A non-performing loan is a credit facility that is in default, which means that the borrower has failed to make payments according to the agreed terms. Section 44A (5) (c) of the Banking Act, provides that: “… a loan becomes non-performing in such manner as may, from time to time, be stipulated in guidelines prescribed by the Central Bank.”
The Central Bank of Kenya Prudential Guidelines, 2013 define non-performing loans as: “…in respect of loan accounts…principal or interest is due and unpaid for 90 days or more…. or interest payments for 90 days or more have been re-financed, or rolled-over into a new loan.” This definition has also been reiterated by the Financial Soundness Indicators Compilation Guide by the International Monetary Funds.
Stopping the Sale
The lender has the right to sell a property that was used as security for a credit facility when the loan becomes non-performing as per the above definition. However, before exercising their right of sale, the lender should give the following notices to the borrower:
- Rectification Notice
Section 90 of the Land Act No. 6 of 2012 (“the Land Act”) provides that a rectification notice is issued on a borrower in default and shall inform him:
- The nature and extent of the default in clear and discernible language;
- If the default is on money, the amount owing and the repayment period which must be not less than three months after service of the notice;
- If the default is on non-performance of a term, the rectification act to be undertaken by the borrower and the time being not less than two months after service of the notice;
- The consequence if the default is not rectified within the periods above; and
- The right of the borrower to seek a relief from the court against the exercise of this power.
- Notice of Intention to Sell
This notice is issued pursuant to Section 96 of the Land Act, and upon non-compliance of the borrower by the Rectification Notice. This notice is issued for not less than 45 days and is intended to make the borrower aware of the lenders intention to sell the property in order to realise their security.
The Notice is served on the National Land Commission (if the charged land is public land), any lessee or sub-lessee if the charged land is a lease, the spouse of the borrower who had given consent, any person who is a co-owner with the borrower, any other borrower, any guarantor of the money advanced under the credit facility and any licensee.
- Redemption Notice
The lender can proceed to instruct an auctioneer licensed under the Auctioneers Act No. 5 1996 through an instruction letter to proceed and sell the property. Upon receipt of a letter of instruction, the auctioneer shall give a notice in writing to the borrower of not less than 45 days pursuant to Rule 15(d) of the Auctioneers Rule 1997 within which the owner may redeem the property by payment of the amount set forth in the letter of instruction.
A borrower aggrieved by the actions of the lender illustrated above may make an application for injunctive reliefs to stop the planned sale where the lender has not satisfied conditions as required by law. Other than the already settled principles in law for the grant of injunctive reliefs, in Jim Kennedy Kiriro Njeru v Equity Bank (K) Limited  eKLR it was established that courts would only grant injunctive reliefs stopping the lender’s right of sale if:
- The amount due to the lender is paid in court as security for costs (may not be paid if excessive & unconscionable based on terms of loan agreement);
- The interest charged is un-contractual or illegal; or
- There is evidence that the borrower continues repayment of the loan facility or at least the principal amount or proof of the borrower’s willingness to continue paying.
On the other hand, Courts are reluctant to grant injunctive reliefs if:
- The dispute is only on the amount owing or interest charged; or
- The borrower has only begun a redemption action.
Before challenging the issue of interest charged and or amount owing, a borrower ought to have produced evidence before court to show that the principal amount of the loan advanced to him was repaid or he has been making an effort or signs of his willingness to regularize his loan account as required by the loan agreement. Courts see “…disputes as regards interest charged…as a subsidiary issue which can only be given enough attention where the Chargor has honoured his obligations to repay the loan or where a charger in default shows willingness to repay the outstanding amount of money owed to lender…”
From the foregoing, security for costs is essential for the grant of injunctive reliefs stopping a lender right of sale and the amount payable is the principal due to the lender. Only when the amount is excessive and unconscionable can it be overlooked. Further, the borrower must prove that interest charged is un-contractual or illegal as well as show his willingness to continue paying or illustrate that they have been paying the principal sum in order to be granted injunctive reliefs.
In summary, it is important for borrowers to make timely payments to avoid their credit facilities being classified as non-performing. Banks should follow due process in recovering debt to avoid having their right of sale stopped by the court. Borrowers who take legal action against banks should be prepared to deposit security for costs.
By Robert Otieno
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