A guarantor becomes liable immediately upon the default of the principal debtor

PASTOR (DR) CHIDOZIE NWACHUKWU v. NICHIM GROUP OF COMPANIES NIGERIA LIMITED & 3 ORS.

COURT OF APPEAL

(ABUJA DIVISION)

(OYEWOLE; MOHAMMED; ABANG, JJ.CA)

FACTS

Nichim Group of Companies Nigeria Limited (the 2^nd Respondent) applied to Crystal Multi-Purpose Cooperative Society Limited (the 3^rd Respondent) for a loan facility of ₦30,000,000.00. The loan was approved, and after certain deductions, the sum of ₦25,200,000.00 was disbursed to the 2^nd Respondent. As part of the conditions for obtaining the facility, the 2^nd Respondent was required to provide guarantors and security. Pastor (Dr.) Chidozie Nwachukwu (the Appellant) acted as one of the guarantors. He executed a Guarantor’s Form, wherein he declared his net worth and offered some of his landed properties as security for the loan. He also deposited the title documents relating to the properties with the 3^rd Respondent.

Dissatisfied with the interest charged on the loan, the 1^st and 2^nd Respondents commenced an action before the trial court. They sought among other reliefs, declarations that the interest charged by the 3^rd Respondent was unlawful, fraudulent, arbitrary, and contrary to mercantile practice and government policy; an order setting aside the interest claimed on the loan; an order directing that interest be recalculated at the maximum approved banking rate applicable at the time the facility was granted; and an order permitting the liquidation of the indebtedness within 365 days from the date of judgment.

The Appellant, who was not originally a party to the suit, subsequently applied to be joined in the proceedings and filed a Statement of Defence and Counterclaim. His case was that he had withdrawn as a guarantor by a letter addressed to the 3^rd and 4^th Respondents and had therefore ceased to be liable under the guarantee. He further contended that his properties were no longer available as security for the loan and sought the release of the title documents deposited with the 3^rd Respondent. At the conclusion of the trial, the trial court agreed that although the Appellant had purportedly withdrawn as a guarantor, the 3^rd Respondent was entitled, in the event of default, to exercise its right of lien or set-off over the properties whose title documents had been deposited by the Appellant as security for the loan and the accrued interest. Dissatisfied with the decision, the Appellant appealed to the Court of Appeal.

One of the issues for determination was: Whether the Appellant is a guarantor to the loan granted to the 2^nd Respondent by the 3^rd Respondent as at 31^st March 2011 and the said loan is secured by landed properties.

ARGUMENT

Counsel for the Appellant argued that there was no credible evidence showing that the loan granted to the 2^nd Respondent was secured by any landed property. According to him, the only document the Appellant executed in relation to the transaction was a guarantor’s form, which merely required him to disclose his assets and net worth. He contended that the document did not expressly state that the Appellant’s properties were to serve as collateral for the loan.

He maintained that while the Appellant agreed to act as a guarantor, the security for the loan was his personal undertaking and not the properties listed in the form. Counsel argued that the trial court wrongly concluded that the 3^rd Respondent could exercise a right of lien or set-off over the properties. He submitted that no valid mortgage, whether legal or equitable, was created over the properties and that there was no instrument authorizing the lenders to deal with the Appellant’s properties where there is default by the 2^nd Respondent. He further contended that some of the properties belonged to third parties and urged the court to hold that the loan was not secured by landed property and that the lenders had no right over the title documents.

Learned Counsel for the 2^nd and 3^rd Respondent argued that a guarantor’s obligation only becomes enforceable upon the borrower’s established default and indebtedness. Counsel submitted that where the borrower’s liability is itself the subject of litigation, it would be improper and contrary to law to proceed against the guarantor before first resolving the principal dispute between the lender and the borrower, and accordingly, the Appellant’s liability could only arise after the court had conclusively determined the rights and obligations of the parties under the loan transaction.

Learned Counsel for the 3^rd and 4^th Respondents argued that the loan was granted only after the borrower satisfied all conditions required for its approval, including the provision of landed property as security. He contended that the borrower expressly represented that landed property would be used as collateral and that the Appellant, having acted as a guarantor, could not subsequently deny the terms upon which the loan was granted. According to Counsel, the Appellant was not involved in negotiating the loan and was brought into the transaction solely to guarantee repayment.

Counsel submitted that the evidence before the court showed that the title documents relating to the properties were in fact used as security for the loan, and that both the borrower and the Appellant had acknowledged the use of those properties in connection with the transaction. Counsel further argued that the Appellant had admitted acting as a guarantor and had disclosed the same properties as part of the assets supporting his guarantee. Having induced the lenders to grant the facility on that basis, he was estopped from denying that the properties constituted security for the loan.

DECISION OF THE COURT

In resolving the issue, the Court Appeal held that:

A creditor is entitled to commence recovery of a loan sum directly against a guarantor upon the default of the principal debtor without first exhausting the remedies against the debtor. The Court of Appeal explained that, unless otherwise stipulated in the contract of guarantee, the creditor is under no obligation to make a prior demand on the principal debtor, notify the guarantor of the default, or commence civil or criminal proceedings against the debtor before enforcing the guarantee.

The Court further reiterated that a contract of guarantee is a separate and independent agreement between the guarantor and the creditor. By executing the guarantee, the guarantor undertakes to answer for the debt or default of the principal debtor and becomes liable once the debtor fails to discharge the obligation secured by the guarantee. In the instant case, the Court held that the contract of guarantee executed by the Appellant was enforceable directly against him without the necessity of joining the principal debtor to the proceedings. Accordingly, the Appellant’s contention that he had ceased to be liable as a guarantor was rejected as being contrary to settled principles governing contracts of guarantee.

Issue resolved in favour of the 3^rd and 4^th Respondent.

 I. Nkpe, Esq., Francis Ameh, Esq., for the Appellant(s)

Kamal O. Fagbemi, Esq., Kehinde Omotayo, Esq., for the 1^st and 2^nd Respondents
Emeka Ohanebo, Esq., for the 3^rd and 4^th Respondent(s)

This summary is fully reported at (2024) 5 CLRN in association with ALP NG & Co.

See www.clrndirect.com ; www.alp.company.