Court name
Commercial Court of Uganda
Judgment date
13 July 2014

Cwezi Properties Ltd v Housing Finance Bank Ltd (Miscellaneous Application-2013/970) [2014] UGCommC 96 (13 July 2014);

Cite this case
[2014] UGCommC 96

THE REPUBLIC OF UGANDA

IN THE HIGH COURT OF UGANDA AT KAMPALA

[COMMERCIAL DIVISION]

MISC APPLICATION No. 970 OF 2013

(Arising from Civil Suit NO. 665 OF 2013)

CWEZI PROPERTIES LIMITED :::::::::::::::::::::::::::::::::::::::::: APPLICANT/PLAINTIFF

VERSUS

HOUSING FINANCE BANK LIMITED ::::::::::::::::::::::::::: RESPONDENT/DEFENDANT

 

BEFORE JUSTICE B. KAINAMURA

 

RULING

This ruling arises from an application by way of summons in chambers under Order 41 Rules 1, 2, and 9 of the Civil Procedure Rules. The Applicant seeks orders that-

  1. A temporary injunction issue restraining the respondent and/ or their agents and all persons claiming under it, from entering onto, taking possession of, advertising, selling, alienating or dealing with the applicant’s property comprised in LRV 2953 Folio 2 Plot 3 Gasper Oda Street Ntinda in anyway, pending the disposal of the main suit.
  2. Costs of this application be provided for.

Background of the application

The applicant’s Managing Director Mr. Ebert Byenkya deponed an affidavit in support of the chamber summons. Mr Ebert Byenkya deponed that the applicant sometime in late 2011 or early 2012 applied for a loan of $610,000 from the respondent Bank for the purchase of a property from Tulip Consultancy Limited comprising a 10 unit block on Plot 3 Gasper Oda Street in Ntinda/Naguru which is the suit property. The respondent offered $455,000 which the applicant/plaintiff accepted. On the 1st of August a mortgage deed was executed between the respondent and the applicant’s shareholders and Directors to secure the credit facility. However, at the time of execution the Suit Property was still registered in names of Tulip Consultancy Limited and therefore the applicant was not the registered owner of the Suit Property. The applicant was subsequently entered on the register as registered proprietor of the suit property on 17th September 2013.

 The applicant was required to pay monthly instalments of $6,268 which it did but at times defaulted due to reasons explained to the respondent. That however, on the 23rd of October 2013, the Managing Director of the applicant found the suit property advertised in the New Vision newspaper for sale by Speedway Auctioneers and Property Managers on instructions of the respondent/defendants. That this was done without any notice of default or notice of sale yet the applicant had paid off a substantial amount which was in arrears. That on further inquiry, the Managing Director of the applicant discovered that the notice of default dated 10th July 2013 and the notice of sale dated 20th September 2013 had never been addressed to the applicant. They were addressed to one of the directors; Mrs. Maxmillia Byenkya’s address which address was never given to the respondent as the applicant’s address for purposes of their dealings.

The applicant contends that the respondent was fully capable of effecting service of the notices more effectively through the addresses availed to the respondent which makes the failure to serve the statutory notices unlawful and constituted breach of the duty of good faith and full disclosure under the Mortgage Act.

That the applicant as a result has suffered serious damage to its credit reputation, financial standing and anticipated economic opportunities. The applicant has filed  a Civil Suit in this court inter alia for a permanent injunction restraining the respondent from selling and or alienating the suit property comprised in LRV 2953 Folio 2 Plot 3 Gasper Oda Street Ntinda and filed this application pending the disposal of the main suit.

The respondent filed an affidavit in reply which was sworn by Mr. Fred Byamukama in his capacity as Legal and Compliance Officer of the respondent. He stated that the applicant’s address was never availed but rather the addresses of Mr and Mrs Byenya of which any constituted an address for purposes of any correspondence. He deponed further that the first security for the loan was property comprised in Plot 3 Gasper Oda Street Ntinda which was then registered in the names of Tulip Consultancy Limited but had been agreed to be transferred into the name Cwezi Properties Limited. That the second security was property in Munyoyo registered in the name of Ebert Byenkya but powers of attorney were to be given to the applicant. Furthermore, it was clearly agreed in writing by both parties that the applicant would keep its loan account free of arrears and one of the consequences of default was that the loan would become payable in the event of any default. However, on 10th July 2013 the applicant defaulted and the respondent issued a demand notice which was communicated through the address indicated in the mortgage deed. Further still, by September 2013, the applicant’s mortgage was still in arrears.

That nonetheless, the applicant clearly admitted the default and what the respondent did was a move to foreclose as a result of the applicant acknowledging default. More so, the mortgage was registered and therein became effectual and the applicant cannot challenge its own creation. The respondent has thus not acted in bad faith or with malice but taken steps to realise the monies the applicant defaulted to pay.

Mr. Byamukama further averred that the grant of the sought for relief will only subject the respondent to financial hardship in light of the applicant’s gross default. He therefore concluded that the balance of convenience weighs in favour of the respondent and an injunction ought not to issue.

An affidavit in rejoinder was sworn by the applicant’s Managing Director Mr Ebert Byenkya in which he deponed that;

The addresses stated in paragraph 3 of the affidavit sworn by Mr Byamukama did not constitute the applicant’s address for the purpose of notices or correspondences with the applicant. He further stated that the respondent never requested for the physical address of service for purposes of serving notices on the applicant. Furthermore, that making the entire loan payable in the event of default is inconsistent with the law, consequently void, and any such term would be unfair, oppressive and unconscionable.

He further stated that the respondent’s notices were never served on the applicant before advertisement of the suit property. Additionally, the amounts claimed in the notices were not legally in default at the time not being 30 days in arrears.

Finally, that the respondent has no right to treat the whole loan as due without issuing proper Notice of default and sale or alternatively, a memorandum signed by both parties varying the mortgage deed.

At the hearing, the applicant was represented by Kavuma Siraj while Richard Bwayo appeared for the respondent.

Counsel addressed Court in written submissions.

Counsel for the applicant submitted that the criteria necessary for the grant of a temporary injunction as was laid down in the case of Buziranjovu Development Company Vs Idah Nantaba Misc App No.141 of 2013 is to  the effect that:-

First is the need for the applicant to show that there is a substantial question to be investigated. Counsel highlighted the fact that there is a main suit that was filed HCCS 665 of 2013 challenging the validity of the mortgage deed, notice of the default and notice of sale under which the respondent purports to sell the suit property.

It was Counsel’s submission that the mortgage was invalid for lack of capacity of the applicant to create a charge over property which was still registered under the name Tulip Consultancy Limited. He cited Section 115 of the RTA which states that the proprietor may mortgage the land by signing a mortgage. He further cited Section 2 of the RTA which defines proprietor as the owner whose name appears or is entered as proprietor on the register. Counsel cited the case of Fredrick Zaabwe Vs Orient Bank & others SCCA No. 04/2006 at pages 25 and 26 where Justice Bart Kareebe JSC emphasised the point of invalidity of a mortgage created by someone other than the registered proprietor.

Additionally, Counsel challenged the execution of the mortgage deed as improper. It was his argument that the deed was never executed at all basing on the fact that Mr. and Mrs. Byenkya signed but no name was ascribed to the applicant at page 22 and none designated as having signed the deed on behalf of the applicant. Counsel pointed to the fact that the applicant is a limited liability company, and Section 50(2) of the Companies Act 2012 provides that contracts may only be made on behalf of the company in writing executed by a person expressly or impliedly authorised to do so. Counsel again relied on the case of Fredrick Zaabwe Vs Orient Bank & others at page 24(supra) where it was held that such irregularity renders the mortgage invalid.

Counsel also raised the ground of invalidity of notice of default and notice of sale. He submitted that because the unregistered instrument was legally ineffective, so was the notice of default and notice of sale. He added that both notices as required by Section 19 and 20 of the Mortgage Act were never served upon the applicant. Counsel further stated that the amounts claimed in the notices of          $ 452,147 and $453,665 were not due because this was a long term loan payable within 10 years.

Counsel submitted that the term set that gave the bank entitlement to summarily cancel the loan was unconscionable which the Mortgage Act defines as unfair or oppressive. In conclusion Counsel stated that there are substantial questions to be investigated in HCCS 665 of 2013 which are more likely to be answered in favour of the applicant.

On the second criteria i.e that the applicant would suffer irreparable injury, Counsel submitted that irreparable damage was defined in the case of Buziranjovu Development Company Vs Nantaba Idah (supra) to mean injury that is substantial or material which cannot be adequately compensated for in damages. Counsel urged that the applicant’s property had already been advertised for sale which was scheduled to take place on the 22nd November 2013. On the basis of the decision in Uganda Development Bank Vs Alley Route M.A 618 of 2007, Counsel submitted that selling the property to a third party would forever constitute irreparable damage to the applicant.

On the ground of balance of convenience Counsel submitted that it is in favour of the applicant. He stated that if the suit property is sold, the property will be completely lost and irrecoverable if the applicant wins the main suit.

Additionally, Counsel submitted that the loan was payable within a period of 10 years and as such if the applicant continues to make to periodic payment, the respondent will suffer no damage if the order is granted.

Counsel accordingly invited court to find that the balance of convenience lies with the applicant and prayed that court grant the application with costs to the applicant.

In reply Counsel for the respondent submitted that the applicant’s submissions did not meet the four corners necessary for the grant of an injunction. On the first criteria of a prima facie case, it was Counsel’s contention that the applicant was just trying to abscond from its duties to pay back the respondent. He further stated that the instruments that were signed were properly executed and the two directors properly understood what had been created. He further cited Section 3 of the Mortgage Act where among others; an unregistered mortgage shall be enforceable in law. Furthermore, in Section 4 of the Mortgage Act, it is the duty of the mortgagor and mortgagee to disclose all the necessary information.

Additionally, Counsel submitted that Section 21(1) (a) of the Mortgage Act provides that the money is payable in full upon default by the mortgagor. Therefore, the recalling of the loan cannot be said to be unconscionable since the deed indicated such a provision. He supported this position with decision of Housing Finance Bank Ltd Vs Edward Musisi Civil Appeal NO. 22 of 2010 where it was held that the power of sale is exercisable when an instalment of a mortgage has become due and payable but has not been paid. Counsel further stated that Regulation 6 of the Land Regulations is to the effect that the service will be deemed to be effective if it is served by post to the address last known and it shall be deemed to be served upon posting. Counsel further pointed to fact that Counsel for the applicant’s relied upon repealed section i.e. Section 115 of the RTA. It was counsel’s further submission that the case of Fredrick Zaabwe Vs Orient Bank and others cited by the applicant also states that a person deriving an interest in the property can mortgage it. Clearly, the applicant indicated its capacity as purchaser which was reflected in the mortgage deed.

Counsel submitted that the applicant’s two sole directors signed the deed. Section 55 of the Companies Act provides that any two directors or a director and secretary of the company can execute validly a document on behalf of the company without a seal. Counsel urged that Mr. and Mrs. Byenkya are the two directors of the company and both signed on behalf of the company in Latin character as provided for in Section 148 of RTA.  

On ground of irreparable damage, Counsel submitted that the applicant admitted default and Section 20(e) of the Mortgage Act grants the respondent the remedy of sale. Therefore, Counsel urged the court to find that the applicant will not suffer irreparable damage.

 On the ground of balance of convenience, Counsel submitted that according to Halsury’s Laws of England, 3rd Edition, para 766 at page 366 the burden of proving the balance of convenience lies upon either party to prove that it will suffer more upon the refusal to grant the injunction. He stated that the applicant’s default occasioned to the respondent great loss given the fact that it has to comply with the Financial Institutions(credit classification and provisioning) Regulations, SI No. 43 of 2005,specifically regulation 6(1), 6(4),11(1).He therefore invited court to find the balance of convenience is in the respondent’s favour.

Counsel concluded by stating that should court be inclined to grant a temporary injunction then the applicant should be required to furnish a security deposit of 30% of the forced sale value of the mortgaged property of the outstanding amount in accordance with Regulation 13(1) of the Mortgage Regulations 2012. The rationale is that the injunction postpones the sale of the mortgaged property. He prayed that the security be in liquid / monetary form.

In rejoinder Counsel for the applicant admitted that Section 115 of the RTA was repealed but maintained that there must be capacity of a party to mortgage the property which the Mortgage Act 2009 still provides for in Section 3(1).

Counsel maintained that the thrust of the decision in Zaabwe Vs Orient Bank and others (supra) is that the body of the mortgage deed must disclose the authority by which person purporting to mortgage the property is acting. He further stated that, that authority is what is provided in Section 146(1) of the RTA which requires the person signing a power of attorney to signify such authority. Counsel urged; this kind of arrangement was never done in order to properly execute the deed the registered proprietor of the suit land who was still Tulip Consultancy Limited.

On the issue of recalling the loan, Counsel for the applicant stated that Section 21 (1) (a) of the Mortgage Act provides only for the situations where the mortgagee can institute a suit against the mortgagor which is not the case in this matter.

 On the issue of address of service, Counsel submitted that as admitted by Byamukama in his affidavit, the applicant was never sent the notices and accordingly they were not served on the applicant.

Counsel also maintained that the applicant will suffer irreparable damage if the application is not granted. He thus prayed that the balance of convenience be found in the applicant’s favour. On the issue of security deposit, Counsel argued that Regulation 13 which the respondent’s counsel cited is inconsistent with Mortgage Act and thus void by virtue of Section 18(4) of the Interpretation Act. He therefore invited court to unconditionally grant this application.

 

 

 

Decision

I have read the pleadings in this application, the affidavits for and against and considered the submissions of both Counsel.

It is now a well settled position of the law that interlocutory applications such as this one for a temporary injunction are meant to provide interim relief but do not dispose of the substantive suit which still has to be heard on its merit. The interim relief sought has the effect of maintaining the status quo pending the disposal of the main suit.

The conditions for the grant of interlocutory temporary injunction are first that the applicant must show a prima facie case with a probability of success. Secondly such injunction will not normally be granted unless the applicant might otherwise suffer irreparable injury which would not be adequately compensated by an award of damages. Thirdly if the court is in doubt, it will decide an application on the balance of convenience (See E.L.T Kiyimba Kaggwa Vs Tiaji Nasser Katende HCCS No 2109 of 1984).

On the first condition requiring the applicant to prove/show a prima facie case, the conventional thinking now based on a wealth of authorities is whether there are serious questions to be tried rather than prima facie case with a probability of success. As observed per curiam by Odoki J (as he then was) in Kiyimba Kaggwa Vs Katende (supra)   

“It is my humble view that considering the object of an interim injunction and the nature of proceedings at which it is considered, a more realistic and fair condition would be to satisfy the court that there is a serious question to be tried rather than a prima facie case with a probability of success for as Lord Diplock pointed out in the American Cyanamine case (supra) in the house of Lords,

“The use of such expression as a “probability” a prima facie case” or “strong prima facie case” in the context of the exercise of a discretionally power to grant an interlocutory injunction leads to confusion as to the object of this form of temporary relief. The court no doubt must be satisfied that the claim is not frivolous or vexatious in otherwise that there is a serious question to be tried.   

As stated earlier this conventional thinking has now been adopted in many cases (see Napro Industries Ltd Vs Five Star Industries Ltd and Star Lite Industries   Misc. Appl No 773 of 2004 arising from HCCS No 325 of 204, and Muhamed Yahu Vs Abdur Khamis HCCS No 217 of 94). I agree with this approach and will adopt it for this application. 

In the main suit the applicant is challenging the validity of the mortgage deed, that at the time it was executed the applicant did have power to create a charge over the suit property as it was still registered under difficult names. The applicant further challenged the validity of the notice of default and notice of sale issued by the respondent as they were not served on the applicant. In the main suit, the applicant also alleges malice and bad faith on the part of the respondent/defendant and on that basis contended in this application that there are substantial questions to be investigated in main suit. All this is denied by the respondent and they contend that the mortgage deed was property executed by the two directors of the applicant who understood they had created a charge over the suit property and that the notices as served were effective.

I agree that the matters stated above raise substantial questions which have to be investigated at the trial of the main suit. It is difficult at this stage to determine whether the case has a possibility of success but the applicant raised serious issues which ought to be tried by this court and therefore constitute a serious question to be tried and the claim is not frivolous or vexatious.

The second consideration for determination by the court is whether the applicant is likely to suffer irreparable harm which cannot be compensated for in damages. In the Kiyimba Kaggwa Vs Katende case (supra) court while defining irreparable harm stated it to mean that there must not be physical possibility of repairing injury, but that the injury must be substantial or material which cannot be adequately compensated for in damages. Counsel for the applicant urged that the applicant’s property had already been advertised for sale and it was his contention that selling the property to a third party would forever constitute irreparable damage to the applicant. On his part Counsel for the respondent urged that in the mortgage deed under clause 6.3 the applicant had agreed to the sale of the property in the event of default and as such the applicant cannot suffer irreparable injury since the property of the suit property was financed by the respondent and the respondent would be selling what it financed in order to retrieve depositors money.

In the case of Pan Afric Impex (u) Ltd Vs Barclays Bank PLC & An. MA 804 of 2007 Justice Egonde Ntende (as he then was) while considering what should be considered in determining what amounts to irreparable harm which cannot be compensated by an award of damages referred to Lord Diplocks finding in American Cynamid Co. Vs Ethicon Ltd (supra) as 510 which was to the effect that:-

“The governing principle is that the court should first consider whether if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendants continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiffs claim appeared at that stage. If on the other hand damages would not provide an adequate remedy for the plaintiff in the event of his succeeding at the trial, the court should then consider whether on the contrarily hypothesis that the defendant were to succeed at the trial in establishing his right to do that which was sought to be enjoined he would be adequately compensated under the plaintiffs undertaking as to damage for the loss he would have sustained by being prevented from doing so between the time of the application and the time of the trial. If the damages in the measure recoverable under such an undertaking would be adequate remedy and the plaintiff would be in such a financial position to pay them, there would be no reason on this ground to refuse an interlocutory injunction”. 

The remedies sought in the main suit are principally a declaration that the mortgage deed is null and void, a declaration that the notice of default and notice of sale are invalid and a declaration that the intended sale of the plaintiff’s property is unlawful. As found above, the matters above raise substantial questions which need to be investigated at the trial. As observed above in the American Cynamid Co case (supra) the crucial issue to consider is to determine whether the applicant/plaintiff could not be adequately compensated in damages recoverable and weigh it against the corresponding need of the defendant to be protected against injury resulting from him having been prevented from exercising his own legal rights of which he could not be compensated under the plaintiffs undertaking in damages should the case be resolved in the defendant favour at trial.    

In my view, from the facts now before me, and in view of my finding that the applicant/plaintiff has established serious questions for determination, i am satisfied that the applicant is likely to suffer irreparable damage which cannot be adequately atoned for in damages, while on other hand the respondent/defendant will be compensated for in damages by the applicant/plaintiff for the period it has been prevented from exercising its own legal rights should the case be decided in its favour. In the result i determine that the balance of convenience lies in the applicant/plaintiffs favour.  

All in all and for the reasons given here above in this ruling the applicant has demonstrated that there is merit in his application. Accordingly the application is allowed and a temporary injunction is issued restraining the respondent its authorised agents and/or servants or any other person claiming under it from entering into, taking possession of, advertising, selling or dealing with the applicant’s property comprised in LRV 2953 Folio 2 Plot 3 Gasper Oda Street Ntinda in any way pending the disposal of the main suit.

 

 

 

I make further subsidiary orders as follows:-

  1. I order that the temporary injunction be lifted if within 4 months from today’s date, the suit is not set down for hearing.
  2. Costs shall be in the cause                          

 

B. Kainamura

Judge

13.06.2014