The National Assembly’s Justice and Legal Affairs committee approved a bill seeking to amend the Law of Contract Act in order to provide legal protection to guarantors whenever commercial banks and lenders are pursuing a principal borrower.
What’s however surprising is that little is known regarding the law on guarantors and the protection of guarantors’ properties or securities in agreements upon default by the principal borrower.
Ideally, a guarantor assumes responsibility for the debt of the principal borrower in a number of transactions such as mortgages, leases, credit facility and business loans.
The amendment seemingly looks to clear the grey areas, particularly on the question as to whose property should be first realised whenever a principal borrower defaults.
The intended amendment further provides a saving grace by stating that before a claim is brought against a guarantor, a financial lender should first realise the security of the principal borrower and not that of the guarantor, even if the guarantor’s security is commercially viable. This is particularly important given the pliable and vibrant nature of the Kenyan financing environment.
Much seemingly so that a High Court, in its judgment, once gave commercial banks and saccos a stamp of approval to blacklist guarantors with the Credit Reference Bureaus (CRBs) if principal borrowers defaulted on loans.
Blacklisting of guarantors may create unnecessary fear to the extent that people may not wish to guarantee loan facilities, bearing in mind that guarantors don’t directly benefit from a loan facility.
Kenyans, by natural instinct, have an exuberated desire to willingly help and guarantee credit facilities for their friends, family and relatives. However, the court’s decision serves as a reminder that this particular desire needs to be quelled and exercised cautiously.
The Kenya Bankers Association, working in tandem with the Central Bank of Kenya, extended credit listing rules to guarantors. In the rules, banks are required to issue a guarantor 30-day notice to enable them engage with the principal borrower. Once the notice lapses, the bank will then give the guarantor another 60 days to regularise the principal borrower’s account; failure to which one is listed by the Credit Reference Bureau.
Commercial banks in Kenya not only have the right to pursue and recover loans from the sale of guarantors’ property when and if a principal borrower defaults, but also have a separate and distinct right of action against a guarantor.
This position may nonetheless change, sooner rather than later, when the bill is passed and enacted into law; translating into a scenario where a creditor will first seek to realise the assets of the principal borrower.
The rationale behind this proposal is to provide some form of a statutory hierarchy that needs to be followed whenever a principal borrower defaults.
At this time, creditors can pursue either of the party’s property to recover its money.
Financial institutions should first exhaust all the properties or securities provided by the borrowers as loan securities before attaching properties of the guarantors.