Bank allowed to pursue debtor for deficit from loan collateral auction

The decision reinforces banks’ contractual rights to pursue borrowers for residual debts post-collateral liquidation.

The case stemmed from an unspecified amount of a loan advanced to N.T. Express Laundromat, where, after defaulting, Mayfair Bank sued in March 2020, seeking Sh9.8 million plus interest.

A consent judgment adopted by the lower court in January 2021 formalised repayment terms. However, the company and Ms Wanjiku later sought to overturn the judgment, claiming they were never served with the court papers.

They also claimed that the bank concealed that it had sold their collateral, including assets valued at Sh27 million in May 2021, leaving a Sh17 million surplus, which they argued should offset the debt.

They emphasised that they did not owe the bank any money, given that it was holding over Sh17 million toward their credit, having liquidated the collateral for the loan.

Further, the borrowers claimed the consent was signed under misrepresentation, as they believed it was merely a "bank variation form," not a binding court order.

They also claimed that the director of the company was Mr Alfred Mwarimu, and that the magistrate erred in finding that he had no proper locus standi to swear an affidavit in support of the case against the bank.

However, Justice Kassan dismissed all grounds and upheld the lower court's ruling, noting that there was no proof of misrepresentation.

This is because the appellants participated in a June 2020 meeting where loan restructuring terms were agreed upon, and the consent document explicitly referenced the court case and consequences of default.

"It is difficult to fathom that either the appellants did not read what they were consenting to or failed to understand the same," the judge observed, signalling that borrowers ought to seek clarification before signing documents when navigating debt restructuring.

The court found that the appellants did not demonstrate that they were induced by duress or fraud at the execution of the consent. The judge held that once signed, parties cannot later claim ignorance of terms unless fraud is proven.

He also found that Mr Mwarimu, who swore affidavits for the appellants, was not a registered director of N.T. Express Laundromat at the time of filing the appeal, undermining his authority to act for the company.

The court referred to the bank's replying affidavit, indicating that it obtained search documents for the company registry showing Ms Wanjiku as the sole director.

The court ruled that the arguments on the sale of collateral were irrelevant, since the consent terms obligated full repayment regardless of the collateral liquidation.

"The terms were clear and unambiguous," Justice Kassan stated in the ruling that sets precedent on borrower obligations after asset liquidation.

The appellants had argued that the trial magistrate erred in failing to allow them to be heard on their defence.

They added that the magistrate failed to find that the disputed consent letter entered between the parties did not take the form of a court consent but a bank variation form.

"The trial magistrate erred in law and in fact in deciding the case on a technicality and failing to consider and uphold the wider interest of substantive justice," they argued.

In the course of the proceedings, Equity Bank filed an objection seeking, among other orders, that the goods and assets of the company and Ms Wanjiku, including a motor vehicle, proclaimed by Mayfair, be unconditionally released. The trial court dismissed the objection.

However, Justice Kassan reiterated that the judgment sought to be set aside was a result of a consent as between the disputing parties.

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