House moves to amend law governing loan defaults

Commercial banks will be forced to pursue principal borrowers, who have defaulted on loans, before moving to recover any debts from the sale of guarantors’ properties if Parliament passes proposed amendments to the banking law.

The National Assembly’s Finance, Planning and Trade committee is seeking the change of law through proposed amendments to the Law of Contract Act, to provide that in the event the principal borrower defaults, the creditor must first realise the assets of the principal borrower before proceeding to attach the assets of the guarantor.

“There is currently no provision that guides the hierarchy to be followed whenever the debtor wants to realise his money from the borrower and the guarantor,” the committee says in a proposal it submitted to the House last week.

“This has left the banks to go for the most liquid security regardless of whether it is from the principal borrower or his guarantor,” Benjamin Lang’at, chairman of the committee, says in the proposed Bill.   

The MPs want the National Assembly to amend Section 3 of the Law of Contract Act to provide that in the event of default, a creditor shall first realise the property of the principal borrower before proceeding to the guarantor.

The Bill has been developed pursuant a public petition by President Uhuru Kenyatta’s cousin Ngengi Muigai, who had asked Parliament to establish why Kenya Commercial Bank (KCB) #ticker:KCB sold the 443 acre Muiri Coffee Estate Limited for Sh760 million without the consent of the owner and before realising the securities offered by Benjoh Amalgamated Limited in parcel numbers LR 12411/1 (Kiambu) and 12411/2 (Nyandarua).

READ: Uhuru kin seek House’s help to regain Sh700m auctioned land

Mr Muigai and his brother, Captain (Rtd) Kung’u Muigai, are the directors of Muiru Coffee Estate and Benjoh Amalgamated Limited.

Through Gatanga MP Humphrey Kimani, the owners of Muiri Coffee Estate Limited had asked Parliament to recommend that necessary action be taken against KCB if found culpable over the sale and transfer of Muiri Coffee Estate without following the due process.

The MPs, however, failed to make any orders against KCB after they concluded that “due process was followed in the sale of the said property.”

The committee found that the 25- year- old dispute is between private citizens that have been heard and determined by courts of competent jurisdiction.

“In light of this, Parliament cannot make a determination on the aforesaid matters as they are matters of law and fact nor vary any judgment made,” the committee says in the report.

The MPs said that in view of the independence of the Judiciary, which is guaranteed by Article 160 (1) of the Constitution of Kenya, Parliament is prohibited from scrutinising or amending the content of any decision made by a court of law.

“Judges are independent in their decisions, and subject only to the law. Consequently, judicial decisions can only be quashed or modified by other competent courts, and only in accordance with the due processes laid down by law,” the MPs said.

The committee noted that though not obligated, KCB should have auctioned the securities belonging to the principal borrower before proceeding to auction the guarantor’s property. It said KCB’s action contravened the rules of natural justice.

Mr Muigai had alleged that KCB irregularly transferred Muiri Coffee Estate Limited after it defaulted in repaying a Sh11.5 million loan it took in 1988 from the bank.

KCB granted Benjoh Amalgamated Limited an overdraft of Sh1, 800,000 and a loan of Sh16,875, 000, through a letter dated April 12, 1989. Muiri Coffee Estate guaranteed the loan.