KAMPALA: Diamond Trust Bank-Uganda (DTB) Uganda alongside its parent company Diamond Trust Bank Kenya (DTB) Kenya have a chance to present their case in the Court of Appeal after the High unjustifiably ruled that the two institutions gave businessman Hamis Kiggundu as a loan was illegal as “it contravened” Financial Institutions Act, 2004.
The Court of Appeal will soon announce a date for the hearing of the case in which Kiggundu wants DTB Uganda to pay him Sh120 billion allegedly debited from his accounts without his knowledge. Principal Judge Dr. Flavian Zeija, did not agree with Kiggundu, staying the execution of the ruling by Judge Henry Peter Adonyo of the High Court Commercial Division. Kiggundu is already in bad books of court after Zeija said the businessman sent emissaries to bribe him to rule in his favour.
Genesis of Kiggundu-DTB Uganda court battle
Between 2011 and 2016, Kiggundu borrowed money from the two commercial institutions to the tune of Shs41 billion to finance his real estate business. He willingly signed the loan agreement with DTB-Kenya. This loan was syndicated because DTB Uganda did not have all the money Kiggundu needed. DTB Uganda had to approach its affiliate in Kenya- DTB Kenya to raise the money for Kiggundu, even though Judge Henry Peter Adonyo in his ruling stated that it contravened the Financial Institutions Act, 2004.
Following the ruling, Kiggundu the proprietor of Ham Enterprises and Kiggs International Limited, would go into early celebrations, but the celebrations were cut short by Dr. Zeija, giving a leeway for DTB-Uganda to appeal against the high court ruling that was castigated by many players in the business community as well as the general public.
The Principal Judge issued an interim order staying the execution of the ruling by Judge Adonyo of the Commercial Court Division. Judge Adonyo’s ruling was that; DTB Kenya illegally carried out business in Uganda without having a licence from Bank of Uganda (BoU) as required by law; that DTB Uganda should refund all the money it had debited from Hamis Kiggundu’s accounts and that DTB- Uganda should unconditionally return all Kiggundu’s mortgaged properties after cancelling the loan mortgages; that DTB-Uganda should pay damages with 8 per cent interest as well as costs of the suit.
Kiggundu wants to be paid Shs120 billion unfairly after he did his own private audit of the bank accounts but interestingly, the independent audit agreed on by the two sides was ignored by Judge Adonyo even though he had earlier okayed it. It surprised many legal professionals in Uganda.
The battle between the two worrying sides is now set in the Court of Appeal. And DTB Uganda is expected to be joined by other members of Uganda Bankers’ Association (UBA) who have castigated Judge Adonyo’s ruling as a dangerous precedent that could harm the whole financial sector and the economy of Uganda at large.
The bankers say they already have offered syndicated loans worth over Shs5.7 trillion to Ugandan registered entities and that Judge Adonyo’s ruling puts that money at risk. They say it might also prompt other borrowers of such loans, to file similar suits to evade repayments. This would put the loan syndication business in Uganda, at a risk.
They further argue that internally Uganda does not have ready money to fund infrastructure projects, hence reliance on syndicated loans is critical in the country. For instance, Stanbic Uganda was in the process of arranging about US$2.5 billion for the oil pipeline (EACOP) meant to transport oil for export from the western district Hoima to the East African coast.
UBA Chief Executive Officer Wilbroad Owor argues that a collective raising of a loan facility guarantees greater security as the risk of defaulting is shared by the several banks in the deal. The bankers say high-risk levels of Ugandan borrowers, the cost of operations especially in the countryside, as well as expensive sources of money for lending are responsible for this.
BoU, the regulator of the financial sector in the country says it does not see anything wrong with the syndicated loan that Kiggundu received, as it is not mandatory that DTB-Kenya has to be registered in Uganda to do that business, even though some analysts say BoU must streamline the issue of foreign lending to Ugandan entities.
More so, BoU also maintains that by appointing its affiliate DTB-Uganda as its agent to handle loan collection from Ham Enterprises and keep collaterals, DTB-Kenya did the right thing. The ruling by Adonyo insinuated that DTB-Kenya was dealing with Agency banking in Uganda where small shops act agents of commercial banks for deposits and withdrawals. The DTB-Uganda agency role in as far as Kiggundu’s loan is concerned is totally different, financial analysts say.
Prof Augustus Nuwagaba, an economic transformation consultant, has quashed Judge Adonyo’s ruling. He says Uganda’s economy is very small with a GDP of only US$30 billion and that the entire commercial bank asset portfolio in Uganda is a mere Shs33.4 trillion.
He argues: “The small nature of the economy means that our financial institutions have to be leveraged through syndicating with other relatively financially powerful institutions in order to be able to disburse loans for financing large projects. For example, Kampala Oil Terminal Reserves, Kaabale Airport in Hoima, and East African Oil Pipeline are all projects funded under syndicated loan arrangement. The essence is to share risk. Same as insurance companies as most of them have to re-insure if they take on high risk policies.”
He says Uganda relies heavily on Foreign Direct Investment. “It is, therefore, not wise to abuse the only window of syndicated loans available to us.” He argues that such a matter as Hamis Kiggundu Vs DTB, Judges must not only rely on laws of the country to make judgments. “I do not mean that we pursue the opposite, which is “everybody doing as you please.”
Only to state that we cannot be wrought up, yet limitations of any given regulations are usually broader than most of us realise. There is need to consider wider ramifications given our contextual realities, he adds.
“The greatest lesson learnt is that certain court decisions may be well and legally premised, but epistemologically in need of resolutions based on wisdom. The writing is clear on the wall,” he says.
Lawyers Abdu Katuntu and Robert Kirunda, both lecturers at Law Development Centre and Makerere University School of Law respectively, while appearing on Capital FM’s Capital Gang talk show recently said that Kiggundu borrowed the money and therefore has the moral obligation to pay back the loan.
Further, Counsel Kirunda argued that the money DTB- Kenya loaned to Ham Enterprises was drawn from deposits of Kenyans, and that failure by Kiggundu to pay could create a security as well as political mayhem between Uganda and Kenya, East Africa’s largest economy whose commercial banks have set up affiliates in most of the countries in the region. For example; Kenya Commercial Bank and Equity Bank that have presence in the Ugandan market.
Katuntu opined that much as there is an issue with the legality of the transaction, Kiggundu received the money and he must pay it back, though he suggested the businessman should not be made to pay interest on the loan given the circumstances under which the money was issued.
Another lawyer Ann Nanfuka, attacked Kiggundu on the same Capital Gang show, saying he should not seek public sympathy, saying that the controversial business man took the loan and must pay back.
Agasha Mugasha, Professor of Law at Bishop Stuart University, says that some crucial information was not considered by the court and that this was a complex matter that required a detailed consideration by delving into the merits of the case.
In any case, he says, there will readily be a case where the cross-border lender (DTB (K)) accepts the law and jurisdiction of the borrower (Uganda) for ease of access to, and enforcement of, the security in the borrower’s jurisdiction. “This possibility cannot be ruled out in the instant case since the borrower’s relationship bank was DTB (Uganda), the borrower’s counsel were in Uganda, and, to buttress those two elements, the legal systems of Uganda and Kenya are similar.”
He further says Court should apply a system of law that preserves the contract, rather than striking it down like Judge Adonyo did. “The court should endeavour to hold the contract as valid because that is the presumed intention of the parties.”
still, he says there are some generally agreed principles. For instance, he says the solution adopted by the court should encourage the economic and social development of the country.
Other analysts argue that it is common market practice for locally licensed banks to seek the support of their parent companies to undertake large lending. It is also the norm for development finance institutions and others to lend to Ugandan borrowers, including the government. Similarly, foreign players are a large part of Uganda’s interbank market. As part of these transactions, a Ugandan entity may be nominated by the lenders as agent for the lender. In none of these cases does the foreign lender take a licence from the BoU. In this case, DTBK appointed DTBU as agent to debit the borrower’s account with the fees and taxes and on each anniversary of the loan and remit funds to DTBK.
More arguments against Judge Adonyo’s ruling
The undertaking of financial institutions’ business in Uganda is limited to only those licensed by the BoU under the FIA, analysts further say. They say following an amendment of the law in 2016, the relevant definition of financial institutions’ business relating to lending or extending credit is qualified by the phrase “money held on deposit”. “In other words, a licence is required only where the lending or extending of credit is from deposits collected from the Ugandan public. It is not tenable to argue that “money held on deposit” can refer to monies held on deposit outside Uganda (in this case, Kenya). It is rarely the case that legislation is given extra-territorial effect and this is not such a case.”
A foreign bank like DTB Kenya, they say, bringing money from outside Uganda cannot be governed by this provision.
The second error by the court, they say is the misinterpretation of section 117 of the FIA. “This provides that a foreign bank may apply to the BoU for permission to establish a representative office in Uganda to engage in limited activities, excluding the taking of deposits. A representative office would mean the foreign bank has premises in Uganda and holds itself out as ready to do those limited activities that it is approved to do by the BoU. Section 117 is stated in permissive terms. It is not mandatory. There is currently no foreign bank with a registered representative office in Uganda.”The court was wrong to fault DTBK for not seeking permission to open a representative office.
The third error by the court was the invoking of the Agency Banking Regulations. “These regulations apply to licensed financial institutions seeking alternative channels to reach their clients. It is under these regulations that banks have appointed shopkeepers and mobile money operators as agents to serve their clients.The Agency Banking Regulations do not govern an entity outside Uganda who simply appoints a local entity to receive loan repayments on its behalf.”
“Future defaulting borrowers may cite the Ham decision as a desperate defence. While the Ham decision is not binding on another High Court judge, it may spark hope for defaulting borrowers from foreign lenders and spawn copycat litigation.”
They until the Ham decision is set aside, it will be the thorn in the side in every opinion by counsel advising foreign lenders. “It will no doubt have a chilling effect on the credit committees of foreign lenders. This decision could not have come at a worse time, coming so soon after the successful conclusion of the oil agreements between the Ugandan Government and Total E & P. If there is a time that Uganda will need access to large credits, it is now.”
The government is the main beneficiary of syndication, with loans like US$ 703 million raised by several banks for the Bujagali Hydropower Project in 2007.
The private sector has also benefited. For instance, in 2009, 2016 and 2020, MTN Uganda has raised three syndicated loans of 100 million dollars each mainly from local banks to expand its network and recently to finance the renewal of its license.
Why Principal Judge stayed execution of high court orders favouring Kiggundu
DTB Uganda and DTB Kenya lawyers led by Kiryowa Kiwanuka, petitioned the principal judge asking him to issue staying orders such that they do not implement justice Adonyo’s decision. Kiwanuka argued that if the application is not granted, the banks would suffer substantial loss by being required to pay Shs 120 billion and approximately Shs 9.6 billion in interest on top of releasing the securities deposited with the bank.
Kiwanuka also noted that the decision would have far-reaching implications on the entire banking sector in Uganda if the implementation is done before their appeal, which has high chances of success is not yet determined.
In his ruling, Zeija noted that the orders need to be stayed because justice Adonyo issued orders in favour of one party in a transaction that he found illegal but made no mention of the sums Kiggundu had borrowed.
Here, Dr Zeija said it important to stay the implementation so that the Court of Appeal can first determine whether the transaction was illegal since it remains an issue of contention in as far as the Contract Act of 2010 is concerned. He said this is because the records show that the banks received independent advice from lawyers before signing the agreements.
Justice Zeija also said the Court of Appeal also needs to first answer the question of agency banking – whether foreign banks that are not trading in Uganda are required to obtain a license from Uganda to execute a contract. The principal judge explained that Bank of Uganda recently released a statement indicating that a license was not required in the transaction under dispute, adding that the Court of Appeal has to first determine whether Bank of Uganda was right or not.
The judge also said that there is a serious threat with the execution of the orders because he has already learnt that shortly when he issued an interim order staying execution last month, Kiggundu’s lawyers secretly extracted an order signed by the acting registrar Lillian Bucyana without court files yet they were already before him and he only learnt about it in the DTB application.
Like it is usually the practice to deposit monies to court involved before proceeding to appeal, the principal judge has said it’s not necessary here since the banks have the capacity to pay Kiggundu his monies should the Court of Appeal concur with justice Adonyo’s decision.
He also added that there is a possibility of vacating the mortgages and it would create more hardships in case the Court of Appeal quashes the decision by the lower court.
Kiggundu already in bad books of court!
Principal judge, Zeija has accused Kiggundu for sending him agents with financial proposals to influence his decision in the matter.
Zeija made the revelation on November 2, 2020 while issuing orders in which he stayed the execution of the Commercial court ruling directing Diamond Trust Bank Uganda (DTB-Uganda) and Diamond Trust Bank-Kenya to refund Shs 120 billion to Kiggundu. Zeija said he was extremely surprised by one of the parties he didn’t name of attempting to bribe him, calling the action disgusting.
“Before I take leave on this matter, I was flabbergasted by one of the parties sending emissaries to me with financial proposals in order to influence my decision. This is disgusting to say the least,” Zeija said.
Meanwhile after failing to succeed, Kiggundu petitioned the Judicial Service Commission (JSC), alleging that Dr. Zeija was biased in his ruling when he sent the case to the Court of Appeal. JSC has acknowledged receipt of Kiggundu’s petition.