🔊 Listen: The in duplum rule in Kenya explained (3 min audio summary)
Among the provisions governing lending in Kenya, few matter more in practice than section 44A of the Banking Act (Cap. 488). Known as the in duplum rule, it limits how much a lender can recover once a loan stops performing. For borrowers facing a growing debt, and for banks working out how much they can recover, knowing how the rule works can decide the outcome of a dispute.
This article explains the rule and briefs one of the leading Court of Appeal decisions on it: Kenya Hotels Ltd v Oriental Commercial Bank Ltd (Formerly The Delphis Bank Limited) [2019] KECA 250 (KLR).
What the In Duplum Rule Says
The Latin term “in duplum” comes from “in duplo,” which roughly means “in double.” Interest stops building up on a loan once the accrued interest reaches the amount originally advanced. Section 44A came into force on 1 May 2007 and limits what a banking institution may recover on a nonperforming loan.
The Court of Appeal has explained that the rule serves the public interest. It protects borrowers from lenders who let interest grow to astronomical figures, and it protects the equity of redemption so that charged property does not become impossible to redeem.
Case Brief: Kenya Hotels Ltd v Oriental Commercial Bank Ltd
- Court: Court of Appeal at Nairobi, Civil Appeal No. 252 of 2009
- Coram: Ouko (P), Gatembu Kairu and Kantai, JJ.A
- Date of Judgment: 25 October 2019
Facts
Delphis Bank Limited, the predecessor of Oriental Commercial Bank, gave Kenya Hotels Ltd a bridging loan of KSh 60,000,000. The loan was secured by a Memorandum of Equitable Mortgage dated 3 April 2001 over Land Reference Nos. 6291/1 and 6901. The properties are the site of Lake Naivasha Country Club. The loan was to be repaid by 21 March 2001.
The original titles had been misplaced, so the company deposited copies of the indentures certified by the Registrar of Government Lands. The funds went into the company’s account but were later moved to Block Hotels Ltd, a company linked to its major shareholder.
The company defaulted. In March 2004 it offered to settle with KSh 105 million in two instalments, but it never paid. The bank then filed an originating summons for leave to sell the properties.
Justice Kimaru of the High Court allowed the bank to sell the properties to recover KSh 69,112,319.17, the sum owing as at 9 October 2001, plus interest at 22% per annum until full payment.
Issues on Appeal
The company raised several grounds. It asked the Court to decide whether the suit could proceed by originating summons, whether a valid equitable mortgage had been created, whether the transaction was tainted by illegality, whether the loan was in fact made to Kenya Hotels Ltd, and whether the bank had calculated interest in line with section 44A of the Banking Act.
Holding
On procedure: The Court held that an originating summons is not defeated just because a dispute is complex or contentious, because the trial court can direct that the matter proceed as though it had been started by plaint.
On the equitable mortgage: The Court held that depositing certified copies can create an equitable mortgage in circumstances like these. A certified copy confirms that the original exists, and the borrower itself had explained that the originals were misplaced.
On where the money went: The Court found that the loan was made to Kenya Hotels Ltd, and that what the company did with the money did not affect its debt to the bank.
On the in duplum rule: The company had been in default for about six years by the time section 44A took effect. The majority held that the section was intended to apply retroactively, and that it covers loans made before 2007, including loans that were already nonperforming at that date.
The Court dismissed the appeal except on interest. It directed the parties to compute what was owed strictly under section 44A(6):
- the principal and interest owing on 1 May 2007;
- contractual interest after that date, capped at the amount owing on that date; and
- recovery expenses.
The Court also criticised both sides’ figures. The majority described the competing computations as numbers plucked from the air, and said it could not tell whether the 22% rate had been applied as flat, simple, reducing balance or compound interest.
Dissent
Justice Gatembu Kairu would have dismissed the appeal outright. He reasoned that interest was never an issue at trial, did not appear in the memorandum of appeal, and was raised without the Court’s leave, which in his view amounted to an ambush.
Why the Decision Matters
For borrowers: Where a loan became nonperforming before May 2007, the rule still applies, with the cap calculated from the balance on 1 May 2007. A borrower who believes a lender has exceeded the cap should raise the point clearly in the pleadings and support it with evidence. The dissent shows the risk of raising it late.
For lenders: Clear records matter. The Court could not settle the figures itself because the statements on record were incomplete and the method of calculating interest was not shown. Accurate, well documented statements of account are a lender’s best protection when a recovery is challenged.
For both parties: Courts do not readily let a borrower escape a security it created and benefited from on technical grounds. In the same decision, though, the Court confirmed that the law protects borrowers from interest that grows without limit.
Conclusion
The Kenya Hotels decision confirms that section 44A applies to old debts as well as new ones, and it sets out how to calculate the cap for loans that went bad before 2007. Anyone dealing with a debt recovery, a statutory notice or a disputed loan balance should have the figures checked against section 44A before taking any step.
Speak With Our Banking & Finance Team
If you are dealing with a disputed loan balance, a statutory notice or a lender’s recovery action, our Banking & Finance team can review your loan statements and assess whether the interest charged complies with section 44A of the Banking Act. We also advise lenders on documentation and compliant recovery. Contact us to arrange a consultation.
This article is for general information only and does not constitute legal advice. Readers should seek advice on their specific circumstances.
Sources
- Kenya Hotels Ltd v Oriental Commercial Bank Ltd (Formerly The Delphis Bank Limited) [2019] KECA 250 (KLR), Court of Appeal at Nairobi, Civil Appeal No. 252 of 2009
- Banking Act (Cap. 488), Laws of Kenya, section 44A
- Mwambeja Ranching Company Limited & another v Kenya National Capital Corporation [2019] eKLR
Case law and legislation are available on Kenya Law.