EADB losses bid to recover Sh1.3b from Kenya Bus Service Mombasa

It started with three Mombasa-based tycoons, Mohamed Jaffer, Minoj Shah and Amritlal Devani (deceased), standing as principal guarantors to a Sh126.75 million loan issued to Kenya Bus Service (KBS) Mombasa by East African Development Bank (EADB) in 1998.

Close to three decades later, EADB is now seeking to recover Sh1.3 billion in accrued interest on the principal amount from Jaffer and Shah after KBS Mombasa allegedly defaulted on the loan.

According to EADB, they agreed to advance a loan of Sh126,750,000 in various currencies equivalent to Special Drawing Rights (SDR) to KBS on October 1, 1998, on condition that Jaffer, Shah and Devani stand as personal guarantors.

In his testimony, Shah told Justice Kizito Magare that in spite of claiming up to Sh1,290,000,000 ($10,000,000), there are no records and termed the claim speculative.

Shah, who was director and shareholder of KBS Mombasa, said that he executed personal guarantees as security for the loan for the purchase of 23 new Sanayi Buses at a cost of Sh116,610,000 and workshop equipment for Sh10,140,000

The director said he signed the loan agreement and the guarantee and Jaffer, who was the chair of KBS Mombasa, was excluded from the guarantee requirement.

He said the bank released Sh261,418,500 ($2,026,500) beyond the amount guaranteed and channelled it to purchase 24 BMC buses instead of the intended 23 Sanayi buses.

Shah said that thereafter, the company experienced serious problems with BMC buses supplied by CMC, leading to operational difficulties and grounding of the buses because of mechanical defects.

He said what was guaranteed was 23 new Sanayi 45-seater buses, but the amount was diverted to buy 24 BMC buses valued at Sh261,418,500 ($2,026,500).

Shah claimed that the bank had unilaterally varied the terms, and the loan was no longer guaranteed.

“The amount disbursed for BMC buses was Sh126,750,000. There was no money left for the workshop agreement under the loan agreement,” said Shah.

He accused EADB of selling their land valued at Sh140,000,000 in 1998 at Sh49.9 million in a vague and opaque process.

He said that the bank auctioned 23 buses as scrap at Sh1,704,640.

The director said the bank failed to account fully for proceeds recovered from securities and receivership and to demonstrate all credits, recoveries, valuation expenses, receiver costs, and sale proceeds.

“There was no account of the 23 buses and other motor vehicles sold, sale of land valued at Sh140,000,000, amounts recovered from receivership and motor vehicles in joint ownership with the company,” said Shah.

He further alleged that the securities to the loan were drawn by an advocate not qualified to practice law in Kenya in accordance with the Advocates Act, a fact that saw the bank’s suit dismissed by Justice Patrick Otieno and later reinstated by the appeal court.

It was submitted that Jaffer and Shah were discharged from obligations in view of the variation of the contract. Shah said that EADB’s conduct was abrasive and discharged Jaffer and Shah from the loan.

However, according to EADB, the businessmen gave their personal guarantees in a form and substance acceptable to the bank to secure the bus company's obligations.

EADB’s principal investment officer Justus Kiragu said that Jaffer, Shah and Devani irrevocably, absolutely and unconditionally guaranteed as primary obligors and not merely as surety to ensure due and punctual payment of the loan with interest, commission, commitment fees and all other charges thereon.

Kiragu said the bank agreed to take a personal guarantee, land as surety and a floating debenture over KBS Mombasa's entire movable assets.

He said that subsequently, after the bus company defaulted in the repayment, the principal and interest accrued to Sh461,615,277 as at February 28 2008.

Kiragu said the loan continued to accrue an interest rate of 12 per cent per annum on the principal amount and six per cent on the arrears from March 1 2003, until payment in full.

The bank said that after selling KBS property to Portside CFS Limited in 2006 for Sh44.9 million, the bus company still owed Sh1,284,983,835 as at March 1, 2009, which attracted a two per cent interest per annum from March 1 2003, until payment in full.

However, Kiragu admitted the bank did not produce a formal statement of account, records relating to recoveries, advertisements, auction processes, receiver expenses, and proceeds from the auction of debenture assets.

Kiragu indicated that the amounts above the loan agreement require a separate agreement; thus, a new agreement requires a fresh appraisal, new company resolutions and fresh securities.

Kiragu said that all the 23 buses were sold as scrap and the amount was not enough to settle the amount owed.

The bank denied being negligent by selling the 23 buses as scrap metal, for Sh1,704,650, subject to the auctioneer’s commission and Sh44,920,003.73 for the land and then came for the guarantors.

However, in dismissing EADB’s suit, Justice Kizito said that in the absence of statements between December 1 1998 and January 6 2005, the court cannot find the case to have been proved.

Justice Kizito said there is no iota of evidence on record showing the bank statement and the account from December 1, 1998, to July 7, 2003, when the claim arose and the suit was filed.

The judge said the bank cannot, in a liquidated demand, just throw figures to the court without even an indication as to when the SDR loan was converted to a dollar account.

He claimed that the figures from January 6 2005 and March 1 2009, were imaginary and have no legs to stand on.

“To make matters worse, the sum of $ 3,578,413.92 was allegedly outstanding as at February 28 2003; there is no indication or documentation as to how the loan amount ballooned to $ 9,961,114.91 in six years,” said Justice Kizito.

The judge noted that the bus company and the bank may have agreed to vary the contract to cover buses and spare parts other than the purchase of Sanayi buses and the funding acquisition of workshop equipment; however, the variation does not cover Jaffer and Shah.

“They are only liable upon the purchase of Sanayi Buses and the funding acquisition of workshop equipment. The two events did not occur; the defendants are not liable to settle the guarantees,” said Justice Kizito.