THE REPUBLIC OF UGANDA
IN THE HIGH COURT OF UGANDA AT KAMPALA
COMMERCIAL COURT DIVISION
(ARISING FROM HCT-00-CC-CS-0282–2008)
MARIA ODIDO …………………….……….… …….….. APPLICANT
BARCLAYS BANK OF UGANDA LTD. ………………RESPONDENT
BEFORE: HON MR. JUSTICE LAMECK N. MUKASA
This is an application by Notice of Motion under Order 36 Rule 4 and Order 52 rule 1 of the Civil Procedure Rules for orders that:
2. Cost of the application be provided for.
The grounds for the application are that:-
2. From inception the Respondent, by its conduct through its mandated officers agreed to finance the project run by BNP well knowing that the source of repayment of the loan with agreed interest was the project when completed.
3. The Project which the Respondent agreed to finance was completion of a hostel but the Respondent knowingly frustrated the project by disbursement of funds in a manner inconsistent with the Commercial presentation made by the Applicant and the said BNP and by withholding a substantial sum of the contracted amount.
4. The Respondent in breach of a lender’s implied obligation refused to fully disburse the loan thereby frustrating the project.
5. The Respondent arbitrarily charged interest on the facility amount at a rate not agreed upon and on amounts not disbursed.
6. The Respondent has sold all assets of BNP but has not accounted for the proceeds of the sale.
7. The Respondent deliberately sold the assets of BNP at an under value with interest to perpetually keep BNP indebted and to unjustifiably invoke the personal guarantees.
8. The suit against the Applicant is misconceived in so far as the purported default by BNP was caused by a breach by the Respondent. The Applicant cannot be held liable under the guarantee when the Respondent breached the facility agreement with BNP on which the guarantee was founded.
In an application of this nature the law is that the Applicant must show by affidavit or otherwise that there is a bonafide triable issue of fact or law. At this stage the Applicant is not bound to show that he has a good defence on the merits of the case but ought to satisfy court that there is prima facie a triable issue in dispute which the court ought to determine between the parties. The Court is not at this stage required to inquire into the merits of the issue raised. However the issues so raised should be real and not a sham. Court must be certain that if the fact alleged by the Applicant were established there would be a plausible defence and if the Applicant has a plausible defence he should be allowed to defend the suit unconditionally. See Abubakar Kato Kasule Vs Tomson Muhwezi (1992-93) HCB 212, Muluku Interglobal Trade Agency Vs Bank of Uganda (1985) HCB 65.
In Kotecha Vs Mohamed (2002) IEA 112 Berko JA at page 118 stated:
The Respondent’s claim, in the main suit, is against the Applicant as a guarantor for the a sum of shs2,972,238,392/= As a guarantor the Applicant’s liability for the non performance of BNP’s obligations is co-existensive with BNP’s obligation. So if BNP’s obligation turns out not to exist or is void or diminished or discharged so is the Applicant’s obligation in respect thereof. See Paul Kasagga & Anor Vs Barclays Bank (U) Ltd HCT-00-CC-MA-0113-2008
In his submission Mr. James Nangwala, for the Applicant, argued that the Applicant had signed the Guarantee upon which she is being sued on the implied understanding that the Respondent would meet its obligations to the principle borrower, BNP. He contends that the Respondent is in breach of its obligations towards the principle borrower.
In paragraph 3 of the Applicant’s affidavit she avers that the Respondent agreed to extend three credit facilities to BNP as follows:
- Apex Loan of Shs475,000000/=
- Apex Loan of Shs1,200,000,000/=
Further the Applicant contends that she has noticed that the Respondent has been fraudulent in the way it handled its financing to BNP in that the Respondent:
(ii) claims amounts under the facility which it did not disburse to BNP as being due from BNP and accordingly due from her.
(iii) sold the hostel project at an under value and failed to account to BNP for the proceeds of the sale.
(iv) sold machinery and equipment belonging to BNP for a total sum of shs70,460,000= but the said sum is not reflected on the statement.
(v) credits are reflected on the statement furnished but they are unexplained and are inconsistent with payments made.
Mr. Masembe-Kanyerezi referred to the Guarantee Deed, annexture B to the plaint, and argued that it was a Demand Guarantee. He submitted that in a demand guarantee the liability of the guarantor arises upon demand as opposed to the default guarantee. Counsel distinguished a demand guarantee from a classic guarantee of suretyship. He distinguished the guarantee in this case from that in Kassaga Vs Barclays Bank (U) Ltd (Supra) which he argued was a contract of suretyship where the Guarantor’s liability is co-existensive with the principal debtor’s liability. He referred to Paget’s Law of Banking 12th Ed page 730 para 34.2 where it is stated:
The guarantee Deed provides:-
“ In consideration of your giving time credit and/or Banking facilities and accommodation to BEE NATURAL PRODUCTS LTD of P. O. Box 5318 Kampala (hereinafter referred to as “the Principal)” I/we the undersigned hereby guarantee to you the payment of and undertake on demand in writing made on the undersigned by your or any of your Directors, General Managers, Manager or Acting Manager to pay to you all sums of money which may now be or which hereafter may from time to time become due or owing to you anywhere from or by the Principal either as principal or surety, or jointly with any other person upon current banking account bills of exchange of promissory notes or upon loan or any other account whatsoever or for actual or contingent liability including all usual banking charges.”
In reply Mr. Nangwala referred to section 16 of the Mortgage Act It provides:
Section 1 (b) defines “mortgage” to mean any mortgage, charge, debenture, loan agreement, or other encumbrance, whether legal or equitable which constitutes a charge over an estate or interest in land in Uganda or partly in Uganda and partly elsewhere and which is registered under the Act.
The facility letter annexture M1to the Applicant’s affidavit constituted the loan agreement. The facilities were secured by, among others, a legal mortgage over plot No, 63 Block 261, Lukuli Makindye Hill, first mortgage over Block 9 Plot 371 Kagugube Kibuga, unlimited guarantee by Ms Maria Odido, M/s Difonzo and Ms Achola Odido, and a Debenture over machinery and stocks.
Mr. Nangwala submitted that for a demand guarantee to be invoked there must be money owing by the principal debtor to the lender. That proof of advancing money to the borrower is on the lender. He argued that the Respondent had not shown that it had advanced all the monies to BNP as per the facilities agreement. He argued that for the obligation to pay on demand to arise under clause 1 of the Guarantee there must be money due from the principal which fact must be proved and not any fictitious amount. Further counsel argued that the Respondent had not adduced any evidence to show that the loan amounts were posted to BNP’s account. Yet clause 9 of the Guarantee provides:-
I have given due consideration to the affidavits by both parties, the documents attached and the able submissions of both counsel. I find the issues raised -- whether the Respondent charged interest arbitrarily; whether the Respondent breached the loan agreement by failing to disburse all the loan monies; whether the Respondent has demanded from BNP more funds than what it actually advanced to BNP; whether the Respondent has breached its duty to the borrower to account for the proceeds from the sale of the securities deposited and whether the respondent has acted fraudulently in respect to the loan agreement -- are issues privy to the Principal (BNP) and not to the Applicant as guarantor. A guarantor is only liable if the Principal debtor fails to pay. The guarantors liability arise where the Principal
fails to discharge its obligations to pay. In light of the above identified issues BNP’s liability is put in issue. If default by the principal debtor is disputed by the Guarantor it must be proved by the Creditor. However, it is the Respondent’s case that the Applicant’s Guarantee is a demand guarantee whereby it is not affected by the disputes underlying the agreement between the borrower and the lender. In respect of a demand guarantee, if the beneficially makes an honest demand, it matters not whether between the lender and the borrower the lender is entitled to payment. The guarantor must honour the demand. But the Statutory provisions of section 16 of the Mortgage Act tend to limit the obligations of the guarantor to the obligations of the principal debtor. So an issue arises as to the nature of the guarantee whether it is an on demand guarantee and if so what is the effect of the provisions of section 16 of the Mortgage Act. These are two traible issues which need to be resolved to determine the Applicant’s liability to pay.
In the premises I find that the Applicant has established circumstances which entitle her to be granted leave to defend the suit. Leave is accordingly granted and the Applicant is to file a Written Statement of Defence within 14 days from the date hereof. She is awarded costs of the application.
Hon. Mr. Justice Lameck N. Mukasa
19th June, 2009