The Court of Appeal, Abuja Division, has restated and reinforced the principles governing contracts of guarantee in Nigerian law, holding that a creditor is entitled to commence recovery of a loan directly against a guarantor upon the default of the principal debtor without first exhausting remedies against the debtor, and that a contract of guarantee is a separate and independent agreement that makes the guarantor liable the moment the principal debtor fails to discharge the obligation secured by the guarantee.
The decision was delivered in the case of Pastor (Dr.) Chidozie Nwachukwu v. Nichim Group of Companies Nigeria Limited & 3 Ors., by a three-member panel comprising Justices Oyewole, Mohammed, and Abang, JJ.CA.
The ruling carries significant implications for commercial lending, cooperative financing, and the widespread practice of guaranteeing loans in Nigeria, clarifying the rights and obligations of creditors, debtors, and guarantors, and shutting down several arguments commonly deployed by guarantors seeking to avoid liability.
The Facts
Nichim Group of Companies Nigeria Limited (the 2nd Respondent) applied to Crystal Multi-Purpose Cooperative Society Limited (the 3rd Respondent) for a loan facility of N30,000,000. The loan was approved, and after certain deductions, the sum of N25,200,000 was disbursed to the company.
As part of the conditions for obtaining the facility, the borrower 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 in which 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 those properties with the cooperative society.
A dispute subsequently arose over the interest charged on the loan. The borrower and its principal commenced an action before the trial court seeking declarations that the interest charged was unlawful, fraudulent, arbitrary, and contrary to mercantile practice and government policy. They also sought orders setting aside the interest, directing recalculation at the maximum approved banking rate, and permitting liquidation of the indebtedness within 365 days.
The appellant, who was not originally a party to the suit, 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 His case was that he had withdrawn as a guarantor by writing a letter to the cooperative society and had therefore ceased to be liable under the guarantee. He sought the release of the title documents he had deposited.
The Trial Court’s Decision
At the conclusion of the trial, the lower court found that although the appellant had purportedly withdrawn as a guarantor, the cooperative society 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 as security. The appellant appealed.
The Arguments
The appellant’s counsel argued that there was no credible evidence showing that the loan was secured by any landed property. He contended that the only document the appellant executed was a guarantor’s form, which merely required him to disclose his assets and net worth but did not expressly state that his properties were to serve as collateral.
Counsel argued that the security for the loan was the appellant’s personal undertaking and not the properties listed in the form, that no valid mortgage, whether legal or equitable, was created over the properties, and that there was no instrument authorising the lenders to deal with the appellant’s properties upon default. He further contended that some of the properties belonged to third parties.
Counsel for the borrower argued that a guarantor’s obligation only becomes enforceable upon the borrower’s established default and indebtedness, and that where the borrower’s liability is itself the subject of litigation, it would be improper to proceed against the guarantor before first resolving the principal dispute between the lender and the borrower.
Counsel for the cooperative society argued that the loan was granted only after the borrower satisfied all conditions, including the provision of landed property as security. He contended that the appellant, having acted as a guarantor and disclosed properties as part of his guarantee, was estopped from denying that the properties constituted security for the loan. He submitted that the title documents were in fact used as security and that both the borrower and the appellant had acknowledged their use in connection with the transaction.
The Court of Appeal’s Decision
The Court of Appeal resolved the issue against the appellant and in favour of the cooperative society, laying down several important principles on the law of guarantees.
No Obligation to Pursue the Debtor First
The court 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.
This principle addresses one of the most common misconceptions about guarantees in Nigerian commercial practice. Many guarantors assume that the lender must first sue the principal debtor, obtain judgment, attempt to execute the judgment, and fail before turning to the guarantor. The Court of Appeal held that this assumption is wrong.
The court 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 practical effect is that once the principal debtor defaults, the guarantor’s liability is immediately triggered. The creditor has the right to choose whether to pursue the debtor, the guarantor, or both simultaneously. The guarantor cannot insist that the creditor pursue the debtor first.
A Guarantee Is a Separate and Independent Agreement
The court further reiterated a foundational principle of guarantee law: that a contract of guarantee is a separate and independent agreement between the guarantor and the creditor.
This means that the guarantee does not depend on the continued existence of the loan agreement for its enforceability. Even if the terms of the underlying loan are disputed, as they were in this case, the guarantee stands as an independent obligation. The guarantor’s promise to answer for the debt of the principal debtor creates a direct contractual relationship between the guarantor and the creditor that can be enforced on its own terms.
By executing the guarantee, the court held, 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.”
Withdrawal Letter Does Not Extinguish Liability
The court rejected the appellant’s contention that he had ceased to be liable as a guarantor after writing a letter purporting to withdraw from the guarantee. The court held that this claim was “contrary to settled principles governing contracts of guarantee.”
The principle established is that a guarantor cannot unilaterally withdraw from a guarantee simply by writing a letter to the creditor. A guarantee is a binding contract, and like any contract, it can only be discharged by the methods recognised by law: performance (when the debt is paid), agreement between the parties, operation of law, or breach by the creditor that fundamentally alters the guarantor’s position. A unilateral letter of withdrawal, without the consent of the creditor, does not discharge the guarantee.
No Need to Join the Principal Debtor
The court also 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.
This principle has significant procedural implications. It means that a creditor can sue the guarantor alone, without making the principal debtor a party to the case. The guarantor cannot object that the debtor should have been joined as a necessary party. The guarantee creates a direct and independent obligation that can be enforced in proceedings to which only the guarantor and the creditor are parties.
The Broader Significance
The judgment carries significant practical implications for several areas of Nigerian commercial life.
For cooperative societies and microfinance institutions, which routinely require guarantors as a condition for lending, the judgment confirms that the guarantee provides a direct and immediately enforceable route to recovery upon default, without the delay and expense of first pursuing the principal debtor.
For commercial banks and other financial institutions, the judgment reinforces the value of guarantee arrangements as credit enhancement mechanisms, confirming that the creditor retains full flexibility in choosing which party to pursue upon default.
For guarantors, the judgment serves as a stark warning. When you sign a guarantee, you are not merely providing a reference or endorsement. You are entering into a binding legal obligation that makes you personally liable for the debt the moment the borrower defaults. You cannot withdraw unilaterally. You cannot insist that the lender pursue the borrower first. You cannot claim that your properties were not offered as security when you deposited the title documents. And you cannot escape liability by joining the proceedings and arguing that the loan terms were unfair to the borrower.
The message is clear: before signing a guarantee, understand that you are placing your personal assets, your creditworthiness, and your financial future on the line. The law treats you as if you borrowed the money yourself.
The Parties
The appellant, Pastor (Dr.) Chidozie Nwachukwu, was represented by I. Nkpe, Esq., and Francis Ameh, Esq. The 1st and 2nd Respondents were represented by Kamal O. Fagbemi, Esq., and Kehinde Omotayo, Esq. The 3rd and 4th Respondents were represented by Emeka Ohanebo, Esq.
The judgment is fully reported at (2024) 5 CLRN in association with ALP NG & Co.
The post “A Guarantee Is A Separate, Independent Agreement” — Court Of Appeal Holds Guarantor Liable Immediately Upon Debtor’s Default, Without Prior Demand appeared first on TheNigeriaLawyer.
