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Banks can pursue loan guarantors if auctions fail
High Court says unsuccessful auctions of assets linked to loan defaulters do not bar lenders from enforcing personal guarantees once a principal borrower defaults.
High Court has ruled that banks may pursue loan guarantors where attempts to auction charged properties have failed, a decision that potentially widens lenders’ recovery options.
In the judgment, the Commercial Division held that unsuccessful auctions of assets linked to loan defaulters do not bar lenders from enforcing personal guarantees once a principal borrower defaults.
“The law is clear that a chargee need not exhaust securities before proceeding against a guarantor,” the court said, endorsing banks’ right to shift recovery efforts after failed auctions.
The ruling arose from a long-running dispute between Bank of India Kenya and We Hotel and Suites Limited, alongside its directors, Piyush Ratilal Shah and Dipak Ratilal Shah, who had signed personal guarantees.
The verdict sets a precedent on how guarantors’ properties can be seized when lenders fail to sell charged property and could shape similar legal disputes across Kenya’s banking sector.
Bank of India Kenya had advanced loan facilities in 2012 amounting to $1.8 million (Sh232 million), secured by debentures over the hotel’s assets and a legal charge against Sunshine Supermarkets. The directors executed guarantees and indemnities backing the borrowing.
After the hotel defaulted, the bank issued statutory notices and attempted to sell the charged property. Evidence showed the lender advertised the property for auction on three occasions, but none of the sales succeeded.
With recovery stalled, the hotel sued in 2019 to stop the auctions, arguing that the statutory notices were irregular. That case was later settled through a court-recorded consent agreement in March 2021.
Under the settlement, the hotel agreed to pay $2.5 million (Sh322.2 million) by March 31, 2021, representing principal and accrued interest. The consent allowed the bank to proceed with recovery if payment was not made.
Fresh suit
However, the hotel paid only $80,000 (Sh103.1 million) before defaulting again. Facing repeated auction failures, the bank filed a fresh suit in 2022 to enforce the guarantees against the directors personally, arguing that the debt remained unpaid and the security had proved ineffective.
The directors opposed the claim, arguing that the consent judgment had conclusively settled the dispute and that the bank could not pursue them after opting to auction the property. They also contended that loan variations had discharged the guarantees.
But the court rejected those arguments, finding that the earlier case involved only the bank and the hotel, not the directors in their personal capacities as guarantors.
The directors had argued that the suit was barred by the res judicata principle (which prevents re-litigation) and that the guarantees were unenforceable because loan terms were varied without their consent.
“Res judicata cannot be raised against persons who were not parties to the earlier suit,” the judge said, noting that the causes of action were distinct.
Regarding the failed auctions, the court held that the settlement did not override the bank’s rights under the guarantees once the borrower defaulted again.
“In my view, the consent did not extinguish or compromise the plaintiff’s right to enforce the guarantees. The liability of a guarantor survives settlements or restructuring arrangements with the principal debtor unless expressly discharged. None was proved here,” the judgment stated, confirming that the guarantees remained valid and enforceable, with the defendants jointly liable.
The court also dismissed claims that restructuring the loan timelines prejudiced the guarantors, finding no material variation that would release them from liability.
Evidence showed that the $2.5 million settlement sum remains unpaid. The court entered judgment against the hotel and its directors jointly and severally for the full amount, with interest at court rates and costs.
Implications
While the bank had sought general damages for loss of business, the court declined the claim, reiterating that such damages are not recoverable for breach of contract.
Beyond the parties, the ruling carries wider implications for Kenya’s credit market. It affirms that lenders are not locked into a single recovery path and may turn to guarantors where auctions fail to realise value.
The ruling comes at a time when auctioneers have been re-advertising charged properties owned by defaulted borrowers after failing to attract buyers.
For banks, the decision could strengthen the enforceability of guarantees, particularly in sectors such as hospitality and real estate, where forced sales can stall or collapse.
