A microfinance institution has been ordered to refund Sh150 million to the Youth Enterprise Development Fund after the High Court found it had breached the terms of a credit guarantee deal by failing to secure a commitment by a commercial bank to cover losses if the loan terms are not met.
The court directed Indo Africa Ltd to repay the Sh150 million plus interest at six percent per year above the prevailing Central Bank of Kenya indicative lending rate from May 14, 2014 until payment in full.
The court also issued an injunction barring the financial institution from transferring, withdrawing or otherwise dealing with funds held in its account at Co-operative Bank’s Westlands branch, except for purposes of settling the judgment debt.
The court upheld a deed of guarantee signed on November 12, 2012 between the Youth Enterprise Development Fund Board and Indo Africa Ltd under the Fund’s Credit Guarantee Scheme. A deed of guarantee is a contract in which a third party (the guarantor) promises to repay a debt or fulfill obligations if the primary borrower defaults.
The scheme was designed to facilitate access to credit for youth-owned enterprises through participating financial institutions.
Under the agreement, the Youth Fund committed Sh150 million while Indo Africa was to contribute Sh600 million, creating a total loan portfolio of Sh750 million for lending to youth enterprises. The agreement required Indo Africa to provide a bank guarantee worth Sh150 million as security before the Fund’s contribution could be released.
Court documents show that the Youth Fund remitted the Sh150 million into a Co-operative Bank account nominated by Indo Africa. The money was then supposed to be transferred to ABC Bank to activate the guarantee required under the agreement.
However, the fund argued that Indo Africa failed to transfer the money to ABC Bank, rendering the guarantee ineffective from the outset.
The fund further accused the lender of misrepresenting the existence and validity of the guarantee for more than eight months before ABC Bank formally confirmed that no effective guarantee had been established.
According to the fund, it repeatedly demanded that Indo Africa rectify the situation by providing a valid replacement guarantee or refunding the money, but the lender failed to comply.
The court agreed with the fund’s position, finding that it was not disputed that the money remained in Indo Africa’s Co-operative Bank account and was never remitted to ABC Bank as required. As a result, ABC Bank told the Youth Fund in October 2013 that the guarantee was ineffective.
The court rejected Indo Africa’s argument that the fund was responsible for collapse of the guarantee because it deposited the money into the lender’s Co-operative Bank account instead of directly remitting it to ABC Bank.
“The record further demonstrates that the Plaintiff afforded the Defendant multiple opportunities to rectify the situation, including a final demand dated February 21, 2014 requiring the Defendant to provide a replacement guarantee or otherwise cure the defect. The Defendant failed to comply,” the judge said.
The judge held that the Fund had merely acted on the instructions provided by Indo Africa and could not be blamed for the lender’s subsequent failure to transfer the funds.
“It is impermissible for a party to instruct another to carry out an act, acquiesce in its performance, and subsequently contend that such conduct amounts to a breach or frustration of the contract,” the court ruled.
The court further found that Indo Africa could not rely on the doctrine of frustration because any difficulties with the guarantee stemmed from its own failure to transfer the funds and its subsequent conduct.
Indo Africa defended itself saying it had fully utilised the Sh150 million in lending to youth enterprises and had disbursed more than Sh581 million to beneficiaries under the programme.
The lender argued that it acted in good faith and later obtained an alternative guarantee from Co-operative Bank after problems emerged with the ABC Bank guarantee.
It accused the Youth Fund of unreasonably rejecting the alternative guarantee and frustrating performance of the contract.
The company also contended that the agreement expired in November 2017 and that the suit could no longer yield practical relief.
In addition, Indo Africa filed a counterclaim seeking Sh761 million, including disbursement fees, interest, costs associated with procuring bank guarantees, losses arising from blocked deposits, reputational damage and loss of business opportunities.
However, the court dismissed the entire counterclaim, finding that it lacked merit.
The judge noted that Indo Africa was attempting to recover substantial sums from public funds for losses it had failed to prove and which it had previously attributed to ABC Bank in separate proceedings.
“In the present matter, the Defendant seeks to recover colossal sums from public funds for losses which, by its own admission in another suit, were occasioned by ABC Bank and not the Plaintiff,” the court said.
“To permit such a claim would amount to unjust enrichment at the expense of the Kenyan public.”
The court consequently upheld the validity and enforceability of the Deed of Guarantee and ordered Indo Africa to refund the Sh150 million together with accrued interest and costs.