StanChart 33-year battle with Galot reaches Supreme Court

A 33-year-old dispute between Standard Chartered Bank (StanChart) and a former customer will now be determined by the Supreme Court after the lender was given the nod by the Court of Appeal.

The bank was allowed to escalate the matter to the apex court on grounds that a judgment in December 2022 by the Court of Appeal, stating that new loans should be secured by registration of fresh securities, created confusion on how lenders should discharge collateral used to obtain a loan.

Read: Tycoon wins 30-year-old case against StanChart

Further, the lender said the decision contradicts previous precedents and created uncertainty in the financial sector.

“The question on the correlation between a security instrument drawn in favour of a lending institution, and the right of recovery under a facility advanced by the same lending institution will be answered once the main question on security is answered,” justices Mohammed Warsame, Kathurima M’Inoti and John Mativo said.

The bank informed the judges that the practice has been that until an asset used as collateral on a loan is discharged, it is a continuing security.

However, in the decision made in 2022, the court held that the securities given by Galot Industries for a loan obtained by a sister company- Manchester Outfitters Ltd- in 1982, was discharged when the loan was converted into local currency.

The court was informed that King Woolen Mills Ltd, which was initially known as Manchester Outfitters Ltd, borrowed a loan of 1,300,000 Deutsche marks and 1,050,000 Swiss francs in 1982 and charged some property belonging to Galot Industries Ltd.

The loan was converted to local currency in 1986 and according to the company, a new agreement was created, hence the lender had no right to appoint receivers.

The bank through Senior Counsel George Oraro said the judgment by the appellate court created uncertainty in the financial sector, requiring the intervention of the Supreme Court.

Mr Oraro said the law applied by the court from as far back as 1978 has been that a party may not retain money or a benefit, which is against the conscience that it should keep.

According to Mr Oraro, the company admitted it defaulted on the loan repayment and the lender had the right to appoint receiver managers. The customer, however, challenged the appointments in the High Court saying the move was made in bad faith.

Lawyer Philip Nyachoti for the clothes maker said there was no misdirection on the part of the judges and the matter involved a private contract between the parties.

Read: StanChart escalates 30-year fight with Galot

In the ruling, the judges said whereas it may appear to be a dispute only between parties to the application, they were mindful that it was a situation that banks and financial institutions grapple with. 

“It is not uncommon that the financial institutions are called upon to make additional advances on the basis of securities already perfected in their favour,” said the judge.

Schools of thought

The judges said it was clear to them, just from the findings of the High Court and that of the Court of Appeal that there were two schools of thought on this issue. 

The first school of thought, they said, is that securities should be discharged and new collateral established when new loans are sought. The other school of thought, the judges said, favours accommodating the fresh credit within the limits of the securities already established.

“This is a situation that we are persuaded needs to be conclusively addressed by the Supreme Court in the intended appeal as a matter involving general public interest. We are persuaded that the import of these provisions in relation to the question as framed needs to be determined with finality,” said the judges.