The High Court Of Uganda Emphasises The Rights Of Secured Creditors In Insolvency Proceedings

• Published date: 08 June 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: ENSafrica
• Author: Ms Sheila Pacuto and Tracy Kakongi

The High Court recently passed a decision (Bank Of India (U) Limited Vs NC Beverages Limited And Uganda Revenue Authority (Civil Suit 0009 of 2021) highlighting the priority of a secured creditor in the winding up or liquidation of a company. The court further checked the actions by the Uganda Revenue Authority ('URA') of seizing and disposing secured assets before they can be realised by a secured creditor on commencement of insolvency proceedings.

Background

The Bank of India gave a loan to NC Beverages (the 'company'). The loan was secured by debentures. The company filed a petition in court for liquidation and later defaulted on the loan. Before the bank could recover the loan, the URA seized and disposed of the charged assets including motor vehicles, a processing plant and machinery, raw materials, assorted equipment and office furniture to recover unpaid taxes. The issues before the court were whether the bank was entitled to the possession and sale of the charged property in priority to the URA.

The court held that the bank, as a secured creditor, had a right to the charged assets over all other creditors of the company. The charged assets formed a 'lender's fund' from which the bank could recover the unpaid debt owed. According to the court, the URA's action of seizing and disposing of the charged assets was unlawful and contrary to the Insolvency Act, which prohibits the levying of distress against a company upon commencement of insolvency. The URA was ordered to turn over the proceeds of the sale of the company assets to the bank.

Good news

This decision shows that a secured creditor may enforce their security even though insolvency proceedings exist against a debtor. The debtor only has the right to redeem charged assets after the debt has been paid off. The funds not subject to the secured assets are held in trust for unsecured creditors.

An exception to the above rule is that where a debtor's assets are insufficient to meet preferential debts, (including remuneration and expenses of the liquidation, employees' salaries accrued over a four-month...