Recent Ugandan Judgement Has Serious Implications For The Region's Banking Sector

• Published date: 22 October 2020
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Charges, Mortgages, Indemnities, Financial Services, Trials & Appeals & Compensation
• Law Firm: Bowmans
• Author: Ms Edline Murungi, Brian Kalule, Dominic Indokhomi and William Kasozi

On 7 October 2020, the High Court of Uganda issued a ruling (Decision) in M.A No. 64 of 2020; Ham Enterprises Uganda and Others v Diamond Trust Bank (U) Ltd and Diamond Trust Bank (K) Limited, which severely affects banking law and business in the country.

Background

Ham Enterprises Ltd, Kiggs International Ltd and Hamis Kiggundu (jointly the Borrowers), Ugandan enterprises and a Ugandan individual, borrowed money from Diamond Trust Bank Kenya Ltd (DTB Kenya).

The lending happened in Kenya and the facility agreement was subject to Kenya law. For purposes of collection, Diamond Trust Bank Uganda Ltd (DTB Uganda) was appointed as Facility Agent with mandate to debit the Borrowers' accounts in DTB Uganda. The lending was secured by mortgages over various properties belonging to the Borrowers in Uganda with DTB Uganda as the Security Trustee.

Over time, the Borrowers defaulted on their obligations and DTB Kenya issued Notices of Default as a precursor to enforcement of the securities. At this point, the Borrowers filed a suit in the High Court in Uganda contending, among others, that the lending by DTB Kenya was illegal because DTB Kenya conducted financial institutions business in Uganda without a licence issued by the Bank of Uganda (BOU) and, alternatively, DTB Kenya engaged in agent banking business in Uganda without the approval of BOU as is required by the Financial Institutions Act 2004 as amended (FIA).

The Borrowers also consequently sought orders to release the charges on the mortgaged properties. In their joint defence, DTB Kenya and DTB Uganda admitted that DTB Kenya was not licensed in Uganda but contended that the facility extended to the Borrowers did not amount to conducting financial institutions business in Uganda and that DTB Uganda's role was not one of agent banking within the meaning of the FIA.

With that 'admission' the Borrowers filed an application to strike out DTB Kenya's and DTB Uganda's written statement of defence for being a 'perpetration' of illegalities. It is from this application that the Decision arose.

The Decision

The judge made the following findings:

• DTB Kenya issued credit facilities in Kenya to Ugandan entities without the approval of BOU. DTB Kenya and DTB Uganda committed illegalities when money facilities were availed by DTB Kenya to the Borrowers without prior authorisation of BOU even if such funds were availed outside Uganda.
• Section 117 of the Financial Institutions Act, 2004 requires a foreign bank to seek the authorisation of BOU before it can engage in activities such as lending and extending credit facilities.
• It was illegal for any person to lend any money held on deposit whether within Uganda or outside Uganda without a licence.
• DTB Uganda illegally acted as agent of DTB Kenya and...