The decision came after a prolonged case involving a hotel and another company that defaulted on loans totaling Ksh231 million.
The loans, taken out in 2012 and 2015, were later restructured under a 2017 Supplementary Term Loan Agreement.
As part of the original loan agreements, the hotel’s assets were pledged as security, and two of its directors acted as guarantors.
In 2021, the parties signed a deed of settlement agreeing that the hotel would repay approximately Ksh321 million, but the hotel failed to honor this arrangement.
The bank attempted to recover the debt by advertising the hotel property for sale on three occasions, but all auctions failed.
Following these unsuccessful attempts, the bank filed a lawsuit against the directors personally, seeking repayment under their guarantee obligations.
The defendants argued that the matter had already been settled in a previous court ruling and that the guarantees were invalid due to changes in the loan terms.
They also claimed that pursuing them personally was unfair, as the bank had not exhausted all possible recovery options.
However, Judge Peter Mulwa, who presided over the case at Milimani Law Courts, dismissed these arguments. He clarified that the previous ruling only applied to the bank and the hotel, not the guarantors.
He further stated that guarantees are legally binding and remain enforceable even when a loan is restructured or a settlement is signed.
"The liability of a guarantor survives settlements or restructuring arrangements with the principal debtor unless expressly discharged," the judgment read.
The court also found no evidence that the guarantors’ responsibilities had been compromised or unfairly affected.
It ruled that the bank was entitled to recover approximately Ksh321 million from the guarantors, along with interest at court rates from the date of filing until full payment. The guarantors are also required to cover the costs of the suit.
A request by the defendants for general damages for alleged loss of business was denied. The court stated that contract law does not allow for such claims when enforcing legally binding guarantees.
Legal experts say this ruling reinforces the principle that guarantees provide a secondary avenue of repayment for banks when borrowers default.
In Kenya, banks routinely require guarantees from directors or third parties as part of loan agreements.
While this provides a safety net for financial institutions, guarantors are personally liable when borrowers fail to meet their obligations, as confirmed in this latest ruling