High Court allows banks to go after guarantors
The High Court of Kenya has ruled that banks can go after guarantors in case a debtor fails to clear a loan.
The High Court of Kenya has ruled that banks can go after guarantors in case a debtor fails to clear a loan.
This decision was from a case involving a bank and a hotel. The hotel and another company defaulted on loans obtained from the bank in 2012 and 2015, totalling Ksh231 million, and they were later restructured under a 2017 Supplementary Term Loan Agreement.
In the signing of the loan, the hotel’s assets were signed as security, and two of its directors were guarantors.
Later on in 2021, they signed a deed of settlement where they agreed that the hotel was to pay approximately Ksh321 million, but the hotel did not honour the agreement.
Previously, the bank attempted to recover the debt by advertising the hotel property for sale on three occasions, but the auctions were unsuccessful. Following these failed attempts, the bank filed suit against the directors as guarantors to recover the outstanding sum.
The defendants argued that, first, a previous court ruling about the hotel already settled this case, so it can’t be brought up again. Secondly, they claimed that any guarantees they signed don’t count because the loan terms were changed.
They further argued that targeting them personally was wrong, for the bank had not exhausted all recovery avenues.
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In his judgment, Judge Peter Mulwa disputed the directors’ arguments, stating the ruling given earlier involved only two parties, that is, the bank and the hotel.
Additionally, he noted that guarantees are legally binding and are enforced once the borrower fails to pay the loan, and so the bank could still go after the guarantors even if the bank tried to sell the properties to recover the debt.
“The liability of a guarantor survives settlements or restructuring arrangements with the principal debtor unless expressly discharged,” the judgment stated.
The court later found no proof that the guarantors’ responsibilities had been unfairly affected or damaged.
In addition to that, the court held that the bank was entitled to recover approximately Ksh321 million from the guarantors, along with interest at court rates from the date of filing until full payment, and the guarantors had to bear the costs of the suit.
The request for general damages for loss of business from the defendants was denied, the court arguing that contract law does not allow such claims.
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