The Court of Appeal has dealt a major blow to the Chandaria family after ruling that companies linked to the industrial dynasty must pay Sh196 million to Shivali Investments Limited over the botched sale of Guilders International Bank, ending a 25-year commercial dispute.
In a judgment delivered by Justices Daniel Musinga, Fatuma Tuiyott, and George Odunga on Friday, the appellate court upheld part of a High Court decision that found the Chandaria companies, referred to in the case as “obligors,” liable to pay the agreed purchase price for Guilders International Bank in 1999 but overturned the order that placed primary liability on Guardian Bank Limited, which is also associated with the family.
“We find that the Chandarias’ obligation to pay the purchase price fell squarely on the family’s obligors and not on Guardian Bank as purchaser,” the judges ruled, clarifying that the companies, and not the bank itself, were responsible for meeting the Sh196 million payment to Shivali Investments.
The Court ruled that the Chandaria-owned firms, and not Guardian Bank, were contractually obligated to pay the Sh196 million agreed in a 1999 share sale agreement with Shivali Investments and three other vendors, Naval Holdings, Ketty Investments, and Saaf Holdings and associated parties owned by Mr. Rajendra (Raju) Sanghani.
According to court documents, the dispute traces back to a complex deal that began with a “Memorandum of Understanding” (MoU) dated October 13, 1999, and culminated in a formal sale agreement on December 30, 1999.
The sellers, Shivali Investments, Naval Holdings, Ketty Investments and Saaf Holdings, said they agreed to sell 200,000 ordinary shares in Guilders for Sh 196,000,000, a price tied to Guilders’ net asset value as at December 31, 1998.
The purchasers were Guardian Bank (the 1st appellant) and a group of obligors drawn from the Chandaria family and related companies (2nd–9th appellants).
The purchase price was pegged at Sh196 million, subject to adjustment based on the recoverability of certain loans in Guilders’ books by December 31, 2001, the “cut-off date.”
What followed was years of recovery work, counter-accusations and litigation over whether the purchasers had properly exhausted recovery avenues, whether the sellers misrepresented the recoverable loan portfolio, and who, as between Guardian Bank and the obligors, ultimately had to pay.
The appellants argued that many of the loans turned out to be non-performing and that they were therefore entitled to deduct huge sums from the purchase price.
Guardian and the obligors argued that the High Court judge erred in treating the MoU (which was expressly “subject to contract”) as part of the binding agreement.
The trial court accepted the sellers’ case and ordered return of securities and payment of the Sh 196 million consideration with interest at 12% as provided in the MoU.
However, the Court of Appeal found that the Chandarias’ firms failed to observe the contractual timelines and procedures for such deductions.
“It would be re-writing the contract between the parties to allow one of them extend obligations of the others and benefits for itself beyond the agreed time,” the judges ruled.
“The cut-off date was supposed to be extended in writing. It was not. Any purported sale or disposal of the securities offered by the plaintiff at any time after the cut-off date was outside the terms of the contract, irregular, null and void.”
The court added pointedly: “The horse had left the barn.”
Through their lawyers, the Chandaria companies argued that the 1999 Memorandum of Understanding (MoU), which preceded the sale agreement, was “subject to contract” and could not bind the parties unless a formal agreement was executed
They further claimed that the High Court wrongly relied on the MoU in ordering payment and return of securities.
Counsel for the appellants submitted that Guardian Bank and the obligors had lawfully set off unrecovered debts based on an independent audit conducted years later by Mr. Bhatt.
The audit, the court heard, showed that the recoverable loan portfolio had shrunk significantly, leaving the appellants with a negative balance of over Sh827 million.
However, the appellate judges dismissed the reliance on the 2014 audit report as “unsustainable and contrary to the contract’s express time limitations.”
“The evidence that emerges is that the 1st appellant had not demonstrated that it had exhausted all avenues in making full recovery of the warranted loans by the cut-off date,” the Court said.
“To admit post-2001 audits as the basis of set-offs would amount to rewriting the bargain struck by the parties.”
Lawyers for Shivali Investments, led by Mr. Sanghani, countered that the Chandaria firms never paid a single cent of the purchase price since 1999.
They argued that the appellants took over the bank, continued to profit from its operations, yet refused to remit the agreed consideration.
“The buyers cannot hide behind audits conducted over a decade later to justify non-payment,” Sanghani told the court.
“They were in control of the bank, they knew the loan book, and they chose not to honour their bargain.”
The Court agreed with this position, holding that the purchasers had full access to Guilders’ books and the opportunity to ascertain bad debts before the cut-off date.
“Had the parties taken the trouble of establishing the state of the loans as of 31st December 2001, this controversy would not have arisen,” the Court observed.
Another contentious issue involved four “blanket securities” that Guardian Bank sold to recover alleged losses.
The High Court had nullified those sales and ordered the return of the securities to the sellers.
On appeal, the Chandaria companies contended that the properties had been sold to third parties who were never heard in the proceedings, rendering the nullification a violation of the audi alteram partem principle, the right to be heard.
The Court of Appeal agreed, holding that the trial judge erred in voiding the sales without involving the third-party buyers.
“The properties are now in the hands of third parties who were not parties to the proceedings and cannot be condemned unheard,” the judges ruled.
The appellate court therefore declined to order the restitution of those securities.
In conclusion, the appellate court declared the appeal partially successful and proceeded to set aside the High Court’s judgment of February 17 2023, substituting it with fresh orders.
The bench, led by Justice Musinga, ordered the Chandaria obligors (2nd–9th appellants), jointly and severally, must pay the Sh196,000,000 to the sellers, with interest at court rates from the date the suit was filed until payment.
The court further ordered that Guardian Bank (the 1st appellant) must “discharge and return the securities specified in the Sale Agreement to the respondents, save for LR numbers 209/9832, 3734/549, 209/8000/150 and 1870/II/6,” or pay their equivalent value if unable to do so.
“Ultimately, while the appeal succeeds in part, the obligation to pay the purchase price lies squarely on the Chandaria obligors. Guardian Bank’s role is confined to releasing the securities as stipulated, and nothing more,” the Judges ruled
