The Power to Institute a Suit by Guarantor against a Chargor where the Amount Paid by the Guaranteed is in Dispute

Robert Njoka Muthara & Anotrher Vs Barclays Bank of Kenya Limited & Another [2017] eKLR

Court of Appeal at Nyeri

Civil Appeal No. 18 Of 2014

G.B.M Kariuki J, F. Sichale J, & J. Mohammed J

March 3, 2017

Reported by Ribia John & Kakai Toili

Civil practice & procedure –locus standi – locus standi of a guarantor to institute a suit - whether a guarantor had the locus standi to institute a suit on the ground that the guaranteed person had paid the entire amount owed to the bank.

Land law – charges – contract of guarantee – validity of a contract of guarantee – execution of a contract of guarantee by the person guaranteed – whether a guarantee not executed by the person being guaranteed is invalid

Land law – charges – consents - land control board consent – whether a contract of guarantee of a charge which the land control board had not been obtained was valid

Land law-charges – statutory power of sale - exercise of statutory power of sale- statutory notice of sale - whether it was proper for the 1^st Respondent to instruct the 2^nd Respondent to sell the charged property without issuing a statutory notice to the Appellant - Registered Land Act(repealed) section 74

Brief Facts:

The Appellants and the 1^st Respondent had a long standing bank/customer relationship. The 1^st Respondent extended several facilities to the Appellants and to Njoka Tanners Limited (the company) wherein the Appellants were directors as well as the majority shareholders. An overdraft facility of Kshs. 9,000,000/= was issued to the company vide a letter of offer dated May 27, 1998. The same was secured by a guarantee executed by the Appellants and charges registered on various properties belonging to the Appellants.

Later on, the company fell into arrears but fortunately a repayment proposal made by the company was accepted by the 1^st Respondent. The Appellants allege that they learnt on December 17, 2002 that the 1^st Respondent had fraudulently instructed the 2^nd Respondent to sell the charged properties despite the fact that the requisite statutory notice of sale had not been served upon them.

The foregoing instigated the Appellants to file suit. They claimed that the guarantee and the charges were illegal and of no effect; that the guarantee hadn’t been executed by all of the company’s directors and also that no Land Control Board consent was obtained for the said charges. The Trial Court by a judgment dated March 13, 2014 dismissed the Appellants’ suit with costs. The Trial Judge found, inter alia, that the in duplum principle was applicable and directed parties to take accounts in respect of the outstanding amount. She also found that the securities offered by the Appellants were valid.

Issues:

(i)                 Whether a guarantor had the locus standi to institute a suit on the ground that the guaranteed person had paid the entire amount owed.

(ii)               Whether a guarantee was valid if not executed by the person guaranteed.

(iii)              Whether a guarantee for a charge was valid despite no Land Control Board consent being obtained.  

(iv)            Whether it was proper for a chargor to instruct a debt collector to sell charged property without issuing a statutory notice of sale to the guantor of the charge.

Relevant Provisions of the Law:

Registered Land Act Cap 300

Section 74

(1)  If default is made in payment of the principal sum or of any interest or any other periodical payment or of any part thereof, or in the performance or observance of any agreement expressed or implied in any charge, and continues for one month, the chargee may serve on the chargor notice in writing to pay the money owing or to perform and observe the agreement, as the case may be.

(2)  If the chargor does not comply, within three months of the date of service, with a notice served on him under sub-section (1), the chargee may -

(a) appoint a receiver of the income of the charged property; or

(b) sell the charged property:

Provided that a chargee who has appointed a receiver may not exercise the power of sale unless the chargor fails to comply, within three months of the date of service, with a further notice served on him under that subsection.

(3)  The chargee shall be entitled to sue for the money secured by the charge in the following cases only -

(a) where the chargor is bound to repay the same;

(b) where, by any cause other than the wrongful act of the chargor or chargee, the charged property is wholly or partially destroyed or the security is rendered insufficient and the chargee has given the chargor a reasonable opportunity of providing further security which will render the whole security sufficient, and the chargor has failed to provide such security;

(c) where the chargee is deprived of the whole or part of his security by, or in consequence of, the wrongful act or default of the chargor;

Provided that -

(i)                in the case specified in paragraph (a) -

(a) a transferee from the chargor shall not be liable to be sued for the money unless he has agreed with the chargee to pay the same; and

(b) no action shall be commenced until a notice served in accordance with subsection (1) has expired;

(ii)              the court may, at its discretion, stay a suit brought under paragraph

(a) or paragraph (b), notwithstanding any agreement to the contrary, until the chargee has exhausted all his other remedies against the charged property, unless the chargee agrees to discharge the charge.

Evidence Act Cap 80

Section 112

Proof of special knowledge in civil proceedings

In civil proceedings, when any fact is especially within the knowledge of any party to those proceedings, the burden of proving or disproving that fact is upon him.

Words & Phrases

Black’s Law Dictionary, 9th Edition at page 1026

Locus standi  - The right to bring an action or to be heard in a given forum.

Held:

1.      The Court’s role as a first appellate court was to re-evaluate, re-assess and re-analyse the evidence before the trial Court and then determine whether the conclusion reached by the trial Court ought to have stood or not and to give reasons either way.

2.      Locus standi is defined in the Blacks Law Dictionary, 9th Edition as the right to bring an action or to be heard in a given forum. Whether or not the Appellants had the requisite locus standi turned on the nature of their relationship with the 1^st Respondent. The Appellants filed the suit in their capacity as guarantors and as the 1^stRespondent’s customer with respect to the guarantee and the wrongful consolidation of the 1^st Appellant accounts respectively. The consolidation of the accounts related to an alleged breach by the 1^st Respondent of its fiduciary duty to the 1^st Appellant arising from bank/customer relationship. Hence, the 1^st Appellant was properly suited to have instituted that claim as against the 1^st Respondent.

3.      A guarantee by definition is a pledge by a person (guarantor), other than a party upon whom the contractual or other legal obligation is imposed, to the effect that if the party so bound (principal) fails to perform the act in question, the guarantor, will either perform or make good any loss or claim arising from the non-performance. The pledge was ordinarily made to a creditor. The essence was that the guarantor agreed not to discharge the liability in any event, but to do so only if the principal debtor failed to honour his duty.

4.      A contract of guarantee is an accessory contract, by which the surety undertakes to ensure that the principal performed the principal obligations. It had is a contract to indemnify the Creditor upon the happening of a contingency, namely the default of the principal to perform the principal obligation. The surety is under a secondary obligation which is dependent upon the default of the principal and which does not arise until that point.

5.      By its very nature, a guarantee is distinct from the agreement which gave rise to the obligation guaranteed. The principal debtor was neither a party to the guarantee nor considered as one with the guarantor. Consequently, the rights and obligations of a guarantor as against the creditor accrued to him or her from the relationship created by the guarantee.

6.      The Appellants’ obligation was to pay on demand any outstanding amount under the overdraft. As a result, the Appellants’ claim, if any, could only have been on the basis of the terms of the guarantee.

7.      Whether or not the 1^st Respondent purported to sell the charged properties without serving the requisite statutory notice and whether the securities given by the Appellants were valid went to the root of the Appellants’ liability under the guarantee. The Appellants had locus to raise those issues.

8.      Whether  the  company  had  repaid  the  entire  overdraft  called  for  the examination  of  the  terms  of  the  overdraft  agreement  between  the  1^st Respondent and the company. The Appellants were not privy to the said agreement and could not have enforced or based a claim thereunder. It was only the company that could have maintained a claim that it had paid the entire amount under the facility. The Appellants could not have rightly made the said claim on behalf of the company which had a separate legal personality from its directors and shareholders.

9.      Once the Appellants executed the guarantee they assumed the company’s liability under the overdraft in the event of default by the company. Equally, the Appellants could not question the terms of the overdraft which had been negotiated by the company and the 1^st Respondent.

10. The Appellants could not have in their capacity as guarantors questioned the interest charged by the 1^st Respondent. Having voluntarily signed the security documents the appellant had to be taken to have been fully aware of the conditions upon which the security was given, and in particular that the documents did not contain a specific rate of interest, but provided for the interest rate to be determined at the ruling rate for Bank advances in Kenya. By signing, the Appellant and the respondents agreed on a rate of interest to be determined by the Bank, and once the rate of interest was determined as agreed, the Appellant was bound by that rate of interest. The proper party to question or take issue with the interest applied by the 1^st Respondent in the overdraft facility would have been the company.

11. The Appellants were not claiming that their liability under the guarantee had been discharged on account of either the 1^st Respondent committed repudiatory breach of its contract with the company or that the 1^st Respondent acted in bad faith against them or connived with the company in respect of the overdraft facilities and the 1^st Respondent and the company carried out dealings without their consent, which dealings were prejudicial to them. The Appellants stepped into the company’s shoes and were litigating on its behalf to the extent of the issues relating to repayment of the overdraft by the company and the interest applied in the overdraft. The trial Court correctly observed as much but should have gone a step further to strike out the issues advanced on behalf of the company which was not a party. The Trial Judge erred in entertaining and making a finding on the aforementioned issues.

12. The 1^st Respondent intended to exercise its statutory power of sale. Prior to giving the instructions to sell the property, the 1^st Respondent had not served the requisite notice contrary to section 74 of the Registered Land Act. The notices served during the pendency of the suit and interim orders therein were of no legal effect.

13. the Appellants were bound by the terms  of the validity of securities offered by the Appellants and as a result, their claim that the guarantee was invalid for not being executed by all the company’s directors failed.

14. The letter of offer of the overdraft was clear on the nature of the securities thereunder. It provided that it was a term of the facility that the security was retained as continuing security for all moneys, obligations and liabilities, actual or contingent, then or thereafter due, owing or incurred. The charges were continuing securities to a series of transactions and the liability thereunder until the transactions contemplated by the parties and covered thereunder had been exhausted. Fresh Land Control Board consents were not required for subsequent transactions contemplated by the parties, such as the overdraft.

15. Apart from admitting that it had erroneously consolidated the 1^st Appellant’s accounts with the company’s account, the 1^st Respondent maintained that it had reversed the said error. Under section 112 of the Evidence Act, when any fact was especially within the knowledge of any party to those proceedings, the burden of proving or disproving that fact was upon him. Consequently, the onus was on the 1^st Respondent to have proved that the reversal was actually done.

16. From the record, the 1^st Respondent had produced statements which confirmed the reversal. The Trial Judge appreciated as much in the judgment The Court was at a loss as to why the trial Court found that the 1^st Respondent had not proved the reversal despite the Court’s foregoing sentiments and the evidence on record.

17. The Trial Court erred in issuing a conditional order directing the 1^st Respondent to make the reversal in the event it had not by crediting the 1^st Appellant’s account with the total sum of Kshs. 9,129,323.25/= and awarding interest on the said amount.

Appeal dismissed, cross appeal allowed.

Orders:

i.               Conditional order directing the 1^st Respondent to make the reversal in the event it had not by crediting the 1^st Appellant’s account with the total sum of                   Kshs.   9,129,323.25/= and awarding interest on the said amount set aside

ii.            Appellants to bear costs of the appeal and the cross appeal both in the trial Court and in the appeal.