Ham Enterprises Ltd & 2 others V Diamond Trust Bank (U) Ltd & Diamond Trust(K) Limited (Civil Appeal No.13 of 2021. Judgment delivered by Chief Justice Alfonse Chigamoy Owiny-Dollo on 6th June 2023.
Attention!
A syndicated loan arrangement is a globally accepted mode of lending money and is not barred by any law in Uganda
Background to the case.
The Appellants obtained credit facilities from the Respondents and as a result, mortgaged several properties as security for the said credit facilities. The 3rdAppellant acted as a guarantor for all these facilities. The Appellants subsequently filed Suit No. 43 of 2020 contending that the Respondents had wrongly debited their loan accounts beyond what was permissible under the loan agreements and that the debits made were based on unlawful, unreasonable, and unconscionable interest rates.
The Appellants later amended their plaint and introduced a new cause of action contending that the loan agreements between them and the Respondents were void for illegality because the 2nd Respondent was not a financial institution duly licensed by the Central Bank of Uganda. The Respondents denied such illegalities in their amended statement of defence. The Appellants also filed an Application wherein they raised a preliminary objection praying for the Respondents’ defence to be struck out.
The Ruling of the High Court
The Court in allowing the Application arising from Civil Suit No. 43 OF 2020 declared the loan facilities by the Respondents to the Appellants illegal and void ab initio, hence unenforceable, on the grounds that the 2nd Respondent did not have a license from the Bank of Uganda to conduct Financial institutions business in Uganda. The Court further dismissed the Civil Suit in its entirety.
The Ruling of the court of Appeal
The Respondents were dissatisfied with this ruling, so they appealed to the Court of Appeal. The Court of Appeal in allowing the appeal with costs set aside all the orders of the trial court and remitted the case to the High Court for trial based on the pleadings of the original plaint and defense on the grounds that a plaint can not be amended to introduce a new cause of action.
The ruling of the Supreme Court
The Appellants being dissatisfied with the ruling of the Court of Appeal, appealed to the Supreme Court on 7 grounds. The major crux of the appeal was the legality of the credit facility that the 2nd Respondent extended to the Appellants. In dismissing the Appeal nearly in its entirety, the Supreme Court stated interalia thus:
1. The Appellants and the Respondents were operating under a syndicated credit facility. In a syndicated relationship, the lender that is usually a “foreign” financial institution, appoints an arranger (a financial institution duly registered under the laws of its jurisdiction) to be their agent bank to represent them in the arrangers’ dealings with the borrower.
2. The “Agency” relationship created between an arranger and an agent bank is not the “Agency” relationship envisaged under the Financial Institutions Act, 2004 as amended and the Financial Institutions (Agent Banking) Regulations 2017 respectively but rather an “Agency” relationship created under a syndicated loan agreement.
3. There is no law in Uganda barring a syndicated loan arrangement.
4. It therefore followed that a credit facility arising from a syndicated loan agreement is not an illegal facility for want of a license to “ operate as a financial institution” by the arranger bank and is a globally accepted mode of lending money.
Effect of the Supreme Court’s Ruling
The ruling has cleared the maze surrounding the “Agent Bank” as an agent of an arranger that is a foreign financial institution. This is not an arrangement for which the financial institution enabling the agent requires a license from the Central Bank because they are not carrying out “the business of financial institutions” in Uganda but are rather enabling the borrower, through a duly registered financial institution, legally obtain the requested for sums.
Concluding Observationas
This ruling as stated is a welcome clarification regarding the difference between syndicated loan facilities and agency banking as envisaged in the banking laws of the Country. More importantly however, it offers comfort to financial institutions that borrowers shall not seek to evade their contractual obligations under the guise of legal technicalities.
As Dmitry Medvedev stated; “When you borrow money, you should always think how you’re going to pay it back” and not, as in this case, seek to wiggle your way out.
Disclaimer: No information contained in this alert should be construed as legal advice from Namara Musinguzi & Co. Advocates or the individual authors, nor is it intended to be a substitute for legal counsel on any subject matter
Prepared By:
Ann Namara Musinguzi (Managing Partner)
ann@namaramusinguziadvocates.com
Ainomugisha Anita ( Legal Associate)
anita@namaramusinguziadvocates.com
