Your Commercial Borrower Has Defaulted: Can You Sue and Enforce Security at the Same Time?

A borrower owes your business KES 25 million. You hold security over several commercial vehicles, land has also been charged, and the directors signed guarantees. Repayments have stopped.

Which remedy should you use first?

Should you sue for the debt, realise the vehicles, exercise the statutory power of sale over the land, pursue the guarantors, or attempt several recovery routes at the same time?

In some financing arrangements, a creditor may have more than one remedy and may not be confined to choosing only one. But the availability and sequencing of those remedies depend on the facility documents, the security structure and the law governing each form of security. For movable collateral governed by the Movable Property Security Rights Act, for example, the Act expressly recognises that exercising rights against collateral does not necessarily prevent enforcement of the secured obligation, and vice versa.

The commercially important question is therefore not simply, “What remedies do we have?” It is: Which recovery route, or combination of routes, gives the creditor the most legally sustainable and commercially effective recovery?

Enforcement strategy should be planned before notices are issued

Once a substantial commercial facility falls into default, there can be pressure to act immediately.

That does not necessarily mean that the first step should be filing suit or instructing auctioneers.

An enforcement strategy should first identify what is actually due, what security exists, the value and priority of that security, which notices are required, whether guarantors are exposed and whether the borrower has raised any potentially sustainable dispute.

The availability of several remedies does not mean that every remedy should be pursued.

If one security is readily realisable and sufficient to discharge most of the debt, immediate litigation against every party may add cost without improving recovery. Conversely, where collateral is depreciating, the borrower appears insolvent or a guarantor holds substantial assets, delay may materially affect the creditor’s position.

The creditor is therefore buying more than litigation. It requires an enforcement architecture.

First establish the amount that can actually be recovered

A borrower being in default does not dispense with the need to establish the debt.

Before enforcement, the account should be reconciled so that the creditor can identify the principal outstanding, contractual interest or profit, applicable charges, payments already received and the balance presently claimed.

This becomes particularly important where a facility has been restructured, repayments have been irregular, several accounts exist or part of the security has already been realised.

The practical objective is simple: if the amount is challenged, the creditor should be able to explain how the figure demanded was reached.

That exercise may also prevent an otherwise sound recovery claim from becoming consumed by an avoidable dispute over the account.

What security does the creditor actually hold?

Commercial lending may be unsecured or supported by several forms of security.

A creditor may hold security over vehicles, machinery, inventory, receivables or other movable assets. Land may be charged. Directors, shareholders or related companies may have guaranteed the debt.

These rights should not be treated as interchangeable.

Where the security concerns movable property and falls within the Movable Property Security Rights Act, the creditor may have post-default rights arising from the Act, the security agreement and other applicable law. The Act permits enforcement through court or, where its requirements are satisfied, without first applying to court.

Charged land is subject to a different regime. The Land Act prescribes a default-notice process and provides remedies that may include suit for the money due, receivership, possession and the statutory power of sale. A further statutory notice is required before completing a sale of charged land.

The enforcement route should therefore follow the security actually held rather than a standard recovery template.

Can a creditor sue and realise security concurrently?

Sometimes, yes. Under section 65 of the Movable Property Security Rights Act, exercise of a post-default right against collateral does not prevent exercise of a post-default right against the secured obligation, and enforcement of the secured obligation does not prevent enforcement against collateral.

This can allow a creditor, in an appropriate transaction, to pursue the debt while also realising movable security.

But the principle should not be overgeneralised.

The precise position must be tested against the security instrument and the statutory regime applicable to the asset. A charge over land, movable security and an unsecured contractual claim do not necessarily follow identical enforcement procedures.

Accordingly, the creditor should establish what can be pursued concurrently before commencing multiple recovery processes.

Having security is different from enforcing it correctly

A creditor may hold valid and valuable security but still create an avoidable challenge through defective enforcement.

For movable collateral, the MPSRA requires a prescribed default notification before post-default remedies are exercised. The statute also regulates possession and disposal of collateral. Where possession without a court application is contemplated, section 71 makes the terms of the security agreement particularly important.

For charged land, sections 90 and 96 of the Land Act similarly impose statutory requirements before the relevant remedies, including sale, can be exercised.

A creditor should therefore review the proposed enforcement process before notices are served rather than discovering a defect after proceedings have been commenced to restrain the sale.

Where do guarantees fit into the recovery strategy?

A personal or corporate guarantee may provide an additional recovery route, but it should be examined separately.

A guarantee is ordinarily a secondary obligation dependent upon the principal debtor’s default, and its scope is governed by what the guarantor actually undertook. Liability may therefore depend on matters such as the amount guaranteed, the underlying debt, any contractual limits and the conditions upon which the guarantee becomes enforceable.

A creditor should not assume that every guarantee automatically covers every advance, restructuring or variation of the facility. The useful question is whether the particular guarantee has matured into an enforceable obligation and how pursuing the guarantor fits within the wider recovery strategy.

What happens when some security has already been realised?

Realising collateral does not necessarily extinguish the debt if the recoveries are insufficient.

For movable security governed by the MPSRA, the statute contemplates enforcement against collateral alongside the secured obligation. The creditor must nevertheless account for proceeds realised from the security; concurrent remedies are not a licence for duplicate recovery.

If vehicles have already been sold, insurance proceeds received or other payments recovered, those sums should therefore be brought into the account before the remaining balance is pursued.

The same accounting discipline becomes important when guarantors are subsequently called upon to satisfy a shortfall.

What should an enforcement review answer?

Before substantial enforcement begins, counsel should be able to answer four practical questions: What amount is presently recoverable? What security and guarantees are legally available? What procedural steps must occur before each remedy can be exercised? And what sequence offers the most proportionate and effective route to recovery?

The answer may be immediate litigation. It may be realisation of security followed by recovery of a shortfall. It may involve guarantors. In other circumstances, restructuring, negotiated repayment or settlement may produce a better commercial outcome than pursuing every available remedy simultaneously.

The objective is not maximum aggression. It is maximum lawful and commercially rational recovery.

For a lender or creditor with a substantial default, an initial enforcement assessment can ordinarily begin with the facility agreement, current statement of account, security documents, guarantees and correspondence relating to default. From those documents, the available enforcement routes, statutory requirements and principal risks can be mapped before substantive recovery action is taken.

KM Law Chambers advises and represents lenders and commercial creditors in substantial debt recovery and enforcement matters, including recovery proceedings, enforcement of movable and immovable security, disputed facility accounts and guarantee claims.

For legal assistance, contact info@kmlawchambers.com,  or call/WhatsApp +254 713 741 741.

This article provides general legal information and does not constitute legal advice on a particular financing or enforcement matter.