The Supreme Court has overturned a Sh34 billion exposure against Standard Chartered Bank in a long-running dispute with clothes maker-Manchester Outfitters over a loan borrowed in 1982.
In a landmark decision, the apex court held that a debenture and other securities remain valid and enforceable for both the original and subsequent loans, ensuring that the original security agreements continue to apply for future advances unless they are formally discharged.
The verdict, delivered on Friday, reversed a December 2022 Court of Appeal decision that had directed Standard Chartered Financial Services Limited to pay Manchester Outfitters (now King Woolen Mills Limited) damages, after it appointed receivers for the firm and later auctioned its property over a defaulted Sh9 million loan.
The appellate court had reasoned that Standard Chartered should have sought fresh securities when the foreign currency loan was converted into Kenya shillings. It held that the appointment of the receiver-manager and the subsequent auction were irregular, leading to a damages award that grew to Sh34 billion, according to submissions made by lawyers in court.
However, the apex court overturned the decision noting that the bank did not need to obtain new securities following the conversion of the loan to Kenya Shillings.
‘It is our considered position that a bank or financier is not required, as a matter of law, to register fresh securities every time a new advance is made, where existing securities remain valid and undischarged, unless the terms provide otherwise,’ the court said.
The Supreme Court clarified that lenders are not required to register fresh securities when loans are converted into local currency. The apex court added that charges and guarantees are only cleared when the proper documents are signed and the charge is removed from the register.
The dispute dates back to 1982, when Manchester Outfitters borrowed a loan from Standard Chartered Merchant Bank (SCMB), London.
To secure the loans, Standard Chartered Financial Services Ltd guaranteed the loan in favour of SCMB, while Manchester Outfitters provided additional securities.
On October 7, 1986, Standard Chartered Financial Services took over and settled the foreign loan, converting the outstanding balance into a local currency loan of Sh9 million.
The appellate court had reasoned that Standard Chartered should have sought fresh securities when the foreign currency loan was converted into Kenya shillings. It held that the appointment of the receiver-manager and the subsequent auction were irregular, leading to a damages award that grew to Sh34 billion, according to submissions made by lawyers in court.
However, the apex court overturned the decision noting that the bank did not need to obtain new securities following the conversion of the loan to Kenya Shillings.
‘It is our considered position that a bank or financier is not required, as a matter of law, to register fresh securities every time a new advance is made, where existing securities remain valid and undischarged, unless the terms provide otherwise,’ the court said.
The Supreme Court clarified that lenders are not required to register fresh securities when loans are converted into local currency. The apex court added that charges and guarantees are only cleared when the proper documents are signed and the charge is removed from the register.
The dispute dates back to 1982, when Manchester Outfitters borrowed a loan from Standard Chartered Merchant Bank (SCMB), London.
To secure the loans, Standard Chartered Financial Services Ltd guaranteed the loan in favour of SCMB, while Manchester Outfitters provided additional securities.
On October 7, 1986, Standard Chartered Financial Services took over and settled the foreign loan, converting the outstanding balance into a local currency loan of Sh9 million.