Reid v. The National Bank of Commerce Civ. App. 28-D-71; E. A. C. A. 9/9/71; Law, Mustafa JJ. A. and Spry V. P.

Reid v. The National Bank of Commerce Civ. App. 28-D-71; E. A. C. A. 9/9/71; Law, Mustafa JJ. A. and Spry V. P.

The appellant, one of the directors of Imara Plywood Ltd. executed, along with others, a personal guarantee guaranteeing payment of the company’s debt from time to time up to a maximum of Shs. 460,000/-, to the National & Grindlays Bank. By virtue of the National Bank of Commerce (Establishment and Vesting of Assets and Liabilities) Act, 1967, all the assets and liabilities of the Grindlays Bank were vested in the National Bank of Commerce, the respondent. In 196 the company negotiated with the TDF Co. Ltd. (Finance Company) a loan of Shs. 900,000 which was paid to the credit of the company’s account with Grindlays Bank. On September 1, 1966, the appellant wrote to Grindlays Bank pointing out that as the company had arranged to obtain finance elsewhere and that as he was not in favour of the arrangement he had resigned his directorship. He concluded “I take it that the securities held by the Bank will be discharged and shall be obliged if you will confirm that the Guarantee given by me to the Bank has been released.” The Bank replied that they were unable to release the appellant from his personal guarantee until the company repays its indebtedness to the Bank or until adequate alternative security is furnished. The latter concluded “we will advise you’re as soon as this has been done”. The security to which the appellant referred to in his letter was a mortgage over the company’s right of occupancy.

It was established that a second mortgage over the same property was given to the Finance Company as security for its loan to the company. Following nationalization the National Bank of Commerce as successor to Grindlays Bank waived its priority thus transforming its first mortgage into a second mortgage and giving the priority to the Finance Company which thereby assumed the status of a first mortgagee. The appellant was sued on the guarantee and judgment was given in favour of the respondent Bank.

Held: (1) “The Company’s overdraft facilities were limited to a maximum of Shs. 460,000. Grindlays Bank’s mortgage was expressed to secure a sum of Shs. 250,000. The guarantors’ liability under the guarantee was limited to Shs. 460,000……. The Finance Company paid Shs. 100,000 to the credit of the company, for which it is sought to make the appellant liable, arose “subsequent to 1^st February, 1967”. In other words, on the 1^st February, 1967 …………. The company’s indebtedness to Grindlays Bank was nil. In my opinion, the appellant was at that moment entitled to be discharged from his liability under the guarantee, in terms of the letter [of the Bank]. (2) “It is unfortunate that the case of Harilal & Co. v. The Standard Bank Ltd. [1967]. E. A. 512, was not cited in the court below, and in particular the following passage from the judgment of Sir Charles Newbold, P. at page 520 – “I do not accept the submission that those words would entitle the bank to change the whole nature of the account which the guarantor guaranteed and nevertheless impose  

upon the guarantor a liability arising in circumstances different from those which were in the contemplation of the parties at the time the guarantee was given.” These words seem to me apposite to the instant appeal. When the appellant and his co-directors signed the guarantee, the nature of the transaction envisaged was that Grindlays Bank should have a mortgage over the company’s land and factory as a primary security, supported by the directors’ personal guarantees as a secondary security. By postponing its mortgage, without reference to the appellant, the whole nature of the transaction was changed. The guarantee, from being a secondary security, became the principal security for the company’s indebtedness. This was never in the appellant’s contemplation when he gave his personal guarantee, and I do not consider that in these completely altered circumstances he can be held to his guarantee.” (3) Appeal allowed Spry V. P. concurred with the first ground for allowing the appeal and he held that it is not strictly necessary to deal with the other main issue, that is, whether the appellant was discharged from his guarantee by the action of the respondent in agreeing to postpone its mortgage to that of the Finance Company. Mustafa J. A. dissented and would dismiss the appeal.