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Legal friendly loans given on strength of borrowers
2005-05-20 07:53:54
By Guardian Reporter
Having a written agreement with a borrower makes all the difference in the world when a dispute arises, writes Anthony Njoroge.
Most adults have at one time or another had to borrow money to meet an immediate financial need.
One can either borrow from a bank or other financial institution, a Sacco, an employer or from friends and relatives.
Financial institutions and employees usually take measures to protect themselves and ensure the borrower can afford to service the loan.
Many people have, therefore, developed an informal network of friends, colleagues and relatives from whom they borrow money when in a financial fix.
These friendly loans are often given solely on the strength of the borrower’s verbal promise to repay the money.
There is neither an agreement signed nor security for the loan exchanged.
Prudent individuals, however, insist on some sort of written evidence or security for the loan.
This ensures that in the event the borrower defaults in repaying the loan, the lender has some evidence to rely on in pursuing the debt.
Companies also experience cash flow problems and resort to seeking friendly loans from other companies.
They, like individuals, may also default in repayment of the loans leading to conflict between the borrowing company and the lender.
An example of such a conflict is set out in the Court of Appeal case of Geometra (EA) Ltd-v Roadsea Link Ltd [2001] East Africa Law Reports at page 376.
Roadsea Link Ltd sued Geometra (EA) Ltd in the High Court claiming for K.shs215,000, being money it had lent Geometra.
Roadsea's case was that Geometra had run short of money and through its Managing Director, one Alfred Lustenberger, approached Roadsea for a friendly loan.
Alfred Lustenberger spoke to Roadsea's Managing Director Mr SR Shah, who then obtained Sh215,000 in cash from Roadsea’s office manager, one Joseph Kibe Mungai, and gave it to Lustenberger.
In exchange, Lustenberger gave Shah a cheque issued by Geometra (EA) Ltd for the same amount but the date and payee’s name were left blank.
When Geometra (EA) Ltd failed to pay back the money as promised, Roadsea had the cheque dated and its name inserted as payee.
The cheque was then presented to the bank for payment.
It was dishonoured whereupon Roadsea sued Geometra.
In its defence, Geometra admitted that it did issue a cheque for Sh215,000 upon the request of one Alfred Lustenberger.
Geometra, however, insisted that the loan given was a personal loan from Mr Shah to Lustenberger and that it (as a company) never received any money.
Lustenberger's explanation as to why the cheque was issued to Roadsea Ltd came out during his testimony when he stated:'I have seen this cheque before. I am the one who issued this cheque as security.
I left it open because it was to be retrieved on payment by me in cash.
I did not put the name of the payee on the cheque as it was not supposed to be banked since mine was a private debt and not the company debt.'
Faced with these two conflicting version the High Court Judge rejected Lustenberger’s account as far-fetched.
On the strength of the cheque and an acknowledgement of indebtedness by Roadsea, the Judge held that the money was lent to Geometra and not to Lustenberger as a person.
Geometra EA Ltd appealed to the Court of Appeal.
Its first complaint was that the trial Judge should have found that the cheque in question had been tampered with or altered contrary to the provisions of section 64 of the Bills of Exchange Act, thereby rendering it inadmissible as evidence.
Geometra's advocate argued that by inserting its name and dating the cheque without Geometra's authority, Roadsea had altered the cheque and could not therefore sue on it.
The Court of Appeal rejected this argument as Roadsea’s actions did not amount to alteration but merely completion of the cheque.
To hold otherwise would be doing violence to the English language.
Geometra then complained that the Judge made a legal error when he found that the money had been lent from Roadsea to them as a company rather than to Lustenberger as an individual.
The Court of Appeal referred to a letter that Geometra had sent to Roadsea in reply to a demand for payment.
The letter was signed by Lustenberger on behalf of Geometra (EA) Ltd and read in part,'We are still blocked (sic) to fulfil our obligation since not all effects are cleared with our bank.
Empty promises from some of our debtors are the reason for the delay but we assure your good office to clear (sic) our outstanding account as soon as possible.
Please bear with us for some more days...'The Court of Appeal noted the use of the possessive pronouns 'we' and 'our' in relation to the debt.
The court found that this letter was conclusive evidence that the money was lent to Geometra and not to Lustenberger as an individual.
Geometra lastly complained that it had not received the Sh215,000 given out by Roadsea.
The Court of Appeal found that the money was borrowed by Geometra and collected by its Managing Director, Lustenberger, who should have passed it on to the company.
If Lustenberger did not hand over the money but converted it to his own use, then that is a matter between Geometra and its Managing Director, Lustenberger.
It was further noted that if Lustenberger seriously believed this was a personal loan, he would have issued his personal cheque and said as much in reply to the letter of demand referred to earlier.
The Court of Appeal dismissed Geometra’s appeal with costs.
* The writer can be reached at thiong'onjoroge@yahoo
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