In Re: Ranch on the Lake Ltd (HCT-00-CC-CI 9 of 2005) [2005] UGCommC 28 (14 June 2005)

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\par }}{\*\ftnsepc \pard\plain \ql \li0\ri0\widctlpar\aspalpha\aspnum\faauto\adjustright\rin0\lin0\itap0 \fs24\lang1024\langfe1024\cgrid\noproof\langnp2057\langfenp1033 {\insrsid8875370 \chftnsepc \par }}{\*\aftnsep \pard\plain \ql \li0\ri0\widctlpar\aspalpha\aspnum\faauto\adjustright\rin0\lin0\itap0 \fs24\lang1024\langfe1024\cgrid\noproof\langnp2057\langfenp1033 {\insrsid8875370 \chftnsep \par }}{\*\aftnsepc \pard\plain \ql \li0\ri0\widctlpar\aspalpha\aspnum\faauto\adjustright\rin0\lin0\itap0 \fs24\lang1024\langfe1024\cgrid\noproof\langnp2057\langfenp1033 {\insrsid8875370 \chftnsepc \par }}\sectd \linex0\endnhere\titlepg\sectlinegrid360\sectdefaultcl\sectrsid11606618\sftnbj {\footer \pard\plain \s15\ql \li0\ri0\widctlpar\tqc\tx4320\tqr\tx8640\pvpara\phmrg\posxc\posy0\aspalpha\aspnum\faauto\adjustright\rin0\lin0\itap0\pararsid8875370 \fs24\lang1024\langfe1024\cgrid\noproof\langnp2057\langfenp1033 {\field{\*\fldinst {\cs16\insrsid11606618 PAGE }}{\fldrslt {\cs16\insrsid16209109 2}}}{\cs16\insrsid11606618 \par }\pard \s15\ql \li0\ri0\widctlpar\tqc\tx4320\tqr\tx8640\aspalpha\aspnum\faauto\adjustright\rin0\lin0\itap0 {\insrsid11606618 \par }}{\*\pnseclvl1\pnucrm\pnstart1\pnindent720\pnhang {\pntxta .}}{\*\pnseclvl2\pnucltr\pnstart1\pnindent720\pnhang {\pntxta .}}{\*\pnseclvl3\pndec\pnstart1\pnindent720\pnhang {\pntxta .}}{\*\pnseclvl4\pnlcltr\pnstart1\pnindent720\pnhang {\pntxta )}} {\*\pnseclvl5\pndec\pnstart1\pnindent720\pnhang {\pntxtb (}{\pntxta )}}{\*\pnseclvl6\pnlcltr\pnstart1\pnindent720\pnhang {\pntxtb (}{\pntxta )}}{\*\pnseclvl7\pnlcrm\pnstart1\pnindent720\pnhang {\pntxtb (}{\pntxta )}}{\*\pnseclvl8 \pnlcltr\pnstart1\pnindent720\pnhang {\pntxtb (}{\pntxta )}}{\*\pnseclvl9\pnlcrm\pnstart1\pnindent720\pnhang {\pntxtb (}{\pntxta )}}\pard\plain \ql \li0\ri0\widctlpar\aspalpha\aspnum\faauto\adjustright\rin0\lin0\itap0 \fs24\lang1024\langfe1024\cgrid\noproof\langnp2057\langfenp1033 {\b\insrsid8868196\charrsid1401876 THE REPUBLIC OF UGANDA \par \par IN THE HIGH COURT OF UGANDA AT KAMPALA}{\b\insrsid4594768\charrsid1401876 \par }{\b\insrsid8868196\charrsid1401876 \par HCT-00-CC-CI-0009-2005 \par \par }{\b\insrsid11624179\charrsid1401876 IN THE MATTER OF THE COMPANIES ACT \par \par AND \par \par IN THE MATTER OF RANCH ON THE LAKE LIMITED (IN }{\b\insrsid3821141 RECEIVER}{\b\insrsid11624179\charrsid1401876 SHIP) \par \par }{\b\ul\insrsid11624179\charrsid1401876 BEFORE}{\b\ul\insrsid4853688 :}{\b\ul\insrsid13049924\charrsid1401876 THE HONOURABLE MR. JUSTICE FMS EGONDA-NTENDE}{\b\ul\insrsid11624179\charrsid1401876 \par }{\b\ul\insrsid13049924\charrsid1401876 \par RULING \par }{\insrsid13049924 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid12060298 \hich\af0\dbch\af0\loch\f0 1.\tab}}\pard \ql \fi-360\li720\ri0\sl360\slmult1\widctlpar\jclisttab\tx720\aspalpha\aspnum\faauto\ls1\adjustright\rin0\lin720\itap0\pararsid15403299 { \insrsid12060298 Mr. Micheal Mawanda, hereinafter referred to as the }{\insrsid3821141 Receiver}{\insrsid9336507 ,}{\insrsid12060298 was appointed }{\insrsid9336507 a }{\insrsid3821141 Receiver}{\insrsid9336507 }{\insrsid12060298 by the Development Finance }{\insrsid11024307 Company of Uganda Ltd, hereinafter referred to as the DFCU to liquidate Ranch on the Lake Limited, hereinafter referred to as the company, after the company defaulted in settling its indebtness to the DFCU}{ \insrsid7942068 and another secured creditor, East African Development Bank}{\insrsid3681865 , hereinafter referred to as }{\insrsid1601796 the Bank}{\insrsid7942068 . The }{\insrsid3821141 Receiver}{\insrsid7942068 sold the security or securities, realising the sum of Shs.1,000,000,000}{\insrsid16005293 .00 (One billion shillings) only. }{\insrsid13049924 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid3681865 \hich\af0\dbch\af0\loch\f0 2.\tab}}{\insrsid3681865 The }{\insrsid3821141 Receiver}{\insrsid3681865 has come to this court seeking directions with regard to the disbursement of the proceeds, specifically in relation to two secured creditors, DFCU and }{\insrsid1601796 the Bank}{\insrsid5578964 , who have locked horns over the matter}{\insrsid3681865 .} {\insrsid16005293 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid5578964 \hich\af0\dbch\af0\loch\f0 3.\tab}}{\insrsid5578964 The brief background to this case in so far as may be relevent to the matters in issue}{\insrsid7672482 are }{\insrsid9336507 that both DFCU and }{\insrsid1601796 the Bank}{\insrsid9336507 adv}{\insrsid7672482 a}{\insrsid9336507 n}{\insrsid7672482 ced}{\insrsid7957302 sums of money to the company all of which were secured by the same securities. As lenders DFCU and }{ \insrsid1601796 the Bank}{\insrsid7957302 entered into a }{\insrsid12082894 Security Sharing Agreement}{\insrsid1015199 dated }{\insrsid6715706 16}{\super\insrsid6715706\charrsid6715706 th}{\insrsid6715706 September 1996 in which the lenders}{ \insrsid8260503 set out the terms that would govern their relationship. In due course the company failed to meet its obligations and both lenders tried cooperating }{\insrsid8158222 with the company to find a buyer for its assets but this did not succeed.}{\insrsid5578964 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid8158222 \hich\af0\dbch\af0\loch\f0 4.\tab}}{\insrsid8158222 On the 17}{\super\insrsid8158222\charrsid8158222 th}{\insrsid8158222 September}{\insrsid4006583 2001 DFCU appointed a }{ \insrsid3821141 Receiver}{\insrsid4006583 relying on its powers as a mortgagee and }{\insrsid1601796 the Bank}{\insrsid4006583 was notified}{\insrsid6905078 of this action on the same date. }{\insrsid1601796 The Bank}{\insrsid6905078 responded to this notification with its own letter calling upon DFCU to rescind its action}{\insrsid1015199 , and allow the sale of the securities to be conducted by the company with support from the lenders.}{\insrsid16196293 DFCU did not alter its position on the appointment of a }{\insrsid3821141 Receiver}{\insrsid16196293 .}{\insrsid8158222 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid16196293 \hich\af0\dbch\af0\loch\f0 5.\tab}}{\insrsid16196293 The }{\insrsid3821141 Receiver}{\insrsid16196293 subsequently sold the securities and realised a sum of Shs.1,000,000,000.00. }{\insrsid10971962 After receipt of this sum of money the }{\insrsid3821141 Receiver}{\insrsid10971962 sought the directions }{\insrsid3821141 of}{\insrsid10971962 this court in this present application}{\insrsid1332269 as to how to disburse the said amount as between DFCU and }{\insrsid1601796 the Bank}{\insrsid10971962 . }{\insrsid16196293 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid4349620 \hich\af0\dbch\af0\loch\f0 6.\tab}}{\insrsid4349620 Before the }{\insrsid12082894 Security Sharing Agreement}{\insrsid4349620 , the position of the parties were that thei r individual interests in the said securities would rank pari passu to each other}{\insrsid5656813 . Had the position remained as such no problems would have arisen. However}{\insrsid1332269 ,}{\insrsid5656813 the }{\insrsid12082894 Security Sharing Agreement}{\insrsid5656813 introduced a further condition or term in the relationship of the parties }{\insrsid5843224 with regard to realisation of securities which is the cause and or the crux of the current dispute.}{\insrsid3962599 This is clause 4.2 which states, }{\insrsid1993901 \par }\pard \ql \li1440\ri1440\sl360\slmult1\widctlpar\aspalpha\aspnum\faauto\adjustright\rin1440\lin1440\itap0\pararsid15403299 {\fs20\insrsid3962599\charrsid1993901 \'93The lenders agree that for purpose of enforcing any security, the entitlement of each lender to receive a share of such proceeds shall be dependent upon such lender having already enforced the security held by it or having taken and be actively pu}{\fs20\insrsid1332269 r}{ \fs20\insrsid3962599\charrsid1993901 suing steps to enforce the security held by it.\'94}{\fs20\insrsid10971962\charrsid1993901 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid4812164 \hich\af0\dbch\af0\loch\f0 7.\tab}}\pard \ql \fi-360\li720\ri0\sl360\slmult1\widctlpar\jclisttab\tx720\aspalpha\aspnum\faauto\ls1\adjustright\rin0\lin720\itap0\pararsid15403299 { \insrsid4812164 Relying on this provision the }{\insrsid3821141 Receiver}{\insrsid4812164 and DFCU argue that }{\insrsid1601796 the Bank}{\insrsid2049547 is not entitled to share in the proceeds of the sale of the securities as it}{\insrsid4812164 did not enforce }{\insrsid9264205 any security}{\insrsid12346618 , }{\insrsid9264205 nor did it }{\insrsid2049547 actively }{\insrsid9264205 take steps }{\insrsid2049547 to enforce the security held by it}{\insrsid12346618 , the first step of which woul d be to make a statutory demand}{\insrsid2049547 . }{\insrsid1187441 On the other hand}{\insrsid1997205 ,}{\insrsid1187441 }{\insrsid1601796 the Bank}{\insrsid1187441 contends that this provision is void for inconsistency with the Section }{ \insrsid15612236 11 of the Mortgage Act. Secondly }{\insrsid1601796 the Bank}{\insrsid15612236 contends that it took active steps to enforce the securities}{\insrsid6321663 . Thirdly that it enforced this security by concurrance }{\insrsid10443129 in}{ \insrsid6321663 conduct}{\insrsid10443129 with the }{\insrsid3821141 Receiver}{\insrsid10443129 appointed by DFCU}{\insrsid6182066 , in accordance with its agreement with the company}{\insrsid10443129 .}{\insrsid4812164 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid11347380 \hich\af0\dbch\af0\loch\f0 8.\tab}}{\insrsid11347380 It is convenient to set out Section 11 of the Mortgage Act at the outset. It states, }{\insrsid16450590 \par }\pard \ql \li1440\ri1440\sl360\slmult1\widctlpar\aspalpha\aspnum\faauto\adjustright\rin1440\lin1440\itap0\pararsid15403299 {\fs20\insrsid11347380\charrsid1401876 \'93}{\fs20\insrsid7546037\charrsid1401876 (1) The proceeds from any sale under this Act shall be applied as follows, and in the following order---}{\fs20\insrsid4924836\charrsid1401876 }{\fs20\insrsid6488533\charrsid1401876 }{\fs20\insrsid3827224\charrsid1401876 \par \par }\pard \ql \li2160\ri1440\sl360\slmult1\widctlpar\aspalpha\aspnum\faauto\adjustright\rin1440\lin2160\itap0\pararsid15403299 {\fs20\insrsid4924836\charrsid1401876 (a) in payment of all expenses properly incurred or incidental to the sale or any prior attempted sale; }{\fs20\insrsid16450590\charrsid1401876 }{\fs20\insrsid4924836\charrsid1401876 (b) in payment of all sums due to the mortgagee and to any other encumbracer with the same order of priority; }{\fs20\insrsid16450590\charrsid1401876 }{\fs20\insrsid3827224\charrsid1401876 }{\fs20\insrsid4924836\charrsid1401876 (c) in payment in the order of priority of any encumbracers subsquent to the mortgagee; and }{\fs20\insrsid16450590\charrsid1401876 }{\fs20\insrsid1401876 }{\fs20\insrsid16450590\charrsid1401876 }{\fs20\insrsid4924836\charrsid1401876 (d) the residue, in any, in payment to the mortgagor}{\fs20\insrsid12335679\charrsid1401876 .\'94 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid12335679 \hich\af0\dbch\af0\loch\f0 9.\tab}}\pard \ql \fi-360\li720\ri0\sl360\slmult1\widctlpar\jclisttab\tx720\aspalpha\aspnum\faauto\ls1\adjustright\rin0\lin720\itap0\pararsid15403299 { \insrsid12335679 Does }{\insrsid7296741 Section 11 of the Mortgage Act}{\insrsid12335679 void clause 4.2 of the }{\insrsid12082894 Security Sharing Agreement}{\insrsid7296741 as contended by }{\insrsid1601796 the Bank}{\insrsid7296741 ? }{ \insrsid3344664 Ordinarily mortgages registered }{\insrsid8986665 over the same property}{\insrsid3344664 take priority}{\insrsid423032 as between the mortgagees}{\insrsid3344664 according to the dates such mortgages were entered on the register}{ \insrsid8986665 in accordance with Section 48 (1) of the Registration of Titles Act}{\insrsid2431386 . However, parties}{\insrsid423032 holding the same interest may agree to vary the order of priority as between themselves, as the parties here did bot h }{\insrsid2431386 in }{\insrsid423032 Clause 3.1 of the }{\insrsid12082894 Security Sharing Agreement}{\insrsid3434073 , and in other instruments between them in which they agreeed that priority shall be pro rata and or pari passu}{\insrsid16470839 their respective secured liability}{\insrsid3434073 . }{\insrsid6317452 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid3434073 \hich\af0\dbch\af0\loch\f0 10.\tab}}{\insrsid3434073 Section 11 of the Mortgage }{\insrsid16470839 Act deals}{\insrsid2195070 ,}{\insrsid16470839 in my view, with th e order of priority, as between different classes of encumbrancers}{\insrsid2195070 , and}{\insrsid6317452 does not deal}{\insrsid2195070 with priority of encumbracers within the same class of encumbrace.}{\insrsid6317452 For that reason it cannot, in my view, void }{\insrsid16385230 Clause 4.2 of the }{\insrsid12082894 Security Sharing Agreement}{\insrsid16385230 , as it would n ot void Clause 3.1 of the same agreement, or all the other provisions relating to priority as agreeed between the parties}{\insrsid3819323 in other instruments between them.}{\insrsid12335679 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid3819323 \hich\af0\dbch\af0\loch\f0 11.\tab}}{\insrsid3819323 For whatever reason the parties agreed to include }{\insrsid14882956 C}{\insrsid3819323 lause 4.2 in the }{\insrsid12082894 Security Sharing Agreement}{\insrsid79893 . It}{\insrsid5641748 established a condition precedent to participating in the proceeds of realisation of the security by one party. This condition was that the other party }{\insrsid12980744 should}{ \insrsid3096861\charrsid3096861 already }{\insrsid12980744 have }{\insrsid79893 \lquote }{\insrsid3096861\charrsid3096861 enforced the security held by it or having taken and be actively pu}{\insrsid12980744 r}{\insrsid3096861\charrsid3096861 suing steps to enforce the security held by it}{\insrsid10574169 .}{\insrsid79893 \rquote }{\insrsid10574169 }{\insrsid1601796 THE BANK}{\insrsid10574169 contends that this clause is ambigous. }{\insrsid2885173 The meaning of the same is fairly clear. If one party enforced the security the other party would only share in the proceeds, assuming that the proceeds are not sufficient to meet all secured liabilities and consquent costs, }{\insrsid3213459 on a pro rata basis or pari passu basis, if that party had taken steps too to enforce its security, for instance as was provided for }{\insrsid12058811 in clause 6 (a) of the Deed of Debenture between the company and }{\insrsid1601796 the Bank }{ \insrsid12058811 dated 29}{\super\insrsid12058811\charrsid12058811 th}{\insrsid12058811 July 1996}{\insrsid14559847 , and annexed to the affidavit of Mr. Onen of the East African Development Bank.}{\insrsid2359765 This provided for concurrance with another person in selling the charged property. }{\insrsid12587199 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid2359765 \hich\af0\dbch\af0\loch\f0 12.\tab}}{\insrsid2359765 It is in fact the contention of }{\insrsid1601796 the Bank}{\insrsid2359765 that it concurred in the sal e of the securities, and is therefore entitled to share in the proceeds.}{\insrsid1530960 For evidence of concurrance reliance is on correspondence between the parties and }{\insrsid14576249 or }{\insrsid1530960 the }{\insrsid3821141 Receiver}{ \insrsid11220462 .}{\insrsid14576249 These are annextures V, W, X, Y, }{\insrsid15278490 Z}{\insrsid5178453 , AA, BB, }{\insrsid14963969 CC, DD, FF, GG,}{\insrsid2767566 HH, II, JJ, }{\insrsid12671362 KK, LL, MM, NN, OO, }{\insrsid12416823 PP,QQ, RR, SS, TT, }{\insrsid12217965 UU, VV, and WW}{\insrsid11303600 to the affidavit of Mr. Onen of }{\insrsid1601796 the Bank}{\insrsid15278490 .}{\insrsid3819323 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid12217965 \hich\af0\dbch\af0\loch\f0 13.\tab}}{\insrsid12217965 I have carefully read the above letters and or correspondence between DFCU, }{\insrsid1601796 the Bank}{\insrsid12217965 and the }{\insrsid3821141 Receiver}{\insrsid12217965 . Annexture V is the first response of }{\insrsid2120494 the Bank}{\insrsid12217965 to the appointment of a }{\insrsid3821141 Receiver}{\insrsid12217965 }{\insrsid2120494 of the company. The Bank}{ \insrsid4942601 in no uncertain terms in this letter did not concur in the appointmentof the }{\insrsid3821141 Receiver}{\insrsid4942601 . On the contrary it opposes this move, and }{\insrsid5116076 requests that the appointment of a }{\insrsid3821141 Receiver}{\insrsid5116076 be rescinded, to allow }{\insrsid11938784 a sale without }{\insrsid3821141 Receiver}{\insrsid11938784 ship}{\insrsid5116076 .}{\insrsid11938784 }{\insrsid5186606 The subsquent correspondence is devoted, among other business, to ascertaining the }{\insrsid6583401 the correct liability of the company to }{\insrsid2120494 the Bank}{\insrsid6583401 , but not expressly }{\insrsid15859751 or even implicitly,}{\insrsid6583401 touch}{\insrsid4006509 ing}{\insrsid6583401 upon the subject of exercise of the powers}{\insrsid4006509 of concurrance provided for under Clause 6 (a) of the Debenture Agreement referred to above.}{\insrsid15859751 It appears to me that an assumption was made by }{\insrsid2120494 the Bank }{ \insrsid11343177 that it would automatically share in the proceeds, and on that basis proceeded in relating to the }{\insrsid3821141 Receiver}{\insrsid11343177 .}{\insrsid12217965 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid14493046 \hich\af0\dbch\af0\loch\f0 14.\tab}}{\insrsid14493046 Prior to the appointment of a }{\insrsid3821141 Receiver}{\insrsid4220704 by DFCU}{\insrsid14493046 , the parties had participated in joint efforts with the company, to sell the company or its assets}{\insrsid4220704 , as a going concern, without enforcing their security. These efforts were unsuccessful. DFCU then embarked on }{\insrsid12388046 enforcing the securities. The efforts prior to enforcement of the securities}{\insrsid10841473 do not in my view amount to enforcement of a security or steps to enforcement of a security. }{\insrsid16465951 To this end the}{\insrsid15533947 se}{ \insrsid16465951 }{\insrsid6047111 efforts}{\insrsid16465951 do not }{\insrsid15533947 provide }{\insrsid16465951 proof that }{\insrsid11485311 the Bank}{\insrsid16465951 took steps to enforce the security. On the contrary, these steps were intended to recover the sums outstanding, without enforcing the security, as it was thought, initially}{\insrsid15533947 ,}{\insrsid16465951 that this would be the better business option. In effect this is the view of }{\insrsid11485311 the Bank}{\insrsid16465951 , expressed in its letter of }{\insrsid2975778 19}{\super\insrsid2975778\charrsid2975778 th}{\insrsid2975778 September 2001, Annexture V to Mr. Onen\rquote s affidavit.}{\insrsid14493046 \par {\listtext\pard\plain\lang1024\langfe1024\noproof\langnp2057\insrsid8350973 \hich\af0\dbch\af0\loch\f0 15.\tab}}{\insrsid8350973 For the foregoing reasons I am unable to find that }{\insrsid11485311 the Bank}{\insrsid8350973 took any steps to enforce its security so as to qualify in sharing in the proceeds realised from the eforcement of the security by DFCU, now currently with the }{\insrsid3821141 Receiver}{\insrsid8350973 .}{\insrsid1191001 And as I have already held that Clause 3.1 of the }{\insrsid12082894 Security Sharing Agreement}{\insrsid1191001 was not void, applying the }{\insrsid5471318 said}{\insrsid1191001 condition precedent}{\insrsid5471318 , }{\insrsid11485311 the Bank}{ \insrsid5471318 is not entitled to share in the }{\insrsid12989427 proceeds of }{\insrsid3821141 Receiver}{\insrsid12989427 ship, for as long as the }{\insrsid10707609 secured }{\insrsid12989427 liabilities to DFCU have not been}{\insrsid1338304 met. }{ \insrsid10707609 As between DFCU and }{\insrsid11485311 the Bank}{\insrsid10707609 , t}{\insrsid11219397 he }{\insrsid3821141 Receiver}{\insrsid11219397 is directed to proceed accord}{\insrsid13790214 ingly}{\insrsid10707609 .}{\insrsid11606618 DFCU and }{\insrsid11485311 the Bank}{\insrsid11606618 shall bear each party\rquote s own costs in these proceedings.}{\insrsid11219397 \par }\pard \ql \li0\ri0\widctlpar\aspalpha\aspnum\faauto\adjustright\rin0\lin0\itap0\pararsid11606618 {\insrsid11606618 \par \par Dated at Kampala this 15}{\super\insrsid11606618\charrsid11606618 th}{\insrsid11606618 June 2005 \par \par \par \par \par \par FMS Egonda-Ntende \par Judge}{\insrsid11606618\charrsid3096861 \par }}