THE REPUBLIC OF UGANDA
IN THE HIGH COURT OF UGANDA AT KAMPALA
(From Mwanga II Magistrates Court Originating Summons No.002 of 2014)
MK CREDITORS LIMITED........................................................................ APPELLANT
KYARIMPA EMILY................................................................................ RESPONDENT ,
This appeal arises from the decision of the Grade 1 Magistrate sitting at Mwanga II Magistrates court in Originating Summons No.002 of 2014, which was delivered on 28th August 2014 in which she dismissed the appellant’s case against the respondent with costs.
The brief facts from which this appeal arises are thus. The appellant company granted a loan of sh. 500,000= to the respondent at a rate of interest of 3 % per day repayable within 14 days. The security was a kibanja. These terms were reduced into a written agreement.
The respondent defaulted and interest accumulated such that as on 31st March 2014, the appellant was demanding sh. 24,451,240= from the respondent. The appellant took out originating summons seeking to foreclose and sell the kibanja security. The learned trial magistrate dismissed the suit on preliminary points of law, hence this appeal.
The grounds of appeal were set out as follows.
- The learned magistrate erred in law when she upheld the defendants preliminary objection basing on wrong legal principles.
- The learned magistrate erred in law when she held that the appellant was required to present a money lenders license to justify its claim and failure to present the same implied that it conducted the transaction in issue illegally.
- The learned magistrate erred in law when she held that the transaction in issue was subject to the Money Lenders Act only on the ground that the heading of the credit agreement stated that, ‘as required by the Money Lenders Act’.
- The learned magistrate erred in law when she held that the transaction in issue was not an equitable mortgage and thus not subject to Section 34 of the Mortgage Act 2009.
- The learned magistrate erred in law and fact, when she determined the issue of excessiveness of interest at the preliminary level before hearing the parties.
- The learned magistrate erred in law when she interpreted a determination that the interest was excessive to mean an illegality on the face of the agreement to warrant a dismissal of the case on the basis of an illegality other than court to determine the appropriate interest.
- The learned magistrate erred in law when she failed to address herself to and to apply the binding authorities provided to her in their totality on record, relating to lending money with land as security and thus came to a wrong conclusion.
- The learned magistrate erred in law when she awarded costs to the defendant, without justification, after holding that the transaction was an illegality.
The appellant prayed for setting aside the ruling and orders of the lower court, reinstatement of the suit and rehearing the same by another magistrate, and for costs.
At the hearing of the appeal, Mr. Male Mabirizi who is the M.D. of the appellant company represented the appellant. The respondent was represented by Byarugabha John. Parties filed written submissions. In submissions in rejoinder the appellant stated that the respondent did not file submissions as directed. The record shows that the respondent was directed to file submissions by 16th December 2016. She filed the same on 9th December 2016, according to the court stamp.
This therefore takes care of the appellants submissions in rejoinder which were only on the failure by the respondent to file submissions as directed.
The appellant submitted on all the grounds of appeal together. The respondent handled each ground separately.
After a careful perusal of the pleadings and the grounds of appeal, I decided to deal with this appeal by first deciding on the law governing the transaction in issue. I will next deal with the matter of interest. In answering the above, all the grounds of appeal will be dealt with.
The Law Governing the Transaction in Issue.
The appellant is a limited liability company trading under the name of MK Creditors Limited. It is into money lending business. Its headed paper upon which the loan agreement in this case was written is headed,
MK CRDEDITORS LIMITED MONEY LENDERS AND BORROWERS The parties entered into an arrangement whereby the appellant advanced a loan of sh. 500,000= to the respondent. The terms of the ‘credit agreement’ were reduced into writing on the appellants headed paper, and the agreement commences thus - ‘CREDIT AGREEMENT as required by the money lenders act. ’
Next follow the terms which include interest at the rate of 3% per day. The loan period is a maximum of 14 days. The security for the loan is a plot of land in Kabaale Busega, 72x78x80x102 feet. An agreement of sale by the original owner Ahmed Nondo to Kyarimpa Emily the respondent herein was attached to the credit agreement. A ‘spousal consent’ was attached thereto, signed by Tibefumura Julius a spouse to Kyarimpa Emily as required under the Land Act was also attached.
Some money though not it is not clear, how much was paid towards settlement of the loan. From the reading of the above, clearly, the appellant is a money lender, and the provisions of the Money Lenders Act therefore apply to him.
The appellant filed the Originating Summons as an equitable mortgagee. In submissions, he stated that the transaction was outside the Money Lenders Act by virtue of S.21 (1) ( c) of the. Money Lenders Act. That section states thus;
‘(1) This Act shall not apply - (c) to any money lending transaction where the security for the repayment of the loan and interest on the loan is effected by execution of a legal or equitable mortgage upon immovable property or of a charge upon immovable property or of any bona fide transaction of money lending upon such mortgage or charge. ’
(2) The exemption provided for in this section shall apply whether the transactions referred to are effected by a money lender or not.
The uncontested fact was that the loan was secured by a plot of land. That is immovable property. To my mind, whether the transaction was put on headed paper which stated that this was strictly a transaction governed by the Money Lenders Act, if the facts of the case revealed that it was one of the exempted transactions, the appellant would be entitled to bring to his aid the legal provisions in Section 21(1) (c) and (2) of the Money Lenders Act. See Kasifa Namusisi v. Francis M. K. Ntambazi SC CA No. 04 of 2005. To that extent the transaction would be exempt from the operation of the Money Lenders Act.
Once it was held that the transaction, whether by a money lender or not was exempted from the operation of the Money Lenders Act, then the issue whether or not the appellant presented a money lenders license became irrelevant. To that extent also, the issue of illegality was not made out.
The next matter then is whether the transaction was indeed an equitable mortgage as stated by the appellant. The respondent submitted that it was not, because, the plot of land held by the respondent was customary in tenure, and was not registered by the Recorder as required under the Lands Act.
The available evidence was that the respondent was the holder of a kibanja interest under customary tenure. This was not registered. There was no evidence that she had a certificate of occupancy.
In the case of Y. Mutambulire v. Yosefu Kimera HC C.A. No. 37 of 1972 reported in  HCB 150 Ssekandi Ag. J., held that in Uganda, the law regulating mortgages is twofold. If the
land mortgaged is regulated by the Registration of Titles Act, then that Act applied. In the case of an unregistered interest in land the applicable law was the common law and doctrines of equity. In that case, the respondent’s interest in the kibanja was unregistered and the applicable law was the common law and doctrines of equity.
This position was reiterated by Lameck Mukasa J., in Uganda Ecumenical Church Loan Fund Limited v. Nankabirwa Harriet HC CS No. 0307 of 2002, where he cited with approval the old case of Waswa v. Kikungwe (1952) ULR1, which recognized that a mortgage could be created in respect of unregistered land held under customary tenure, and principles of equity would be the applicable law. •
There was no evidence that the interest of Emily Kyarimpa was registered with a Recorder, let alone that she had a certificate of occupancy as required under the Land Act. In the Nankabirwa case (suvra), it was held that in such circumstances, the requirements of registration of the mortgage under the Land Act would not apply to such transaction either.
The Mortgage Act in S. 2 recognizes ‘informal mortgage’ to be
‘a written and witnessed undertaking, the clear intention of which is to charge the mortgagor’s land with the repayment of money or money’s worth obtained from the mortgagee and includes an equitable mortgage and a mortgage on unregistered customary land. ’
From the above, I was satisfied that the transaction which the parties entered into was an equitable mortgage, but the Mortgage Act would not apply to it on account of non registration. It is to be noted that while the existing Mortgage Act No. 8 of 2009 is not applicable to this transaction, having commenced operation on 2nd September 2011, well after the transaction was entered into, it recognizes in S. 3 (5) that unregistered mortgages are enforceable between the parties. That is quite instructive.
My finding therefore is that there was created between the parties an equitable mortgage. The Mortgage Act is not applicable to the transaction. The common law and principles of equity shall apply.
The next matter to consider would be the issue of interest. The argument was that this was harsh and unconscionable, and therefore illegal. The alleged illegality stemmed from the finding of that court that the Money Lenders Act applied to the transaction, which puts the higher limit at 24% per annun.
Where court finds that the interest rate is harsh and unconscionable, the remedy does not lie in declaring the transaction void and therefore illegal. The law tries as much as possible to protect the parties, while at the same time giving truth to the principle of freedom of contract. Even under the Money Lenders Act, the remedy is to reopen the transaction and ascertain what the court believes, in the circumstances to be appropriate interest. See Sections 11 and 12 of the Money Lenders Act. But I already held that the Money Lenders Act does not apply to this transaction.
Section 26 of the Civil Procedure Act provides that,
(1) Where an agreement for the payment of interest is sought to be enforced, and the court is of the opinion that the rate agreed to be paid is harsh and unconscionable and ought not to be enforced by legal process, the court may give judgment for the payment of interest at such rate as it may think just. ’
The above with respect would be the correct procedure to adopt in circumstances such as these. Parties ought to be given an opportunity to adduce evidence or to address court on the matter before a ruling in that respect is made.
The respondent does not, in submissions deny the indebtedness, but asserts that she paid some or the whole of that debt. The question whether there is money owing, and if, so, how much will be determined in court after evidence is adduced. That will be the same with respect to the issue of interest.
This was an appeal from an Originating Summons, where the questions put for court’s determination were not answered, but the suit was dismissed on technicalities. The appellant prayed for the suit to be sent back for trial before another magistrate. My view is that considering that that court has the jurisdiction to refer the parties to ordinary civil suits for the proper, determination of the issues, this court will make that order instead.
Accordingly this court orders that the appellant should proceed under the ordinary civil suit to have their matters determined.
There was an issue as to costs. Costs normally follow the event save for good cause. In applications, costs will often be ordered to be in the cause. In this appeal, I would have directed that costs in this court and in the court below to follow the event in the suit to be filed. But I cannot speculate when and whether there will be such a suit. In the event therefore, and in fairness to both parties, I order that each party bears their costs in this court and in the court below.
Rugadya Atwbki Judge
Court: The Registrar of the Commercial Division of this court shall read this judgment to the parties.