Bill shielding loan guarantors back to MPs

MPs are set to review a Bill that seeks to compel creditors to seize assets of defaulting borrowers before touching a guarantor’s property after President Uhuru Kenyatta refused to assent ito it.

It will require a two-thirds majority or 233 Members of Parliament to be present and voting to veto Mr Kenyatta’s rejection of the Bill.

In a memorandum explaining his refusal to assent to the Laws of Contract (Amendment) Bill, 2019, Mr Kenyatta argued the Bill would prejudice the financial sector if enacted into law in its current form.

“They are likely to affect creditors by making debt recovery process longer and more expensive, as well as by affording guarantors the opportunity to conceal or dispose of assets in order to avoid the realisation of security when debts are unpaid,” Mr Kenyatta said.

Mr Kenyatta rejected clause 2(1) of the Bill that stipulates that before a suit is brought against a defendant, the plaintiff shall first realise the assets of the principal. “The proposed new provisions to section 3 of the Law of Contract Act will negate a long-standing principle of contract law that is relied on by lenders, borrowers, guarantors, investors and other stakeholders in the Kenyan economy, especially in the capital markets,” Mr Kenyatta said in the memo.

The Bill, sponsored by Juja MP Francis Waititu wanted to amend Section 3 of the Law of Contract Act that lays rules for signing of such agreements.

The Law of Contract (Amendment) Bill, 2019, proposes that in case of a default by the principal borrower, the creditor should first auction the assets of the former before raising the property of guarantors.

“An obvious effect will be to prolong the process of settling debts in the case of a default through protracted asset-tracing and litigation without the assurance that the outcome will be positive.

“The current system is prompt and predictable and enjoys the confidence of the majority of stakeholders,” President Kenyatta said.

He said the amendment was likely to adversely affect creditors and may provide statutory loophole that enables guarantors who provide third-party security to divert assets that have been pledged as security during the period when lenders are pursuing the principals’ assets through the courts.

“The proposed provisions are likely to adversely affect credit advanced to micro, small and medium enterprises due to lender’s reluctance to rely on third-party collateral.