Ruling will make banks shy away from lending

Jubilee Secretary-General Raphael Tuju

Jubilee Secretary-General Raphael Tuju.

Photo credit: File | Nation Media Group

The Court of Appeal Ruling delivered on November 20 in the consolidated appeal filed by Alma Tuju, Mano Tuju, Raphael Tuju and Yma Tuju must cause enormous alarm to commercial banks.

In the ruling, the court overturned the High Court decision where the appellants had failed to convince the judges to stymie all proceedings against them, arising from their failure to service a loan given to Dari Ltd, of which they were directors and in respect of which they had given personal guarantees.

The genesis of the matter was a loan which Raphael Tuju as the Director and Chairman of Dari Ltd, had sought and obtained from the East African Development Bank for purposes of projects proposed by the company.

The company defaulted in repaying the loan as long ago as 2016 and the bank moved to realise securities which had been issued by the company and its directors, which included personal guarantees.

Insolvent

Part of the remedy open to the bank was to declare the directors insolvent if they failed to honour the guarantees. The bank issued insolvency notices against the directors, requiring them to make the payments within the prescribed statutory period.

When the guarantors failed to comply with the notices, the bank enforced them. It also appointed receivers pursuant to the terms of the Debenture signed by both parties.

The guarantors tried to stop the proceedings against them in the High Court on the grounds that they were part of proceedings which had been stayed by the Court of Appeal, arising from the same lending. The High Court dismissed their plea, thereby precipitating an appeal.

In its decision, the Court of Appeal not only stayed the proceedings and enforcement of the statutory demand notices dated January 20, 2020 issued against the guarantors pending the hearing and determination of the appeal before them but, more significantly, gave no condition whatsoever to be met by the guarantors upon the stay being granted.

In the appeal to which the court made reference, a stay of proceedings had been issued on condition that the company deposit the sum of Sh50 million in a joint interest generating account held by the advocates of both parties.

The stay of proceedings in these circumstances does not take into account the fact that the debt to the bank remains unpaid and continues to accrue interest.

Due to the inundation of the case load in the courts, appeals do not get heard quickly and so there is no incentive for a recalcitrant borrower to have their proceedings concluded expeditiously.

It is also true that the longer it takes for the legal issue to be resolved, the more likely it is for whatever security that may have been given by the borrower for the borrowing will be diluted, such that even when it is eventually sold in settlement of the debt, the proceeds would be insufficient to meet the debt.

The Court of Appeal has also watered down the efficacy of guarantees and debentures as securities, as these are normally independent contracts from loan agreements, which can be enforced separately and simultaneously upon default by borrower.

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