged, the Lender should ensure it obtains Spousal Consent from all spouses of a Chargor if they have an interest in the said property, to avoid invalidation of the said security documents. (e) There is no provision in law obligating the Lender to obtain Spousal Consent from a Widow or Widower where the estate of the deceased is yet to be determined.

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Elsewhere, it has been held that the relationship of the bank and its customer is one of confidence. The Court of Appeal in Standard Chartered Bank of Kenya Ltd Vs Intercom Services Ltd (2004) eKLR referred to Tuornier vs National Provincial and Union Bank of England Ltd, where it was held that the customer and the Bank in their relationship have one of the implied terms of their contract which is that the Bank would abstain from disclosing information as to the affairs of the customer without the customer’s consent. The question that begs answering then is whether freezing of an account amounts to breach of the duties arising from the nature of the Banker Customer Relationship.

REASONS FOR FREEZING OF ACCOUNTS By definition, the very nature of freezing of an account is that it is a precautionary measure and does not occasion irreparable harm against the customer.

Conversely, a bank that acts without care in allowing suspicious activity in its account may be at a greater risk of being held liable for allowing fraud or even money laundering if it fails to freeze an account with suspicious accounts.

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Therefore, where sufficient lawful reasons exist to warrant freezing an account, a bank should proceed to freeze the customer’s account. In Benson Odongo Okwiri Vs Consolidated Bank of Kenya Limited (2015) eKLR it was remarked obiter that; [21] The court was also in agreement with the Defendant that punitive or exemplary damages were not payable firstly because there was no law that prevented the banks from freezing its customers’ accounts for lawful reason if it was suspected that there was unusual activity in such accounts and secondly, because such damages are only awarded in very limited cases.

One of the main reasons why a bank account may be frozen is to allow for investigations to be carried out against the account holder. In Samuel Watatua and another Vs Republic, Court of Appeal, Nairobi, Criminal Appeal No. 2 of 2013 (unreported), cited with approval in Timothy Isaac Brian & 2 others Vs Inspector General of Police & 7 others (2014)eKLR the Court stated, “A reading of section 180 of the Evidence Act together with sections 118 and 121 of the Criminal Procedure Code leaves no doubt in anybody’s mind that the court, upon application, has power not only to authorize access by police to bank accounts of suspected criminals but also to freeze those accounts for the purposes of preserving evidence and the subject matter of the alleged crime.”

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PROCEDURAL REQUIREMENTS Though valid reasons may exist to warrant a bank freezing its customer’s account, the procedure to be followed before an account is frozen has also been a subject of great legal discussion. From the authorities cited above, it is presumed that freezing of a bank account is only done pursuant to a court order directing so. Further, in view of the drastic implications of the effect of freezing on a customer’s economic wellbeing, it can be argued, and rightfully so, that that the customer ought to be duly notified of the reasons before freezing is done.

In Viable Deco Solutions Limited Vs Co-operative Bank of Keya Limited (2014) eKLR the court pointed out the procedure to be followed before freezing. The court emphasized the need to notify the customer before freezing in the following terms; Necessity of notice to Customer [20] Notice to the customer of important matters touching on the account held in a bank is almost an indispensable necessity. And although methods of communication are various and varied, most banks indispensable necessity. And although methods of communication are various and varied, most banks have adopted technology in communication of important matters to the customer; a method that is fast and almost instantaneous. The necessity of communication arises from the fiduciary nature of Customer-Bank relationship which is undergirded by absolute faith and trust. Ordinarily, full disclosure of WAMAE & ALLEN QUARTERLY | Issue #001 | July 2018

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FREEZING BANK ACCOUNTS any action taken by the Bank, especially those which are adverse to the Customer is imperative aspect of that relationship. Therefore, whereas the Applicant agreed “to comply, observe and be bound by the Terms and Conditions made by you [read the Bank] and in force from time to time or as amended by you [read the Bank] pertaining to such account (s) … and the General Terms and Conditions documents”, any such terms and conditions so made must be brought, one way or other, to the attention of the Applicant without delay. Equally, any adverse action taken by the Bank on the account held by the Applicant must be brought to the attention of the Applicant without any delay. Freezing an account is an intrusive measure of extreme dimensions and must be fully disclosed to the affected party, unless, the disclosure has been restricted or limited by law through what I call ‘’gag order’’ which prohibits the Bank or the relevant officer of the Bank from disclosing the existence of a surveillance or freeze order. Of importance, such restriction must be sanctioned by law and under the superadded authority of a court order; they are common in legislations on Bank Fraud, Anti-corruption and Anti-money Laundering laws; for instance, the Proceeds of Crime and Anti-money Laundering Act. In the absence of such restriction, a contrary view on disclosure of adverse actions by the bank would be unconscionable and a negation of the law especially in contractual and mutual engagement of a Customer and a bank. Accordingly, informing the Customer of the taking of an adverse action authorized by the contract is not an onerous task whatsoever. In the present case, the Respondent was under an obligation to notify the Applicant of the freezing of its account as well as any other Terms and Conditions that the Applicant was subject to. The Notification could be by making an express reference to or by incorporating existing Terms and Conditions into the signed contract document or by a general advertisement or notification to the customers generally especially of those Terms and Conditions which are made subsequent to the Contract. It is worth of repeat that the methods for communication may be various and varied as long as they achieve the intended results.

paragraph 5 provides thus: [5] Closing or Freezing Accounts 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 customers promptly STATUTORY IMPOUNDMENTS ON THE BANK’S ROLE TO CONTROL INCIDENCES OF FRAUD AND/OR MONEY LAUNDERING BY CUSTOMERS The Bank in his case has a clause under its account opening forms that mandates the bank to freeze accounts. Clause 21 states that: the Bank may at any time freeze any account of the Customer if and as long as there is any dispute in respect thereof or if the Bank has doubt for any reason whatsoever as to the person or persons entitled to operate the same, without any obligation to institute interpleader proceedings or take any step of its own initiative for the determination of such dispute or doubt.

Clause 21 is proper in the Bank’s exercise of its duty under section 33(4) of the Banking Act, Cap 488; which empowers the Central Bank to issue guidelines to the banks in order to maintain a stable and efficient banking financial system. Therefore Clause 21 is proper and lawful since it is exercised by the bank towards the bank’s role to help foster prompt corrective action in case of suspicious transactions by customers. In this regard, there is the Central Bank of Kenya Prudential Guidelines, 2013 which banks must enforce.

Part II of the Guidelines has a requirement under the Scope for the financial institutions’ Statement Policy to exercise inter alia, prudent customer identification, identification of suspicious activities and the need to report such activities for further investigation. Therefore, the bank is entitled to freeze the customer’s account so as to enable it exercise its finanIt is therefore important that, unless the bank is cial monitoring roles under the Guidelines. Clause 21 barred by law from disclosing information to the cli- is thus proper in restricting a suspicious customer’s ent, the bank must always disclose action taken on guest to withdraw funds or falsify accounts in promothe customer’s account due to the nature of the rela- tion of the anticipated vice. tionship it has with the customer.

Further, under sections 44, 45, 46, 47 and 48 of the A guide can be seen in the Kenya Bankers Associa- Proceeds of Crime and Anti-Money Laundering Act, tion A Consumer Guide to Banking in Kenya which at 2009, financial institutions are obliged to monitor 20

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FREEZING BANK ACCOUNTS and report suspected money laundering incidences to the Central Bank, verify customer identity and establish and maintain customer records and internal reporting procedures. All these roles can be well exercised upon freezing the account of a suspected customer since there is need to minimize further unlawful transactions related to the account under suspicion.

Moreover, parties are bound by the contracts they enter into provided there was no coercion, misrepresentation or fraud on either party. This is trite law as was stated in National Bank of Kenya Ltd Vs Pipeplastic Samkolit(K) Ltd & another (2001)eKLR where the Court of Appeal stated “…a Court of law cannot re-write a contract between the parties. The parties are bound by the terms of their contract, unless coercion, fraud or undue influence are pleaded and proved.”

The Application to Open a Business Account Form created a legally binding contract between the parties and the Applicant and the Bank became bound by the terms contained therein and those incorporated into the Contract by reference to other documents. In this regard, the Bank is neither required to obtain a court order to freeze the account nor to institute inter pleader proceedings in case of a dispute or doubt as to the person or persons entitled to operate the account. Clause 21 of the General Terms and Conditions does not perpetuate any illegality and is therefore enforceable between the Applicant and the Bank.

founded’’ under Clause 22 are likely to introduce some confusion, but the textual wording of the said Clause does not permit the Bank to act whimsically or as they wish without first determining whether there is a dispute or doubt as to the person or persons to operate the account. First of all, there has to be a dispute or the Bank should have doubt as to the person or persons entitled to operate the account in question. I am mindful that the words ‘’whether or not well founded’’ under Clause 22 are likely to introduce some confusion, but the textual wording of the said Clause does not permit the Bank to act whimsically or as they wish without first determining whether there is a dispute or doubt as to the person or persons to operate the account. It is expected the Bank should give consideration to the prospects of any complaint raised on an account to see whether it amounts to a dispute or a serious doubt in the sense of Clause 22 referred to above, because not all complaints amounts to a dispute or to doubt. At the very least, a bank is expected to exhibit a sense of reasonableness in handling such complaints in deciding which complaint amounts to a dispute or doubt for purposes of Clause 22 and which ones does not. The law requires of the Bank as trustees and the custodian of customer’s funds to attain that threshold.

Although the court in the above case granted a mandatory injunction for unfreezing of the account in light of the facts in that case, the analysis above goes to show the need for due process before freezing an account. The test to be applied in holding a bank and its customer to their contract was enunciated in the above case with due emphasis to reasonableness beThe court analyzed a similar clause in Viable Deco fore freezing.

Solutions Limited Vs Co-operative Bank of Keya Limited (2014) eKLR in the following terms; BALANCE CONVINIENCE The only limb of the above General Terms and Condi- Further, with regard to the bank’ position that the tions which raises pertinent legal issues and invites a account opening form provides for the bank’s right discourse thereto is in respect of; “freeze any account to freeze accounts and the customer is bound by it, a of a Customer if and so long as there is any dispute similar issue arose in the case of Paviwa Ltd Vs Co-opor the Bank has doubt for any reason (whether or not erative Bank of Kenya Limited (2013)eKLR. In this well founded) as to the person or persons entitled to case, the Plaintiff customer sought orders against operate the same...’’. the defendant bank for un-freezing of its account.

Clause 22 of the General Terms and Conditions does The facts leading to dispute were that the Plaintiff not create any necessity for the Bank to obtain a court and other persons had been suspected of and subseorder in order to freeze the account herein so long as quently investigated for fraud. The Defendant bank there is a dispute or the Bank is in doubt for any rea- basing on the clause on the account opening form son as to the person or persons entitled to operate froze the account hence the plaintiff application. The the account. First of all, there has to be a dispute or court in its ruling stated; the Bank should have doubt as to the person or per- [7] Further I am of the considered opinion that the sons entitled to operate the account in question. I am balance of convenience between the banks claim and mindful that the words ‘’whether or not well the plaintiff’s claim is against the grant of the orders Innovative

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FREEZING BANK ACCOUNTS sought since any damage that the plaintiff is likely to prove will be adequately compensated for by way of damages whereas if the bank were to lose the money being held in the plaintiffs account and it turns out that the bank is entitled to the said money it might not be possible to recover.

The judge in that case opined that a balance of convenience as to the risk of prejudice to be suffered tilted in favour of the bank freezing an account with suspicious activity. It is in such cases that banks should not accept deposits to the frozen account as this will be aiding the fraud or money laundering as the case may be.

In such a case, the interest that would have accrued will be lower. An example is in the case of John Kung’u Kiarie Vs Dyer & Blair Investments Bank Limited & another (2016)eKLR where the court found the Defendant bank liable to pay the retained interest together with interest on the same for the entire period that it had been unlawfully withheld.

CONCLUSION The upshot of the foregoing is the bank is entitled to freeze the customer’s account in accordance with the law. The bank has to demonstrate valid reasons, either TIMELINES pursuant to a court order or in light of a It is also key to know for how long an account can clause in the contract’s Account Opening be frozen. There is no express provision as to how Form. In the latter case, the bank should ling an account can be frozen. However, judicial in- also be reasonably satisfied that there is put as to period of time when an account is frozen a dispute or the bank is in doubt for any is to the effect that this should be for a reasonable reason as to the person or persons entiperiod of time and what is reasonable is question of tled to operate the account. The procefact depending on the circumstances of the case. For dure to be adhered also requires prior or instance, in Ethics and Antic Corruption Commissions post notification of the customer as the Vs Mahmoud Hassan Ali & Another (2015) eKLR the case may be. Vigilance of dispensing off Applicant sought orders to freeze the Respondent’s the contentious matter when reasonable account for six (6) months to undertake investiga- time is also key. tions into the Respondents’ account.

However, the court while noting that the Applicant had been seized of the investigations for more than two years. As such the accounts were frozen for a period of thirty (30) days only.

As a matter of caution, the bank should be certain as to the existence of sufficient reason for freezing an account whether this fact is informed by statute or contractual clauses. The procedure set out in paragraph and adhere to the procedure set out in paragraph 13 above should also be adhered to. Additionally, the bank should also act vigilantly to ensure that the reasons leading to the freezing of an account are dispensed with within a reasonable period of time in case of an adverse determination that the freezing was irregular.

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Charles WAMAE

Senior Partner

Digitization of the Lands and Companies Registry in Kenya

The Constitution of Kenya (2010) tried to address Kenyan’s concerns, by providing amongst other things, a reformed legal framework for the administration, use and land management in Kenya. It provided that Parliament would pass laws to this effect and as a result the following laws were passed: I. The Environment and Land Act 2011 No. 19 of 2011; II. The Land Act 2012 No. 3 of 2012; III. The Land Registration Act 2012 No. 2 of 2012; IV. The National Land Commission Act No. 5 of 2012 which is meant to give effect the principles of devolved government in relation to land management and administration; V. The Community Land Act No. 27 of 2016 which regulates land that is communally owned; and VI. The Land Laws (Amendment) Act No. 28 of 2016 which amended the Land Act and the Land Registration Act.

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THE LAND ACT No. 3 of 2012 AND THE LAND REGISTRATION ACT No. 2 of 2012 The preamble of both Acts state that, amongst other things, the Acts are supposed to revise consolidate and rationalize the registration of the title and to give effect the principles of devolved government in Kenya. The Land Act categorized land holding in Kenya into freehold, leasehold and customary. It further provided for the various methods of land acquisition; administration and management of public land and private land; elaborate provisions on creation and enforcement of charges; and compulsory acquisition.

The LRA on the other hand provides for the following, establishment of the Land registry and the Chief Land Registrar; additional overriding interests; elaborate procedures for transfer of interest inland; it recognized the Environment and Land Court established under the Environment and Land Act and it brought about the concept of digitization.

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DIGITIZATION OF LAND’S REGISTRY DIGITIZATION OF THE LANDS REGISTRY The concept of digitization of the Land and Companies Registries in Kenya began in the year 2013 to give effect to Sections 9 and 10 of the Land Registration Act 2012. Section 9 gives the Registrar of Lands the mandate to maintain the register and any document required in a secure, accessible and reliable format which includes amongst other ways, electronic files.

Section 10 on the other hand, places emphasizes on the accessibility of the register by members of the public by electronic means amongst others. Charity Ngilu, the then Cabinet Secretary for Lands began the process of digitization of the land registry targeting it to a completion within 3 years . She echoed that the digitization process will bring efficiency and transparency to individuals aiming to make dealings in land.

This marked the commencement of digitization of 57 land registries which had been keeping manual records since 1895. The computerization initiative was meant to improve service delivery by solving the following problems ; • Documents disappearance • Failed file tracking system • Tattered records in the land registries • Poor Ministry image • Long timelines of service delivery • Bottlenecks/ Steps in service delivery

survey plan; provide easy storage; provide security and back up in the event of loss and to provide a survey plan that can be used by many officers at a time for quality control checks.

Further, it entails developing a Document Managing System for Land Title Documents Records that is scanning, indexing and archiving of deed files, land rent cards and green cards. There was also the development of a Land rent information database system handling payment of land rent and issuing demand notices. It also involved the production of digital topographical maps; establishment of the Kenya National Spatial Data Infrastructure aimed to create a platform of discovery and access of spatial information to facilitate data sharing through the internet; and creation of a land information for informal settlements meant to map out informal settlements. The automation programme has stalled due to various challenges including torn and missing land records; issue of capacity building; poor working environment; poor staff attitude; lack of integration by the department; use of outdated procedures and practices. This in turn has affected the general public and professionals who count on efficiency in the land registries.

DEMERITS OF DIGITIZATION The automation meant the reconstruction of records High costs of project administration registered under GLA regime which were in a poor Digitization involves updating of land records online. state and searches could therefore not be easily This is done by well trained personnel. Depending on done. It also includes the creation of a property data the volume of the records determines the numbers base system such that a property value data base is of the personnel needed. The larger the group the created at the valuation division of lands. After field more expensive it is. Further, digitization creates the inspection, a valuer does a market analysis to deter- need for designing search and retrieval tools which is mine the market value manually. Where the file is as well costly and dents the tax payers’ pockets. out of the registry, this occasion delay in collection of data.

Developing a file tracking system for all settlement plot files meant there will be efficient allocation of settlement files; reduction in time taken to retrieve settlement plot files for action; reasonable timelines in all settlement transactions and reduced cases of missing file and an integrated and unified form makes the procedures run simultaneously. The automation also involves the creation of a Document Management System (DMS) for all approved physical development plans in the country so as to reduce time taken for vetting and verifying plans submitted for approval by the County physical planners and time taken by officers, professionals and members of the public to access and retrieve any authenticated 24

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DIGITIZATION OF LAND’S REGISTRY Transforming digital content also requires end user application and other applications which are costly. There is also the costs for creating awareness amongst members of the public who are the users of the online system, and training of the lands and companies’ employees to enable them carry out their duties effectively.

Lack of Political Good will Land abuses were mainly done by those in public authorities when the manual system was still fully in use. These people could easily manipulate records and resell properties to new people yet the properties have owners leading to a scenario whereby a parcel of land had more than one owners, they converted property in their own names and grabbed Voluminous Records huge parcels for their own benefit. Digitization would Kenya has massive land records, not to mention the change this position and therefore, most public officompany records of over 100 years which have to be cial are against it dragging the process which by now, automated. This process will take a longer period of could be implemented. time to be completed, leading to unnecessary delays in land transaction and high cost in land dealings Duplicity since the processes will be overly stretched.

Currently, proprietors of land are forced to do a double job of using both the manual and the digital sysTorn and missing records tem which is tiring, costly and time consuming. A Due to the quantity of the records, more often the good example is the valuation process, the presenrecords are misplaced or destroyed, making it diffi- tation of documents is done manually, the investigacult to retrieve and update the same in the system. tions of the property’s value as well but the payment Moreover, some records are too old. The papers are is done and declared online. The payment of rates tattered, not legible or missing, posing difficulties in and rents as well, require one to check the online systhe entire digitization of process. Owners of the par- tem for the figures, then manual payments. cels of lands are forced to apply for reconstruction of their files which is costly and time consuming.

MERITS OF DIGITIZATION Despite the above challenges, some countries like Change Management the United States , give hope to Kenya’s situation in Change is good however it is not usually easily accept- respect of digitization of records because of the suced. This problem has occurred in respect of digitiza- cess witnessed on the same. The following are the tion. Staff and members of the public who transact merits of digitization of records; in land have a negative attitude towards digitization, a) It is faster and more flexible. Unlike the manclaiming that it will worsen the current situation. This ual system of creation and preservation of records, makes them unwilling to corporate and learn how digitization guarantees one the completion of transthe system works therefore, derails the digitization action by the touch of the button for there is no mulprocess. tiple visits to be made to the various registries for example the generation of E-slips upon payment of Illiteracy stamp duty. It takes roughly about five minutes.

Illiteracy is proving to be difficult as most dealers (b) One does not have to be physically present in land are completely confused on how to use the at the registries to perform different transactions as online platform and they cannot afford to pay ad- the same can be done at any time through the online vocates or other personnel to assist on the same or portal. when they find help, they are defrauded or exploited (c) It is convenient and their land taken away from them without their (d) It saves money wasted on managing the paknowledge. per records. (e) It allows easy editing and updating of scanned Hostile working Environment documents easily.

Digitization has not been welcomed by those work- (f) Electronic documents have the same value as ing at the registries, instead the employees at these manual documents as they can be legally acceptable registries have become advocates against it because if well maintained. they fear for their job security upon the success of (g) It provides long term preservation of records the process. than papers. The records are not easily misplaced or destroyed due to improper storage. (h) It allows sharing of knowledge within and Innovative

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DIGITIZATION OF LAND’S REGISTRY across the lands and companies registry. (i) It reduces land grabbing because the online system of record keeping is likely to show the citizenry what land has been grabbed and by whom.

DIGITIZATION OF THE COMPANIES REGISTRY The Companies Registry is responsible for the registration of business names and limited liability companies. According to the Information and Communication Technology Authority (ICTA), approximately 300 business names are registered and 200 companies are incorporated daily. The digitization of records has seen records from 2009 scanned and the data captured to allow for online search of company names and information.

Advantages a) Provision of high-end servers that efficiently handle over 1,000,000 company files and store the scanned documents in a format that can be linked to a searchable database by the members of the public. b) There is increased transparency and much faster access to company registry services. Initially, people were asked for bribes in order to do a search.

Files used to go missing and after a bribe, they would miraculously appear. c) Easier and faster way to incorporate new companies, reducing the registration process from two weeks to one day. Since the digitization was done and completed in 2010, the International Monetary Fund (IMF), using data from the Kenya National Bureau of Statistics (KNBS) found that registration of companies in Kenya has increased by 52.9% between 2010 and 2015. d) It is now easier and possible to register a company from anywhere in the country, avoiding the need for a physical visit to the Companies Registry in Nairobi. e) Access to any information regarding any company has become easier since one can search whether a company has any charges and debentures without having to physically visit the manual registry.

As earlier stated, in the five years since commencement of digitization of companies, registration of businesses has doubled. This is a clear signal of an improving business environment. Transactions relating to registration of debentures has become easier and less time consuming. This has been effective especially to the legal profession and financial institutions and companies in general.

It has created a conducive environment for conducting business.

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Disadvantages Sometimes, the local ‘.ke’ registry root servers fail to work and once the root servers go down, the entire records system becomes inaccessible.

The last fault was experienced on 19th January 2018 when websites were not working. Hundreds of thousands of people were greatly affected since registered companies have to file for tax returns monthly (VAT) on or before the 20th of each month. They were unable to file their companies’ tax returns.

DIGITIZATION OF THE MOVABLE PROPERTY SECURITIES REGISTRY The Movable Property Security Rights Act, 2017 was assented to in May 2017. This new law facilitates the use of movable property as collateral for credit facilities, establishes the office of the Registrar of Security Rights and provide for the registration of security rights in movable property. The Act also benefits small and medium-sized enterprises, which have trouble accessing financing from the formal sector.

The Act establishes the Office of the Registrar for purposes of receiving, storing and making accessible to the public information on registered notices with respect to security rights and the general running of the registry. The registry is purely online and is currently fully operational.

Advantages From the foregoing, the Act has enhanced access to credit facilities using moveable property as collateral, which will benefit small and medium-sized enterprises. These small and medium-sized entities have trouble accessing financing from the formal sector. This has been made easier by having an online platform.

Disadvantages The Act does not provide any mechanism to verify that a person who registers a notice on movable property in their name is the rightful owner of the property. This could eventually lead to disputes around ownership pursuant to registration.

CONCLUSION The transition from the first registration regime to the current one and finally to digitization of records in the registries has led to increased efficiency in conducting business. However, it is evident that proper mechanisms need to be put in place to ensure security, ease of use by the general public and capacity to avoid situations where the servers are down or have crashed.

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The firm as presently constituted, was registered under the name of Wamae & Allen Advocates. The firm was founded after Paul Matheri Wamae, Charles Wambugu Wamae and Allen Waiyaki Gichuhi recognised the need to create a new and dynamic law firm that would bring about greater expertise, depth and value to the practise of law and client satisfaction.

The firm’s slogan is “Responsive Accurate Innovative Negotiators”. The slogan personifies and exemplifies the vision of the firm that places the client’s needs on the pedestal of excellence. In a competitive legal environment, the firm will ensure that the client will benefit from prompt and efficient legal service through the provision of effective and innovative legal solutions. Communication is the key to success and the client will be timely informed of the progress of the matters and alerted of any imminent delays and of the solutions to overcome unforeseen obstacles.

CLIENT FIRST-BECAUSE WE CARE • A strong commitment to our clients. We focus the firm’s resources towards developing products and service delivery which add value to their business.

• Expeditious and satisfactory delivery of services. We have put in place an effective task-turn-around-time policy in our operations and we therefore accomplish legal assignments within the specific needs of a client and at the most affordable cost.

• Our commitment to client care is among the guiding pillars. The client benefits from the provision of training seminars as part of our client care strategy. Our strength is knowledge and technology • We emphasize on continuous education for both the Advocates and the Subordinate staff to ensure a flow of fresh ideas and improved understanding of the ever changing needs of our clients .

• Our fully computerized and networked system, office inter-communication within the firm is user friendly and therefore ensures efficiency.

• Our Library is well equipped to facilitate access to current and relevant legal materials.

INTERACTION AND NETWORKING-STRENGTH IN NUMBERS Our Memberships in professional organizations offer a source of intellect from which our clientele stands to benefit from.

The firm is also affiliated to other law firms in the region ensuring that we keep abreast of the ever-changing legal trends.

For more information, please visit www.wamaeallen.com

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Top Plaza,3rd Floor Kindaruma Rd/ Kamburu Drive-off Ngong Road P.O. Box 4132 - 00200 Nairobi, KENYA TELEPHONE

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