The Supreme Court has overturned a Sh34 billion exposure against Standard Chartered Bank in a long-running dispute with clothes maker-Manchester Outfitters over a loan borrowed in 1982.
In a landmark decision, the apex court held that a debenture and other securities remain valid and enforceable for both the original and subsequent loans, ensuring that the original security agreements continue to apply for future advances unless they are formally discharged.
The verdict, delivered on Friday, reversed a December 2022 Court of Appeal decision that had directed Standard Chartered Financial Services Limited to pay Manchester Outfitters (now King Woolen Mills Limited) damages, after it appointed receivers for the firm and later auctioned its property over a defaulted Sh9 million loan.
The appellate court had reasoned that Standard Chartered should have sought fresh securities when the foreign currency loan was converted into Kenya shillings. It held that the appointment of the receiver-manager and the subsequent auction were irregular, leading to a damages award that grew to Sh34 billion, according to submissions made by lawyers in court.
However, the apex court overturned the decision noting that the bank did not need to obtain new securities following the conversion of the loan to Kenya Shillings.
“It is our considered position that a bank or financier is not required, as a matter of law, to register fresh securities every time a new advance is made, where existing securities remain valid and undischarged, unless the terms provide otherwise,” the court said.
The Supreme Court clarified that lenders are not required to register fresh securities when loans are converted into local currency. The apex court added that charges and guarantees are only cleared when the proper documents are signed and the charge is removed from the register.
The dispute dates back to 1982, when Manchester Outfitters borrowed a loan from Standard Chartered Merchant Bank (SCMB), London. To secure the loans, Standard Chartered Financial Services Ltd guaranteed the loan in favour of SCMB, while Manchester Outfitters provided additional securities.
On October 7, 1986, Standard Chartered Financial Services took over and settled the foreign loan, converting the outstanding balance into a local currency loan of Sh9 million.
When Manchester Outfitters defaulted, the firm was issued demands—first for Sh14.2 million in February 1989, and later for Sh19 million in September 1990—before the lender appointed joint receivers and managers to run the business.
According to the bank, Manchester Outfitters had admitted defaulting on the repayment, giving the lender the right to appoint receivers.
The clothes maker, however, challenged the move at the High Court, claiming it was done in bad faith, but the case was dismissed.
That decision was later overturned by the Court of Appeal, which held that the securities had been discharged when the loan was converted into local currency.
But the Supreme Court reinstated the High Court’s position, affirming that the 1982 guarantee and the securities remained valid and enforceable, and that the appointment of the receiver-managers following the default was lawful.
The court faulted the appellate court for finding otherwise, saying it had erred in concluding that there was no basis for the receivers’ appointment.
“In conclusion, we stress that borrowing money, whether as a friendly loan or from a financial institution, creates a legal and moral obligation to repay, regardless of whether or not the money was secured,” the court said.
The Supreme Court added that one cannot, in good conscience, in good faith, and in law, enjoy the benefit of borrowed money and later evade repayment, citing the lack of security.
The lender moved to the Supreme Court arguing that the decision made by the Court of Appeal threw into confusion the requirement for discharge of securities used to obtain a loan.
The bank maintained that the practice has been that until a legal charge is discharged, it is a continuing security.
The clothes manufacturer on its part said the loan was converted to local currency in 1986 and in the new agreement, the lender had no right to appoint receivers and the new debenture to be created was to be co-shared with another one held by KCB Group.
“We have no doubt that the parties understood that by localisation of the original loan, the appellant in effect replaced SCMB London as the lender, on the same terms. Indeed, as a matter of form, the debenture and legal charge did not reflect the altered position of the parties, because it was a continuation. No additional or new securities were provided or necessary,” said the court.
