Standard Chartered Financial Services Limited vs. Manchester Outfitters Limited and others (Petition No. 3.012 of 2024) (being an appeal from the Judgement of the Court of Appeal at Nairobi (Makhandia, Kantai & Nyamweya. JJ.A) delivered on 16th December, 2022 in Civil Appeal No. 88 of 2000)
Introduction.
The Supreme Court of Kenya recently delivered a judgment concerning the validity of security instruments when loan facilities change. Specifically, the Supreme Court had to determine whether a financier holding securities (such as a charge or debenture) is legally required to register fresh securities whenever a subsequent advance is made, or if the existing securities remain valid so long as they have not been formally discharged. Additionally, the Supreme Court examined whether a borrower is discharged from their obligation to repay a loan simply because the borrowing might not have been secured as contemplated by the parties.
What were the factual circumstances that led to this litigation?
The history of this case spans nearly 35 years. In 1982, Standard Chartered Merchant Bank, London, advanced a Euro currency loan to Manchester Outfitters (the 1st Respondent), secured by a guarantee from the Appellant (Standard Chartered Financial Services) and a debenture and legal charges over properties created by Manchester Outfitters.
In 1986, the Appellant took over the loan, settling the amount with the London bank, and converted the facility into a local currency loan of KES. 9,000,000.00. When the loan fell into arrears, the Appellant appointed receivers and managers based on the original 1982 loan agreements. Manchester Outfitters sued, arguing that the 1986 localised loan was a fresh facility that required new securities, and that the original 1982 securities applied only to the Euro currency loan.
Did the Supreme Court agree that fresh securities were necessary for the 1986 loan?
The Supreme Court ruled that a financier is not required to register fresh securities every time a new advance is made if the existing securities remain valid and undischarged. The Court held that the loan agreements executed in 1982 operated as continuing securities. Although the Euro currency loan was settled, the security instruments themselves were never formally discharged in accordance with the law. The Supreme Court relied on the principle of continuing security which means that a security instrument remains valid to secure fluctuating advances or future borrowings until it is formally discharged, even if the specific account hits a zero balance at some point.
Further, the Supreme Court grounded this in the repealed Companies Act (Cap 486) and Registered Land Act (Cap 300), noting that a debenture or charge subsists until a formal memorandum of satisfaction or discharge of charge is registered. The Supreme Court emphasized that there is no automatic discharge of a security instrument merely because a debt is paid, the formal process of cancellation in the register is mandatory.
The Court of Appeal previously ruled that the lack of new registration invalidated the receivers’ appointment. Why did the Supreme Court overturn this?
The Court of Appeal of Kenya had argued that because the 1986 facility letter stated it superseded previous agreements, the old securities were abandoned, and the failure to register new ones left the loan unsecured. The Supreme Court rejected this, stating that the Court of Appeal erred by ignoring the statutory requirements for discharging securities. The Court clarified that the localisation of the loan merely replaced the lender, Standard Chartered took over from the London bank but the parties intended the original security instruments to continue covering the debt.
If a loan turns out to be unsecured, can the borrower refuse to pay?
The Supreme Court was firm on this point, a borrowing that is not secured does not discharge the borrower from the obligation to repay. The Supreme Court distinguished between the debt (the personal obligation to repay) and the security (the accessory that provides a remedy in case of default). Even if the security were found to be invalid or non-existent, the contract to borrow money imposes a binding legal and obligation to repay. The Supreme Court noted that Manchester Outfitters admitted to receiving the funds and defaulting, meaning they could not escape liability by merely citing a lack of security.
How did the principle of “Unjust Enrichment” influence the judgment?
The Supreme Court held that allowing the borrower to keep the borrowed funds and retain the security without repayment would amount to unjust enrichment. The principle presupposes that if a defendant has been enriched at the plaintiff’s expense, and it would be unjust to retain that benefit, the law must intervene. The Supreme Court observed that the Court of Appeal’s decision effectively allowed the borrower to keep both the money and the securities, which was an inequitable outcome.
Conclusion.
The judgment safeguards certainty in commercial lending. It protects lenders from the impractical burden of re-executing and registering fresh securities for every single advance or adjustment to a credit facility. It establishes that unless a borrower follows the strict statutory procedure to formally discharge a security, that is, registering a memorandum of satisfaction, that security remains a valid encumbrance available to secure subsequent debts.
This article builds on our previous article, linked here.
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