Margherita Millers Limited and Anor v Housing Finance Bank (HCCS 390 of 2018) [2021] UGCommC 45 (31 August 2021)

Full Case Text

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# THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA AT KAMPALA (COMMERCIAL COURT DIVISION)

### FROM HCCS No. 390 OF 2018

## 1. MARGHERITA MILLERS LIMTED

$\mathsf{S}$

$20$

$25$

2. JULIUS MUSIIMENTA BAKEINE:::::::::::::::::::::::::::::::::::

**VERSUS**

### 1. HOUSING FINANCE BANK LIMITED

2. COMMISSIONER LAND REGISTRATION::::::::::::::::::::::::::::::::::::

## BEFORE: HON. JUSTICE RICHARD WEJULI WABWIRE

### **JUDGMENT**

The Plaintiffs filed this suit against the Defendants contesting the legality of the Mortgage Deed and debenture executed in favour of the 1st Defendant in respect of credit facilities granted to the 1st Plaintiff. The Plaintiffs are also challenging the procedure followed by the 1st Defendant in recovery of the outstanding loan which it advanced to the 1st Plaintiff. In the amended plaint filed in Court on 8th May 2019, the Plaintiffs are seeking for the following declarations and orders;

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- i) A declaration that the purported Mortgage executed on 23rd March 2012 by the Plaintiff over the land comprised in Mailo Register, Kyadondo Block 219 Plot 205 at Najeera and Block 108 Plots No. 181 and 248 at Nakyesanja and Kyadondo Block 206, Plot 1358 at Mpererwe was null and void; - ii) A declaration that there was no Mortgage executed by the Plaintiff in favour of the first Defendant over land comprised in Kyadondo Block 206, Plot 1358 at Mnererwe: - iii)A declaration that the debenture purportedly executed by the $1st$ Plaintiff in favour of the $1^{st}$ Defendant on $23^{rd}$ May 2012 is null and void: - iv) A declaration that the sale of the security properties by the $1st$ Plaintiff was null and void; - v) An order to the $1^{st}$ Defendant to pay over to the Plaintiff special damages being the sums it received from the illegal sale of the landed securities, machinery, and factory in pursuance of a purported power of sale under the Mortgage and debenture with *appropriate interest;* - vi) Special damages; and General damages.

In the alternative the Plaintiffs are also seeking for;

- a) A declaration that the 1st Defendant negligently and/or improperly and/or unlawfully and/or wrongfully exercised its power of sale of the Mortgaged properties and the debenture; - b) A declaration that the Defendant negligently and/or wrongfully and/or improperly and/or 55 unlawfully sold or caused the sale of the 1st Plaintiff's factory under the debenture;

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- c) A declaration that the $1^{st}$ Defendant as Mortgagee/pledge generally breached its duty to the 1st Plaintiff as a Mortgagor/pledger in the purported sale of the properties; - 60

d) General damages:

- *Interest:* $e)$ - 65 Costs.

#### **BACKGROUND**

The 1st Plaintiff was a customer of the 1st Defendant Bank operating bank account number 0121110023700 at the Defendant's Kampala Road Branch. In 2012, the 1st Plaintiff applied to 70 the 1st Defendant for credit facilities totalling to US \$ 701,432. The credit facilities included; an Overdraft Business Facility of USD 70,000, a term loan of USD 426,000 and a Finance Lease Facility of USD 205,432.

- According to the 1st Defendant Bank, the repayment of the sums advanced, and the interest $75$ accrued under the above facilities was secured by real property; parcels of land comprised in Block 108 plots 181 & 248 at Nakyesanja, Block 206, Plot 1358 at Mpererwe & Block 219 Plot 205 at Najeera and a debenture. - The Plaintiffs' case is that the legal documents creating the Mortgage over the above-mentioned 80 property and the debenture were not duly or legally executed in accordance with the law. The 1st Defendant did not issue a notice of sale in respect of the Debenture and that the legal process required to be followed in recovery of outstanding loans under a Mortgage was not complied with. - 85

According to the 1st Defendant, the 1st Plaintiff's Managing Director and the 2nd Plaintiff approached the 1st Defendant in 2009 and 2010 and applied for credit facilities to wit; an

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overdraft business facility of USD 70,000, a term loan of USD 426,000 and a finance lease facility of USD 205,432. The above facilities were respectively secured by, among others, the following assets as security for repayment:

- The Overdraft and the Term Loan were secured by a further charge over property $a)$ comprised in Kyadondo Block 108 Plots 181 and 248 at Nakyesanja, Mengo District, a first legal Mortgage over land comprised in Kyadondo Block 219 Plot 205 at Najeera, Wakiso District, a further charge over property comprised in Kyadondo Block 206 Plot 1358 at Mpererwe, Personal Guarantees of the 1st Plaintiff's Directors, that is, the 2nd Plaintiff and Edrida Nimwesiga Musiimenta, a Debenture over the Company's floating and fixed assets, registered Powers of Attorney duly executed by Julius Musiimenta and Edrida Nimwesiga Musiimenta in favour of the $1^{st}$ Plaintiff to use the suit properties to secure the loan facilities of USD, 426,000, USD 256,970 and USD 70,000, among others. - The Finance Lease Facility-VAF was secured by original documents of Title for the $b)$ financed machinery (PETLINE-Injection moulding machinery, blow moulding machinery, PET preform moulds and brand new 240KW cummins silent diesel generator) duly registered in the names of the 1st Defendant, comprehensive insurance cover over the machinery to be purchased, a lien on the $1st$ Plaintiff's Bank Account No. 0121110023700 with the 1st Defendant's Kampala Road Branch, Personal Guarantees of the Directors, that is, the $2^{nd}$ Plaintiff and Mrs Edrida *Nimwesiga Musiimenta, among others.*

The 1st Plaintiff serviced the facilities for a few months before it defaulted on its repayment obligations. The 1st Defendant also raised a counterclaim against the 1st and 2nd Plaintiffs and Edrida Nimwesiga Musiimenta, a director in the 1st Plaintiff Company. In the Counterclaim the $1st$ Defendant/Counter-claimant is seeking for:

(a) Payment of the outstanding sum of USD 443,654.92 as at $23^{rd}$ May 2018.

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- (b) Accrued interest on (a) above at the agreed interest rate, being 11% per annum, until payment in full. - (c) Default interest in (a) above at 5% per annum until payment in full.

(d) Costs of the Counterclaim

At the scheduling of this matter the parties agreed on the following issues to be presented to Court for determination:

1. Whether the Mortgage was valid?

- 2. Whether the debenture was valid? - 3. Whether the sale of the land and the plant and machinery pursuant to Mortgage and the debenture was valid?

- 4. Whether, if the Mortgage and debenture were valid, the 1st Defendant negligently and/or wrongfully and/or improperly exercised its power of sale of the security properties, thereby breaching its duty of care to the 1st Defendant? - 5. Whether the $2^{nd}$ Plaintiff is entitled to take out of the factory at Najeera his personal 140 Dell Computers, (3 in number), 1 number printer and 1 number scanner valued at Shs. 30m/= (or whether the 1st Defendant should not pay the 30m/= if it fails to return the items)? - 145 6. Remedies to the parties?

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When this matter came up for the hearing, the Plaintiffs were represented by Messrs' Barya. Byamugisha & Co. Advocates while Messrs' Nangwala, Rezida & Co. Advocates represented the $1^{st}$ Defendant.

The Plaintiffs presented four (4) witness and the 1st Defendant presented 3 Witnesses. All the witnesses gave their evidence in chief through witness statements, and they were duly cross examined by counsel for the opposite party.

- 155 Counsel for the parties filed written submissions in line with the directives of this Court. Counsel for both parties in their written submissions extensively addressed Court on the above issues. I have carefully considered the written submissions of the parties and the several authorities they have cited in support of their arguments. - There were factual disputes over outstanding amounts and properties belonging to the Plaintiff. 160 These factual disputes were resolved by a court appointed independent auditor nominated by consensus of the parties. The auditor's report was adopted and is on record as a binding finding of this court.

What then remained to be resolved were combined factual and legal issues which were canvased 165 in evidence and submissions. The issues were framed as indicated above.

For good order and consolidation of the judgement, I put it on record that the findings in the Audit Report on matters under this suit, prepared by UHY Thakkkar & Associates, dated 30th June 2020 were adopted as findings of this Court and are binding on the parties. The finding included *inter alia*, that;

- 170 - 1. The outstanding indebtedness of the 1st Plaintiff to the 1st Defendant at the date of the final audit, which is the balance payable by the 1st Plaintiff was USD116, 420.

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- 2. According to a valuation done by Katuramu and Company in January 2017, the market 175 value of the property comprised in Block 206, Plot 1358 Mpererwe was Ugx 450,000,000/= while the forced sale value was Ugx 290,000,000/= - 3. According to a valuation done by Katuramu and Company in January 2017, the market value of the property comprised in Block 219, Plot 205 Najjera was Ugx 970,000,000/= while the forced sale value was Ugx $600,000,000/$ =. This property has not yet been sold off by the 1st Defendant.

### **ISSUE no.1: WHETHER THE MORTGAGE WAS VALID?**

Three Mortgage Deeds dated 15th September 2009, 15th November 2010 and 23rd March 2012 marked DEx13 in the Defendants Supplementary Trial Bundle were exhibited.

The contention between the parties primarily stems from the Mortgage Deed dated 23rd March 2012. 190

The Plaintiffs contend that the Mortgage Deed which purports to encumber the three parcels of land as security was neither executed by the 1st Plaintiff nor the 1st Defendant. They further argue that the land comprised in Kyadondo Block 206, Plot 1358 at Mpererwe was never subject of a mortgage to the 1st Defendant because it was not certified, that it had crossings across "1358" and "206" describing the property in reverse order and crossings were not countersigned on behalf of the $1^{st}$ Defendant.

It is the Plaintiffs' case that the Mortgage Deed does not bear the signature of any of the officials of the 1st Plaintiff and 1st Defendant, or their stamps or common seals and that the 1st Plaintiff purports to execute the Mortgage as a Mortgagor by reason of a Power of Attorney, the particulars of which are not mentioned.

Counsel for the Plaintiffs argued that a scrutiny of the Power of Attorney – Exh. DE6 and DE7 (clause 2 and 3 thereof) will clearly show that it gave power to the 1st Plaintiff to "Mortgage",

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"sign" and "execute" the Mortgage as a corporate entity and in a corporate form, that but the 1st 205 Plaintiff did not Mortgage, execute and sign the Mortgage in that form or at all.

He submitted that the lack of sanctioning of the financial facility from the Defendant by the 1st Plaintiff, necessarily invalidates the Power of Attorney.

210 Counsel for the Plaintiffs cited the case of Lucy Nelima & 2 Ors -vs- Bank of Baroda (Uganda) Ltd HCCS No. 55 of 2015 (Land Division), to brace his submissions.

In that case, Justice Bashaija J observed that:-

"... Apart from the foregone, the Mortgage Deed is also illegal for want of proper execution by the Defendant. A closer scrutiny of the Mortgage Deed easily reveals that it 215 also passes as a loan agreement. At page 1 thereof, it is stipulated that the Mortgage Deed made between the registered proprietors (sic) of the suit property on the first part, M/S Era Shine Ltd, on the $2^{nd}$ part and the Defendant on the third part. It bears obligations of the bank such as to grant an overdraft of Shs. 200,000,000/= sanctioned for working capital for business of M/S Era Shine Ltd. Further, at page 22 thereof, whereas the $1^{st}$ and $2^{nd}$ 220 parties signed the Mortgage Deed, the bank did not sign it. That was a legally fatal irregularity as far as the authenticity of the Mortgage Deed is concerned which also rendered it invalid.... Section 3(1) of the Mortgage Act (supra) provides that a person may by any instrument in the prescribed form, Mortgage his interest in land to secure a debt under the 2nd Schedule of The Mortgage Regulations, 2012, the prescribed form requires 225 the signature of both the Mortgagor and the Mortgagee and for their respective witnesses. *The failure to sign is a fatal defect.*"

In reply, Counsel for the 1st Defendant submitted that the 1st Plaintiff duly executed the Mortgage Deed dated 22nd March 2012 and the Company's seal is affixed thereon. He submitted that without prejudice to the foregoing, the 2nd Plaintiff and Edrida Nimwesiga Musiimenta (the 3rd Counter Defendant), also executed the said Mortgage Deed in their capacity as directors on behalf of the 1st Plaintiff/ Mortgagor. He argued that it is not in dispute that the two are directors of the 1st Plaintiff Company with ostensible authority to do such acts.

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He cited Section 33 (1) (a) of the then Companies Act Cap 110 which stipulated that a contract on behalf of a Company is made when signed by any person acting under its express or implied authority. He contended that under Section 33 (2) of the said Act, a contract made according to the said section shall be effectual in law and shall bind the Company and its successors and all other parties to it. Counsel also referred to Section 132 (1) of the Registration of Titles Act Cap 230 which recognizes a seal of a Company in lieu of signing an instrument such as a Mortgage.

Counsel for the 1st Defendant drew this Courts attention to the fact that during the cross examination of PW1 (the 2nd Plaintiff), upon being shown the original copy of Mortgage Deed, 245 testified that the Mortgage was executed and sealed by the 1st Plaintiff.

#### **RESOLUTION OF COURT.**

- Regulation 17 of the Mortgage Regulations 2012 stipulates that the Mortgage instrument shall 250 be as in Form 1 in Schedule 2. The prescribed form in the said schedule requires the signatures of both the Mortgagor and the Mortgagee and their respective witnesses. - Regulation 17 of the Mortgage Regulations 2012 would seem to be a departure from the position held in the case of Olinda De Souza Figueiredo V Kassamali Nanji [1963]1 255 EA 381 which was cited by the Defendants to brace their contention that the mere fact that a Form provides for the signature of a party does not make it mandatory that such party must sign in order to give the instrument legal efficacy and that therefore, when the signature is not, apart from the Form necessary, the requirement of the Form does not 260 make the signature a matter of substance.

In Diana Nansikombi Bbosa vs. Stanbic Bank (U) Ltd., HCCS No. 406 of 2014, which was decided after enactment of Mortgage Regulation 17 and after Olinda De Souza (supra),

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Court observed that a Mortgage Deed that is not duly executed in accordance with the provisions 265 of the law is invalid.

This position is upheld by my learned Judge brother, Andrew Bashaija J in the case of Lucy Nelima -HCCS 55 of 2015, (supra) in which he specifically points out that where a Mortgage Deed also doubles as a loan agreement, the omission to have it properly executed by the Bank was a fatal irregularity.

Notably however, there are various persuasive decisions from other jurisdictions, which continue to uphold the position that the omission by a Mortgagor to execute a Mortgage Deed does not render such a Mortgage invalid (see Target Holdings Ltd v Priestley, Helden v Strathmore Ltd and Roller team v Riley- [1999] Lexis Citation 2496; Harshad Ltd V Globe Cinema Ltd & 275 Others [1960]1 EA 1046, including Olinda De Souza Figueiredo V Kassamali Nanji [1963]1 $E$ A 381).

Based on these decisions, which I find more applicable to the instant case, I distinguish the circumstances of the instant case from the cases of Diana Nansikombi (supra) and Lucy Nelima 280 (supra) in that in the instance case there is no dispute over the fact of indebtedness and therefore of the existence of a loan. The contest is over the validity and therefore enforcement of the Mortgage Deed.

- I have extensively reviewed the impugned Mortgage Deed. The recitals on page 4 of the Deed 285 clearly define the 1st Plaintiff as the "Mortgagor" and the 1st Defendant as the "Mortgagee". However, at page 22 of the Mortgage Deed, Eng. Musiimenta Bakeine Julius and Edrida Nimwesigwa Musiimenta signed as 1st Mortgagor and 2nd Mortgagor/Spouse, respectively. - At the execution page 22 of the Deed, the Seal of the 1st Plaintiff is affixed against the signatures 290 of both Eng. Musilmenta Bakeine Julius and Edrida Nimwesigwa Musilmenta.

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Clause 1.1 of the Deed recognised the Mortgagor as the registered proprietor, which may not be factually accurate. However, even if the 1st Plaintiff/Mortgagor was not the registered proprietor of the land which is the subject of the Mortgage, the Plaintiff was securing the borrowing with property put at their disposal under Powers of Attorney granted by Eng. Musiimenta Bakeine Julius and Edrida Nimwesigwa Musiimenta for that purpose.

During cross examination, PW1 who also is the 2nd Plaintiff confirmed that he is the Managing Director of the 1st Plaintiff and that he had submitted loan application letters to the 1st 300 Defendant bank for purposes of securing a loan from them and that he had signed documents titled "Mortgage".

During cross examination, PW1 also positively identified the original copy of the Mortgage Deed which bears the Seal impression of the 1st Plaintiff Company and testified that it had been duly executed and sealed by the Plaintiffs.

He confirmed that he had read the Mortgage document before he signed them and that the 1st Plaintiff executed and signed the Mortgage Deed and that the amounts in the security documents were disbursed to the 1st Plaintiff. PW1 testified that he is a university qualified Mechanical Engineer, the significance of which is that he could competently read and understand what he read.

It is common ground, but also discerned from the other uncontested Mortgage Deeds signed by them in those capacities on the $15/9/2009$ and $15/11/2010$ , that the 2nd Plaintiff is the Managing Director of the 1st Plaintiff while Edrida Nimwesigwa Musiimenta is its Director and Secretary.

In the case of General Parts (U) Ltd v Non-Performing Assets Recovery Trust SCCA No. 5 115 of 1999; Mulenga, JSC (as he then was) observed that for a Mortgagor to duly execute the Mortgage document as a Mortgagor, whether in the capacity of registered proprietor or of a donee of a Power of Attorney, it had to affix its common seal to the document or to act by its attorney appointed for the purpose.

$20$

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The learned Justice further observed that:

"Ordinarily a limited liability Company executes a document by affixing its common seal which is witnessed or authenticated by the two directors or one director and the Company secretary. Where execution is by agent(s), as was done by UCB, the agent(s) is/are named and stated to sign on behalf of the principal".

S 132(1) RTA which provides that a corporation, for the purpose of transferring or otherwise dealing with any land under the operation of the RTA, or any lease or Mortgage may, in lieu of signing the instrument for such purpose required, affix to the instrument its common seal. A Deed executed by affixation of its seal, in the case of a corporation, is therefore properly executed.

In the instant case, even if the Mortgage Deed did not expressly state that the 2nd Plaintiff and Edrida Nimwesigwa Musiimenta were signing on behalf of the 1st Plaintiff as the holder of their Power of Attorney, the Deed in the instant case bares the Seal of the 1st Plaintiff.

In my opinion, while execution of a Mortgage Deed is a matter of substance, the format of the signature or name of person executing is a matter of form. Consequently, affixation of a seal is sufficient for purposes of validating the Deed.

- Even if the form in the schedule to the Mortgage Act was not strictly complied with, the mischief 340 intended to be taken care of by Regulation 17 regarding signature aspect of the Form is taken care of by affixation of the seal. My thinking is also in keeping with Article 126(2) of the Constitution of the Republic of Uganda which gives precedence of substantive justice over technicality. - Further guidance is taken from S.43 of the Interpretation Act which provides that where any 345 form is prescribed by any Act, an instrument or document which purports to be in such form shall not be void by reason of any deviation from that from which does not affect the substance of the instrument or document or which is not calculated to mislead.

As such, the Deed was properly executed by the Mortgagor but was never so executed by the Mortgagee. Be that as it may, the Deed was duly registered.

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The effect of registration of the Deed and the manner in which the parties conducted themselves would appear to have overridden the significance of the omission to execute the Deed by the Defendant bank until the Plaintiffs defaulted on their obligations and the Defendants moved to realise and execute the securities.

- 355 In the English case of Bank of Scotland V Waugh & Others [2014] EWHC 2117 (Ch) & Others [2014] EWHC 2117 (Ch) - a Mortgage Deed was signed by the Trustees/Defendants but none of the signatures was witnessed as is required by the **Law of property (Misc Provisions)** Act 1989 for execution of a Deed as an individual. - Court held that although the charge was not validly executed as a Deed and therefore prima facie 360 void for the purpose of conveying or creating a legal estate, the effect of registration of the Mortgage was to create a charge (*emphasis mine*).

The effect of registration of the Mortgage is to create a charge which would otherwise not have been created as a legal Mortgage on account of the anomalies in its execution. This therefore means that upon registration, the Defendant bank is entitled to rely on the effect of registration of the Mortgage.

In Shah V Shah [2001] EWCA Civ 527 (CA), the Respondents attempted to have the court render invalid, a Deed which they had signed but had the signature of the attesting witness added later, but not in their presence.

The relevant law (-Law of Property (Misc Provisions) Act 1989), required that a Deed be signed in the presence of a witness who attested to the signature. The validity of the Deed was upheld notwithstanding the non-compliance with the requirements of the relevant law.

In the instant case, the Deed was executed by the Plaintiff with full understanding of its content and effect. It was then, on the face of it, validly registered. The Plaintiffs even went ahead and enjoyed access to funding that accrued from the impugned Mortgage transaction.

PW1 confirmed this when he testified, during his cross examination, that the Plaintiffs had applied for loans which were granted against securities given by the Plaintiffs and that the

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Plaintiffs did indeed default on their loan obligations. I have no reason to imagine that PW1 380 could have been telling ies to this court.

The content of the Deed document, the testimony of PW1 and the conduct of the parties constituted an unambiguous representation of fact that it was a Mortgage Deed. The Defendant Bank and indeed the Plaintiffs acted in a manner that validated the assumption that there was a valid Mortgage. The omission, by the Defendants, to execute the Deed and the fact that that notwithstanding, it got to be registered, does not render the conclusion that the Mortgage Deed is

In the instant case, adherence to the requirements of Regulation 17 of the Mortgage Regulations, in the face of a duly registered Deed would undermine the public policy behind the very law of 390 Mortgages which, in my opinion, is to secure either parties' interest by limiting the possibility of disputes as to authenticity of the transaction. In the instant case, whether or not the omission to comply requirements of Regulation 17 are necessary to address this mischief and secure the lenders rights, the answer is found in the very facts of the case and in the testimony of PW1 395 during cross examination, alluded to above.

valid unreasonable.

In Shah V Shah, when rejecting the plea to have the Deed rendered invalid, court cited the Law Commission (Deeds and Escrow), Law Commission Report No 163 June 1987 in which it was stated that;

"It would be undesirable if failure to have just one signature witnessed on a Deed which had many were to render the whole Deed invalid. ...... failure to have a signature witnessed and attested should have the effect that the signatory would not prima facie be bound but that the Deed, if capable of operating without that signatory would still be valid, the signatory would still be bound if he took the benefit of the Deed or through estoppel if someone else acted on the assumption that the Deed was properly executed".

In the instant case, the parties intended the impugned Mortgage Deed to be relied on as a Deed and it was relied on as such. The Mortgage Deed was duly registered and the parties thereafter conducted themselves in a way that validated the terms of the Deed.

In the case of Bank of Scotland V Waugh & Others [2014] EWHC 2117 (Ch), court referred to the legal principle that a document which for some defect of form, but which is otherwise Page 14 of 36

valid fails to take effect as a legal Mortgage will, subject to compliance with the law, be a good 410 equitable Mortgage. A defective Mortgage once registered, gives rise to an equitable Mortgage. Court concluded that even though the trustees could rely on the defects in execution of the charge to stop it taking effect as a legal charge it would still take effect as an equitable Mortgage.

The conclusion I derive from the foregoing is that whereas the parties in the instant case intended 415 to create a legal Mortgage, they failed to take all the steps when the defendant Bank did not execute the Deed, in the event, an equitable Mortgage was created given that except for this omission, the other provisions of the Mortgage Act and Regulations were complied with.

I am also fortified in this opinion by the decision in Nanjibhai Prabhudas Co. Ltd V Standard bank Ltd [1968] EA 670 in which it was stated that:

"The courts should not treat any incorrect act as a nullity, with the consequence that 420 everything founded therein is itself a nullity, unless the incorrect act is of a fundamental nature matters of procedure are not normally of a fundamental nature".

In the event, I abide the position that, although the Mortgage Deed was not validly executed by the Defendant Bank and did not therefore of itself create a legal Mortgage, the Mortgage Deed and conduct of the parties gave rise to an equitable Mortgage which was therefore validly

425 enforceable.

Issue no.1 is answered in the affirmative.

## **ISSUE no.2: WHETHER THE DEBENTURE WAS VALID**

430 Counsel for the Plaintiff also submitted that the Debenture, not having been sealed by the 1st Plaintiff, not having been properly registered by the 1st Defendant and the borrowing based on it as security not having been duly sanctioned by the 1st Plaintiff was invalid.

He submitted that the debenture was not sealed or stamped by the 1st Plaintiff, the borrowing it purports to secure and its purported execution were not duly sanctioned by the 1st Plaintiff. He 435 also argued that the debenture was not registered, contrary to the laws governing its registration at the time.

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He cited Section 96 of the Company's Act, Cap 110 Laws of Uganda 2000, and argued that the Debenture, as a charge, should have been filed within forty-five days after the date of its creation.

He contended that the defective registration was done later after the Notices of Default $(7/2/2013)$ and Sale $(22/5/2013)$ and the advertisement for sale of the security properties of $(16/9/2013)$ .

He referred to Company Cause No. 5 of 95: Summerfruit (U) Ltd –vs- Chris Sserunkuma & Anor.) Where Court held that if the debenture is not registered within the prescribed time, it 445 becomes void against *inter alia* the creditors. Counsel for the Plaintiff submitted that the 1st Defendant did not invoke Section 102 of the Company's Act to extend the time for registration of the debenture with the effect that there was no registration at all, thereby rendering the debenture invalid because once a party is out of time, he or she needs to seek leave of Court.

- In reply, Counsel for the 1st Defendant contended that the 1st Plaintiff duly executed the 450 debenture dated 22nd March 2012. He also argued that at all material times when the 1st Plaintiff approached the 1st Defendant for loan facilities, all relevant documents were at all material times signed by either the 1st Plaintiff or the 2nd Plaintiff and Edrida Nimwesiga Musiimenta in their capacities as directors. That the 1st Plaintiff duly executed the debenture dated 23rd March 2012 - through affixation of its seal. 455

During cross examination, PW1 who also happens to be the 2nd Plaintiff, confirmed that he is the Managing Director of the 1st Plaintiff and that he had submitted letters to the 1st Defendant Bank for purposes of securing a loan from them and that he had signed documents titled "Mortgages".

PW1 also confirmed that he is a qualified Engineer. Consequently, his capacity to comprehend 460 the nature of the transaction he was involved in and the undertakings he made on his behalf and that of the Plaintiff Company is not in contest.

PW1 confirmed that he had read the loan documents before he signed them and that the amounts in the documents were disbursed to the 1st Plaintiff. He also conceded that the 1st Plaintiff had defaulted on the loans and that the Defendant Bank was entitled to recover the security according to the agreement.

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According to the DD issued by the 1st Plaintiff in favour of the 1st Defendant on 22nd March 2012, which I have carefully analysed, the 1st Plaintiff applied for a Business Loan Facility, Overdraft Facility and a Finance Lease Facility altogether adding up to US \$ 701.432 repayable in 48 months, 48 months, and 12 months respectively.

The debenture was signed on 23rd March 2012 on behalf of the 1st Plaintiff by 2nd Plaintiff and 470 Edrida Nimwesiga Musiimenta in their capacity as directors of the 1st Plaintiff. It was registered on 16th December 2014 and the suit challenging its validity was filed on the 17th May 2018.

That the DD was executed is an "agreed fact" under Item 6(viii) of the Joint Scheduling Memorandum (JSM). It also an admitted fact that the debenture was registered as a charge in favour of the Defendant.

In his submissions however, Counsel for the Plaintiff challenges the debenture on four counts, namely;

- not being sealed and or stamped by the 1st Plaintiff, $\mathbf{I}$ . - II. the borrowing it purports to secure.

- its purported execution not having been duly sanctioned by the 1st Plaintiff. $\mathbf{III}$ . 480 - IV. undue registration (sic) contrary to the laws governing registration at that time.

Premised on the agreement reflected at Paragraph 6(viii) of the Joint Scheduling Memorandum and the testimony of PW1, canvasing counts (i) and (iii) is rendered otiose. Out of all the counts raised by the Plaintiffs against the DD therefore, I only have to resolve counts (ii) and (iv).

- 485 Regarding Count (ii), as I understand it, PW1 confirmed in his testimony during cross examination, that he had read the loan documents before he signed them and that the amounts in the security documents were disbursed to the 1st Plaintiff. He also conceded that the 1st Plaintiff had defaulted on the loans and that the Defendant bank was entitled to recover the security according to the agreement. - In respect of Count (iv), one would wonder why the Plaintiffs did not raise the issue of non-490 registration of the DD before expiry of the 42 days or before they defaulted on their payments. The Plaintiff never raised a challenge or took steps to rectify the apparent anomaly for a period

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of over 6 years after the Deed was executed. The challenge to the validity of the debenture in the instant case comes across as an afterthought.

- 495 Having enjoyed the benefits that accrued by virtue of the transaction secured by the DD, it is absurd that the Plaintiffs wake up after 6 years, seeking to impeach the validity of the very document which underpinned their access to the money and the enjoyment of the loan benefits. especially so, after they had defaulted on their obligations to the Defendant bank. - Even if the common practice is that the banks have generally assumed the role of registering the 500 securities, primarily, it is the duty of the borrower to lodge the DD for registration by the Registrar. In the instant case, the legal obligation to register the charge fell on the 1st Plaintiff as stipulated in Section 97 (1) of the Companies Act Cap 110. The 1st Defendant being a person interested in the Mortgage had a right and an option, but not an obligation, to pursue registration of the charge on its own. - I have addressed my mind to the case of Equip Agencies Ltd V I & M Bank Ltd [2017] eKLR, 505 cited by the Defendants and find it instructive in respect of the issue of validity of a belatedly registered charge document.

In the case of Equip Agencies (supra), the charge document was registered 17 months after it was executed, long after the 42 days stipulated under the Companies Act of Kenya. Court held that registration of a charge by the Registrar, signifies that all the necessary consents and 510 requirements have been fulfilled. The Companies Act of Kenya is in pari materia with the Companies Act of Uganda, Cap 110.

I am inclined to believe that the challenge, in the circumstances, is devoid of merit, the DD having been duly registered and on the authority of the cases of Al-Jahal Enterprises Ltd V Gulf Bank Ltd (2014) eKLR and of King'orani Investments Co. Ltd V KCB and Another (2017) eKLR and of Equip Agencies (supra) I would not sustain the Challenge.

I find that the DD is valid and Issue no. 2 is answered in the affirmative.

Page 18 of 36 ## WHETHER THE SALE OF THE LAND AND THE PLANT AND ISSUE $no.3$ : MACHINERY PURSUANT TO THE MORTGAGE AND THE DEBENTURE DEED (DD) **WAS VALID?**

Counsel for the Plaintiff submitted that having proved that the Mortgage and Debenture were invalid pursuant to the authority of Lucy Nelima & 2 Ors -vs- Bank of Baroda (Uganda) Ltd (Supra), the 1st Defendant could not derive any valid powers or at all from them to sell the properties. That the purported sale by the 1st Defendant, of any of the properties, without taking Court action was therefore null and void and that the 1st Plaintiff is accordingly entitled to a declaration to that effect. That as far as the sale under the Debenture is concerned, even assuming the Debenture was valid, under Clause 8, the means of realizing the security was by appointment of a Receiver.

He cited the case of National Enterprises Corporation and 2 Ors-vs-Nile Bank Ltd SC. C. A No. 17 of 1994, in which Justice Odoki, as he then was, faulted the actions of the Bank in directly seizing and selling the debtors property and declared the sale invalid for reason that they ought to have done so through the appointment of a Receiver, which was not done.

Plaintiff's Counsel submitted that lack of appointment of a Receiver was pleaded in paragraph 10 of the Amended Plaint and that PWI testified to this in paragraphs 33 and 34 of his Witness Statement and that this evidence was neither challenged, contradicted nor denied.

- He further submitted that the effect of failure to appoint a Receiver would be that the security in 540 the Debenture would only be lawfully sold by the 1st Defendant under an order of Court which was not the case in respect of the machinery which was sold by the 1st Defendant and consequently, the sale was invalid in that regard as well. - In response, Counsel for the 1st Defendant submitted that the sale of the suit properties was valid 545 because it was pursuant to duly executed and registered security documents. He also submitted

Page 19 of 36

that some machinery was secured and sold under the lease facility and the other under the Debenture.

Counsel for the 1st Defendant argued that the 1st Defendant had two options of realization of 550 property secured under the debenture and it could exercise either or both options, that is, through a Receiver or Manager and/or through itself being a duly appointed attorney of the 1st Plaintiff under the debenture with mandate to do so. He further contended that Clause 11.1 of the DD and indeed the debenture at large was intended to empower the 1st Defendant to sell the machinery upon the $1^{st}$ Plaintiff's default on its repayment obligations as contracted.

In Bank of Scotland V Waugh & Others [2014] EWHC 2117 (Ch) & others [2014] EWHC 2117 (Ch) - a Mortgage Deed was signed by the Trustee/Defendants but none of the signatures was witnessed as is required by the Law of property (Misc Provisions) Act 1989 for execution of a Deed as an individual.

The Bank appointed a receiver to enforce the charge and the Trustees applied for cancelation of the charge on grounds that it had not been properly attested to, was invalid and the actions of the bank thereunder were therefore void.

Court held that although the charge was not validly executed as a Deed and therefore prima facie void for the purpose of conveying or creating a legal estate, the effect of registration of the 565 Mortgage was to create a charge.

That the effect of registration of the Mortgage is to create a charge which would otherwise not have been created as a legal Mortgage on account of the anomalies in its execution. This therefore means that upon registration, the Defendant bank is entitled to rely on the effect of registration of the Mortgage.

The import of the decision in that case is that once the security has been perfected by registration, then it is valid and enforceable.

Page 20 of 36

575 The omission of the lender to properly execute the Mortgage Deed does not therefore militate against the lenders right to recover money due to them. Realisation and execution of securities under such a Mortgage Deed would therefore not be void.

In the instant case, having found that an equitable Mortgage was validly created, it was therefore valid for enforcement as such.

- 580 On the other hand, the DD as well was a valid and enforceable contract between the parties and therefore the terms regarding recovery thereunder could be lawfully enforced by the Defendant. The Plaintiff intimated that the land comprised in Kyadondo Block 206 Plot 1358 at Moreorwe was never subject of a Mortgage to the 1st Defendant because it was not certified and hard crossings which were not countersigned. I refuse to accept this submission because all else in the - documents on record indicate that the property at Mpererwe was a subject of the Mortgage. The 585 apparent anomaly is inconsequential. On further scrutiny of the documents, I find that in the Plaintiff's own loan application marked DEX12, the land at Mpererwe which is offered as security is referred to as Plot 1358 Block 1358. I am convinced that despite the inconsistency by both parties, the parties intended to refer to the same property at Mpererwe. - The question however is whether the Defendants lawfully exercised the right of enforcement. 590 The Plaintiff argued that even if the DD was valid, the Defendant could only exercise his right of recovery by sale through a duly appointed receiver who would then have had to obtain a Court order to sell, which was never done.

The Defendant's contention is that under the DD, the Defendant had two options on how to proceed to realise the securities and that the Defendant could exercise either or both options. 595 These options are; appointment of a Receiver /Manager under clause 8.1 of the DD or secondly, realisation of the securities directly by themselves in exercise of their mandate derived from Clause 11.2 by which they are appointed as attorneys of the 1st Plaintiff.

Counsel for the Defendant's submitted that as duly constituted attorneys of the 1st Plaintiff, they did what the latter would have ordinarily done in the circumstances, which would have been to sale off the assets charged under the DD in order to pay of the outstanding sum.

He submitted that the overarching purpose of the DD is to secure and ensure recovery of the money owed in the event of default, without recourse to the borrower and hence the Power of Page 21 of 36

Attorney derived under clause 11.1 of the DD. That this clause mandated the Defendants to act as they did when they seized and sold off some of the Plaintiff's securities in a bid to recover money owed to them.

I have carefully addressed myself to the relevant provisions of the charge documents, most specifically clauses 8.1 & 11.2 of the DD.

Clause 11.2 of the DD appoints the Bank/1st Defendant or any Receiver or Manager as irrevocable attorneys of the Company to execute and do any acts and things which the Company 610 ought to execute and do under the covenants of the Deed and to use the name of the Company/1st Plaintiff in exercise of any of the powers conferred by the clause. Among such things would be the covenants to repay all the loan sums advanced to it by the Defendant bank together with any other actual and or contingent liabilities under the loan and to assign proceeds from any items 615 sold by the Company from time to time.

By Clause 4 of the DD, the 1st Plaintiff charged to the 2nd Defendant all its securities/assets for the payment of all the moneys and the discharge of all obligations and liabilities covenanted to be paid for under the Deed.

The plain intention of securitising assets in a borrowing transaction is that in the event of default the assets may be liquidated in order to make good the default. 620

I have addressed myself to the cardinal rule of interpretation of written documents, which is to the effect that courts must give effect to the intention of the parties – see NSSF V MTN Uganda Ltd and Another HCCS No. 0094 of 2009cited by the Defendants.

In the instant case, the intention of the parties is comprehensively captured in the provisions of the Business Facility/Loan forms, the DD and the testimony of PW1/1st Plaintiff, Julius 625 Musiimenta. The fact of indebtedness and of default is not disputed.

My interpretation of the Deed is that the inclusion of Clause 11.2 and the mandate derived therefrom is not to augment clause 8.2 which provides for appointment of a Receiver or Manager, but rather the clause introduces and allows for an alternative, complete and separate option for recovery which can be pursued without appointment of a receiver and recourse to

Page 22 of 36

court. The circumstances of the instant are distinguished from those in the case of National **Enterprises V Nile Bank (supra)**, in which the bank had no option as is presented by Clause $11.2$ of the DD in the instant case.

The Defendant could therefore rely on the DD to lay claim on the Plaintiff's asset as security for the loan and to sell as they did. On the other hand, the defendant's right to sell under the Mortgage Deed (Clause 6) and S.20 of the Mortgage Act is not subject to appointment of a Receiver or recourse to Court for any orders as the Plaintiff suggests.

For the reasons I have stated above, I find that the sale of the securities was valid. Issue no. 3 is therefore answered in the affirmative

ISSUE no.4: WHETHER, IF THE MORTGAGE AND DEBENTURE WERE VALID, THE 640 1ST DEFENDANT NEGLIGENTLY AND/OR WRONGFULLY AND/OR IMPROPERLY EXERCISED ITS POWER OF SALE OF THE SECURITY PROPERTIES. THEREBY **BREACHING ITS DUTY OF CARE TO THE 1ST DEFENDANT?**

This issue is partly resolved by the finding in Issue no 3 above. The residual question which is 645 now to be addressed under this Issue no. 4 is whether the Defendants in exercising their power, breached a duty of care to the 1st Plaintiff.

Counsel for the Plaintiffs submitted that the execution and sale of securities was invalid, that in respect of the immoveable property at Mpererwe and the partial sale of the five items of the machines comprising the factory, the 1st Defendant breached its duty of care to the 1st Plaintiff.

In reply Counsel for the 1st Defendant submitted that prior to realization of the suit property, the 1st Defendant issued the relevant notices, advertised the properties and also conducted a valuation of the property. Following which, the 1st Defendant received and accepted Christine Kwagalakwe's offer. That nothing stopped the 1st Defendant from accepting a payment from her even when the Defendants' acceptance of the offer lapsed because there were no better offers at the time.

Page 23 of 36

- In respect of the price at which the land at Mpererwe was sold, Counsel for the 1st Defendant 660 argued that the Survey and Valuation Report dated 7th March 2017 sanctioned by the 1st Defendant, the subject property was valued at UGX. $565,000,000/$ = being the open market value and UGX. 365,000,000/= being the forced sale value and sold on $27th$ July 2017 at 280, 000. $0000/$ = as indicated on page 6 and 8 of the Audit Report and not 85,000,000/= as submitted by the Plaintiffs' Counsel. He contended that the price at which the subject land was sold was the best obtainable price at the time and the 1st Defendant took all reasonable steps to obtain the best - 665

## 670 **RESOLUTION OF COURT.**

property prior to the intended sale.

The question to be resolved by this Court, is whether in exercising their mandate of sale, the Defendants breached their duty of care to the Plaintiff.

price as advised by the valuation report and required by law by advertising and valuing the

Regarding the sale of machinery and plant, the Plaintiffs contend that there were negligent anomalies in the process of advertising sale of the assets.

That whereas the assets were initially advertised on the 16/9/2013 with an intended date of sale stated to be 18/10/2013, the assets were never sold and were re-advertised on the 2/11/2015 for sale by $17/11/2015$ . That however, the assets were subsequently sold from $6/4/2017$ to $13/10/2017$ , twelve months later and without any other adverts in between.

That the alleged sale of all the equipment is not evidenced by any agreement or invoices. The absence of invoices and or agreements of sale does not evince a breach of the duty that the lender/Defendants owed the Plaintiffs

The Plaintiffs' case was that despite the long lapse of time between the first advert and initially intended date of sale and a subsequent advert, there was no re-advertisement before the assets were finally sold off and that the assets were disposed off at an understated value.

Page 24 of 36

$\mathbb{V}^{\sim}$

They specifically pointed out the plastic extrusion straw making machine for which the offer to buy was made categorising the equipment as scrap and it was sold off as such and further that there was no evidence of advertising of the properties.

$110$

$15$

It is a long established position that when deciding whether or not to exercise its power at any time, a lender owes no general duty to the borrower beyond a narrow duty to exercise its powers in good faith and for proper purposes. The Mortgagee is under an equitable duty to take reasonable care and a duty of good faith, honesty and proper motive when dealing with the securities- (see- Shamji V Johnson Mathey Bankers Ltd (1968) BCC 98). The obligations do not arise in tort, or pursuant to any implied contractual provision, but in equity.- See Yorkshire Bank V Hall [1991] 1 WLR 1713.

The lenders obligation is to take reasonable care to obtain a proper price, which should be a reflection of the true market value of the property Mortgaged. This would require, among others, that the property is properly and conspicuously advertised in media that is accessible by potential buyers and that the sale is done within a period not so distant from the date when the property was advertised so as to render the price offer, in a way, obsolete.

In my opinion, any advert any time within six months from advert to date of sale is a fair and reasonable period to consider when determining whether the lender took reasonable steps to obtain a true market value. A longer period than six months would, in my opinion, impute a lack of reasonable care.

In the instant case, the property at Mpererwe was valued on the 7th March 2017 and given values and sold on 27th July 2017. Much as the sale was done just over 4 months after the valuation, it was 18 months after the property had been advertised and it was sold at a value of about shs 85 million below the forced sale value. The forced sale value was shs 365,000,000 but the property was sold at shs 280,000,000/ in 2017 having been last advertised on 2/11/2015.

Page 25 of 36

In the case of Cuckmere Brick Co. Mutual Finance Ltd [1971] EWCA Civ 9, when handling the sale of the Mortgaged property on behalf of the lenders, the Auctioneers were negligent, with the result that the property was sold at an under value. Court held the lenders liable to the borrowers and that a mortgagee was under a duty to take reasonable care to obtain the true market value of land.

Even if the Mortgagee is not bound to postpone the sale in the hope of obtaining a better price, 725 their conduct and actions such as timing of the advertisement of the sale and other actions must not point to an absence of good faith or improper motive.

The position that a Mortgagee owes the debtor a duty of care to take all steps to realise the security at the best price reasonably possible was also upheld in Gosling V Gaskell (1897) AC 575.

From the evidence on record adduced by the Plaintiffs and highlighted by Counsel for the Plaintiff in his submissions, the Defendants acted in a peculiar manner when handling the disposal of the land at Mpererwe, right from the manner in which they advertised the property culminating into disposal of the property below the forced sale value and not having the property effectively transferred to the buyer, to date.

In my view, a shortfall of Shs $85m/$ = was way out of any conceivably acceptable margin of error relative to the size of transaction between the parties.

- 740 Regarding the factory equipment, Appendix 18 of the Auditors Report indicates that up to 18 pieces of equipment were missing and unaccounted for, contrary to the testimony by DW 1 and DW2 that every machine was intact at the time of taking over the factory. Save for the denials in submissions, this testimony was not retracted in re-examination. - On account of the extended time lapse between the date of advertisement and when the sale was 745 done, the effort to obtain a proper price for the mortgagor was undermined. The defendants ought to have followed the valuation which was conducted, with a new advertisement, not more

Page 26 of 36

than six months before the sale. This was exacerbated by presentation of some of the machinery as scrap, which evinced improper motive. All this eroded the chances of getting an optimum price for the assets.

All these things undoubtedly prejudiced the Plaintiffs because had the full value been realised, it would have gone a long way towards reducing their liability to the Defendant Bank.

Even if the Defendant bank was not under any obligation to maximise proceeds from the sale of 755 the assets, they were obliged to deal with the security assets in a reasonable manner so as to ensure that the optimum amount can be derived from them to satisfy the indebtedness. They owed the Plaintiffs a duty of care to ensure that the securities held are properly taken care of and accounted for.

Premised on all the forgoing, the Mortgagee breached its duty of care to the 1st Plaintiff. 760

Issue 4 is answered in the affirmative.

ISSUE 5; WHETHER THE 2ND PLAINTIFF IS ENTITLED TO TAKE OUT OF THE FACTORY AT NAJEERA HIS PERSONAL DELL COMPUTERS, (3 IN NUMBER), 1 PRINTER AND 1 SCANNER, ALL VALUED AT SHS. 30M/= OR WHETHER THE 1ST **DEFENDANT SHOULD NOT PAY THE 30M/= IF IT FAILS TO RETURN THE ITEMS?**

Counsel for the Plaintiffs submitted that the $2nd$ Plaintiff demanded access to the factory, in writing to the 1st Defendant to access and remove their above stated personal properties. That the 1st Defendant, never in its pleadings or evidence denied that the 2nd Defendant owned these properties personally, that they were in the factory when he was evicted out of it or that he was denied access thereto. He submitted that the 1st Defendant has not returned the items to the 2nd Plaintiff.

In reply, Counsel for the 1st Defendant argued that the personal assets were charged together with other Company immovable properties under clause 4.1 (b) of the Debenture Deed.

Page 27 of 36 ## **RESOLUTION OF COURT**

I have carefully scanned the record and find that the submission by Counsel for the Defendants regarding the claim that the computers belonged to the Company is not supported by any evidence. It was basically evidence in submissions from the Bar.

The Defendant's contention is that the computers belonged to the Company by virtue of the fact of usage for Company work. This assertion is not supported by any form of evidence. On the 785 contrary, the Plaintiffs submitted evidence in the form of an Invoice and Receipt (Ex PE6) for the computers issued in the names of the 2nd Plaintiff.

I am not convinced that the particular items belonged to the Company, these were personal assets of the 2nd Plaintiff which, even if he may have put at the disposal of the 1st Plaintiff, were not 790 within the scope of the assets envisaged under Clause $4(1)$ (b) of the Debenture Deed. There was no charge created over the $2nd$ plaintiff's personal property.

The 2nd Plaintiff was and is still entitled to take his personal Dell Computers (3 in number), 1 printer and 1 scanner valued at Shs. $31,500,000/=$ out of the factory at Najeera and I so order. 795 Should there be a failure to do so or inordinate delay at the instance of the defendants to enable release of the said property, in any case not later than 5 work days from the date hereof, then, the Plaintiff should be compensated by the 1st Defendant to the extent of the stated uncontested market value of the computers reflected on the Invoice and Receipt exhibited as PEx PE6.

# **ISSUE NO.6: REMEDIES AVAILABLE TO THE PARTIES**

Counsel for the Plaintiffs sought to have this court make declarations that the Mortgage and debenture are invalid and that as a result, the 1st Plaintiff would be entitled to receive the full value of the security properties which were sold by the 1st Defendant.

Page 28 of 36

That in the same regard, the 1st Plaintiff is entitled to the land at Najeera which the 1st Defendant has not sold and return of the land at Mpererwe, which has not yet been transferred to the buyer. or payment of compensation of the market value thereof, being Shs. 970,000,000/ $=$ based on its valuation.

Counsel for the Plaintiff further sought to have the 1st Defendant refund Shs. 600,000,000/= realised from sale of the land at Nakyesanja, which PW1 sold and paid over the money to the 1st Defendant allegedly under pressure of the 1st Defendant, under the mistaken and false belief that there was a valid Mortgage over the property.

In respect of the debenture, the Plaintiff sought to have the return of equipment sold or compensation at open market value of the items the Defendant purportedly sold and the other machinery which, although intact when the $1^{st}$ Defendant took over the factory from the $2^{nd}$ Plaintiff, were missing at the time of the inspection by the auditors.

In the alternative but without prejudice, Counsel for the Plaintiffs submitted that if the Mortgage and debenture are upheld as valid, the Auditor's Report established that only US \$ 116,420 was still outstanding from the 1st Plaintiff to the 1st Defendant before or without selling the land at Najeera and without putting into consideration the value of the equipment which is missing from the factory and is not accounted for.

He argued that the 1st Plaintiff is entitled to an award of US \$ 347,240 and return of the Najeera property which has not been sold, if the exercise of the power of sale by the 1st Defendant under the Mortgage and Debenture are upheld as valid.

## **RESOLUTION OF COURT.**

**DECLARATIONS**

Page 29 of 36

The Plaintiffs having failed on issues 1 and 2, the declarations sought by the Plaintiff, that the 835 Mortgage Deed is null and void, that the Debenture Deed is invalid and unenforceable and that consequently sale of the properties charged was unlawful are denied.

#### **RETURN OF ASSETS /COMPENSATION**

Having found that both the Mortgage Deed and the Debenture Deed are valid and enforceable. except for the personal items claimed and granted under Issue no.5, I find no merit in the prayers for return of assets or refund of proceeds from the sale thereof or payment of compensation amounting to open market value of any of the properties disposed of pursuant to the Mortgagee's powers under the said Mortgage and Debenture Deeds.

The land and equipment at Mpererwe and Najeera are still held within Mortgagee's legitimate entitlement under the Mortgage and Debenture Deeds, pending settlement of the outstanding amount. The Defendants therefore still have a right to hold and dispose of the property under the terms of the charge documents. This right though is underpinned by the obligation of a duty to do so diligently with care and good faith and to account for the proceeds from the sale.

The Plaintiff is not entitled to a return of or compensation for the property unless they resolve their liability to the Defendant.

The prayers to be compensated or have the property returned to the plaintiffs are accordingly declined.

#### **GENERAL DAMAGES**

Counsel for the Plaintiff argued that there is evidence which proves that the conduct of the 1st Defendant in being casual, unserious and not being transparent to the 1st Plaintiff, necessitating the intervention of this Honourable Court, caused loss and inconvenience to the 1st Plaintiff. He

Page 30 of 36

prayed that this Honourable Court be pleased to find that UGX 2 billion would be a reasonable award in damages in the circumstances. 865

In Simon Mbalire vs. Moses Mukiibi HCCS 85 of 1995, Justice Tinyinondi, (RIP) as he then was, held that;

"The fundamental principle by which Courts are guided in awarding damages is restitution integrum. By this principle is meant that the law will endeavour so far as money can do it, to place the injured person in the same situation as if the contract had been performed or in the position he occupied before the occurrence of the tort both in cases arising in contract and in tort, only such damages are recoverable as arises naturally and directly from the act complained of". $-$

- Upon careful assessment of the acts of breach of the duty complained of and which this court 875 found attributable to the conduct of the 1st Defendant, the Plaintiff has in that respect discharged his duty of proof to warrant award of damages for breach of duty attributable to the 1st Defendant. - I however find the sum of Ugx 2 billion extremely excessive and in the event award Ugx 880 $50,000,000/$ with interest at a rate of 8% per annum from the date hereof until payment in full. which in my opinion is reasonable and sufficient.

Additionally, the 1st Plaintiff is entitled to compensation arising out of an undervalued sale of the property at Mpererwe. This being the difference between the price at which the property at 885 Mpererwe was disposed of and the forced sale value.

The Plaintiff is accordingly awarded Ugx 85 million, with interest at a rate of 18% per annum from the date of sale of the property until payment in full.

**INTEREST**

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In Uganda Revenue Authority vs Stephen Mabosi SCCA No.1 of 1996 Court observed that interest is awarded at the discretion of Court, but like all discretions, it must be exercised judiciously taking into account all circumstances of the case.

I have considered the claim for interest and awarded interest as stated above.

### THE COUNTERCLAIM

On the counter claim Counsel for the 1st Defendant submitted that the 1st Defendant Counterclaimed for an outstanding sum of USD\$ 443,654.92 as at 23rd May 2018 and 5th February 2018 in respect of the overdraft, term loan and VAF facilities as per the Redemption Statements. That despite the lawful realization of some of the secured properties, the 1st Plaintiff still remained and is still heavily indebted to the 1st Defendant to the stated tune as of that date.

Counsel for the 1st Defendant/Counter-claimant argued that the balance represented as payable by the 1st Plaintiff as per the Auditor's Report on page 5 of 8 is USD. 116,420 as at 30th June 2020, -the date of the final audit. That however, the total indebtedness of the 1st Plaintiff at the time of write off (taking into account the last debt being written off on 24th October 2014) was 910 USD. 553,894.65. that when calculating the outstanding indebtedness under appendix 9, the Auditor only factored in the proceeds from the sale of some of the suit properties (land and machinery) and the fees. He never considered that the interest on the sum due continued to accrue even after the respective debts had been written off.

He then argued that a write off did not mean that the 1st Plaintiff was absolved of liability or that the interest did not continue to accrue. That the debt remained outstanding even after payments were made. That the Auditor should then have factored in the interest which the parties agreed to as per the findings under item 4 on page 4 of 8 of the Auditor's Report.

He referred Court to the case of Samuel Black t/a SB Coaches-Vs-dfcu Bank Limited H. C. C. S No. 416 of 2009 where Court observed that while analysing the intent of a debt write

Page 32 of 36

$\mathcal{V}^{\prime}$

off stated that by Regulation 11 of the Financial Institutions Credit Capitalization and *Provisioning Regulations, 2005 regulations, financial institutions are required to provision for* non-performing facilities periodically and write off the same after ninety (90) days if the same is 925 not regularized. By provisioning, the Financial Institution applies its own funds to offset the debt and write it off in its balance sheet. However, the Financial Institution is expected to pursue recovery of the debt from the borrower and reimburse itself. It cannot therefore be said that by writing off a debt the borrower is discharged from liability to pay as wrongly argued for the Plaintiff. If that were the position then there would be many deliberate loan defaulters with a 930 view of benefitting from the write off. That would be contrary to the banking laws, customs and practices and a disincentive for banks to lend money and in my view, it could not have been the intention of the framers of the Financial Institutions Credit Capitalization and Provisioning Regulations 2005.

Counsel further submitted that the amount owing is USD. 443,654.92 as at 23rd May 2018 and 5th February 2018 in respect of the overdraft, term loan and VAF facilities plus further interest at the agreed rate until payment in full.

In reply, Counsel for the Plaintiffs contended that the 1st Defendant is not entitled to the sum 940 claimed or any part thereof. That instead, it is the 1st Plaintiff that is entitled to a sum of US \$ 347,240 from the Defendant. He prayed that the Counterclaim be dismissed with costs.

To resolve this issue, I have painstakingly analysed the audit report and the Charge documents in the context of the submissions made by Counsel for either party.

Item 4 of the Audit Report establishes that the interest rates applied to the facilities through the loan period were 12% for the business loan and 11% for the Leases 1, 2 and 3.

Clause 2.1.2 of the Mortgage Deed provided for interest at the rate of 11% per annum while the Debenture Deed provides that interest would be at the Bank's variable reference rate or the 950 margin rate.

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In Item 7 the audit findings are that as at the date of final audit, the Plaintiffs liability to the Defendants stood at UD\$ 116,420. Appendix 9 lays out how this sum is arrived at.

As rightly submitted by Counsel for the Defendant the sum of USD\$116,420 is arrived at by subtraction of the sale proceeds from disposal of the securities and fees all together amounting to USD\$437,475.00 from the total indebtedness as at 24th September 2014 being USD\$553,895.00.

- 960 Appendix 9 does not include interest at the stipulated rates indicated under Item 4 of the Audit Report nor by the relevant clauses of the Mortgage and Debenture Deeds. If this had been applied on the total indebtedness from the 24th September 2014 to the date of audit and then subtracted the proceeds from the disposal of assets and the fees from this figure, the total balances arrived at would have been different from that reflected in the Audit Report. - 965

I have also interrogated the implications of the expression "write-off" and in doing so, I have addressed myself to the relevant legislation on bad debts and debt write off.

The Bank of Uganda Regulations that govern the determination of how bad debts should be treated are the Financial Institutions Act 2004 and the Financial Institutions (Credit 970 Classification and Provisioning) Regulations, 2005. The import of these Regulations was instructively stated by lady judge Helen Obura, as she then was, in the case of Samuel Black t/a SB Coaches-Vs-dfcu Bank Limited H. C. C. S No. 416 of 2009, which was rightly referenced by the Defendants. In that case, the learned Judge reiterated that a debt write off did not absolve a 975 borrower from liability. A position I agree with.

In my view, a write off is a lending institution's in-house accounting and financial book statement which, unlike a debt cancellation, does not extinguish liability. In effect therefore, because a write off does not amount to a cancellation of indebtedness even with a write off in place, interest, unless specifically frozen, continues to accrue and the debt therefore continues to grow. Unfortunately, Appendix 9 does not reflect this growth.

Page 34 of 36

Having factored in the interest rates that the parties agreed to as per the findings under item 4 on page 4 of 8 of the Auditor's Report, the Defendants arrived at an outstanding sum of USD 443.654.92 as at 23rd May 2018 and 5th February 2018 in respect of the overdraft, term loan and VAF facilities, a position I am in agreement with.

In the event, I allow the counterclaim against the 1st Plaintiff/1st Counter Defendant and the 2nd Plaintiff/Counter Defendant and Edrida Musiimenta the 3rd Counter-Defendant as guarantors to the 1st Plaintiff/1st Counter Defendant.

# **COSTS**

$\mathbf{1}$

In Ritter v. Godfrey (1920) 2 KB 47) Court noted that ordinarily, costs follow the event, and a successful litigant receives his or her costs in the absence of special circumstances justifying some other order. (See also: Section 27 of the Civil Procedure Act Cap 71). However, this rule will yield where considerations of fairness require it.

Considering the facts surrounding this case and the dictates of fairness, every party shall bear their own costs in respect of the main suit and of the counter claim.

#### **FINAL ORDERS:** .000

- 1. Payment by the 1st Defendant to the 1st Plaintiff of Ugx 50,000,000/= in general damages. - 2. Payment by the 1st Defendant to the 1st Plaintiff of Ugx 85,000,000/= in compensation for the difference between the forced sale value and the price at which property at Block 206, Plot 1358 Mpererwe was sold. - 3. Interest to accrue on (1) above at the rate of 8% per annum from the date hereof until payment in full.

.010

.005

Page 35 of 36

- 4. Interest to accrue on (2) above at the rate of 18% per annum from the date of sale of the property at Block 206, Plot 1358 Mpererwe until payment in full. - 5. $2nd$ Plaintiff to take his personal Dell Computers (3 in number), 1 printer and 1 scanner valued at Shs. $31,500,000/$ = out of the factory at Najeera. Defendants to enable release of the said property within 5 work days from the date hereof failure upon which the Plaintiff to be compensated in the sum of Shs. 31,500,000/= by the $1^{st}$ Defendant. - 6. Payment by the plaintiffs/counter defendants to the 1st defendant, of the outstanding sum of USD 443,654.92 as at 23rd May 2018 and 5th February 2018 in respect of the overdraft, term loan and VAF facilities. - 7. Accrued interest on (6) above at the agreed interest rate, being 11% per annum from date of first default, until payment in full. - 8. Default interest in (6) above at 5% per annum from date of first default until payment in full.

Delivered at Kampala this. $\frac{1}{\text{day of}}$ $\frac{1}{\text{OS}}$ $2021.$

RICHARD WEJULI WABWIRE

**JUDGE**

$\mathbf{r}$

.015

.020

.025

.030

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