The High Court recently delivered its judgement in Home Afrika Limited vs Ecobank Kenya Limited (Insolvency Cause Number E010 of 2021), determining that statutory demands towards Guarantors may be set aside if the creditor holds security from the principal debtor in respect of a debt claimed by the demand.

A Guarantor is a natural and/or legal person who undertakes repayment of a loan facility inclusive of any interests, charges or additional costs, where the principal debtor defaults on the facility. Additionally, Deeds of Guarantees and Indemnities are binding contracts as long as they are signed by the named Guarantors. In a typical loan transaction, the Creditor will offer a loan facility to a Debtor and for additional security, the Creditor will require the Debtor to provide a Guarantor to ensure repayment of the loan facility.

In this case, Ecobank Kenya Limited (“Ecobank”), the creditor, offered a loan facility to Moru Ridge Limited, the debtor, which included Home Afrika Limited as its guarantor, in this loan transaction. Upon Moru Ridge Limited’s default of the loan facility, Ecobank proceeded to recover the debt through the statutory power of sale, which allows creditors to sell the security, (Moru Ridge Limited’s property) in this case by way of auction to recover the debt. Unfortunately, Ecobank was unsuccessful in selling the debtor’s property and the property remained in its custody.  Thereafter, Ecobank served a Statutory demand notice to Home Afrika Limited as the guarantor in hopes of recovering the accrued debt.

Ecobank argued that the Chargee’s statutory power of sale, under section 97 of the Land Act,2012, does not discharge the Guarantor’s liability to ensure repayment of the defaulted loan facility. On the other hand, Home Afrika Limited maintained that Ecobank had obtained leave to sell the security therefore settling the debt owed in full and extinguishing the Guarantee held by it.

The High court considered the issue raised by the parties on whether statutory demands may be set aside if a Creditor holds a security and can recover the sum owed.

The Court made the finding that under section 97(5) of the Land Act, 2012, the Creditor/Chargee is not entitled to compensation from the debtor or former debtor or any guarantor if it’s unable to recover the debt owed through the power of sale. Therefore, the Court ruled in favor of Home Afrika Limited.

Conclusion.

This decision sheds clarity to Guarantors engaged in loan transactions in cases where the Creditor holds an existing security from the Debtor that may be sold off to recover the sum owed and has obtained leave to do so. In such cases, the Guarantor’s liability is extinguished and the Creditor should not require the Guarantor to repay the defaulted loan if the Creditor is unable to sell the security.

The case in detail is accessible here.

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