An analysis on Negligence in Loan Disbursements by Banks
The High Court, in a landmark Judgment delivered on 26th May, 2023 in the case of Gulf African Bank Limited v Atticon Limited & 4 others (Comm. Case No. E086 Of 2019 ) held that a bank must conduct an official search from the Companies Registry to fulfill it’s Know Your Customer Obligations before it can open an account for a company.
The failure by the bank to conduct such official search or require the usual documents to confirm the status of the company would impute negligence on the side of the bank and will be liable for the loss incurred.
In this case the dispute arose between Gulf African Bank (GAB) sued Atticon Ltd and four other defendants for breach of contract. GAB had advanced a loan facility to Atticon to finance a contract with Export Processing Zones Authority (EPZA). The loan agreement required Atticon to pay the proceeds of the contract into an account held at GAB. However, Atticon instead deposited the proceeds into an account held at another bank. GAB sued Atticon for the balance of the loan facility, plus interest and costs.
In arriving at the decision, the Court held that the Bank was negligent as it had failed to act in accordance with the Central Bank of Kenya Prudential Guidelines, 2013. It had failed to conduct an official search at the Companies Registry to ascertain the lawful and bona fide directors of the Company or require the usual documents to confirm the status of the Company and the authorized directors.
This was amplified by the fact that it allowed transactions in the subject account even after doubts about the directorship of the Company were brought to its attention. The Bank did not also notice the difference between the Company’s directors and signatories and that they never questioned the same.
The Court held that since the Bank was negligent in making unauthorized loan advances to the Company, it could not recover the amount advanced to the Company and could only recover the money from the guarantors who purported to execute guarantees in favor of the bank and who ultimately benefited from the money paid to the company.
The Court further held that the Bank was negligent in the manner that it allowed the subject account to be opened and the loan to be disbursed and therefore it was liable for the loss to the Company for allowing imposters to run the account.
The decision is a reminder for banks to ensure at the account opening stage, during its operation and security documents handling, strict compliance with the provisions of the Prudential Guidelines are adhered to.
Failure to take these compliance steps, they will be held liable for the losses that their customers suffer.
The Lawyers acting for the banks, also have a duty of care while acting for the client bank to ensure while drawing the security documents, due diligence is conducted, including conducting an updated company search in respect of the borrowers and the Chargors and to ensure the signatures provided in the security documents are those of the authorized directors.
If you have any queries relating to the above, please do not hesitate to contact Saahil Patel or Grace Kimunya. Please note that this e-alert is meant for general information only and should not be relied upon without seeking specific subject matter legal advice.
Prepared by: Grace KimunyaAugust 18, 2023