KENYA: HIGH COURT RULES A CREDITOR CANNOT SEEK RECOVERY AGAINST A GUARANTOR AFTER PURCHASING THE CHARGED PROPERTY OF A CHARGOR
The High Court has, in a recent decision issued in Insolvency Cause No. E010 of 2021 – Home Afrika Limited v Ecobank Kenya Limited, held that a creditor is precluded by section 97(1) as read together with 97(5) of the Land Act, 2012 from pursuing enforcement action against a guarantor if the chargee had purchased the charged property pursuant to the leave of the court.
By way of a summary of the facts of the case, Ecobank Kenya Limited (the Bank) sought and was granted permission by the court to purchase the charged property through a private treaty as previous auction attempts had been unsuccessful.
Afterwards, the Bank pursued Home Afrika Limited (Home Afrika), a guarantor, for the debt and issued a statutory demand for payment against Home Afrika. Home Afrika then filed an application challenging the legality of the statutory demand on the grounds that the debt had been wholly settled as the Bank had obtained leave to realise its security in separate court proceedings. Home Afrika argued that its obligation as a guarantor of the debt owed by Moru Ridge, therefore, fell away and therefore asked for the statutory demand to be set aside.
In its response, the Bank argued that Home Afrika had guaranteed to pay, on demand, all money and discharge all obligations and liabilities owed to the Bank by Moru Ridge through a guarantee and that the guarantee remained enforceable because the security held by the Bank had not been sold.
The Court set aside the statutory demand issued against Home Afrika and in so doing, relied on an interpretation of sections 97(1) and 97(5) of the Land Act as a basis for finding that the Bank was not entitled to any further compensation if it could not recover the sums advanced during an exercise to sell the charged property. The Court was of the view that the Bank could not pursue Home Afrika for the debt as the court had permitted it to purchase the charged property to settle the debt owed by Moru Ridge.
In essence, the finding of the court was that a statutory demand may be set aside where the creditor holds security in respect of a debt claimed.
What this means for you
The position in law in Kenya in respect of the realisation of securities is that a chargee has the right to seek enforcement against a guarantor and the chargor whether simultaneously or otherwise. A chargee is under no obligation to first seek recovery against the chargor before seeking enforcement against a guarantor. That position was upheld by the Court of Appeal in a decision which can be found here.
It is for this reason that we consider that this recent High Court decision does not represent the correct position in law. Having said that, the decision does create the risk that similar decisions may be made by the courts if faced with similar facts.
In this regard, our advice is that lenders need to carefully review their strategy prior to commencing recovery or realisation of securities, to avoid similar bottlenecks. This means that it would, for example, be crucial to ensure that the security provided by a principal debtor would be sufficient to facilitate recovery action, more so when forced sale values are considered. Chargees should also ensure that their standard lending documents expressly state that a guarantor is a principal debtor and bears equal liability with respect to repayment of the debt.
Another option to consider in mitigation of the risks posed by the ramifications of this court decision, is to pursue both guarantors and principal debtors simultaneously.
Finally, it would appear that filing liquidation proceedings against guarantors may not be a viable recovery solution, as statutory demands can be set aside by the court if the debt is disputed or for other reasons.