Court name
Commercial Court of Uganda
Case number
Miscellaneous Criminal Application 936 of 2018
Judgment date
14 January 2020

EMCO Works Ltd & 2 Ors v ECO Bank Ltd (Miscellaneous Criminal Application 936 of 2018) [2020] UGCommC 2 (14 January 2020);

Cite this case
[2020] UGCommC 2




                           MISC.  APPLICATION   NO. 936 OF 2018

(ARISING FROM   HCT-00-CC-CS-860-2018)

  3. PONNY LUSIBA KIWANUKA::::::::::::::::::::::::::::::::::APPLICANTS


ECO BANK LIMITED :::::::::::::::::::::::::::::::::::::::::RESPONDENT



R U L I N G:

The Applicants Emco Works Limited, Joseph Lujuza and Ponny Lusiba Kiwanuka filed this Application against Eco Bank Limited herein after called the Respondent seeking unconditional leave to appear and defend Civil Suit No. 860 of 2018 and costs of the Application.

This Application is grounded on the following;

  1. That the Applicants have a good defence to the suit and are not indebted to the Respondent.
  2. That the Respondent handled the transaction between the parties illegally, acted malafide and with utter dishonesty;
  3. That the Respondent illegally and without notice to the Applicants sold the security for the loan at an under value and;
  4. That the claim against the Applicants is brought in bad faith and for unjust enrichment.

The background to this claim as discerned from the pleadings is that the Respondent filed Civil Suit No. 860 of 2018 against the Applicants jointly and severally for recovery of UGX. 395,286,081/= being a debt due and owing from the 1st Applicant to the Respondent as of 22nd September 2017, interest and costs of the suit.

The 1st Applicant being a customer of the Respondent and operating an account with the Respondent bank, Account No. 0010266100496901 was advanced a short term loan of UGX. 251,184,635/=. The offer letter dated 12th April 2012 shows that the sum of UGX. 251,184,635/= comprised of UGX. 101,184,635/= as an existing facility that had been restructured and UGX. 150,000,000/= was a new short term loan.

The purpose of the loan was to avail the 1st Applicant with working capital for the periodic maintenance of Rwentobo- Ngoma- Kizinga Road. The interest rate chargeable on the facility was 29.5% per annum. The facility was secured by a legal mortgage over the Property comprised in Plot 564 Block 569 land at Buddu.

It is the Respondent’s contention that the 2nd and 3rd Applicants guaranteed the facility. The Respondent also alleges that the 1st Applicant defaulted in her loan obligations therefore she demanded payment from the 1st Applicant as principal debtor and the 2nd and 3rd Applicants as guarantors. That she subsequently issued a Notice of Default and then a Notice of sale and proceeded to sell the security at UGX. 100,000,000/=. According to the Respondent this sum was appropriated towards reduction of the amounts owed by the Applicants. Because the   Applicants  remained indebted to the Respondent to a tune of UGX. 395,286,081/= as at 22nd September 2017, she filed this suit seeking recovery of UGX. 395,286,081/=, interest thereon at 29.5% per annum from 23rd September 2017 till payment in full and costs of the suit.

Counsel for the Applicants submitted that this Application raises four triable issues namely; that the Applicants were not indebted to the Respondent because the interest charges were unlawful. Secondly that the 2nd and 3rd Applicants did not guarantee the Facility therefore the Respondent has no cause of action against them. Thirdly, that the Applicants were never served with the Default Notice or the Sale Notice.

Lastly, that the sale of the security was tainted with illegalities because the Respondent conducted the sale without the knowledge of the Applicants who got to know of the realization of the security when they were being evicted from the property.

It is an established principle of law that unconditional leave to appear and defend is granted upon the Applicant showing that they have a good defence on the merits; or that there is a dispute which ought to be tried, or a real dispute as to the amount claimed which requires taking an account to determine or any other circumstances showing reasonable grounds of a bonafide defence; Bhaker Kotecha vs Adam Muhammed CACA 48/2001 [2002] 1 EA 112.

The Applicants contended that the Respondent made illegal charges and deductions. That the interest rate was unlawfully charged because when a loan is subjected to penal interest and normal interest, the statement should clearly reflect the same. The Applicant alleged that the interest charged was inconsistent because in some cases such as; on 31st January 2012 when the 1st Applicant was in default there was no double charge while on 14th March 2012 when the loan was not in arrears there was a charge, Annexures ‘F’, ‘SP1.’

The Respondent’s Counsel contended that the 1st Applicant was indebted. He further stated that debts on the account were contractual debts and the Applicants were well aware that the loan accrued interest. That in the event of default, a penal interest would apply therefore the charges made and the debts accrued were not fraudulent or illegal.

It is my view that the Respondent would not be faulted for charging penal interest if it was provided for in the Facility. The Applicants did concede that delay in payment would attract penalties however Clause 7(iii) of the Facility only provides for a normal interest rate being 2% above the bank’s Uganda Shilling Prime Lending Rate of 27.5% totaling 29.5% per annum.

It is trite that parties to a contract may agree at the time of contracting that in the event of a breach, the party in default shall pay a stipulated sum of money to the other. This sum however should be a genuine pre-estimate of the loss which is likely to  flow from the breach, then it represents the agreed damages, called liquidated damages, and it is recoverable without the necessity of proving the actual loss suffered; Halsbury’s Laws of England fourth edition reissue volume 12(1)paragraph 1065 at page 486.

In this present case, no evidence has been brought to Court to enable Court ascertain the exact penal interest charged. In any case the penal interest is disputed which in my view would distinguish the claim from a liquidated damage.

For those, reasons I find the issue of the legality of interest charged by the Respondent to be a triable issue.

As for the guarantee, it is not disputed that the 2nd and 3rd Applicants guaranteed the first facility. This is clearly illustrated by the personal guarantee and indemnity endorsed by both the 2nd and 3rd Applicant on the 24th day of March 2011.

The Respondent’s Counsel submitted that while the 2nd and 3rd Applicants conceded to guaranteeing the first facility, the facility of UGX. 215,184,635/= was a consolidation of both the existing facility of UGX. 101, 184,635/= and the new short term facility of UGX.150,000, 000/=. Furthermore, that the 2nd and 3rd Applicants signed the facility as Directors of the 1st Applicant and having signed off the guarantee deed to the 1st Facility and the Facility of 12th April 2012, the guarantee extended to the facility of the suit.

A guarantee is an undertaking whereby a person contracts with another to pay a debt of a third party who notwithstanding remains primarily liable for such payment;  Paul Kasagga & Another vs Barclays Bank (U) Ltd HCMA 113 of  2008.

Clause 3 of the Personal guarantee and  indemnity executed by the 2nd and 3rd Applicants extended to other existing and future security. Clause 3 states;

“3. This Guarantee shall extend to cover:

(a) death ,bankruptcy ,liquidation or winding up of the Customer, and all sums which would have been owing to you by the Customer if such death, bankruptcy, liquidation or winding up had not occurred at the time when you received actual notice thereof.

(b) all moneys obtained from or liabilities incurred to you notwithstanding any invalidity, incapacity or irregularity in incurring such liabilities, or in any other existing or future security or agreement between you and the Customer or any other person.”

Clause 3(b) implies that the obligation of the 2nd and 3rd Applicants as guarantors to the 1st Applicant was a continuing obligation that extended to cover money obtained in other existing and future securities.

This Court is of the view that explicit terms of a contract are always the final word with regards to the intention of the parties. The Court will not improve the contract which the parties have made for themselves however desirable the improvement might be; FA Tamplin Steamship Co. Ltd vs Anglo-Mexican Petroleum Products Co. ltd [1916] AC 397 AT PG 403- 404.

Since the 2nd and 3rd Applicants are bound by the personal guarantee and indemnity, it is obvious that as guarantors they had an obligation to ensure that the loan facility was serviced. This view is further fortified by the words of Lord Diplock in Moshi vs Lep Air Services Ltd & Others (1973) AC 331,348 [1972] 2 ALL ER 393 wherein the duty of a guarantor was stated as;

“to guarantee the performance by a debtor of his obligations to a creditor arising out of a contract gives rise to an obligation on the part of the Guarantor to see to it that the  debtor performs his obligations to the creditor.”

From the foregoing, I find that while the 1st Applicant was availed the loan facility, the same was indeed guaranteed by the 2nd and 3rd Applicants. In this they also guaranteed the existing and future facilities of the 1st Applicant as provided for Clause 3(b) of the Personal Guarantee and Indemnity dated 24th March 2011.

Turning to the issue of the validity of sale, it is a settled position of the law that where money secured by a mortgage is made payable on demand, a demand in writing shall create a default in payment. Section 19(2) of the Mortgage Act 2009 provides that;

“Where the mortgagor is in default of any obligation to pay the principal sum on demand or interest or any other periodic payment or any part of it due under any mortgage or in fulfillment of any covenant or condition, express or implied in any mortgage, the mortgagee may serve on the mortgagor a notice in writing of the default and require the mortgagor to rectify the default within forty five working days.”

The Respondent’s Counsel argued that the allegation of non service of notices was a claim against the Bank but not a defence for the money claimed.  In her affidavit in reply deponed by Alex Paul Okello the Head of Remedial Management of the Respondent bank, reference is made to a Notice of Default dated 2nd January 2014 and a Notice of Sale of mortgaged property dated 5th May 2014.

Both notices were addressed to the registered proprietor of the property being Kaggwa Andrew Kyanyaga and George William Lusiba. While the Notice of default was copied to the 2nd Applicant as director of the 1st Applicant, the Notice of Sale was copied to both the 2nd and 3rd Applicants the guarantors of the facility. This in my view would fulfill the requirements of the Mortgage Act if these notices were served upon the Applicants.

Counsel for the Applicants submitted that they were not served with notices of default and sale. In his reply Counsel for the Respondent did not say whether service was effected or not.

In my view he was silent on this service because none was effected upon the Applicants. This was a breach that invalidated the sale.

The sum total is that the sale was illegally conducted and cannot stand.

Furthermore, the transaction between the intended purchaser one Jude Kasawuli and the Respondent’s advocates Masembe, Makubuya, Adriko, Karugaba & Ssekatawa Advocates indicates payment terms contrary to Regulation 14 of the Mortgage Regulations, 2012. Regulation 14 (1) stipulates that;

  1. At the fall of the hammer, the person declared purchaser shall within one working day, pay a deposit of at least thirty percent of the purchase amount to the officer conducting the sale.”

In this case as seen in the terms between Masembe, Makubuya, Adriko, Karugaba and Ssekatawa Advocates and the intending purchaser Jude Kasawuli, the buyer would pay UGX. 100,000,000/= by first depositing UGX. 20,000,000/= and pay the balance of UGX. 80,000,000/= almost a month after. This clearly was in breach of Regulation 14 of the Mortgage Regulations 2012 because as mentioned above the purchaser was to pay 30% at the fall of the hammer.

Regulation 14(2) clearly states that where the purchaser defaults in paying the deposit the property shall be resold. It further says that the balance would be paid within 21 working days. In the present case the purchaser did not pay 30% as required and the agreement for the balance gave him 90 days instead of 21 working days.

Regulation 14(4) stipulates that where the balance is not paid within the time specified the property may be resold to the second highest bidder or re-advertised in accordance with these regulations.

In this case the moment the purchaser defaulted in paying 30% and even where he paid 30% he failed to pay the balance within 21 working days this property should have been re-advertised for sale. On re-advertising the property for sale, the deposit so far made by Jude Kasawuli should have been refunded to him less the costs incurred by the Bailiff who conducted the sale as provided for under Regulation 14(5).

While this irregularity on its own would not necessarily vitiate the sale, it enabled the person who has suffered loss or injury as a result of the irregularity to seek damage or compensation against the mortgagee and under certain circumstances to seek a declaration of ownership. And where it has been by private treaty, to sue the mortgagee for breach of contract.

The foregoing irregularities cannot be ignored because while section 29 of the Mortgage Act protects the purchaser in a sale effected in a case of fraud, misrepresentation or other dishonest conduct on the part of the mortgagee of which the purchaser has no actual or constructive notice, it is trite that a Court of law cannot sanction what is illegal. An illegality once brought to the attention of Court, overrides all questions of pleadings, including any admission made thereon; Makula International Limited vs His Eminence Cardinal Nsubuga & Another [1982] HCB 11.

Since issues concerning the manner of sale have been raised this Court also finds this to be a triable issue.

Turning to the issue of the valuation report, the Respondent contended that the sale of the property was premised on the valuation of 2014 carried out by Associated Consulting Surveyor Annexure SP3 which placed the open market value of the property at UGX. 100,000,000/= and the forced sale at UGX. 50,000,000/=.  He submitted that the attachment of the valuation report by East African Consulting Surveyors & Valuers to the affidavit in reply deponed by Alex Paul Okello which found the market value of the security to be UGX. 200,000,000/= and the forced sale value to be UGX. 140,000,000/= was made in error.

According to the Respondent the property depreciated in value justifying its market value and the purchase price. In Annexure SP3 the security was described to be in poor condition. Clause 8 of the report described the condition of the buildings in these words;

The buildings appear to be constructed to standard specifications. However they are in poor state of maintenance, poor tenantable state and generally in poor condition. They are largely dilapidated. The residential house is fair and it is an old model structure.”

While the Respondent contended that the undervalue of the property is no defence to the money claimed by the Respondent, the Applicant averred that improvements had been made on the property. Paragraph 10 of Applicants’ affidavit in rejoinder deponed by the 2nd Applicant describes the improvements made in these words;

‘‘That I later improved the value of the property by adding a perimeter wall enclosure in 2011 and it is surprising that after 4 years the property was sold far below the  forced sale price and without informing or involving any of us. Copies of the photos indicating the added perimeter wall are attached as RC.’’

Because there are two valuation reports before Court, this Court is of the view that it would only be prudent that the Respondent call witnesses to validate the findings in both reports. It would only be by calling of evidence that the first report would explain the market value of the security at the time the loan facility was executed and the depreciation of the property at the time of sale.

The sum total is that triable issues having been established by the Applicants, the Application is allowed. The Applicants should file their defence within 10 days hereof. Costs of the Application will abide the decision in the suit.


Dated at Kampala this 14th day of    January     2020.