TRIAL COURT: IN BRIEF HCCC No. 648 of 2004 BETWEEN SANTOWELS LIMITED VS STANBIC BANK KENYA LIMITED

In the case of Santowels Limited vs. Stanbic Bank Kenya Limited, Santowels filed a suit against Stanbic Bank, alleging that the bank had overcharged interest rates. The claim was based on Section 39 of the Central Bank of Kenya Act, CAP 491 (CBK Act), which allowed the Central Bank of Kenya (CBK) to set maximum and minimum interest rates.

Santowels contended that Stanbic Bank had exceeded the capped rates specified in Gazette Notice No. 1617 of 1990, which set a maximum interest rate of 16.5% per annum for loans up to three years. As of 31st October 2004, the alleged overcharged interest amounted to Kshs. 17,256,522.66 based on the capped rate and Kshs. 8,978,813.63 based on the contractual rate.

To support their claim, Santowels engaged the Interest Rates Advisory Centre Ltd. (IRAC) for recalculations. This resulted in overcharged interest claims of Kshs. 68,986,536.28 (capped rate) and Kshs. 10,499,411.74 (contractual rate).

Stanbic Bank’s Defense

Stanbic Bank argued that their relationship with Santowels was purely contractual and that interest rates were not regulated during the contract period. Additionally, Stanbic Bank contended that the suit was time-barred under the Limitation of Actions Act, CAP 22.

Court’s Findings

The Court determined that the suit was not time-barred, as the cause of action arose in 2003 when Santowels discovered the alleged overcharging. It was also found that Stanbic Bank’s interest rates were unlawful, as they were not authorized to charge above the capped rates. However, the recoverable amount was based on the contractual rates, and Santowels was awarded Kshs. 8,498,764.03, plus interest at court rates from the date of filing the suit until full payment, along with the costs of the suit.

Furthermore, the Court concluded that the relationship between Stanbic Bank and Santowels was contractual, not fiduciary, and that Santowels had failed to prove a breach of contract by Stanbic Bank.

Aggrieved by the entire judgment, both parties filed Civil Appeal No. 160 of 2018.

CIVIL APPEAL NO.160 OF 2018 BETWEEN SANTOWELS LIMITED VS. STANBIC BANK KENYA LIMITED

In the appeal, Santowels contended that, according to the evidence, the High Court should have awarded Kshs. 68,986,536.28 based on the capped interest rate of 16.5% per annum. Santowels aimed to have the High Court’s decision overturned and replaced with a verdict in its favor for the higher sum, along with interest at bank rates from the dates of the overcharge.

Conversely, Stanbic Bank argued that the suit was time-barred, that Section 39 of the CBK Act was not applicable, and that Section 44 of the Banking Act did not pertain to interest rate variations but rather to the rate of banking. Stanbic Bank further alleged that the High Court incorrectly distinguished between the rate of banking and contractual interest rates, that the High Court rewrote the contract by allowing interest rate variation, and improperly relied on IRAC’s computations.

Court of Appeal’s Ruling

The Court of Appeal held that:

The suit was not time-barred.
The High Court had evaluated the evidence thoroughly and correctly.
The applicable interest rate was 16.5% between 1991 and 1997, as per Section 39 of the CBK Act. It found that Stanbic Bank had unlawfully increased the interest rate without the necessary approval under Section 44 of the Banking Act.
The High Court erred in the figure awarded, correcting it to Kshs. 10,449,411.74.
The Court found no merit in Stanbic’s cross-appeal and dismissed it.

Aggrieved by the entire judgment, Stanbic Bank sought leave to file an appeal at the Supreme Court, which leave was granted by the Court of Appeal.

PETITION NO. E005 OF 2023 BETWEEN STANBIC BANK KENYA LIMITED AND SANTOWELS LIMITED

In the petition before the Supreme Court, Stanbic Bank sought several declarations and orders:

Declaration on Gazette Notice Revocation: A declaration that the revocation of Gazette Notice No. 1617 of 1990 by Gazette Notice No. 3348 of 1991 and the subsequent repeal of Sections 39, 40, and 41 of the CBK Act liberalized bank interest rates from control or regulation by the Cabinet Secretary for Finance through CBK.
Section 44 of the Banking Act: A declaration that Section 44 of the Banking Act, which requires financial institutions to obtain approval from the Minister for Finance before any increase in the rate of banking or other charges, does not refer to the variation of interest rates under Section 52(1) of the Banking Act.
Contractual Interest Rates: A declaration that the rate of banking and other charges under Section 44 of the Banking Act does not apply to contractual interest rates under Section 52 of the Banking Act.
Statute-barred Claim: A declaration that the respondent’s claim was statute-barred.
Authority of IRAC: A declaration that IRAC had no authority or jurisdiction to rewrite the various contracts between the parties.
Setting Aside Judgments: An order setting aside the Court of Appeal’s judgment dated April 28, 2022, and allowing Stanbic’s cross-appeal with costs. An order setting aside the High Court’s judgment and dismissing the respondent’s suit with costs.
Refund of Amounts: An order directing Santowels to refund the full decretal amount, all costs, and auctioneer’s charges with interest at court rates of 14% per annum from the date of payment until full payment.
Costs Award: An award of costs for this appeal, Civil Appeal No. 160 of 2018, and HCCC No. 648 of 2004 to Stanbic.

Santowels’ Response

In response, Santowels’ Managing Director, Rajiv Raja, filed a replying affidavit on March 24, 2023, and a cross-appeal on March 31, 2023. Santowels contended that the Court of Appeal incorrectly awarded Kshs. 10,449,411.74 instead of Kshs. 68,986,536.28. Santowels sought a recalculation of the overcharge based on the unsanctioned capped interest rates and a judgment in the sum of Kshs. 68,986,536.28.

Supreme Court’s Observations

The Supreme Court observed that Stanbic Bank’s grounds of appeal went beyond the Court of Appeal’s certified issues, which centered on interpreting Sections 44 and 52 of the Banking Act. As a result, the Court limited its focus to the interpretation of these specific sections. Additionally, the Supreme Court dismissed Santowels’ cross-appeal for not adhering to procedural requirements, underlining the significance of following the prescribed procedures to engage the Supreme Court’s jurisdiction.

SUPREME COURT’S INTERPRETATION

Section 44 of the Banking Act

The Supreme Court interpreted Section 44 as follows:

Banking institutions are prohibited from increasing their banking charges without the Cabinet Secretary’s prior approval. This rule mandates banks to obtain permission before raising loan interest rates.
The term “rate of banking” encompasses interest rates applied to loans. This understanding is in line with the Banking Act’s objective of regulating banking operations and safeguarding consumers from unfair interest rates.
Moreover, Section 44 aims to maintain oversight and fairness by necessitating banks to seek approval from the Cabinet Secretary, ensuring that any interest rate adjustments are justifiable and not exploitative.

Section 52 of the Banking Act

The Supreme Court noted that Section 52 specifies:

Any violation of the Act or the Central Bank of Kenya Act will not nullify any contractual obligation between a bank and any individual. This implies that agreements between banks and customers remain valid even if the bank does not adhere to certain statutory obligations.
Section 52 prohibits banks from demanding interest or fees that surpass the maximum limit allowed by the Act or the Central Bank of Kenya Act. This provision safeguards customers from being exploited by banks charging exorbitant interest rates.

SUPREME COURT’S ORDERS

Subsequently, the Court issued the following orders:

Approval Requirement: Banks must seek the Cabinet Secretary’s approval before increasing interest rates on loans and facilities. This ensures regulatory oversight and protection for consumers.
Enforcement of Interest Rates: While contracts between banks and customers remain valid, banks cannot enforce interest rates or charges that exceed the statutory limits. This maintains the balance between contractual freedom and regulatory compliance.
Law Interpretation: The court emphasized the need for a clear and consistent interpretation of the law, ensuring predictability and adherence to the rule of law.
Revocation of Past Regulations: The court held that certain past regulations, like the capped interest rate of 16.5% per annum prescribed by Gazette Notice No. 1617 of 1990, were revoked, and thus, they no longer apply.
Regulatory Oversight: Interest rates on loans and facilities are subject to regulatory oversight under Section 44 of the Banking Act. Banks must seek approval from the Cabinet Secretary before increasing interest rates.
Consumer Protection: Section 52 ensures that contracts between banks and customers remain valid, but banks cannot charge interest rates beyond the statutory limits. This interpretation aims to balance consumer protection with the freedom to contract, ensuring a fair and regulated banking environment.

ADDITIONAL INFORMATION

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Authors

William Karoki, Founding Partner, Lawyer
Florence Mwende