IN THE HIGH COURT OF MALAWI
COMMERCIAL CAUSE NO. 28 OF 2007
MAPANGA FURNITURE LIMITED…………..………………………………………1ST PLAINTIFF
DR NARHARI DAYALJI PATEL ……….…………………………….……………2ND PLAINTIFF
HENDERSON DICKSON CHAGWAMNJIRA t/a
CHAGWAMNJIRA AND COMPANY…………………….………………………..1ST DEFENDANT
CORAM: HON. MR JUSTICE F.E. KAPANDA
Msowoya of Counsel for the Plaintiff
Chagwamnjira of Counsel for the Defendants
Place and Date of Judgment: Blantyre, 27th day of May 2008
The Plaintiffs have brought this action against the Defendants claiming the following:-
An injunction to restrain the Defendants by themselves, their servants or agents or howsoever otherwise from selling, offering for sale, and inviting tenders to purchase the Mapanga Furniture Complex or any part thereof as well as Title Number Nkolokoti-44 belonging to the 1st Plaintiff and Titles Numbers Mapanga-31, and Nyambadwe-576 belonging to the 2nd Plaintiff.
An order of specific performance requiring the 2nd Defendant to execute discharges of the respective charges on the said Titles Numbers Nkolokoti-44, Mapanga-31, and Nyambadwe-576.
Further, it is prayed that the costs of, and incidental to, this action be for the Plaintiff.
The Defendants deny the Plaintiffs’ claim. There is a defence in that regard. Further, the Defendants counterclaims from the Plaintiff. Indeed, the Defendants pleaded as follows:-
The Defendant bank denies unlawfully offering the above-said pieces of land for sale. It is the Defendant bank’s position that it sought to sell the subject pieces of land following default and non-payment of accruals on the properties which were charged to the 2nd Defendant who instructed Messrs Chagwam’njira and Company to sell following the arising the power of sale as provided for in the Registered Land Act. The 1st Plaintiff says that the 2nd Plaintiff’s debt to the 2nd Defendant was extinguished.
The Defendants deny that the Plaintiffs are entitled to an order to discharge the charges above-mentioned.
There is a counter-claim for the sum of K42, 899,598.49 with interest. The Defendants state that the said sum of K42, 899,578.49 is the balance outstanding on the account of Rare Earth Company (Malawi) Limited a Company whose indebtedness to the 2nd Defendant the Plaintiffs guaranteed by various charges namely a charge of Nkolokoti-44, Mapanga-31, and Nyambadwe-576 among others and guarantees which were transferred to this Company on August 12, 2004, as assets and liabilities that were transferred.
The Plaintiffs deny neither owing the said money to the Defendants nor securing its repayment. Indeed, the Plaintiffs deny being indebted to the Defendant in the alleged sum of K42, 899,578.49. As it were, the Plaintiffs deny having ever given nor executed any charges or guarantees securing any debt owed by Rare Earths Malawi Limited to the Defendant.
The Plaintiffs replied to the Counterclaim and put up a Defence to the Counter Claim. For lack of brevity, and indeed for the sake of clarity, I will reproduce the pleadings contained in the Re-Amended Reply and Defence to Counterclaim. The said Re-Amended Reply and Defence to Counterclaim were as follows:-
Except in so far as the same consists of admissions the Plaintiffs join issue with the Defendants upon their defence.
DEFENCE TO COUNTERCLAIM
The Plaintiffs refer to paragraph 2 of the Counterclaim and deny being indebted to the 2nd Defendant in the sum of K42, 899,578.49 as alleged or at all. The Plaintiffs state that they have never given nor executed any charges or guarantees securing any debt owed by Rare Earths Malawi Limited to the 2nd Defendant.
The other paragraph 2 of the Counterclaim is also denied.
The Plaintiffs refer to paragraph 3 of the Counterclaim and state that there is no basis at law and in fact for requiring this Court to order the Plaintiffs to pay the 2nd Defendant the said sum of K42,899,598.49 whether with or without interest. Further, the Plaintiffs state that even if there was any sum payable to the 2nd Defendant on account of the alleged charges or guarantees (which is denied) interest payable on such sum as from the date the 2nd Defendant went into liquidation cannot be at the compound rates customarily charged by banks.
The Plaintiffs refer to paragraph 4 of the Counterclaim and deny the claim for costs. The Defendant states that costs are in the discretion of the Court and any agreement attempting to oust that discretion is illegal and unenforceable.
The Plaintiffs state that the 2nd Defendant’s Counterclaim herein was the subject of the 2nd Defendant’s claim against the Plaintiffs in Miscellaneous Civil Cause No. 41 of 2006 being a matter between The Liquidator, Finance Bank Malawi Limited (In Voluntary Liquidation) versus Mr Pramodral Hansraj Patel, Dr Narhari Dayalji Patel and Mapanga Furniture Limited which action was discontinued by the 2nd Defendant without the leave of the Court on July 18, 2006, and costs in the said matter are outstanding. The Plaintiffs, therefore, state that they are entitled to, and hereby claim, an Order staying the Counterclaim until costs in Miscellaneous Civil Cause No. 41 of 2006 have been agreed and paid or taxed and paid.
Except as hereinbefore expressly admitted the Plaintiff’s deny each and every allegation of fact contained in the 2nd Defendant’s Counterclaim as if the same were herein set out and traversed seriatim.”
The 1st Defendant has also put a rejoinder as follows:-
The Defendant in reference to paragraph 4 (amended) pleads that interest can only be paid depending on the terms of the contract as obtaining in the Charge documents.
The defendant denies that the issue of liquidation has any bearing on the rate of interest which is contractual.
As regards the 2nd plaintiff as these debts are pre-incorporation debts the issue of liquidation of the other party to the contract would not extinguish the obligation incurred.
4. Save as herein admitted the 1stdefendant denies each and every allegation of fact as contained in the counter-claim as if each one of them is set forth and traversed seriatim.”
As it were, the Plaintiffs commenced this action against the Defendant claiming an injunction and an order of specific performance.
The Defendants on the other hand counterclaims from the Plaintiffs. There is so much I have put in the introduction to this judgment. I will now proceed to deal with the facts of this case.
The facts of this case are lengthy. They will have to be summarized. The said facts are to be discerned from the evidence on record. As far as this court was able to gather from the said record, an outline of the facts obtaining in this matter, as I see it, are undisputed and are as follows:-
Loan facility and Creation of Securities
Some type of bank facilities were granted to a firm called Rare Earth Co. against securities of properties offered by M/S Mapanga Furniture Co. Limited and Dr N. D. Patel. The said properties were namely Nkolokoti 44, Mapanga 31 and Nyambadwe 576 among others.
These securities were granted to secure an overdraft facility to a firm called Rare Earth Company owned by Dr Patel the 2nd Plaintiff. It is commonplace that subsequently this company became a limited liability company and the debt that was in the name of the company firm was taken over by the limited liability company as admitted by Dr Patel. However, it is not agreed between the parties that there were supposed to be any other securities for the new company except those to secure further facilities. The Plaintiffs are of the view that a letter from the limited liability company itself, not the Bank, said that the new company was to take over the assets and liabilities of the Company Rare Earth. The Defendant, on the other hand, contends that the new company offered new securities in order to transfer the liability.
Further, it is common cause that the securities transferred are the same one for the firm i.e. Zikomo Flowers Ltd Debenture, shareholders land and properties i.e. Dr Patel land In Nyambadwe and the Mapanga Complex. It is clear that “P1” is a charge for Mapanga Furniture Co. Ltd making up the Mapanga Complex. Further, this Charge stipulates as follows: -
“ Paragraph 2: The Chargor will on demand pay to the Chargee sums of money as now are or as shall from time to time be owing by the company to the Chargee whether solely or jointly with any other person, firm or company’s current account or otherwise or for any matter or thing whatsoever interest, discount, commission and all other banking charges and that interest shall be computed according to the usual mode of the chargee in dealing with current or other accounts as well after as before any judgment obtained hereunder
Paragraph 7: The Chargee may at any time and without notice to the Chargor or the Company combine or consolidate all or any of the Company’s accounts with any liabilities of the Chargor or company and set off or transfer any sums standing to the credit of any one or more of such accounts in or towards the satisfaction of the Company’s or Chargor’s liability to the Chargee on any other account or in any other respect whether collateral, joint or several and whether such account and liability be at or to one or more branches of the Chargee.
Paragraph 8: This security shall be a continuing security to the Chargee notwithstanding any settlement of account or other matter or thing whatsoever and shall be in addition to and shall not operate so as in any way to prejudice or affect the securityby any charge of any land certificate or title deed relating to the land hereby charged or any other security which the Chargee may now or at any time hereafter hold for or in respect of the monies hereby secured or any part thereof.
Paragraph 9: The banking facilities granted to the company by the Chargee are upon the express condition that the extent, nature and duration of such facilities shall always be in the entire discretion of the Chargee and that this Charge shall be discharged only if the Debenture is discharged as well.
If the Chargor fail to pay the Chargee on demand any monies hereinbefore agreed to be paid then the Chargee shall be entitled to exercise the statutory power of appointment of a receiver or sale conferred on Chargees by Section 68 of the Registered Land Act. Section 68 of the Act restricting the exercise of such power and the power to sue shall not apply to this charge.”
Furthermore, it is in evidence that “P2” is a charge for Dr Patel who is a promoter. It is the property of the 2nd Plaintiff. Additionally, “P3” is also property of the 2nd Plaintiff who “decided” to form a Limited Liability Company thereby promoting it.
Effects of Formation of Limited Liability Company
On the one hand Dr. Patel states that Messers Rare Earth Company Limited agreed to take over its assets and liabilities. He said this included the debt herein and the liabilities. He again says that his liability was transferred. Thus, in his judgment there was zerorization of the account of Rare Earth Company. According to Dr Patel this zerorization of the account of Rare Earth Company clearly extinguished his indebtedness and also extinguished his and the other Chargor’s obligation herein.
On the other hand, Mr. Mzumara the Defendant’s witness, is of the view that the letter of 13th August 2004 which was co-authored by the Plaintiff shows that a sum of K14 million as outstanding overdraft on the account of Rare Earth Company. This K14 million was secured by charges and that any transfer thereof also transferred the securities.
The foregoing notwithstanding the events that followed the Plaintiff’s request to zerorize is of equal significance. I will as much as possible give a chronology of what happened.
On receipt of this request from the Plaintiffs to zerorize, no such zerorization occurred. In its place the Defendant wrote the Plaintiffs that the new Company should submit a Board Resolution of Rare Earth Company Malawi Ltd authorizing transfer of all assets and liabilities of the old entity on an urgent basis to enable it to transfer the balance outstanding in Rare Earth Company to the new entity.
On 20th August 2004 a Board resolution was arranged which purportedly resolved to transfer all assets and liabilities of Rare Earth Company. This was in respect of the so called assets and liabilities of Rare Earth Company existing as of 5th August 2004. As it were, a request to have the securities discharged after the grant of the said Board Resolution was met with a response that the securities transferred with the loan and that no discharge could be done. It is well to point out that there was no challenge to this proposal by the Bank until the Power of Sale had been exercised.
2nd Plaintiff’s Interest in Mining Monazite
If it be added, the following is also trite in so far as the relevant facts of this case are concerned:-
Before December 2002 the 2nd Plaintiff became interested in mining monazite somewhere in Balaka. In December 2002 he registered a business name “RARE EARTH CO.” for purposes of carrying on the mining business. RARE EARTH CO. later became known as RARE EARTH COMPANY.
Further, it is common cause that in 2003 the 2nd Plaintiff procured a facility from the Defendant bank. The said facility was secured, inter alia, with the following:-
A charge executed on the 15th day of October 2003, by the 1st Plaintiff over Title Number Nkolokoti-44 in favour of the Defendant securing repayment of MK5,000,000.00/=
A charge executed on the 3rd day of November 2003, by the 2nd Plaintiff over Title Number Mapanga-31 in favour of the Defendant securing repayment of MK5,000,000.00/=
A charge executed on the 3rd day of November 2003, by the 2nd Plaintiff over Title Number Nyambadwe-576 in favour of the Defendant securing repayment of MK5,000,000.00/=
Incorporation of Rare Earths Company (Malawi) Limited: take over of assets and liabilities in monazite mining
In 2004 other people got interested in the monazite mining project. They formed a consortium culminating into the incorporation of a limited liability company known as Rare Earths Company (Malawi) Limited (the “Limited Company”). The 2nd Plaintiff was not a shareholder. The Limited Company proposed to take over the 2nd Plaintiff’s monazite mining project by taking over all of the 2nd Plaintiff’s assets and liabilities in respect of the mining project. The 2nd Plaintiff agreed. Accordingly, the 2nd Plaintiff did not have any further use of the facility he had with the Defendant as apparently he was no longer carrying on the project.
It is not in dispute that on 5th August 2008 the Limited Company took over all the assets and liabilities of the 2nd Plaintiff in respect of the mining project. This required mitigating the 2nd Plaintiff of his obligations to the Defendant bank.
As a result, on 13thAugust 2004 the Limited Company and the 2nd Plaintiff approached the Defendant bank with a suggestion of completely settling the 2nd Plaintiff’s liability to the Defendant and closing his account. The said proposal was discussed with the Defendant on 14th August 2004. It would appear that the Defendant agreed to the proposal and only required a board resolution of the Limited Company. Thus, so it seems, the 2nd Plaintiff’s indebtedness to the Defendant was to be settled completely by payment of MK110, 000,000.00/= cash and the transfer of the balance of K15, 647,952.25/= to a new borrower, the Limited Company.
It is in evidence that after the take over of the debt the Limited Company sought a facility from the Defendant bank for which security was demanded. Pending approval of the new facility the Defendant bank granted the Limited Company a further unsecured accommodation of up to US$153,780.00(about MK17, 000,000.00).
The record further shows that owing to disagreements between the Defendant bank and the Limited Company, the new facilities were not granted to the Limited Company except for the unsecured amounts of MK5, 774,473.23/= being the balance from the taken over debt. Further, the MK17, 000,000.00 granted was security pending approval of the total funding requirements of the Limited Company. The said sums grew to K30, 000,000.00 as of 4th November 2004. Additionally, as at 5th August 2005, the amount owing by the Limited Company was allegedly K42, 899,548.49. Since the sum remained unsecured the Defendant bank demanded for its immediate payment.
Closure of Defendant Bank
It is gathered that subsequently the Defendant bank was closed by the Reserve Bank of Malawi. The said Defendant bank temporarily opened under curatorship. Then the Defendant bank descended into a member’s voluntary winding up.
The property the subject matter of the suit: commencement of action
It is contended that notwithstanding the fact that the 2nd Plaintiff owes the Defendant nothing since August 23, 2004, and that the Defendant bank is holding no charge executed by the Plaintiffs securing the debt owed by the Limited Company to the Defendant bank, the Defendant bank has since October 2005 sought to sell the pieces of land the subject matter of this suit.
The court observes that in a bid to achieve the Defendant’s intentions of selling the said properties the Defendant’s Liquidator commenced an action.1 By this action the Defendant’s Liquidator was seeking, inter alia, an order allowing him to sell the above-mentioned properties being Title Number Nkolokoti-44, Title Number Mapanga-31, and Title Number Nyambadwe-576.
It is said that when the action last came up for hearing objections were raised on behalf of the Plaintiffs herein who in the said cause were the 2nd and 3rd Defendants. The hearing was adjourned and the next thing that happened was that the action was discontinued without leave of the Court.
For a moment it was perceived that by discontinuing the action the Defendant had abandoned its endeavour to sell the said properties. However, on 24th July 2006, through a newspaper advert the Defendant bank,acting through Chagwamnjira and Company, advertised for sale the above-said properties belonging to the Plaintiffs.
Finally, it is well to point out that the statement of account that the 2nd Plaintiff received from the Defendant, dated 28th August 2004, shows a nil balance. The account has since remained closed.
I think I have said this above, that the Defendant opposes the action herein. For all intents and purposes it has been submitted on its behalf that the action by the Plaintiffs be dismissed. As expected, the Plaintiffs are of the view that they have made out their case against the Defendants. Short of brevity, I will summarize and reproduce the arguments of the parties. The said arguments of the respective parties were put into categories as follows:-
The Defendant’s arguments
It is submitted by the Defendant that at law a Company can adopt pre-incorporation contracts. The Defendant has in this regard attempted to call in aid the Companies Act.2
Dr Patel’s Special Position
The Defendant moreover says that Dr Patel is in a special position for being a surety over himself if it is accepted that the Company Rare Earth Company was his trade name. The Defendant went on to suggest that if one were to look at some document before this court it is apparent that the document is a surety charge by Dr Patel to Finance Bank for a Company called Rare Earth Company. The same argument for surety charge applies to the charge to Dr Patel.
Question of who is owing?
As regards the question of who is owing, so it is said by the Defendant, in terms of the charge documents it is immaterial who is owing. Furthermore, it was put by the Defendant that Paragraph 2 of P1 binds the Chargors in this case the Plaintiff to pay money owing by Rare Earth Company on their account or an account held jointly with the company ”or otherwise or owing for any matter or thing whatsoever.” This,”or otherwise or owing for any matter or thing whatsoever.”, the Defendant furthers says, has come to be an arrangement under paragraph 11 where the Bank assented to an arrangement of compromise where the K14 million outstanding on the principal debtor Rare Earth Company was transferred to another thing called Rare Earth Company Ltd. The said Rare Earth Company Ltd defaulted in the payment. Hence, the recourse to the Plaintiff and the defaulting Company by notices under section 68 of the Registered Land Act.
Is the remedy of injunction available to the Plaintiffs?
The Defendant moreover says that the claim from the Plaintiffs is one of permanent injunction and a consequent order that the Defendant executes discharge for properties. The Defendant opine that the prayer to discharge can not be susutained as the Charge documents contained special clauses that would prevent such discharges. Further, the Defendant went on to suggest that by some doctrine in Mumba vs. NBS Bank the Supreme Court has come out clearly that one can not get an injunction where the Chargor has already exercised his right of sale. The Defendant went on to suggest that the Registered Land Act in section 71 (3) makes no provision for injunctions where a power of sale has arisen and that as allegedly confirmed in the Mumba vs. NBS Bank case that is good law.3
The Effect of the Letters of the 4th November 2004, 24th December 2004 and 31st December 2004
The Defendant says that Dr Patel laboured to demonstrate that the letters of 31st December 2004 being meant that there was no security for the facilities to the Rare Earth Co. Ltd. The Defendant however contends that the reason in that letter that Penal Interest was being charged was not because as Dr Patel puts it there were no securities in place. It was, as put by the Defendants, because the Bank’s offer letter dated 23rd November 2004 for increased facilities on top of the K14 million had not been accepted. Furthermore, it was put by the Defendant that it is clear from the letter that in addition to the K14 million transferred there were further sanctions of credit which made the debt total K30 million. In fact, so the argument went, exhibit P11 refers to a recent application for banking facilities and that the Plaintiff will not be allowed further advances beyond the K30 million. That exposure required fresh guarantees. The Defendants’ Counsel further submits that there was an attempt to show that new securities were needed but a look at the heading of some documents were for variation of terms and mode of payment of charge documents. These, in the view of the Defendants, were not new charges. Furthermore, it was put by the Defendant that the actual documents were not brought to the Court but the heading of same shows that they were neither new charges nor were they introducing new chargors or new charges. The Defendant further states that Dr Patel is wrong when his testimony only touched on the mode and terms of payments as the facilities had increased from K14 million to K30 million. Indeed, it is said Dr Patel is reading issues into letters which are not there. Thus, so it is said, a clear attempt at misleading the Court. Further, the Defendants argue that the Plaintiffs can not be allowed to resile from the terms of charges that he got benefit of and refused to sign because equity will regard as done that which ought to be done. Finally, the Defendants has placed reliance on the case of Finance Bank vs. Phillip & Linda Grissiel4 which they say is for the proposition that a charge is valid as between the chargor and chargee notwithstanding the fact that it is not registered so long as the said chargor benefited from it by receipt of funds.
Accord and satisfaction
The Defendants opines that it may be argued that what happened here amounts to an accord and satisfaction of the debt. Thus, the debt of Dr Patel trading as Rare Earth Company has been extinguished by the taking over by the Company Rare Earth Company Ltd. As it were, the Defendants agree that the debt of Rare Earth Company is extinguished and that is why they are not a defendant herein. However, the Defendants’ counsel submits that all authorities on accord and satisfaction or novation have no application to the instant case because Dr Patel has been sued on the basis of a security charge that he gave and so has Mapanga Furniture Limited. It is said that as a result of special clauses in 2, 7, 8, 9 and 11 of the charge these special conditions allows the Defendant bank to have recourse to the chargor notwithstanding assenting to the compromises that were there. Indeed, the Defendant suggests that in the absence of the these clauses what happened here would have amounted to accord and satisfaction or novation which principles are further caught by Section 2 of the Registered Land Act that will not allow any law that is not compliant with the Registered Land Act.
Assets and liabilities
The Defendant submits that the transfer of the money from the old account that was zerorised to the new Company comes out clearly in Defendants letter of August 2004. The Defendant asserts that in this letter the Bank put a condition to that transfer of money and that the said letter of August 2004 and the letter exhibited as D4 should be given the meaning they were intended to have. It is the view of the Defendant that these two letters give out a contract which provides that the 2nd Plaintiff’s account will be zerorized not because he has paid all the money but because the parties have agreed to transfer the assets and liabilities to the new company. It is further argued that in this case the issue is what amounts to company assets. In its view the 2nd Plaintiff enjoyed facilities with the Bank which amounted to assets which he passed these assets to a new Company. The Defendant further argues that what he is now saying is that I gave the assets of an overdraft to the new Company but I did not transfer the supporting securities. The assets of an overdraft could not, as the Defendant thinks, transfer in void without the securities in issue. If the 1st Company were to be bought, so it is further argued, the buyer would buy together with the overdraft facility and hence with the securities in issue. The overdraft could not stand alone in void.
Further, the Defendant has suggested to this court that the taking over of the debt and obligations owed by the 2nd Plaintiff through the Company Rare Earth Co. had to go with the security. Furthermore, the Defendant continued to say, if a contrary intention was envisaged such clear intention should have been made in the letters and in the resolution given by the Limited Company. The only logical answer, so it is urged, is that it is because there was no such agreement and that all parties including the 2nd Defendant envisaged continuation of these facilities by way of transfer of assets together with the supporting securities. Further, the Defendant suggests that the Chargor Dr Patel, the 2nd Plaintiff, additionally agreed as per paragraph 7 that the Plaintiff may transfer any sums to the credit of the Chargor or company without the need to get his consent.
Consequences of failure to pay
It is argued that the consequences of failure are provided for in the charge. These were, as put by the Defendant, that the Chargor would pay when demanded so pay money as would be during by the Company i.e. Rare Earth to the Charge whether the Company owns that money solely as Rare Earth Co. Ltd or firstly with any other person or firm or company current account or otherwise or any matter or thing whatsoever. Indeed, it is said that the agreement provided that the Chargor would pay on demand money which the Company defined as Rare Earth Co. Ltd owes. Finally, it is submitted that the parties agreed that the Plaintiff could grant indulgency and assent to any compromise, composition or agreement or arrangement with the company including arrangement to transfer some funds into a 3rd party account without prejudice to the security provided by the Charge. This, it is argued, means that the Plaintiff granted the benefit of a transfer of the K14 Million to Rare Earth Company Ltd without any prejudice to the Plaintiff’s rights under the Charge.
Interpretation of contracts
The Defendant has invited this court to consider that the parties herein entered into a contract as evidenced by the Charges. Accordingly, the Defendant opines that in terms of the law this court must look at the Charges and interpret the meaning thereof from the Charges only. Further, the Defendants say that the provisions of Section 20 of the Companies Act should be invoked. It is the further view of the Defendant that, pursuant to the law, as a Chargee it cannot be stopped from selling the charged property. In point of fact, Counsel argues that Finance Bank Malawi Ltd being Chargees can not be permanently stopped from selling the charged property more so when the Plaintiffs have allegedly not paid anything in between the injunction and date of hearing
As mentioned earlier, the Defendant counterclaims from the Plaintiff. As it were, the Defendants reckon that there is no dispute as to the sum of K42, 899,598.49 demanded in the counterclaim. It is prayed that the counter-claim be granted.
For the submissions given above, the Defendants have prayed for the dismissal of the Plaintiffs’ claim. Moreover, the Defendants have advocated to this court to order that the moneys being claimed in the counterclaim should be paid by the Plaintiff. Finally, the Defendants also pray for costs of this action.
As it were, the Plaintiff’s arguments were essentially the following:-
The Plaintiff says that the 2nd Plaintiff’s debt to the Defendant was extinguished in August, 2004. Further, the Plaintiff argues that the Plaintiffs have never executed charges over titles numbers Nkolokoti-44, Mapanga-31 and Nyambadwe-576, respectively to secure any debt owing to the Defendant by the Limited Company. Furthermore, the Plaintiffs argues that given that they never executed charges over titles numbers Nkolokoti-44, Mapanga-31 and Nyambadwe-576, respectively to secure any debt owing to the Defendant by the Limited Company the Defendant is, therefore, obliged to execute discharges of charges in respect of the said titles. The Plaintiffs therefore pray that this court grants them the following orders and reliefs:-
(a) An order of injunction restraining the Defendants by themselves, their servants or agents or howsoever otherwise from selling, offering for sale, and inviting tenders to purchase the Mapanga Furniture Complex or any part thereof as well as Title Number Nkolokoti-44 belonging to the 1st Defendant and Titles Numbers Mapanga-31 and Nyambadwe-576 belonging to the 2nd Plaintiff.
(b) An order of specific performance requiring the Defendant to execute discharges of the respective charges on the said Titles Numbers Nkolokoti-44, Mapanga-31, and Nyambadwe-576.
(c) Costs of the action.
The Plaintiffs further note that even if it were to be held that the debt was not extinguished, the 2nd Plaintiff and his sureties would never be liable to pay the sums that the Limited Company had borrowed over and above the K5,774,473.23. In its judgment the facilities afforded to the Limited Company over and above the said K5,774,473.23 beginning with the US$153,178 (K17,000,000.00) as of August 20, 2004, cannot and should not concern the 2nd Plaintiff and his sureties. Furthermore, Counsel asserts that the 2nd Plaintiff’s indebtedness to the Defendant was effectively extinguished and the counter-claim ought to be dismissed in its entirety.
I desire to state my earnest appreciation to both Counsel for their careful and forceful written submissions on the issues that arise for consideration in this matter. Any lucidity in this judgment is really due to the said submissions.
Without much ado, I now proceed to reflect on the pertinent issues for consideration in this action. This is now an apt time for me to enumerate the issues that arise and fall to be resolved by this court.
ISSUES FOR DETERMINATION
The questions that have been isolated herein below arise from my reading of the pleadings that were exchanged between the parties, and the arguments of Counsel. As I see it, the following are the issues that call for determination in this matter:-
(a)Whether or not the 2nd Plaintiff’s indebtedness to the Defendant was extinguished on 23rd August 2004?
(b)Whether or not the Plaintiffs executed Charges over Titles Numbers Nkolokoti-44, Mapanga-31, and Nyambadwe-576 and guarantees securing repayment the debt owing by the Limited Company to the Defendant?
(c)Whether or not the assumption of a debt previously secured by a Charge automatically transfers the Charge?
(d)Whether or not parties can by prior agreement usurp court’s discretion as to costs of a court action?
If there are other secondary questions I shall also allude to them later in this opinion. I will now, without much ado, proceed to deal with the matters that arise and fall to be resolved. However, I do not propose to deal with the said issues as they appear above.
LAW AND DISCUSSION
Practice and procedure concerning registered land
It is well to point out that the practice and procedure regarding registered land is governed by the Registered Land Act5 (the ?ct?. I will do no better than have recourse to Section 3 of the Act which instructively provides:-
“Except as otherwise provided in this Act, no other written law and no practice or procedure relating to land shall apply to land registered under this Act so far as it is inconsistent with this Act:
Provided that, except where a contrary intention appears, nothing contained in this Act shall be construed as permitting any dealing which is forbidden by the express provisions of any other written law or as overriding any provision of any other written law requiring the consent or approval of any authority to any dealing.”
For a Charge to take effect it must be registered.
Section 60 of the Act allows proprietors of registered land to charge their interest in such land by an instrument in prescribed form. The section stipulates:-
(1) A proprietor may, by an instrument in the prescribed form, charge his land or lease or charge to secure the payment of an existing or a future or a contingent debt or other money or money’s worth or the fulfilment of a condition, and the instrument shall, except where section 68 has by the instrument been expressly excluded, contain a special acknowledgment that the chargor understands the effect of that section, and the acknowledgment shall be signed by the chargor or, where the chargor is a corporation, by one of the persons attesting the affixation of the common seal.
(2) A date for the repayment of the money secured by a charge may be specified in the charge instrument, and where no such date is specified or repayment is not demanded by the chargee on the date specified the money shall be deemed to be repayable three months after the service of a demand in writing by the chargee.
(3) The charge shall be completed by its registration as an encumbrance and the registration of the person in whose favour it is created as its proprietor and by filing the instrument.”
As it were, in my reading of the above section, the charge, however, needs to be registered for it to take effect.
Variation of a Charge
Section 65 of the Registered Land Act is illuminating on variation of a charge and provides thus:-
“The amount secured, the method of repayment, the rate of interest or the term of the charge may be varied by the registration of an instrument of variation executed by the parties to the charge, but no such variation shall affect the rights of the proprietor of any subsequent charge, unless he has consented to the variation in writing on the instrument of variation.”
As I understand it, at law a Charge under the Registered Land Act cannot be varied by substituting borrowers. It can be varied, however, only as to the following matters:-
(a) the amount secured;
(b) the method of repayment;
(c) the rate of interest;
(d) the term (period of repayment).
Even in the above-said matters the variation can only take effect by the registration of an instrument executed by the parties to the Charge.
Novation Releases the Original debtor from the obligation to pay the debt
My understanding of the law, which is trite and therefore requiring no further citation of authority, is that novation is an act whereby with the consent of all parties, a new contract is substituted for an existing contract and the latter is discharged. Usually, it takes the form of the introduction of a new party to the new contract and the discharge of a person who was party to the old contract. On this point, I can do no better than re-echo the words of the learned authors of Halsbury’s Laws of England, 4th edn. The law on novations is instructively explained in Halsbury’s Laws of England, 4th edn. paragraph 580 as follows:
“Contractual rights, but not liabilities, may, as a general rule, be transferred by assignment without the consent of the promisor. Novation, however, is an act whereby, with the consent of all parties, a new contract is substituted for an existing contract and the latter discharged. Usually, but not necessarily, a novation takes the form of the introduction of a new party to the new contract and the discharge of a person who was a party to the old contract.”
Perhaps an expose of the law on specific performance will further help us to appreciate what this court has to do where novation is also in issue. I have always understood the law to be that specific performance of an old contract will be refused where there has been a novation. Furthermore, it is important to observe that the Learned Authors of Halsbury’s Laws of England, 4th edn, para 496 deals with the position of the law on specific performance as it relates to novation and put it as follows:-
“Specific performance is refused where the contract has been rescinded by novation; that is, where the parties have come to a fresh agreement for good consideration which from its nature must be presumed to be in substitution for the former agreement.”(Emphasis and underlining supplied by me)
Moreover, as I understand the law, when the initial debtor/obligor is completely substituted for a new one it does not need to be expressly stated. rightly observed by the Plaintiff’s Counsel it may be inferred from the conduct and facts proved. In saying this the court is guided by the case of Wilson and Lloyd6 where Bacon V-C said:-
“A novation (if I am obliged to use that word) has been completely effected. The Institutes -the oldest law upon the subject- have been referred to, and they say that two things must concur: there must be the animus novandi, and the subsitution of some other thing for that original obligation out of which the debt arose ….The animus novandi…is a thing which is not to be proved as a fact, but is an inference from the facts which are proved.” (Underlining and emphasis supplied)
It is well to also point out that at law novation of a debt operates as a complete release of the original debtor. As it were any attempt to reserve the right of recourse against the original debtor is a dutiful but ineffective wish7.
The words ‘without prejudice’ are ineffectual where a new binding contract has been formed.
In the case of Thomas -vs- Brown8 it was decided that the words “without prejudice” could not vitiate a contract that had been entered into. In his judgment in the said case of Thomas -vs- Brown Quain J said the following which is revealing and I adopt it:-
“… .[W]e must consider the peculiar position of the parties as disclosed by the correspondence. It appears that after the purchaser received the abstract the solicitors examined it with the deeds and made requisitions. These were acts which assumed that a contract existed, and yet the Plaintiff now proposes to take proceedings upon the footing that there was no contract at all. It will, no doubt, be said that everything was done “without prejudice to any question which might arise as to the contract of purchase”, and that this reservation having been assented to, the Defendant is bound by it. But, in my opinion, the words “without prejudice to any question which may arise” mean any question as to the execution of the contract, and not any question as to the existence of the contract. Under such circumstances the Plaintiff is not entitled to recover the deposit.”9
A similar position was expressed in the case of Walker -vs- Wilsher10. In his dictum Lindley LJ said thus on the meaning of the words ?ithout prejudice?-
“ What is the meaning of the words “without prejudice?” I think they mean without prejudice to the position of the writer of the letter if the terms he proposes are not accepted. If the terms proposed in the letter are accepted a complete contract is established, and the letter, although written without prejudice, operates to alter the old state of things and to establish a new. A contract is constituted in respect of which relief by way of damages or specific performance would be given.”11
Further, in Tomlin -vs- Standard Telephones and Cables Limited12 the question was whether or not an agreement contained in exchange of letters marked “without prejudice” was nonetheless valid and enforceable. The point had been taken by the Defendant that by reason of the words “without prejudice” the Defendant was not bound by the agreement and that in fact the court was not even entitled to look at the correspondence so marked “without prejudice”. The court held that there was a binding contract and the words “without prejudice” were of no consequence. Dankerwets LJ had this to say which in my mind is enlightening and informative:-
“ A point that arises is that all the letters written by the agent of the insurance company bore the words “Without Prejudice”. The point is taken that, by reason of those words, there could not be any binding agreement between the parties and it was said, indeed, on behalf of the defendants that the letters were not admissible. I feel no doubt, as the learned judge felt no doubt, that the letters were admissible, because the point was whether there had been a concluded agreement of any kind between the parties in accordance with that correspondence, and it would be impossible to decide whether there was a concluded agreement or not unless one looked at the correspondence. The learned judge quoted a statement by LINDLEY, L.J., which really was in the case of no more than a dictum but seems to me to have great force and to be of great importance in regard to the case. That was in Walker -vs- Wilsher 23 QBD 335. When the case is looked at, it appears that in fact the decision was that the letters in question should not have been looked at for the purpose of the case at all and that, consequently, the judge in the court below was at fault in relying on them for the purpose of depriving the party of his costs. But in the course of his judgment, LINDLEY, L.J., said at page 337:
‘What is the meaning of the words ‘ without prejudice’? I think they mean without prejudice to the position of the writer of the letter if the terms he proposes are not accepted. If the terms proposed in the letter are accepted a complete contract is established and the letter, although written without prejudice, operates to alter the old state of things and to establish a new one’.
That statement of LINDLEY, L.J. is of great authority and seems to me to apply exactly to the present case if in fact there was a binding agreement, or an agreement intended to be binding, reached between the parties; and accordingly it seems to me that not only was the court entitled to look at the letters although they were nearly all described as “without prejudice”, but it is quite possible (and in fact the intention of the parties was) that there was a binding agreement contained in that correspondence. That disposes of the first point.”13
Furthermore, in the Australian case of Alleyn -vs- Thurecht14 Thomas J stated that it is not all cases where a party to a contract has tried to reserve his rights using the words “without prejudice” that the reservation will work. I can do no better than adopt the wise pronouncement of Thomas J. He said:
“ It needs to be recognised that the words “without prejudice” can mean quite different things. Normally they are the formula by which a party invokes privilege against subsequent tender in evidence of a communication. Whether the protection is a part of the law of privilege, or an exclusion on grounds of public policy does not here matter (vide Phipson on Evidence (12 ed), para 623A and para 679). However, the phrase is also commonly used (or misused) to convey a reservation of rights. Nowadays it is used in contracts as equivalent to a proviso. A party may say in a perfectly open situation “I am doing this entirely without prejudice to my rights to do that”. Sometimes such a statement will be accurate. Other times the law will adjudge it to be a pious but ineffective wish”.15
Jurisdiction to relieve a debtor from excessive or harsh interest on money lent.
As I understand it, this Court has jurisdiction to relieve a debtor from excessive or harsh interest on money lent. In point of fact, this Court has statutory jurisdiction to reopen a money-lending transaction with a view to relieving a debtor from harsh, unconscionable and excessive terms. Actually, in saying thus, I am guided by Section 3 of the Loans Recovery Act16which states that:-
(1) Where proceedings are taken in any court for the recovery of any money lent after the commencement of this Act, or the enforcement of any agreement or security made or taken after the commencement of this Act, in respect of money lent either before or after the commencement of this Act, and there is evidence which satisfies the Court that the interest charged in respect of the sum actually lent is excessive, or that the amounts charged for expenses, inquiries, fines, bonus, premium, renewals or any other charges, are excessive, and that, in either case, the transaction is harsh and unconscionable, or is otherwise such that a Court of equity would give relief, the Court may reopen the transaction, and take an account between the lender and the person sued, and may, notwithstanding any statement or settlement of the account or any agreement purporting to close previous dealings and create a new obligation, reopen any account already taken between them, and relieve the person sued from payment of any sum in excess of the sum adjudged by the court to be fairly due in respect of such principal, interest, and charges, as the court having regard to the risk and all the circumstances, may adjudge to be reasonable; and, if any such excess has been paid, or allowed in account, by the debtor, may order the creditor to repay it; and may set aside, either wholly or in part, or revise, or alter, any security given or agreement made in respect of money lent by the lender, and if the lender has parted with the security may order him to indemnify the borrower or other person sued.
(2) Any court in which proceedings might be taken for the recovery of money lent by a lender shall have and may, at the instance of the borrower or surety or other person liable, exercise the like powers as may be exercised under this section where proceedings are taken for the recovery of money lent; and the court shall have power, notwithstanding any provision or agreement to the contrary, to entertain any application under this Act by the borrower or surety, or other person liable, notwithstanding that the time for repayment of the loan, or any instalments thereof, may not have arrived.”
As mentioned above, this Court has power to relieve a debtor from undue or inconsiderate interest on money lent by any moneylender including a bank if it so finds that the said interest is indeed unjustifiable or harsh.
Effect of a Guarantee or Suretyship on the primary obligation
As I understand it, the position at law is that the most fundamental character and/or principle of a guarantee or surety contract is that it is an accessory contract, not a primary contract. That is to say, the surety’s obligations are coterminous with those of the principal debtor. The surety’s liability does not arise until the principal debtor has failed to pay. More significantly, however, it is settled law that anything which nullifies, reduces or extinguishes the liability of the principal debtor has the same effect on the liability of the surety.17
This is so much with the law that I found relevant in the action before me. I will now delve into the application of the said law to the instant case.
DISCUSSION: Application of the law to the facts of this case.
I find and conclude that the indebtedness of the 2nd Plaintiff to the Defendant was extinguished on 23rd August 2004 by novation. In my judgment, and I so conclude, the intention to release the 2nd Plaintiff absolutely is obvious from the letter of 13th August 2004, which is very clear that it is offering a mechanism for closure of the 2nd Plaintiff’s account with the Defendant and setting off the debt. As it were, the closure of the account amounted to a consideration. This was agreed upon and on 23rd August 2004, the 2nd Plaintiff’s account had a nil balance. In fact, it is in evidence that the said 2nd Plaintiff’s account has since remained closed. In saying this I am aware of the fact that surely if it had been intended that the 2nd Plaintiff should continue being liable the debt should have continued to sit in his account with the Defendant bank. This conclusion is premised on the settled law that anything which nullifies, reduces or extinguishes the liability of the principal debtor has the same effect on the liability of the surety.18 Further, it is well to note the provisions of the Clause 11 of the Charges. The said Clause 11 of the Charges stipulates that:-
“The Chargee may in its discretion grant time or other indulgence to the Company and assent to any compromise, compositions or arrangements with the company without prejudice to this charge.”
The court noted that the Defendant during the trial tended to advocate that this clause operated to reserve its right of recourse against the 2nd Plaintiff and his sureties irrespective of any grant of time or indulgence or compromise or arrangements because such would be without prejudice to the charge. However, I must say at the outset that I associate myself with the position taken by the Claimant, as the case authorities have clearly demonstrated, that the words ‘without prejudice’ would only operate to reserve that right if the grant of time or indulgence or compromise or arrangement is not accepted by the 2nd Plaintiff and acted upon/taken advantage of by him. If the 2nd Plaintiff accepts the grant of time or other indulgence and acts on it a binding contract is formed from which the Defendant cannot resile. As it were, had the position been that the debt had been called in for non-payment and in its discretion the Defendant granted the 2nd Plaintiff two months within which to pay failing which then the Defendant would proceed to exercise its right of sale. However, if the 2nd Plaintiff accepted that grant of time and undertook to pay in two monthly instalments and paid the first instalment then the Defendant would not be allowed to exercise its right of sale before the expiry of the two months period. The words ‘without prejudice’ in the clause in the charges herein would be ineffectual as a binding contract would have been created. Similarly, in this case, the Defendant bank having consented to a novation and accepted the Limited Company as a full debtor in the place of the 2nd Plaintiff; and having actually transferred that debt from the 2nd Plaintiff’s account to the Limited Company’s account; the Defendant cannot rely on clause 11 aforesaid to try and have recourse against the 2nd Plaintiff and his sureties upon default by the Limited Company. In saying this I am alive to the dicta in the cases of Thomas-vs.-Brown, Walker-vs.-Wilsher, Tomlin-vs.-Standard Telephones and Cables Limited, Alleyn-vs.-Thurecht noted above.
Further, as I see it, what happened being a novation any endeavor to reserve the right of recourse against the 2nd Plaintiff (a former debtor) and his sureties is ineffectual at law.19 Additionally, the debt having been extinguished the obligations of the 1st Plaintiff as surety was extinguished likewise20.
In my judgment, in the present situation, the Plaintiffs have never executed any Charges on their titles numbers Nkolokoti-44, Mapanga-31 and Nyambadwe-576 as sureties securing repayment of the debt owed by the Limited Company to the Defendant. As I see it, the said debt remains unsecured that is why the Defendant terminated the facility and demanded immediate repayment of the money from the Limited Company. Indeed, it is unconscionable and harsh for the Defendant to agree to a novation extinguishing the 2nd Plaintiff’s indebtedness then turn around and start claiming from the 2nd Plaintiff and some of his previous sureties the sum of K42, 899,578.49 which includes sums that have nothing to do with the debt taken over which by 23rd August 2004, had been reduced to K5, 774,473.23. All I can observe is that it is astounding that an entity which was previously a bank and extended a facility to a customer on the understanding that the entity would continue as bank for it to continue receiving compound interest for the period when it seized to be a bank. In such situations this Court will do well to invoke its jurisdiction under the Loans Recovery Act and order that only simple interest be paid in respect of the period the entity is not a bank. As a result, this court finds and concludes that only simple interest be paid in respect of the period the entity is not a bank.
CONCLUSION AND DISPOSITION
The Plaintiffs have made out their case against the Defendants. In the circumstances, I see no reason why this Court should deny them the remedies sought in these proceedings. Therefore, this Court finds and concludes as follows:
Firstly, that the 2nd Plaintiff’s debt to the Defendant was extinguished in August, 2004. Secondly, that the Plaintiffs have never executed charges over titles numbers Nkolokoti-44, Mapanga-31 and Nyambadwe-576, respectively to secure any debt owing to the Defendant by the Limited Company. The Defendant is, for that reason, obliged to execute Discharges of Charges in respect of the said titles. Accordingly, this Court hereby grants the Plaintiffs the following orders and reliefs:-
(a) An order of injunction restraining the Defendants by themselves, their servants or agents or howsoever otherwise from selling, offering for sale, and inviting tenders to purchase the Mapanga Furniture Complex or any part thereof as well as Title Number Nkolokoti-44 belonging to the 1st Plaintiff and Titles Numbers Mapanga-31 and Nyambadwe-576 belonging to the 2nd Plaintiff.
(b) An order of specific performance requiring the Defendant to execute discharges of the respective charges on the said Titles Numbers Nkolokoti-44, Mapanga-31, and Nyambadwe-576.
Assuming that I am wrong in coming to this conclusion I would proceed to hold that, even if it were to be held that the debt was not extinguished, the 2nd Plaintiff and his sureties are not liable to pay the sums that the Limited Company had borrowed over and above the K5, 774,473.23. The facilities afforded to the Limited Company over and above the said K5, 774,473.23 beginning with the US$153,178 (K17, 000,000.00) as of 20th August 2004, cannot and should not concern the 2nd Plaintiff and his sureties. Further, in saying this I am aware of the fact that this court observed that the 2nd Plaintiff’s indebtedness to the Defendant was effectively extinguished and the counter-claim ought to be dismissed in its entirety.
It is trite law that costs of and incidental to all proceedings in the High Court shall be in the discretion of the High Court21. Additionally, it is commonplace that costs normally follow the event. An instructive authority is Order 62 of the Rules of Supreme Court.22 The Plaintiff has had to resort to litigation to get what is due to it. There is no denying of the fact that the Plaintiff has succeeded in its claim against the Defendant. Therefore, the Plaintiff must be awarded costs of this action. I so order.
Pronounced in Open Court this 27th day of May, 2008 at the Commercial Division of the High Court of Malawi, Blantyre Registry.
1Miscellaneous Civil Cause Number 41 of 2006: The Liquidator Finance Bank of Malawi Limited (in voluntary liquidation) -vs- Mr Pramodral Hansraj Patel, Dr Narhari Dayalji Patel, and Mapanga Furniture Limited.
2 Companies Act Section 20 provides that: -
“Any person who purports to enter into a contract in the name of or on behalf of a Company before it comes into existence shall be personally bound by the contract and entitled to the benefits thereof, except as provided in this section.
A company may within a reasonable time after it comes into existence, expressly, or by any action or conduct signifying its intention to be bound thereby, adopt a written contract made before it came into existence in its name or on its behalf, and upon such adoption, subject to subsection (3)
(a) the Company shall for all purposes be bound by the contract and entitled to the benefits thereof as if the Company had been in existence at the date of such contract and had been a party thereto; and
(b) the person who purported to act in the name of or on behalf of the company shall, except as provided in subsection (3), cease to be bound by or entitled to the benefits of the contract”.
Except as provided in subsection (4), whether or not a contract made before the coming into existence of a Company is adopted by the Company, the other party to the contract may apply to the Court for an order fixing obligations under the contract as joint or joint and several, or apportioning liability between or among the Company and the person who purported to act in the name of or on behalf of the Company, and upon such application the Court may make any order it thinks fit.
If expressly so provided in the written contract, the person who purported to act in the name not in any event be bound by the contact nor entitled to the benefits thereof.”
3 Section 71 (3) of the said Registered Land Act stipulates:
“a transfer by a charge in exercise of his power of sale shall be made in the prescribed from and any person suffering damage by an irregular exercise of such power shall have a remedy in damages only against the person exercising the power”
4 Court Case No. 1761 of 2000
5 Cap.58:01 of Laws of Malawi
6 (1873) L R 16 Eq 60 at page 74
7 Commercial Bank of Tasmania -vs- Jones and Another  AC 313.
8 (1876) 1 Q BD 714
9 (1876) 1 Q BD 714 at page 723
10 (1889) 23 QBD 335
11 (1889) 23 QBD 335 at page 337
12  3 All ER 201
13  3 A II ER 201 at pages 203 and 204
14  2 Qd R 706
15  2 Qd R 706 at page 718
16 Cap.6:04 of the Laws of Malawi
17 Commercial Bank of Tasmania -vs.- Jones  AC 313;Perry -vs.- National Provincial Bank of England  1 CH 464, CA; Re Natal Investment Co, Nevill’s Case (1870) 6 Ch App 43
18 Commercial Bank of Tasmania -vs- Jones, supra, per Lord Morris.
19 Commercial Bank of Tasmania -vs- Jones, supra
20 Commercial Bank of Tasmania -vs- Jones, supra
21 Section 30 of the Courts Act.
22 Chihana vs. Speaker of the National Assembly and Malawi Electoral Commission Misc. Civ. Cas. No. 2933 of 2005 (H.C) (Unrep.).