SHINYANGA REGIONAL TRADING CO LTD AND ANOTHER v NATIONAL BANK OF COMMERCE 1997 TLR 78 (CA) A

SHINYANGA REGIONAL TRADING CO LTD AND ANOTHER v NATIONAL BANK OF COMMERCE 1997 TLR 78 (CA) A

Court Court of Appeal of Tanzania - Mwanza

Judge Mnzavas JJA, Mfalila JJA and Lubuva JJA B

CIVIL APPEAL 21 OF 1996

28 February 1997

Flynote

C Company law - Debentures - Registration of - Effect of non-registration - In

terms of ss 79 and 80 of the Companies Ordinance Cap 212 if charge not registered

within 42 days it becomes void and the loan so secured immediately payable.

Company law - Debentures - Nature of - No such thing in law as a debenture contract

or agreement. D

Land law - Sale of land - Under debenture - Debenture merely providing for

appointment of receiver in event of default - Company had no direct power of sale in

such event.

-Headnote

E The appellant appealed against a judgment of the High Court which had upheld a

claim by the respondent against it relating to the sale of a godown. The godown was

among the properties listed in the debenture which had been issued by the appellant

to secure an overdraft facility granted by the respondent to the appellant. When the

appellant failed to pay in time the respondent sold the godown by public auction.

Subsequent to that sale the appellant sold the godown to the second appellant who

alleged that it was the bona fide purchaser for value of the property. F

The judge at the trial held that the sale and transfer of the godown to the second

appellant was illegal because it was contrary to the terms of the debenture and held

that the second defendant was not a bona fide purchaser as the sale had been tainted

by fraud. On appeal:

Held: G

(i) That the trial court had erred in describing the instrument as a

debenture contract or agreement: there was no such thing as a debenture contract or

agreement in law. A debenture was simply a document issued by a company as

evidence of its indebtedness which was normally secured by a charge over its

property and could only be made and issued by one side, namely the borrowing

company; H

(ii) Sections 79 and 80 of the Companies Ordinance Cap 212 were quite

clear as to the registration of charges and the consequences of non-registration,

namely that if the charge was not registered within 42 days it became void and the

loan so secured became immediately payable. In the present case the debenture had

not been so registered and it was accordingly void; I

1997 TLR p79

(iii) Even if the debenture had been properly registered and valid at the A

time of the sale of the godown by the respondent it would make no difference on the

validity of the sale by the respondent as under the debenture the respondent had no

direct power of sale.

Case Information

Appeal allowed.

Cases referred to: B

1. Long v Abercorris Slate & Slab Co [1887] 37 ChD 260

2. Eastern Distributors Ltd v Goldring [1957] 2 QB 600

3. Commonwealth Trust v Aktoy [1926] AC 72

4. Mtumwa Rashid v Abdallah Idd and Anor Civil Appeal No 22 at 1993

C

Rweyemamu, for the appellants.

Prof. Fimbo, for the respondent.

[zJDz]Judgment

Mfalila JA:

This appeal is against the judgment and decree of the High Court of Tanzania at D

Tabora in which judgment was entered in favour of the present respondent, the

National Bank of Commerce. In the High Court, the National Bank of Commerce was

the plaintiff, Shinyanga Regional Trading Company Ltd was the first defendant and

Nyanza Bottling Company Ltd was the second defendant. In this appeal, the E

National Bank of Commerce will be referred to as the respondent, Shinyanga

Regional Trading Company Ltd as the appellant and Nyanza Bottling Company Ltd,

which is not a party in this appeal will be referred to as the second defendant. The

respondent's claim in the High Court was for a declaration that the sale of the F

godown on Plot No 308 Block `B' in Shinyanga township, executed between the

appellant and the second defendant and its subsequent transfer was illegal. The

respondent alleged in its plaint that the said godown was among the properties listed

in the debenture which was issued by the appellant to secure an overdraft facility

amounting to Shs 50,000,000/= which it made available to the appellant. But G

according to the respondent, when the appellant failed to repay the loan within the

stipulated time, it decided to sell the properties listed in the debenture after giving

due notice. Among these properties was the said godown. The sale of the H

properties including the godown was conducted by public auction. Following this

auction, the respondent averred, the appellant filed a suit in the High Court, Civil

Case No 18 of 1994 seeking among other reliefs, a declaration that the sale of the

godown is null and void. However, according to the respondent, before this case, I

1997 TLR p80

MFALILA JA

A namely Civil Case No 18 of 1994 was determined, the appellant sold and

transferred the godown to the second defendant, and according to the respondent,

this sale and transfer of the godown by the appellant to the second defendant was

illegal because:

B (a) By that time it had already sold the said godown at a public auction and

the money so realised was deposited in the appellant's account.

(b) The said sale and transfer between the appellant and the second

defendant was made without notice to it in breach of the mandatory provisions in the

debenture. C

(c) The said sale and transfer was effected before finalisation of Civil Case

No 18 of 1994.

(d) The said sale and transfer was effected in complete disregard of the

caveat filed by the buyer of the property at the public auction which it organised. D

In its written statement of defence, the appellant denied that its sale of the godown to

the second defendant was unlawful or illegal and that it did not fail to repay the loan

as alleged and that in any case no due and proper notice was given by the respondent

before the sale of the godown. The appellant further averred that on 17 E

September 1994 it repaid the entire loan to the respondent by depositing the sum of

Shs 63,542,025/25 in its account with the respondent as full settlement of the

outstanding loan before the expiry of the agreed period on 30 September 1994 F and

that the second defendant's credit note for Shs 63,542,025/25 is evidence of this

transaction. That following the deposit of this amount in its account with the

respondent, it informed the respondent on 22 September 1994 to treat this credit as

settlement of the loan provided to them by the respondent. G

On its part, the second defendant denied that the sale of the godown by the appellant

was illegal because it was a bona fide purchaser for value without notice land that

therefore it acquired a good title. H

At the commencement of the trial, three issues were framed as follows:

1. Whether the sale and transfer of the suit premises by the first

defendant to the second defendant was illegal.

2. If the sale was illegal, whether the second defendant was a bona fide

purchaser for value. I

1997 TLR p81

MFALILA JA

3. Whether in the circumstances, the plaintiff was entitled to sell the suit

A premises and whether he had title to pass to the purchaser.

The respondent called only one witness in support of its case, its legal officer Mr

Makenena Ngero. He told the trial court that they were requesting the court to B

nullify the sale of the godown by the first defendant to the second defendant because

this sale was effected when the same godown had already been sold by the plaintiff in

exercise of its powers as debenture holder under clause 3 of the debenture. This

clause, he said, empowered the debenture holder to sell the C charged property in

the event of a default in repaying the loan so secured. Mr Ngero told the trial court

that the sale of the godown by the first defendant to the second defendant was

subsequent to the sale by the plaintiff at a public auction on 22 August 1994. Mr

Ngero mentioned two other matters which in his view tainted the legality of the sale

transaction between the two defendants. These were first, that according to the terms

of the debenture, the borrower could not sell or transfer D the property so charged

without the consent of the debenture holder. Secondly, that after the godown was

sold by the plaintiff through a public auction, the first defendant filed a civil suit in

court praying for a declaration that the sale by the plaintiff was illegal, but before the

court determined the case, the first defendant went ahead and sold the property to

the second defendant. It was for this reason, E he said, that the second defendant

cannot claim to be a bona fide purchaser for value because he had notice of the sale of

the godown by the plaintiff.

On its part, the appellant also called one witness, its erstwhile General Manager, F

Hamisi Shilla Kitonka. He told the trial court that the appellant obtained an overdraft

facility from the respondent's Manonga branch in Shinyanga township amounting to

Shs 50 000 000/=. This loan, he said was secured by a debenture, but he denied that

the debenture had any restriction on the appellant's right to deal with G the

properties so charged, saying that the appellant was free to sell any of these properties

provided approval was sought and obtained from its Board of Directors. Mr Kitonka

added that the loan plus interest of Shs 13 million was to be cleared by 30 September

1994, but in June the respondent recalled the overdraft and H demanded payment

within 14 days. The appellant requested for extension of time in which to pay. When

this request was rejected, he said, they had no alternative but to sell one of the

appellant's properties to raise the required money. It was decided to I

1997 TLR p82

MFALILA JA

A sell one of the godown which they sold to the second defendant for Shs 60 000

000/=. When this amount was paid on 17 September 1994, it was deposited into their

account with the respondent to clear the overdraft but they were informed that the

overdraft had been cleared. They did not know how the overdraft had been B

cleared. In these circumstances, Mr Kitonka concluded, the sale of the godown to the

second defendant by the appellant was perfectly legal.

After hearing all the evidence and the submissions, the learned Trial Judge answered

the first issue in the affirmative, namely that the sale and transfer of the C suit

premises by the appellant to the second defendant was illegal, because it was contrary

to the terms of the debenture which prohibited the appellant from alienating any of

its property without the consent of the respondent as the debenture holder except of

course in the ordinary course of its business. D

With regard to issue 2, the learned judge answered it in the negative, namely, that the

second defendant was set a bona fide purchaser for value without notice because the

sale of the godown between the two was tainted with fraud.

Lastly, the learned Trial Judge answered the third issue in the affirmative, that the E

respondent had a good title to pass. In the circumstances, the learned judge entered

judgment for the plaintiff as prayed, and also declared that the sale and transfer for

the godown by the appellant to the second defendant was illegal, null and void. The

judge also made a consequential order that the register of titles be F rectified by

deleting the registration of the second defendant as owner thereof and further that

the purchaser at the public auction be registered under s 51(1) of the Land

Registration Ordinance Cap 334.

This decision aggrieved Shinyanga Regional Trading Company Ltd which then G

filed this appeal, the memorandum thereof consisting of six grounds of appeal.

Before dealing with the appeal on merits, there is a point which we feel is of such

importance, though not part of this appeal that it should be dealt with to avoid it

misleading the lower courts if not the High Court itself. H

At the commencement of the trial, counsel for the defendants raised a preliminary

objection which is so pointless both in fact and law that we feel the Trial Judge should

not have expended so much energy and time trying to resolve it. In his preliminary

objection, counsel for the defendants urged the court to dismiss the case against the

second defendant because in his view it was wrongly I

1997 TLR p83

MFALILA JA

joined. Counsel told the trial court that the second defendant was wrongly joined A

because the suit in question in founded on two unrelated contracts. One contract was

what he called a debenture contract under which the respondent advanced Shs 50

million to the appellant and that since the second defendant was not a party to this

contract, it could not be sued on it. The second contract, he B submitted, involved

the sale of the godown by the appellant to the second defendant to which the

respondent was not a party, hence it could not sue on it. We remarked that this

objection was pointless both in fact and in law, because it is clear to anyone reading

the plaint that the respondent was not suing on any C contract even if there was

such a thing as a debenture contract or agreement in law. The respondent was simply

challenging the legality of the sale and transfer of property over which it believed it

had a legal charge. This is the factual position. On the legal front, there is no such

thing as a debenture contract or agreement in law for the simple reason that such

contract is impossible to make. A contract, like the D tango, takes two to

materialise. But a debenture, being simply a document issued by a company as

evidence of its indebtedness which is normally secured by a charge over its property,

can only be made and issued by one side, namely the borrowing company. Therefore,

since counsel was making submissions on E points whose legal significance he did

not obviously understand, the judge should have dismissed the objection in a few

lines, mostly asking counsel to make himself more familiar with concepts in company

law. Unfortunately, the learned judge went to far as to commend counsel for what he

called his `lucid F submissions', and throughout the proceedings and in his

judgment, the learned judge talks of `debenture agreement'. If left uncorrected it can

create a wrong impression in the lower courts that there are such things as debenture

contracts and agreements in company law. Although the words of Chitty, J in Long v

Abercorris Slate & Slab Co (1) at 264 to the effect that: G

`I cannot find any precise legal definition of the term ``debenture'', it is not

either in law or commerce a strictly technical term of what is called a term of art' H

sound severely pessimistic on the meaning and nature of debentures, it does not mean

that the term is incapable of having a precise meaning or that its meaning is so elastic

as also to be a species of contract. Of course the rights of the debenture holder are

contractual rights against the borrowing company, but these contractual I

1997 TLR p84

MFALILA JA

A rights relate to the agreement to lend by the lender and to borrow by the

creditor. Debentures then are species of documents issued by companies evidencing

their indebtedness which [the indebtedness], is normally but not necessarily secured

by a charge over the company's property. Debentures which do not provide a charge

are called naked debentures. In sum then debentures are a class of securities issued by

companies. B

Having put the legal and factual position on the correct footing, we are now in a

position to deal with the appeal before us.

C As we have already indicated, the appellant filed a six point memorandum of

appeal, but in our view the controlling ground is ground No 3, in which the appellant

complained that the learned judge erred on point of law and fact in holding that the

debenture agreement (sic) exhibit P1 is a valid debenture for the 1993/1994 loan. D

We say this is the controlling ground because the way this ground is determined will

affect the outcome of the entire appeal. On this point depends the determination of

the question in ground one, that is whether the sale and transfer of the godown by

the appellant to the second defendant was legal. It will also determine the question in

ground 5, that is whether the respondent was entitled to sell the godown and pass the

title to the purchaser. E

The learned Trial Judge made the decision on the validity of the debenture while

dealing with issue No 3 which was whether in the circumstances, the plaintiff was

entitled to sell and pass title to the purchaser. As already indicated, the learned F

judge answered this issue in the affirmative holding that the plaintiff had a good title

to pass, but we feel that the first part of the issue which is whether the plaintiff was

entitled to sell the premises under the terms of the debenture was not clearly dealt

with. This question was a subject of detailed analysis by counsel for the appellant in

his final written submissions. In his detailed submissions, learned counsel G stated

that the plaintiff (present respondent) was not entitled to sell the godown to recover

its loan, because firstly the respondent did not have such power under the debenture

under which it purportedly acted. In law, counsel stated, the remedies H available

to the debenture holder in case of default in the payment of the principal amount or

interest, are to sue for the recovery of the outstanding amount; to file a petition in

court for the winding up of the company; to exercise any of the powers conferred by

the debenture ie appointing a receiver or if the debenture does not contain such

powers, the debenture holder may apply to court for the appointment of a receiver

and/or manager, or an order for sale or foreclo- I

1997 TLR p85

MFALILA JA

sure. Learned counsel stated further that as the debenture relied upon by the A

plaintiff did not confer on it any power of sale, it was incumbent upon it to apply to

the court for an order of sale. Hence, he concluded, as it had neither the power of sale

under the debenture nor a court order to sell the godown by public auction, the sale

effected by the respondent was illegal, therefore null and void and no title was

thereby passed. B

The second reason given by learned counsel in his submission was that when the

respondent proceeded to auction the godown on 20 August 1994, it had already been

sold on 10 August 1994 hence there was no subject matter to sell on 20 October 1994.

In these circumstances, he stated, both the auctioneer and C purchaser acted under

a mistake of fact as to the existence of the subject matter so that under s 30(1) of the

Law of Contract Ordinance Cap 433, the resulting contract of sale was void.

The learned Trial Judge dealt with the question on the assumption that the D

respondent's loan to the appellant was still secured by the debenture and that in

selling the godown to recover the loan, the respondent was properly exercising its

professed power of sale. After discussing what happens at a sale by public auction, and

as to when the contract is concluded, pointing out that such a transaction is subject to

the doctrine of caveat emptor, the judge concluded as follows: E

`This explains why s 51 (1) of the Land Registration Ordinance does not

require, in cases where property is sold by a lender in the exercise of his professed

power of sale, the registrar or purchaser to enquire whether any default has occurred.

The power of sale need not be F absolute, it is enough that a reasonable man,

prudently investing his money in land will have reasonable grounds upon which to

believe that the lender has power to sell the property. In my view such power is

presumed to exist where the sale is by public auction. The power to sell or to be

specific, the lender's professed power of sale at the public auction in question is G

protected by the operation of the doctrine of estoppel. There are several types of

estoppel, but estoppel by reputation is more relevant here. By this doctrine, where the

owner of property by words or conduct represents or permits it to be represented that

another person is the owner of goods or other properties, any sale of such property by

that person is valid against the true H owner as if the seller was actually the owner

thereof as regards anyone buying such property on reliance or the reputation. It has

also been said that estoppel would arise if the true owner represents or permits it to

be represented that he had no interest in the goods. In this case that is how PW1

behaved. He made no I

1997 TLR p86

MFALILA JA

A attempt to stop the sale until 6 days later when he filed a suit in court. Hence

the first defendent is estopped from asserting that the plaintiff could not pass a good

title to the purchaser.'

In support of these views the learned judge quoted the remarks of Devlin J in the

English case of Eastern Distributors Ltd v Goldring (2) at 608: B

`The class of questions which relate to how far a person who is not the real

owner of goods, but who appears to the world, or rather to those who deal with him

as owner; and who deal with him on the faith of his apparent ownership should be

called to confer upon a third party a greater title than he himself has . . .' C

And in an earlier case, Commonwealth Trust v Aktoy (3) , it was decided that `if

someone permits goods to go into possession of another, with all the insignia and D

indicia of apparent title, it would be inconsistent with legal principle to permit the

transaction to be upset'. However the difference with the present case which the

learned judge apparently missed is that in this case the appellant did not permit the

premises to go into the possession of the respondent, to the contrary, he did not or

refused to surrender the title deeds thereof, and did not register the debenture as

required by law. E

But as we have already stated, these findings of the learned Trial Judge were

predicated on the premise that the security provided by the debenture was available

to the respondent at the time it decided to sell the godown to realise the amount of

the loan. Indeed, ever the two reasons given by Counsel for the F appellant in his

written submissions on issue No 3, were based on the same assumption and

throughout the proceedings in the High Court, the case proceeded on that basis. Both

sides in the case saw the wisdom of engaging the G services of more experienced

counsel to argue their respective cases in this court. In recognizing the talents of

counsel on both sides, we want to say that the parties could not have made better

choices. Both Mr Rweyemamu who marshalled the appellants' case, and Professor

Fimbo who resisted the appeal on behalf of the respondent, left no stones unturned in

their respective fights both at factual and legal levels. Our wish is that such high level

performance will become H standard to the greater majority of the members of the

Tanzania Bar.

In arguing the appeal, Mr Rweyemamu learned Counsel for the appellants, discarded

the premise adopted throughout the trial both by the trial court and counsel who

appeared in that court, that the I

1997 TLR p87

MFALILA JA

security provided by the debenture was still available to the respondent at the time

A of the sale of the godown by public auction. Mr Rweyemamu submitted that as the

debenture was not registered, the loan extended by the respondent to the appellant

remained unsecured. He added that under s 79 of the Companies Ordinance, Cap 212,

an unregistered debenture is void against the liquidator and any creditor of the

company. Therefore, he said, the rights of the respondent as an B unsecured

creditor was to demand repayment within forty-two days after its loan became

unsecured. After this period, he said, the respondent could not go back to the

debenture and purport to exercise the power of sale under it. The only course C

open to the respondent as an unsecured creditor, he added, was to proceed by way of

ordinary civil suit to recover its unsecured loan. With regard to the allegation that the

appellants' sale of the godown to the second defendant was tainted with fraud, Mr

Rweyemamu submitted that the fraud, if any, could only D affect the sale to the

second defendant if at the time of this sale, the loan advanced by the respondent was

still secured by the debenture. This is because, he contended, there can be no fraud in

the sale to the second defendant if the debenture no longer acted as security for the

respondent's loan. With the E debenture no longer in force, he said, the godown

was not encumbered, with the consequence that the appellant was free to dispose it in

any manner it wished. This freedom, he added, extended to the manner in which the

appellant treated the proceeds of such sales. As a corollary to their argument, Mr

Rweyemamu F submitted that as the respondent, the debenture holder, no longer

had any rights under the debenture, it could not purport to exercise the power of sale

under that debenture even if the said debenture provided such power, hence the

respondent had no right to sell the godown, he had no title in the godown which he

could pass to any buyer. G

On his part, Professor Fimbo dealt with the debenture at three levels. These were the

validity of the debenture at the time the respondent decided to auction the godown.

The powers of the debenture holder and the fraudulent acts of the appellant

company.

With regard to the status of the debenture at the time the godown was being H

auctioned by the respondent, Professor Fimbo submitted that it was still in force. He

conceded that the debenture was not registered, but added that it was not registrable

under s 8(2)(d) of the Registration of Documents Ordinance Cap 117 because a

debenture does not create a trust, and ss (2)(k) of the same Ordinance excludes all

documents relating to land from registration under the I

1997 TLR p88

MFALILA JA

A Ordinance. The only law, he said, which requires registration of debentures is the

Companies Ordinance Cap 212 under s 80, and that the consequences of nonregistration

are listed in s 79. But, he added, the only way in which this debenture

could be extinguished or brought to an end was through the conditions B in para 17

being satisfied and that there is no evidence indicating that these conditions were

satisfied, hence in his submission, the debenture was still subsisting at the time the

respondent decided to auction the godown under it.

C Regarding the powers of the debenture holder, Professor Fimbo conceded that no

receiver or manager was appointed and that under the terms of the debenture, the

respondent could not exercise the power of sale directly, but he urged this court to

accept the Trial Judge's justification of the respondent's direct exercise of the power of

sale, namely that it was exercising its professed power of sale as lender and that this

professed power of sale exercised through a public auction, is protected by operation

of the doctrine of estoppel. D

Lastly, regarding the appellants' fraudulent acts, Professor Fimbo painted the

following picture of the appellant's conduct and actions which he said were

fraudulent and that therefore the subsequent sale of the godown by the appellant to

the second defendant was void. He said that the appellant issued a debenture to E

the respondent on the security of which the respondent lent moneys to the appellant.

After completion of this agreement for an overdraft facility secured by the debenture,

the appellant behaved in the following manner.

F Firstly, it failed or neglected to register the debenture with the Registrar of

Companies. Secondly, the appellant failed to hand over title deeds to the respondent

of the properties charged by the debenture. Thirdly, the appellant suffered distress by

the Income Tax Department and upon the sale of its motor vehicle in satisfaction of

this distress, the appellant deposited with another bank, CRDB, the proceeds of such

sale contrary to the provisions of para 4 of the G debenture which provided that

during the continuance of that security (the debenture), the respondent would be

appointed and act as the sole banker of the appellant. Fourthly, that the appellant

failed to pay the loan after receiving notices from the respondent. Lastly, that even

after learning of the sale of the godown H through public auction; sending its

officials to the auction and informing its customer of this sale, the appellant still went

ahead not only with the sale of the godown to the second defendant, but actually

proceeded to execute a deed of transfer in its favour. In addition, Professor Fimbo

went on, at the hearing of Civil Case No 18 of I

1997 TLR p89

MFALILA JA

1994, the appellant committed another act of fraud, in that it concealed from the A

High Court the act of transfer of the godown to the second defendant. By concealing

vital information from the court, Professor Fimbo submitted, the appellant was

defrauding it. Quoting a decision of this court in Mtumwa Rashid v Abdallah Idd and

Another (4), Professor Fimbo asserted that a transaction like the B one in the

present case, which is tainted with fraud, is void and should be set aside. On this

principle, he urged this court to set aside the sale and transfer of the godown by the

appellant to the second defendant.

In our view, these strongly opposed positions can only be resolved by the court C

applying the relevant provisions of the law. The debenture Exhibit P1 was not

registered both under the Registration of Documents Ordinance Cap 117 and the

Companies Ordinance Cap 212. The effect of this non-registration according to Mr

Rwayemamu was to render the debenture ineffectual leaving the respondent's loan to

the appellant unsecured. Section 9 of the Registration of Documents Ordinance

provides as follows: D

`9. No document of which the registration is compulsory shall be effectual to

pass any land or any interest therein or render such land liable as security for the

payment of money, or be received as evidence of any dealing affecting such land

unless and until it has been E registered.'

Professor Fimbo's answer to this was that this provision cannot invalidate the

debenture because it was not registrable under Cap 117 s 8(2)(d) thereof, as it did F

not create a trust and that it was also excluded by the provisions of ss (2)(k). We

agree, and that for that reason, the debenture's effectiveness cannot be determined by

s 9 of the Registration of Documents Ordinance Cap 117. But the debenture was most

certainly compulsorily registrable under the Companies Ordinance. Section 80

thereof provides as follows: G

`80 (1) -- It shall be the duty of a company to send to the Registrar for

registration the particulars of every charge created by the company and of the issue of

debentures of a series, requiring registration under the last foregoing Section (s 79)

but registration of any such H charge may be effected of the application of any

person interested therein.

(2) Where registration is effected on the application of some person other than

the company, that person shall be entitled to recover from the company the amount

of any fees properly paid by him to the registrar of the registration . I

1997 TLR p90

MFALILA JA

AI (3) If any company makes default in sending to the registrar for registration

the particulars of any charge created by the company, or of the issues of debentures of

a series requiring registration as aforesaid, then, unless the registration has been

effected on the application of some other person, the company and every director,

manager, secretary or other person, who is knowingly a party to the default, shall be

liable to a fine not exceeding twenty thousand shillings for every day during which

the default continues.' [emphasis is ours] B

And s 79 provides as follows

C `79 (1) -- Subject to the provisions of this part of this Ordinance, every charge

created after the fixed date by a company registered in the territory and being a

charge to which this section applies shall, so far as any security or the company's

property or undertaking is conferred thereby, be void against the liquidator and any

creditor of the company, unless the prescribed particulars of the charge, together with

the instrument, if any, by which the charge is created or D evidence, or a copy

thereof verified in the prescribed manner, are delivered to or recovered by the

registrar for registration in a manner required by this ordinance within forty two days

after the date of its creation, but without prejudice to any contractual obligation for

repayment of the money thereby secured, and when a charge becomes void under

this section the money secured thereby shall immediately become payable. E

(2) This section applies to the following charges.

F (a) A charge for the purpose of securing any issue of debentures.

...

...

...

...

(f) A floating charge on the undertaking or property of the company.' G

This section then applied to the debenture Exhibit P1 issued by the appellant.

Professor Fimbo conceded that the debenture Exhibit P1 was required to be registered

under s 80 of the Companies Ordinance and that the relevant penalities for default are

spelt out in s 79, but he submitted that despite this non-compliance H with s 80, the

debenture was still in force because, in his submission, the only way in which this

debenture could be brought to any end was through the realisation of the conditions

in para 17 of the debenture and that there is no evidence that the conditions in that

paragraph had been satisfied. We appreciate the ingenuity of the argument, but with

respect it has no validity. A private agreement I

1997 TLR p91

MFALILA JA

cannot replace the clear terms of the law of the land. No one is allowed to contract A

out of the law. Sections 80 and 79 of the Companies Ordinance, are quite clear as to

the registration of charges and the consequences of non-registration, that if the

charge is not registered within forty two days, it becomes void, and the loan so

secured becomes immediately payable. Therefore, since this debenture was not B

registered under s 80 within forty two days, it became void at the end of that period.

The respondent's overdraft facility became unsecured, the debenture as it were passed

out of existence. All that the respondent was left with was his contractual rights to

recover the debt under ordinary civil litigation. When therefore C the respondent

embarked upon the exercise of its purported power of sale under the debenture, and

sold the godown through a public auction, it had no such right of sale, it had no

interest in the godown which it could pass to any buyer. The sale of the godown by

the respondent was null and void and therefore no interest passed to the buyer. D

But even if the debenture Exhibit P1 had been properly registered and was valid at

the time of the sale of the godown by the respondent, it would make no difference on

the validity of the sale by the respondent, because, under the debenture the

respondent had no direct power of sale. All that the debenture provided was for the

E appointment of a receiver in the event of a default. The receiver would then act in

the interests of both the lender and the borrower. The respondent could not act as

receiver under the debenture. As Katiti, J remarked in a ruling in Civil Application

No 18 of 1994 relating to the same subject matter: F

`the defendant (present respondent) reserved itself (sic) a blank cheque, to

recover its money ie appoint itself a prosecutor, judge, pass judgment/decree execute

the same, initiate the public auction and pocket the proceeds thereof'. G

In his submission, Professor Fimbo was aware of this difficulty. As indicated earlier,

he conceded that no receiver was appointed in terms of the debenture, nevertheless,

he urged this court to agree with the Trial Judge's justification of the respondent's

action, namely, that it was properly exercising its professed power of H sale. This

may be so, but if the respondent had any power of sale, professed or otherwise, such

power could only be derived from the debenture which spelt out the mode of

exercising it namely through a receiver duly appointed. The respondent had no direct

power of sale which it purportedly exercised in this case. In the circumstances, the

respon- I

1997 TLR p92

MFALILA JA

A dent had no interest in the godown which it could pass to the purchaser at a

public auction. The sale was therefore null and void. But as we have already found,

the debenture had already been rendered void at the time of the sale of the godown

by public auction. We therefore agree with the complaint in ground 3 of B the

memorandum of appeal that the learned Trial Judge erred in law and fact in holding

that the debenture was valid for the 1993 of 1994 loan. It was rendered void after

forty two days for non-registration.

We said earlier that this was the controlling ground of appeal, because the way this

ground is resolved would effect the outcome of the appeal. It would affect the C

determination of the complaint in ground one namely whether the sale and transfer

of the godown by the appellant to the second defendant was legal. The Trial Judge

ruled that it was not in that it was tainted with fraud. But this finding D was based

on the premise that the debenture was valid and subsisting at the time the two sales

by the respondent and the appellant were undertaken and concluded. Since we have

found that the debenture was already void at the time of the two sales, the godown

was not in any way encumbered as the respondent's loan was unsecured, the

appellant was free to deal with it in any manner it wished. There could be no fraud in

the appellant selling its unencumbered property or E depositing the proceeds of any

such sale in any bank it wished, since the debenture which restricted its banking

transactions to the respondent was no longer in existence. Hence the instances of

fraud enumerated by Professor Fimbo against the appellant have no relevance. We

therefore say that the sale and transfer of the godown by the appellant to the second

defendant was perfectly legal. F

Our resolution of the complaint in ground 3 also effectively determines the complaint

in ground 5 that is whether the respondent was entitled to sell the godown and pass

the title to the purchaser at the public auction. The learned Trial G Judge found that

he had such right and title, but we have already held in the course of determining the

complaint in ground 3 that the respondent was not entitled to sell the godown and

had no title to pass to the purchaser. With these findings, the complaints in grounds 4

and 6 automatically fall away, ground 2 was abandoned. However, we would like to

say in connection with the complaint in H ground 6 that we agree with it. The Trial

Judge was wrong to grant reliefs which were not asked for in the pleadings, namely

the rectification of the register and the registration of the purchase at the public

auction.

Before we end, we would like to point out that the respondent I

1997 TLR p93

MFALILA JA

found itself in this predicament largely through the ineptitude of its legal A

department. For instance, how could the respondent's legal department sit idly by

without monitoring the security of the loan the respondent had advanced to the

appellant? The respondent's legal department was either negligent or incompetent,

for we cannot see how they could have failed to ensure that the appellant complied

with s 80 of the Companies Ordinance, or taken steps themselves and registered B

the debenture as they are empowered by ss (1) of that section, because the respondent

was surely `a person interested therein'. After such registration, the respondent could

then have compelled the appellant to comply with s 83 of the Ordinance that is

endorsing the certificate of registration on the debenture. C

The result of our findings on grounds 1, 3 and 5 is that this appeal succeeds. We allow

the appeal and set aside the judgment and order of the High Court. The appellant will

have its costs of this appeal and those in the court below. We also allow costs for two

Counsel as well as the preparation of the record because if the D record was

defective or incomplete, the rules allowed the respondent to file a supplementary

record. The costs so incurred would then be considered. E

1997 TLR p93