The High Court has cleared KCB Group to auction Cysuites Apartment Hotel, a luxurious serviced apartment hotel owned by Cytonn Investments, over a defaulted Sh425.6 million loan.
Justice Fridah Mugambi said that Cytonn had no legal standing to block the bank from auctioning the property because the registered owner is Wasini Resorts Ltd.
The investment firm challenged the sale as a shareholder in Wasini Resorts Ltd through Cytonn Investment Partners Twenty LLP.
But the court ruled that a shareholder cannot stop a lender from enforcing security over land owned by the borrowing company.
The court row also sucked in the government official receiver, which had frozen several assets, including Cysuites Apartment Hotel, in the race to recover more than Sh14 billion owed to about 4,000 investors.
Cysuites, which is located on Church Road, Westlands, Nairobi and registered under Wasini Resorts, has six blocks with serviced apartments.
Cytonn Investment Partners Twenty LLP bought one million shares in the company under a 2018 share purchase agreement and proceeded to establish Cysuites Apartment Hotel on the land.
The title was used to secure a $3.2 million (Sh425 million) loan borrowed by Wasini Resorts at the time Cytonn Investment Partners Twenty LLP purchased the shares in April 2018.
Cytonn Investment Partners Twenty LLP purchased the shares using Sh1 billion funds acquired from its co-special purpose investment vehicle Cyttonn High Yields Solutions (CHYS LLP), which is in liquidation and subject of a separate court fight with the official receiver.
CHYS LLP was one of Cytonn’s investment vehicles that raised money from individual investors and financed several real-estate special purpose vehicles (SPVs) before being placed in liquidation in 2023.
According to the official receiver, CHYS advanced Sh1 billion to Cytonn Investment Partners Twenty LLP on April 11, 2018, specifically to finance the purchase of Wasini Resorts shares.
Cytonn Investment Partners Twenty LLP, while not the borrower, argued in court that acquiring one million ordinary shares entitled it to assume Wasini Resorts’ assets and liabilities, making it the beneficial owner of the property and allowing it to challenge KCB’s seizure and auction.
The firm also argued that it negotiated with KCB to restructure the debt, made repayments and remained willing to continue servicing the facilities. It asked the court to block KCB from disposing of the property.
KCB opposed the application, saying only the borrower, Wasini Resorts, could seek relief against seizure and auction. The bank maintained that Wasini Resorts remained a separate legal entity whose assets and liabilities could not be claimed by its shareholder.
The official receiver, Mark Gakuru, who was appointed by the High Court to liquidate CHYS after its administration collapsed, joined the proceedings because CHYS claimed an interest in assets acquired using investors’ money, including the Wasini Resorts transaction.
He argued that Cytonn Investment Partners Twenty LLP merely acted as a vehicle through which funds were used to buy shares in Wasini Resorts and therefore had no independent proprietary interest in the property.
Justice Mugambi agreed with the bank. She said the law recognises a company as separate from its shareholders and that buying shares does not transfer ownership of company property. The court ruled that the property belonged exclusively to Wasini Resorts, and its liabilities are borne by the company itself.
“Shareholders are entitled only to a share in the profits while the company is a going concern, and to a distribution of surplus assets upon winding up. They cannot arrogate to themselves ownership rights over the company’s assets during its subsistence,” the court said.
It also found that the share purchase agreement relied upon by the applicant was not part of the charge documents and that KCB neither consented to nor participated in that agreement.
“It is manifest that the share purchase agreement between the applicant and Wasini was neither noted in the charge document nor was the bank a party to it,” it said.
The court noted that Wasini Resorts remained solely responsible for repaying the facilities and that statutory notices had been issued to it as the borrower. Court records showed the outstanding balance on the US dollar facility stood at $3,299,781.18, equivalent to about Sh425.6 million, as of September 24, 2024.
Justice Mugambi rejected the argument that ongoing restructuring discussions prevented KCB from enforcing its security.
“A chargor cannot compel a chargee to accept a restructuring arrangement in lieu of repayment. The right to restructure is not a statutory entitlement but a matter of contractual negotiation,” she said.
The court also dismissed claims that preservation orders issued in separate insolvency proceedings involving Cytonn High Yields Solutions LLP barred KCB from seizing the assets.
Those preservation orders were issued in January 2023 after the High Court placed CHYS in liquidation and ordered several Cytonn-linked development projects preserved while the official receiver traced investor funds and recovered assets for creditors.
Justice Mugambi held that the preservation orders were designed to protect assets in the liquidation process but could not override the rights of a secured lender holding a valid charge over the property.
“The law is settled that a secured creditor is entitled to exercise its rights under the security document or statute in the event of default,” the court said.
Court records from the CHYS liquidation lists Cysuites as one of several Cytonn SPV developments under preservation in the battle with the official receiver.
Other properties locked in the court fight are The Alma, Riverrun, Ridge, Taraji, Applewood, Kilimani and Athi River, which the official receiver seeks to recover for creditors and investors.
The case is one of several disputes arising from the collapse of Cytonn High Yields Solutions LLP, an investment vehicle placed into liquidation in 2023.
Courts have since been asked to determine competing claims by banks, investors, home buyers and the official receiver over numerous Cytonn-backed property projects.
