Gulf African Bank Limited v View Power Communications Limited & another

HCCOMM NO. E050 OF 2024 P. MULWA, J. Defendant executed a guarantee dated 19 th November 2021, guaranteeing repayment of the facilities together with profits, commissions and costs. 3. The Plaintiff states that the Defendant defaulted by failing to make the agreed repayments. Thereafter, the Plaintiff received a letter dated 1st June 2022 notifying it of changes to the 1st Defendant’s shareholdings, directorship, and account signatories, which had been effected on 19 th October 2021 without the Plaintiff's knowledge or consent, contrary to the terms and conditions of the letters of offer. 4. Following the default, the 1st Defendant sought a moratorium and restructuring of the facilities through letters dated 30th November 2022 and 3rd August 2023, which requests the Plaintiff rejected. Consequently, the Plaintiff claims that as at 17th January 2024, the Defendants jointly owed Kshs. 27,961,170.54. 5. The Plaintiff further pleads that under Clause 2.01 of the Guarantee, the 2nd Defendant remained liable notwithstanding that he may have ceased being a director or shareholder of the 1st Defendant. Formal demand letters were issued to both Defendants on 23 rd January 2024. Despite the demand, the defendants have failed to settle the outstanding debt 6. The 2nd Defendant filed a statement of Defence dated 6 th March 2024. He contends that although he previously guaranteed the 1st Defendant’s banking facilities while serving as its director, he fully honored all obligations during his tenure and no default occurred before he exited the Page 2 of 13

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HCCOMM NO. E050 OF 2024 P. MULWA, J. company. He denies the allegations that the changes in the shareholding and directorship were effected without notice or consent and further denies that the Guarantee remained binding after he ceased being a director. He asserts that the Plaintiff accepted the change by effecting the change of account signatories and could not reasonably have done so without conducting due diligence and approving the transition. 7. He further contends that he is not a party to the loan agreement between the Plaintiff and the 1 st Defendant and therefore bears no contractual liability for the outstanding debt. He argues acknowledging the that the Plaintiff's 1st Defendant's own pleading application for a moratorium and loan restructuring demonstrates that the Plaintiff dealt directly with the new management, thereby estopping it from asserting that he remained liable as guarantor. He denies service of a demand notice and/or intention to sue and maintains that there is no reasonable cause of action against him and prays that the suit against him be dismissed with costs. 8. At the hearing, the Plaintiff called two (2) witnesses while the Defendant called one witness. 9. Lawi Sato testified as Pw1. He adopted his witness statement and list of documents, both dated 7 th February 2024. He stated that the amount now stands at Kshs. 21,915,021.13, as the 1st Defendant paid some amounts after default judgment was entered. Page 3 of 13

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HCCOMM NO. E050 OF 2024 10. P. MULWA, J. He testified that a bank will follow up on a guarantor upon default by the borrower. There was an attempt to change the directorship from the 2 nd Defendant to Mohamed Noor. He told the court that clause 3.7 of the sale agreement was clear that the new director was to take the guarantorship. He told the court that the Plaintiff was not a party to that agreement. 11. Salma Osman testified as Pw2. He adopted his witness statement dated 19th November 2024 and the list and further list of documents as his evidence in chief. In crossexamination, he testified that he interacted with the Defendants in 2021 when the 1st Defendant’s account was opened. He also stated he came to know Mohamed Noor in October 2022 as the one handling the bank accounts for the 1st Defendant. 12. Warsame Abdi Aden testified as Dw1. He adopted his witness statement dated 6th March 2024. He stated he knows the Company known as View Power Communications Limited, which he purchased on 16 th November 2018, with the existing liability of Kshs. 3,278,200/= with the Plaintiff. He later sold the Company to Mohamed Noor in October 2021 as a going concern. They both went to the bank to conduct due diligence and were served by Pw2. He states the purchaser was aware of the existing liability as per the sale agreement dated 29th October 2021, as per clause 3.7. The change of the account signatories was done with the consent of the bank. Page 4 of 13

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HCCOMM NO. E050 OF 2024 13. P. MULWA, J. He confirmed signing the guarantee and guaranteeing Kshs. 36 Million. He also told the court he signed the invoices as a director on 23rd November 2021 to enable him to draw down Kshs. 10 million facility. He stated the letter dated 1 st June 2022 notifying the bank of the change of directorship was received by the bank on 16 th June 2022 at the Kenyatta Avenue Branch and not the Eastleigh Branch. 14. In re-examination, he testified that the company used both branches, that is, Eastleigh and the Kenyatta Avenue Branch. The sale agreement shows that by 29 th October 2021, he had sold the company. 15. Default judgment was entered for the 1 st Defendant on 18th April 2024. 16. After the hearing, the parties filed written submissions. The Plaintiff filed submissions dated 2 nd March 2026 while the 2nd Defendant filed submissions dated 17th March 2026. Analysis and determination. 17. I have carefully considered the pleadings, the oral and documentary evidence tendered by the parties, the submissions filed and the applicable law. Since an interlocutory judgment was entered against the 1 st Defendant on 18th April 2024, the only issue falling for determination is whether the Plaintiff has established its claim against the 2nd Defendant as guarantor. 18. It is not disputed that the Plaintiff advanced Murabaha and Tawarruq financing facilities to the 1 st Defendant. It is equally uncontested that the 2 nd Defendant executed a written guarantee dated 19th November 2021 securing the Page 5 of 13

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HCCOMM NO. E050 OF 2024 P. MULWA, J. repayment of those facilities. During cross-examination, the 2nd Defendant expressly admitted executing the guarantee and further admitted signing invoices dated 23 rd November 2021 to facilitate the drawdown of the Kshs.10 million facility. The existence and execution of the guarantee, therefore, ceased to be an issue. 19. In Ebony Development Company Ltd v Standard Chartered Bank Ltd (2008) eKLR, it was held that: “The security of the charge was a guarantee. The obligation of a guarantor is clear. It becomes liable upon default by the principal debtor. It is not the guarantor to see to it that the borrower complies with his contractual obligations but to pay on demand the guaranteed sum…” 20. Further in Halsbury’s Laws of England 4th Edition Vol. 20 para 194 at page 124, it is stated thus: “On the default of the principal debtor causing loss to the creditor, the guarantor is, apart from special stipulation, immediately liable to the full extent of his obligation, without being entitled to require either notice of the default or previous recourse against the principal...” 21. It is not in dispute that the guarantee agreement was executed by the 2nd Defendant. A guarantee agreement is a tripartite stand-alone agreement separate from the loan agreement. The defence mounted by the 2 nd Defendant is principally that he ceased being a director and shareholder of the 1st Defendant after selling the company to one Page 6 of 13

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HCCOMM NO. E050 OF 2024 P. MULWA, J. Mohamed Noor under the Sale Agreement dated 29 th October 2021, and that the purchaser assumed responsibility for the existing liabilities pursuant to Clause 3.7 thereof. He further contends that the Plaintiff accepted the change of ownership and account signatories and is consequently estopped from enforcing the guarantee against him. 22. I have looked at the Guarantee Agreement Clause 2.01, which provides as follows: “This guarantee is a continuing security and shall secure the ultimate balance from time to time owing to the Bank by the customer in any manner whatsoever, notwithstanding administration or the liquidation, commencement of a moratorium in respect of any change in the constitution of the customer or in the name or style thereof or any settlement of account or other matter …” 23. The above clause expressly provides that the guarantor's liability would continue notwithstanding that he ceased to be a director or shareholder of the borrower. Parties are bound by the terms of the contracts they freely enter into and courts do not rewrite contracts for parties merely because the bargain subsequently becomes onerous. 24. In National Bank of Kenya Ltd v Pipeplastic Samkolit (K) Ltd & Another [2001] eKLR, the Court of Appeal held: Page 7 of 13

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HCCOMM NO. E050 OF 2024 “A court P. MULWA, J. of law cannot rewrite a contract between the parties. The parties are bound by the terms of their contract unless coercion, fraud or undue influence are pleaded and proved.” 25. The sale agreement relied on by the 2 nd Defendant was a private contract between himself and the purchaser, Mohamed Noor. The Plaintiff was not a party to that agreement. It is a cardinal principle of the law of contract that contractual obligations bind only the parties thereto. The doctrine of privity of contract precludes a stranger from either enforcing or being bound by a contract unless expressly provided by law. 26. Consequently, Clause 3.7 of the Sale Agreement, which purports to transfer liability to the purchaser, cannot operate to discharge the 2nd Defendant from his obligations under the Guarantee without the Plaintiff's express consent. The Guarantee constitutes a distinct and independent contract between the Plaintiff and the 2nd Defendant. Its terms provide for its continuation notwithstanding changes in the constitution of the principal debtor. The 2 nd Defendant, by Clause 2.01, expressly covenanted that his liability would survive any such change. 27. The 2nd Defendant's contention that the Plaintiff's acceptance of the change of account signatories estopped it from enforcing the guarantee is, with respect, unmeritorious. Estoppel, whether by conduct or representation, requires clear and unequivocal conduct by the party sought to be Page 8 of 13

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HCCOMM NO. E050 OF 2024 P. MULWA, J. estopped, which induces a reasonable belief in the other party, who then acts to his detriment. 28. In this case, the mere change of account signatories is an administrative act routinely undertaken by banks to facilitate the operations of an account. It does not constitute a waiver of the bank's rights under a separate contract of guarantee, nor does it amount to a representation that the guarantor is discharged. The change of signatories was effected at the instance of the 2nd Defendant and the purchaser, and the bank's cooperation in facilitating this operational change cannot be construed as a release of the 2nd Defendant from his subsisting guarantee obligations. To hold otherwise would be to imply a variation or discharge of a written contract by conduct, which this court is hesitant to do in the absence of clear, cogent evidence of an intention to vary or discharge. 29. Furthermore, the 2nd Defendant's own evidence reveals a significant inconsistency. While he claims to have sold the company on 29th October 2021, he admitted under crossexamination that he subsequently signed invoices as a director on 23rd November 2021 to facilitate the drawdown of a Kshs. 10 Million facility. This conduct is inconsistent with his assertion that he had completely divested himself of all interest and liability in the company by that date. A person who, after the alleged sale, continues to act as a director and facilitates further drawdowns of the very facility he Page 9 of 13

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HCCOMM NO. E050 OF 2024 P. MULWA, J. guaranteed cannot subsequently disclaim liability on the ground that he had exited the company. 30. The liability of the guarantor is co-extensive with that of the principal debtor, unless the contract provides otherwise. 31. The 2nd Defendant's contention that the Plaintiff's acknowledgement of the moratorium and restructuring requests demonstrates that the Plaintiff dealt with the new management and is thereby estopped is similarly without foundation. The bank's consideration of, and even dealings with, the new management of the 1st Defendant does not ipso facto discharge the guarantor. The guarantee remains enforceable unless the creditor, by a binding agreement with the principal debtor, alters the nature of the guaranteed obligations in a manner prejudicial to the guarantor, without the guarantor's consent. There is no evidence that any restructuring was effected, as the Plaintiff rejected the requests. The mere fact of the borrower's application does not discharge the surety. 32. The 2nd Defendant’s denial of service of the demand notice is a bare denial. The Plaintiff produced a demand letter dated 23rd January 2024 addressed to the 2nd Defendant. The 2nd Defendant did not lead any cogent evidence to rebut the presumption of service. 33. A guarantor cannot escape liability by unilaterally resigning from the directorship of the principal debtor company, as independent the of guarantee the is directorship. a personal The change covenant in the Page 10 of 13

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HCCOMM NO. E050 OF 2024 P. MULWA, J. directorship does not extinguish the debt of the company nor discharge the personal obligation of the guarantor, unless there is an express stipulation to that effect. The 2 nd Defendant is thus bound by the terms he freely negotiated and executed. 34. On the quantum of the claim, Pw1 testified that the outstanding amount as at the time of hearing was Kshs. 21,915,021.13, the 1st Defendant having made some payments after the entry of default judgment. The Plaintiff is bound by the evidence it has led. The court cannot grant a sum greater than what the Plaintiff's own witness admits is the current outstanding balance. The Plaintiff is entitled to judgment for the sum of Kshs. 21,915,021.13, being the reduced outstanding balance. 35. The Plaintiff also sought profit at the contractual rate of 20% per annum as agreed in the Murabaha and Tawarruq facilities. Parties are ordinarily bound by agreed contractual interest rates unless they are shown to be illegal, unconscionable or contrary to statute. The Defendant did not challenge either the applicable contractual rate or its computation. I have examined the documents, and the rate of 20% per annum is provided for as the profit rate or default rate. The Plaintiff is entitled to this contractual rate until payment in full, as the Guarantee secures all profits and costs. Page 11 of 13

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HCCOMM NO. E050 OF 2024 36. P. MULWA, J. Having considered the entire evidence, I find that the Plaintiff has proved its case on a balance of probabilities and an interlocutory judgment having been entered against the 1st Defendant on 18th April 2024. 37. In the result, I find as follows: i. Judgment is hereby entered for the Plaintiff against the 2nd Defendant as guarantor jointly and severally with the 1st Defendant for the sum of Kshs. 21,915,021.13. ii. The said sum of Kshs. 21,915,021.13 shall accrue contractual profit/interest at 20% per annum from 17th January 2024 until payment in full. iii. The Plaintiff shall have the costs of the suit against both Defendants jointly and severally. iv. The costs shall attract interest at court rates from the date of taxation or agreement until payment in full. It is so ordered. JUDGMENT delivered virtually, dated and signed at NAIROBI This 31st day of July 2026. PETER M. MULWA JUDGE In the presence of: Page 12 of 13

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HCCOMM NO. E050 OF 2024 P. MULWA, J. Ms. Cheruiyot h/b for Mr. Kongere for Plaintiff Mr. Njihia h/b for Mr. Gitahi for 2nd Defendant Court Assistant: Lispa Page 13 of 13

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