Want to collaborate or support access to justice?
Contact UsWant to collaborate or support access to justice?
Contact Us
Read this story on Esheria.
For decades, a quiet myth has comforted Kenyan company directors as they sign personal guarantees. The thinking is simple, intuitive, and widespread: if the business fails, the bank will first pursue the company. Then it will sell the company’s assets. Only after exhausting every other option will the lender come knocking on the guarantor’s door.
A recent decision by the High Court of Kenya has shattered that belief entirely.
In Bank of India Kenya v We Hotel and Suites Limited & 2 others, the court delivered a ruling that every director, shareholder, and entrepreneur in Kenya must understand. The court confirmed that a guarantor can be sued directly the moment a borrower defaults. The lender does not need to wait. It does not need to sell the charged property first. It does not need to demonstrate that the borrower is insolvent. And it certainly does not need to treat the guarantor as a last resort.
This judgment raises an uncomfortable but essential question for Kenya’s business community: what does it truly mean to sign a personal guarantee today?
At its heart, the dispute involved a familiar commercial tragedy. A company borrowed money. The loan was secured by property, debentures, and personal guarantees from its directors. The company defaulted. The bank sought to recover its funds. But the legal question that emerged was deceptively simple: must a lender follow a strict order when recovering a debt?
For many years, business practice leaned toward a “sequential enforcement” model. It felt fair. It aligned with the principle that a company is a separate legal person. It also reflected how most directors understood their role when they signed guarantees as a backstop, not a front-line obligation.
The High Court, however, took a different and far more rigorous path.
The story begins in 2012, when We Hotel and Suites Limited obtained a loan of approximately USD 1.8 million from Bank of India Kenya. Like most commercial lenders, the bank did not rely on trust alone. It constructed a multi-layered security package: a legal charge over hotel property, debentures over the company’s assets, and personal guarantees signed by the directors personally.
When the company first defaulted, the bank did not immediately rush to court. Instead, it attempted to manage the situation commercially. In 2017, the parties restructured the loan, granting the borrower more time to repay. This gave the directors hope that the worst had passed.
But the debt remained unpaid.
By 2021, the dispute reached court, only to be settled. The company agreed to pay USD 2.5 million – a figure reflecting the accumulated principal, interest, and fees. That settlement could have ended the matter. It did not. The company defaulted once again.
At this point, the bank turned to its primary security. It attempted to sell the charged property. Not once, but three separate times. Each auction failed, likely due to poor market conditions, legal complications, or lack of buyers.
Frustrated and facing an ever-growing non-performing loan, the bank changed strategy. It decided to enforce the personal guarantees directly against the directors.
The High Court ruled firmly in favour of the bank. It held that the directors, as guarantors, were jointly and severally liable for the outstanding amount of USD 2.5 million, together with accrued interest and legal costs.
More importantly, the court confirmed a broader legal principle of significant consequence: a lender is not required to exhaust its remedies against the borrower or the charged property before pursuing a guarantor.
In plain language: the moment a borrower defaults, the guarantor can be sued immediately.
Understanding the court’s reasoning
To grasp the full weight of this decision, one must examine the legal reasoning that underpins it.
A guarantee is a separate, independent promise
The court treated the guarantee as an autonomous legal obligation. When the directors signed the guarantees, they were not merely supporting the company. They were making their own direct, unconditional promise to the bank. That promise becomes enforceable the moment the borrower defaults – not when the bank has exhausted other options.
This means the lender has options. It can pursue the borrower alone. It can pursue the guarantor alone. Or it can pursue both simultaneously, in parallel proceedings. There is no legal rule, the court confirmed, that forces a lender to follow a particular sequence of enforcement.
Failed auctions do not limit the lender
One of the most striking aspects of the case is what happened with the charged property. The bank tried to sell it three times without success. The directors argued that this failure should matter that the bank should be required to keep trying to sell the property before coming after them personally.
The court disagreed emphatically.
It held that the inability to sell the charged property does not extinguish or even diminish the lender’s right to enforce the guarantees. If anything, failed auctions strengthen the case for doing so. A lender cannot be expected to remain trapped in an endless cycle of unsuccessful property sales while a debt continues to accrue interest and the guarantors remain untouched.
This reflects a practical commercial reality. Property markets are unpredictable. Auctions fail for many reasons title defects, low valuations, poor marketing, or simply a lack of buyers. The law will not force a lender to wait indefinitely.
The directors also relied heavily on the 2021 settlement agreement. They argued that the settlement, which involved the company, should bar further action against them personally.
Again, the court rejected this argument.
The earlier case involved the company as the primary borrower, not the directors in their personal capacity. Because of this, the legal principle of res judicata (finality of litigation) did not apply to the guarantors. They were not parties to that settlement in their individual capacities.
More critically, the court made it clear that a settlement or restructuring does not release a guarantor unless the agreement expressly says so. Silence is not enough. Implication is not enough. If a guarantor wants to be released, that release must be written in clear, unambiguous terms.
This is a critical point. Many guarantors assume that once a loan is restructured, their obligations are automatically reduced, reset, or even extinguished. This case shows that such assumptions can be ruinously costly.
Practical lessons for directors and guarantors
The lessons from Bank of India Kenya v We Hotel and Suites Limited are both practical and urgent.
First, a personal guarantee should never be treated as a routine document or a mere formality. It is one of the most serious financial commitments a director can make – often more consequential than the loan agreement itself.
Second, the precise terms of the guarantee matter enormously. Is the liability limited to a specific amount or unlimited? Is it continuing or one-off? What specific events trigger enforcement? These are not small details. They are the difference between a manageable risk and financial ruin.
Third, restructuring a company loan is not enough to protect a guarantor. If the intention is to release or limit guarantees, this must be clearly stated in writing, preferably in the restructuring agreement itself. Verbal assurances from relationship managers are worthless.
Fourth, relying on charged property as a safety net is risky. Market conditions can change. Auctions can fail. Legal challenges can delay sales for years. A guarantor should never assume that “there is property” as a defence against personal liability.
Fifth, directors must remain actively engaged in the financial health of their companies. A guarantee is not a passive document. It requires constant awareness of the borrower’s performance, the lender’s intentions, and the value of any security.
The bigger picture in Kenyan commercial law
The decision in Bank of India Kenya v We Hotel and Suites Limited reflects a wider trend in Kenyan courts. Over the past decade, there has been a growing judicial emphasis on enforcing commercial obligations strictly, with fewer equitable interventions for debtors.
This is good for predictability. It allows businesses and lenders to plan with confidence, knowing that courts will uphold clear contractual terms.
But it also demands greater responsibility from individuals. The law is increasingly unwilling to soften the edges of a bad bargain. A director who signs a guarantee without understanding its implications, or who assumes that banks will act “fairly” or “in order,” does so at his or her own peril.
Conclusion
A guarantor be sued before the borrower in Kenya? The answer is unambiguous. Yes.
But the more important takeaway is not simply about legal timing or the order of enforcement. It is about understanding risk at a fundamental level. A personal guarantee is not a distant safety net. It is not a document to be signed in a hurry at the end of a loan negotiation. It is a live, enforceable obligation that can be activated the moment a borrower defaults whether or not the bank has tried to sell property, whether or not the company has other assets, and whether or not the guarantor believed they would be last in line.
For directors and business owners across Kenya, the message is simple but serious. When you sign a guarantee, you are not just backing your company. You are putting your own financial future, your personal assets, and often your family’s security directly on the line.And as the High Court has made unmistakably clear in Bank of India Kenya v We Hotel and Suites Limited, the law will hold you to that promise without delay, without sympathy, and without the comfort of being last.
