The High Court has ordered real estate and property management firm Lloyd Masika Limited to disclose its financial records to Stanbic Bank Kenya, escalating a debt dispute triggered by alleged inflated asset valuations.
The court granted Stanbic Bank’s application compelling Lloyd Masika to produce its books of account, audited financial statements, bank statements, title documents, and such other records relevant to the recovery of the contested debt.
The unprecedented decision comes after a public auction of the firm’s assets, which recovered less than two percent of the outstanding debt.
The legal battle traces back to February 2018, when Lloyd Masika valued three Machakos County properties (Machakos/Ndalani Phase II/461, 462, and 465) at Sh87 million open market value and Sh56.5 million forced sale value.
Relying on this valuation, Stanbic Bank advanced a Sh40 million loan to an unnamed borrower.
Trouble began when the borrower defaulted, prompting Stanbic to commission a revaluation that pegged the same properties at Sh17 million open market value and Sh13.1 million forced sale value-a huge drop from Lloyd Masika’s initial assessment.
Stanbic was aggrieved with the occasioned loss because it advanced a loan facility on the footing of Loyd Masika’s report.
The dispute was referred to arbitration, and in December 2021, the arbitrator found Lloyd Masika ‘wholly negligent in submitting false valuation reports,’ holding the firm liable for the Sh40 million loss Stanbic incurred.
The arbitrator noted the valuations fell ‘outside permissible margins of error’ and ordered Lloyd Masika, a prominent real estate firm, to pay Sh44 million, including costs.
Despite the company’s attempts to set aside the award, the High Court upheld it as binding in April 2023.
However, Stanbic’s recovery efforts hit roadblocks after Lloyd Masika defaulted on repayment, leading to a public auction that raised only Sh1.1 million, of which Sh706,335 was remitted to the bank. The lender said the debt balance remains unpaid.
It accused the company of concealing assets and sought court orders to compel directors to submit to oral examination as to the debts owing and means of satisfying the decree.
The bank hinted at plans to lift the corporate veil should evidence emerge that directors fraudulently transferred company assets to evade creditors.
Lloyd Masika’s directors opposed the application, arguing they had initiated a separate case at the High Court to enforce a Sh500 million professional indemnity insurance policy from UAP.
They insisted that this insurance policy constitutes a “chose in action” (a legal right to sue) capable of satisfying the decree and that the bank’s application for disclosure of financial books was therefore premature. The company argued that the bank’s application was intended to embarrass and blackmail the directors.
“The bank knowingly contracted us under an agreement requiring this insurance. Their application is premature and violates our constitutional property rights,” the directors stated in court filings.
However, the court dismissed Lloyd Masika’s objections, noting that the existence of an insurance claim did not exempt the firm from disclosing other financial affairs.
The court held that the insurance claim does not preclude the decree-holder from invoking Order 22, Rule 35 of the Civil Procedure, which allows decree holders to apply for the disclosures.
‘The purpose of this provision is to enable the decree-holder to obtain information on the company’s assets and financial affairs. Whether or not the insurance claim ultimately satisfies the decree is a separate question that does not foreclose discovery of other potential assets,’ ruled the court.
The ruling shows that upon furnishing the bank with the stated documents, the lender will be at liberty to apply for the cross-examination of the company directors in court, potentially leading to piercing the corporate veil-a rare move that would expose directors’ personal wealth to recovery efforts.