~ In Duplum Rule vs. Doctrine of Unconscionability ~

In bespoke private credit, venture debt, and informal corporate lending, the absence of strict statutory regulation is often viewed as a commercial advantage. Lenders operate under the assumption that between parties, the sanctity of the contract is absolute. Thus, if a borrower signs a facility agreement with aggressive compounding interest, the courts will not intervene to save them from a bad bargain.

The Court of Appeal’s decision in Kanwal Sarjit Singh Dhiman v Kenshavji Jivraj Shah [2025] KECA 1264 (hereinafter Dhiman) shatters this assumption.

While the judgement ostensibly centers on a private land-backed loan gone wrong, its implications go far beyond the parties involved. Essentially, the decision shows that courts are now actively using principles of fairness to cap the profits of unregulated lenders.

The Banking Act Did Not Apply, But Equity Did

To understand the gravity of Dhiman, we must separate statutory regulation from equitable intervention.

While it is a settled point of law that the strict in duplum rule caps interest accumulation once it equals the principal, under Section 44A of the Banking Act, this statutory ceiling applies exclusively to licensed banks, leaving private equity funds, individual lenders, and the informal credit sector entirely unbound.

In Dhiman, a private lender advanced KES 7 million (of which KES 4 million remained unpaid) at an agreed rate of 36% per annum, compounded quarterly. Over nearly three decades of litigation, that outstanding balance mathematically compounded to an astonishing KES 69 billion.

The lender rightly argued that as an individual, he was not conducting a banking business by stealth, and therefore, the Banking Act, and its statutory limitations, did not apply to him.

The Court of Appeal agreed with this technical defense but struck down the debt anyway. Sidestepping the Banking Act entirely, the Court invoked the doctrine of unconscionability, determining that the sheer disparity between the original principal and the compounded debt shocked the conscience of the court. The contract was declared void, the lender’s title to the security was revoked, and the borrower was ordered to repay only the KES 4 million principal at a standard court rate of 12%.

The Commercial Reality for Alternative Debt Markets

This judgment effectively creates a shadow regulatory framework for the entire credit ecosystem. By using unconscionability to achieve an_ in duplum_-like outcome, the Court has put all non-bank lenders on notice.

1. The Microfinance and Digital Lenders Sector While tier-one banks have long priced in duplum risks into their models, the microfinance sector (both deposit-taking and digital credit providers) often relies on high-velocity, high-yield compounding to offset massive default rates. _Dhiman _establishes that even if your entity is not strictly bound by the Banking Act, a court will look at the mathematical trajectory of your interest. If your standard-form contract creates a _"punitive or extortionate financial consequence" _over time, it is legally fragile, regardless of whether the borrower consented at the outset.

2. Private Equity and Bespoke Credit Facilities

For sophisticated capital providers structuring mezzanine debt, distressed financing, or bridging facilities, the defense of "freedom of contract" is no longer an impenetrable shield. The Court of Appeal emphasized that while they will not rewrite a merely "bad bargain," they will strike down one that is substantively oppressive. A high interest rate designed to reflect extreme commercial risk must now be stress-tested: does the tail-end compounding risk rendering the entire security package void?

3. The Informal Corporate Sector

Inter-company loans, director loans, and joint venture financing structures frequently utilize aggressive default interest rates to force performance. Dhiman illustrates that courts will not hesitate to unravel these structures, disgorge the accumulated interest, and revert the parties to a basic restitution model (unjust enrichment) if the returns look fundamentally disproportionate.

Redefining Debt Structuring

The era of relying solely on the literal text of a loan agreement is over. Commercial certainty now requires lenders to look beyond what is legally permissible at the date of execution, and model what becomes equitably tolerable at the date of enforcement.

Structuring high-yield credit outside the traditional banking sector now requires bespoke mechanisms, such as Built-in interest caps, equity kickers, or periodic rate resets.

Connect with our Finance & Restructuring Partners for a confidential audit of your credit instruments and equitable risk exposure.

                                         ~ Published on 26 March 2026 ~