Inside 34-year-old court battle between Manchester outfitters and Standard Chartered

Manchester Outfitters Executive Director Rajesh Galot displaying sample of Surgical gown produced locally by the firm against Covid-19 pandemic. [Samson Wire, Standard]

The Supreme Court will, for the second time, determine a three decades old case between clothes manufacture and a local bank in Sh34 billion battle.

The first time, the matter between Manchester Outfitters and Standard Chartered Bank was sent back to the High Court on basis that the lower court should determine if the bank was entitled to sell off ancestors' land to recover the loan taken in 1989.

And this time, apex court has flagged two issues in an appeal filed by the bank.

A five-judge Bench unanimously agreed that there is a conflicting stand from lower courts whether banks must re-register a security whenever a borrower takes a subsequent loan, even if the security for the previous loan has yet to be released.

The Bench composed of Justices Mohammed Ibrahim, Smokin Wanjala, Njoki Ndung’u, Isaac Lenaola and William Ouko.

Headed by Justice Ibrahim, the Bench further said that it will address the issue whether a security agreement with a lender affects the lender’s right to recover a loan.

Specifically, the Court will decide if an unsecured loan—whether or not it was intended to be secured—relieves the borrower of their repayment obligations.

“We are in agreement with the Court of Appeal that this is a substantial issue that affects the entire financial, banking, and commercial sector, therefore transcending the parties' circumstances,” they observed.

At the same time, the court froze the orders issued in favour of Manchester by the Court of Appeal and a land case in Machakos High Court until the case is heard and determined.

In its application, the bank claimed that the clothes firm had started the process to force it pay Sh 33 billion.

It alleged that the amount is too high and there was uncertainty about whether Manchester would be able to repay the amount if the case succeeds.

“The applicant is apprehensive that if a stay is not granted forthwith, the assessment will be finalized, judgment given, and execution levied with grave and irreversible consequences to the applicant (Standard Chartered),” argued Oraro.

The lender claimed that Manchester, which is now called King Woolen Mills Limited stopped operating in 1990 when the High Court dismissed Gregory Cahill appointment as a receiver manager.

Oraro argued that there is no single bank in Kenya that could foot the amount demanded by Manchester.

According to the bank, Manchester is in the process of revoking the sale of two properties it had disposed of to recoup the loan at the heart of the dispute.

Tailoring Workers based at Manchester outfitters engaging in Mass production of Face Masks and PPEs along Dunga road Nairobi. The produces thousands of locally made Covid 19 protective masks to be used locally at affordable rates. [Samson Wire, Standard]

In the case, Manchester is pursuing Foam Mattresses Limited seeking to have two properties reverted to it.

The battle is now before the Supreme Court for a second time. Court of Appeal judges Mohamed Warsame, Kathurima M’inoti and John Mativo certified the case to be of public interest.

The Bench, led by Justice Warsame, also addressed the question of whether a borrower is obligated to repay an unsecured loan.

The third issue that they flagged out was if an incomplete record of appeal denies a party a right to fair hearing.

“It has been demonstrated that the issues to be canvassed on appeal transcends the circumstances of the particular case, and has a significant bearing on the public interest; that the issues raise points of law, which we are persuaded are substantial, the determination of which will have a significant bearing on the public interest,” the judges ruled.

The dispute over a Sh9 million loan has resulted in a legal battle that has dragged on in court for three decades. And the amount at the heart of the dispute has now reached Sh33 billion.

This case is one of the longest-running commercial disputes in Kenya.

The approval marks the second round of legal proceedings between the clothing manufacturer and the bank regarding a loan obtained in 1982.

The bank's lawyers, Oraro and Radhika Arora argued that their client wants to know whether the security provided by Manchester Outfitters remained valid until the end.

Last year, Court of Appeal judges Sankale ole Kantai, Asike Makhandia and Pauline Nyamweya ruled that the High Court made a mistake by allowing the bank to seize Manchester's premises for defaulting on a loan that had been cancelled.

The judges ruled that Manchester suffered losses as a result of the cancelled loan and should have been compensated.  

They ordered the High Court to assess the actual damages and losses suffered by the company, which the bank should pay.

The lender argued that the judgment had created confusion in the banking industry.

“The judgment of this honourable court requiring new advances to be secured by the registration of a new charge or debenture throws the law and practice of banking into confusion, contradicts previous precedents, and creates uncertainty in the financial sector,” said Oraro.

The lender was initially called Eastern African Acceptances Limited. It was then renamed Standard Chartered Acceptances Limited, then changed to its current name; Standard Chartered Financial Services Limited.

On the other hand, Phillip Nyachoti asked the Court of Appeal to dismiss the application for certification.

Nyachoti, who is representing Manchester Outfitters, said the three-judge-bench was right as everyone was missing the fifth record of appeal.

However, he said, the judges asked for the High Court’s record, which then gave all the information required.

The lawyer also argued that there is no public interest in the case for it to be certified for hearing before the Supreme Court.

He stated that the loan was a private contract between his client and the bank.

The bank and the clothes maker will now approach the same court to try and win the minds and the hearts of new judges.

The dispute started in March 1982 when the company entered into a loan agreement with the bank.

The company continued servicing the loan until January 1989, when it defaulted in repaying a balance of Sh14 million which the bank demanded plus interest.

Manchester Outfitters offered to sell a piece of land which at the time was valued at Sh38 million to settle the loan balance but the sale did not happen. 

Standard Chartered appointed a receiver manager on default, sparking the 34-year-old case in which Manchester is now demanding Sh33 billion from the lender.

Unhappy with the receivers, Manchester and Gallot moved to the High Court on September 5, 1990 challenging appointment of Ad Gregory and CD Cahill as receivers.

After nine years of war before the High Court, Justice Erastus Githinji (now retired as a Court of Appeal Judge) allowed the bank to claim its dues.

Aggrieved, Manchester lodged an appeal seeking to set aside the High Court’s decision or alternatively, have the case re-heard by the High Court.

While the Appeal Court was hearing the case, the lender sold off Manchester Outfitters and Gallot’s security.

At the end of the hearing, on October 4, 2002, the appellate court through a majority judges’ decision slapped the bank with Sh251 million bill and ordered it to pay 14 per cent interest.

Retired Justices Abdul Lakha and Effie Owuor judgement that the bank should compensate the garments maker carried the day while Justice Phillip Tunoi dissented.

The appeals court, by then, was the highest court in the land, meaning the judgement was final.

Nevertheless, the bank did not bow out; it instead lodged another suit before the Comesa Court of Justice, arguing that the decision was against the treaty establishing Comesa.

It however retreated from the Comesa war in 2006 and filed another application before the Court of Appeal in Kenya, arguing that the declaration by the three-judge bench ought to have been set aside.

The argument by the bank was that Justice Lakha ought to have stepped aside as he had represented Manchester Outfitters in the case before the High Court.

However, the firm filed an objection. After 11 years of being in court, on April 8, 2016, a five-judge bench comprising of Justices Wanjiru Karanja, Hannah Okwengu, John Mwera (now retired), GBM Kariuki (now retired) and Philomena Mwilu set aside the 2002 judgment and ordered that the case be heard afresh.

The clothes maker moved to the Supreme Court, arguing that the appeals court wrongly applied the 2010 Constitution.

The bench led by Chief Justice David Maraga, Justices Smokin Wanjala, Njoki Ndung’u and Isaack Lenaola found that it would be absurd for the Supreme Court to review an appeals court decision if that court itself could not.

After the Court of Appeal re-heard the case, it ruled in favour of Manchester Outfitters. Following this judgment, the lender is now seeking to approach the highest court in the land again.