Commercial banks and saccos can now blacklist guarantors with Credit Reference Bureaus (CRBs) should the principal borrowers default on loans.
The judgment was made in a case where a guarantor, Obadiah Gitonga had sued Co-operative Bank listing him with a CRB after a school he guaranteed defaulted on a loan.
Obadiah Gitonga Micheu had accused Co-op Bank of occasioning him huge losses after banks rejected his application to borrow on the basis of his negative credit record.
Justice Grace Nzioka, however, ruled that although the bank was negligent in failing to inform him of the outstanding loan amount, it acted within its legal mandate to list Mr Micheu with the CRB.
“The referral of any information to the CRB is a requirement of the law and the defendant as a financial institution is entitled to do the same, and as a result of their negligence in notifying the plaintiff of the outstanding balance, the court has held that the plaintiff will not pay any interest on the said sum,” she ruled.
The High Court refused to grant Obadiah’s prayer that the bank delists him saying that his lack of knowledge about the defaulted payment did not release him from the contract, adding that he should have settled the amount when he learned of the same.
Justice Nzioka held that the relationship between Mr Micheu as a guarantor is founded in the law of guarantees and that a guarantor assumes the responsibility of paying debt where the principal debtor fails.
Mr Micheu had guaranteed loans advanced by Chogoria Junior School, where he is a director, using two parcels of land, one belonging to him and another owned by his father, Jediel Micheu.
In September 2008, the bank served him with notice that the school had defaulted and allowed him to dispose of the land to clear a Sh952,262 debt.
After the land was sold, it emerged that some Sh133,000 was still outstanding in a separate loan account.
The plaintiff argued that he learned about the outstanding amount after a bank rejected his loan application because he was already blacklisted with the CRB.
Justice Nzioka also declined to award him Sh215.8 million as damages and lost earnings that he accrued after his loan application was turned down.
The decision is expected to significantly affect the activities of lenders who require guarantors to disburse credit.