Thika Coffee Mills has lost its bid to recover more than $253,000 (Sh32.6 million) from a farmers’ cooperative society after the High Court found that its lending model trapped growers in a cycle of debt through a loan arrangement the judge declared harsh, unconscionable and oppressive.
At the same time, Buchana Coffee Growers Cooperative Society lost its counterclaim for $45,212 (Sh5 million) against the miller after failing to prove the losses and damages it sought.
The court ruled that the coffee miller had already recovered substantially all the money it had advanced to the cooperative and could not continue pursuing additional payments.
The dispute arose from a crop advance agreement signed in June 2014 after the cooperative appointed Thika Coffee Mills as its sole miller, crop developer and marketing agent.
Under the three-year agreement, the miller advanced the society $92,392 (Sh11.9 million) at an annual interest rate of 18 percent, with repayment to be made through deductions from coffee sale proceeds. The company also held a lien over all coffee delivered by the cooperative until the debt was cleared.
Triple role
Thika Coffee Mills accused the cooperative and its officials of breaching the agreement by diverting coffee to another processor, Sasini Limited, instead of delivering it for milling and marketing as agreed.
It claimed the diversion deprived it of the security underpinning the loan and sought $253,156, comprising the principal and accrued interest. It also sought an injunction compelling the cooperative to deliver all future coffee harvests until the debt was fully settled.
The miller said the cooperative’s officials allegedly colluded with licensing authorities to obtain movement permits allowing the coffee to be delivered to another entity, effectively depriving Thika Coffee Mills of its investment.
It said that although the defendants acknowledged the debt of $92,392 and promised to pay, they later sought a full waiver of the amount in a letter dated June 12, 2019.
However, the cooperative denied liability and argued that the company had abused its dominant position by acting simultaneously as lender, miller and marketer.
It told the court that the arrangement gave the company complete control over coffee proceeds while forcing the society into repeated borrowing after recovering earlier loans much faster than agreed. It argued that the company’s claim was based on unfair, coercive and unlawful practices.
The court accepted that argument after reviewing the evidence presented during the trial.
“It was not disputed that the plaintiff occupied a triple role of miller, marketer and financier, making them the controller of the entire coffee value chain,” the court said.
It found that the company recovered an earlier loan worth $122,952.88 in 13 months instead of the agreed three years, creating a cash-flow crisis that forced the cooperative to take additional loans.
Debt trap
Titus Ndung’u Machanga, the mills accountant at Thika Coffee Mills, testified that the company had recovered $383,467.57 (Sh49.5 million), comprising principal of $92,392.23 (Sh11.9 million) and interest of $291,575.30 (Sh37.6 million).
He maintained that the cooperative still owed $565,547 (Sh73 million), including the original principal and $473,154.77 (Sh61.0 million) in accrued interest.
“This is clearly outrageous and unconscionable, and it would appear that the structure of the loans was designed to keep the society perpetually indebted,” the judge said.
The court said the evidence showed the company had advanced about $559,093 through nine loans and recovered about $543,022.
It ruled that continuing to pursue another $253,156.79 was disproportionate because the company had already been substantially compensated.
“In my view, this is not a case of a farmer borrowing and refusing to repay, but a case of a powerful miller entrapping a cooperative society in a cycle of debt,” the judge said.
“I am in agreement with the defendants that the interest rate of 18 percent per annum in the coffee sector context, where farmers receive proceeds annually rather than monthly, was predatory and designed to keep the society permanently in debt,” the judge added.
The court also found that the company knew the cooperative’s borrowing limits required approval by members but still advanced loans exceeding those limits without producing evidence that the necessary resolutions had been obtained.
It further found that the miller exercised extensive control over coffee movement permits and coffee proceeds while recovering loans from farmers who had not benefited from the financing programme.
Failed counterclaim
The cooperative had sought to rescind the agreement, demanded accounts and claimed damages, arguing that the company converted individual farmers’ liabilities into debts owed by the entire society and failed to account for coffee sales and returned farm chemicals.
The court rejected those claims, saying the defendants had not produced sufficient evidence to justify damages and had themselves accepted advances from the company.
In their statement of defence, the cooperative said the miller introduced an Improve Production, Improve Quality (IPIQ) programme for farm chemicals and inputs, under which 483 members subscribed and received $122,952 worth of chemicals.
The cooperative said that instead of recovering the loan over the agreed three years, the miller recovered it in full during the first year by charging the society’s account.
The ruling comes as the government audits historical debts owed by coffee cooperative societies as part of wider reforms in the sector.
Cooperatives Cabinet Secretary Wycliffe Oparanya recently said only verified liabilities would qualify for settlement after an audit found that many claims could not be substantiated.
