Rwenzori Cotton Ginners Company Limited v Jinda International Textiles Co. Limited & 2 Others (Miscellaneous Application 3061 of 2023) [2024] UGCommC 154 (3 May 2024)

| 5 | THE REPUBLIC OF UGANDA<br>IN THE HIGH COURT OF UGANDA AT KAMPALA<br>COMMERCIAL DIVISION<br>MISCELLANEOUS APPLICATION NO. 3061 OF 2023<br>(ARISING FROM CIVIL SUIT 35 OF 2009) | | | |----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---|-------------| | | | | | | | | | | | | | | | | | | | | | 10 | RWENZORI COTTON GINNERS COMPANY<br>LIMITED | ] | APPLICANT | | | VERSUS | | | | 15 | | | | | | 1.<br>JINDA INTERNATIONAL TEXTILES CO. LTD<br>] | | | | | 2.<br>JING HONG | ] | RESPONDENTS | | | 3.<br>GUO DONG | ] | |

#### **RULING**

#### **Introduction**

- 25 This application is brought under Order 26 Rules 1 and 3 of the Civil Procedure Rules and Sections 64(b), 64(e) and 98 of the Civil Procedure Act. The Application seeks the following reliefs: - (a) The Respondents be ordered/directed to give security for the payment of all costs incurred by the Applicant in defending the Counterclaim in HCCS 35 of 2009. - 30 (b) Costs of this application be provided for.

20 **Before: Hon. Justice Ocaya Thomas O. R**

### **Background**

The background of this application is fairly convulated but I will restate the major facts/averments for ease. The Applicant is the 3rd Counter Defendant in HCCS 35 of 2009

35 [ABSA Bank (U) Limited v Jing Hong & Anor] ["the main suit"] which is pending before this court.

5 Essentially, the story by the Applicant herein is something like this. The 1st Respondent herein obtained a loan of USD 2,450,000 from Absa Bank Limited ["Absa"] which was secured by a mortgage (including further charges) of property described as LRV 1154 Folio 6 land at Lira and debentures. The 1st Respondent then pledged the same collateral above as security for a loan from Uganda Development Bank ["UDB"]. The 1st Respondent defaulted on the

10 above loans.

The 1st Respondent then filed HCCS 156/2008 against Absa and Andrew Kasirye (as receiver) challenging the legal mortgages and debenture security the loans advanced. The said defendants in that suit counterclaimed for USD 2,450,000 as the sum outstanding. The above 15 suit was dismissed and judgment entered for the counterclaimants. The Court of Appeal affirmed the judgment on appeal.

Following the appointment of Mr. Andrew Kasirye as the receiver of the 1st Respondent, the above mortgages were transferred to the Applicant after payment of UGX 4,000,000,000 to 20 ABSA and UGX 2,000,000,000 to UDB. Accordingly, on 28 September 2014, the ABSA mortgage was transferred to the Applicant and on 27 March 2019, the UDB mortgage was transferred to the applicant, leaving the Applicant as the sole mortgagee.

Prior to the transfer of the mortgages, ABSA had commenced HCCS 35/2009 seeking recovery of the sums due to it but the suit was against only the 2nd 25 and 3rd Respondents herein. By an amendment on 14th September 2023, the 1st Respondent was joined as a counterclaimant along with the 2nd and 3rd Respondents and the counterclaim is, interalia, against the Applicant.

- 30 According to the Applicant, the counterclaim has no merit because; - (a) From 2009, the Respondents did not counterclaim against ABSA and accordingly, their claim is time bad, having been brought after fourteen years. - (b) The claim is brought in bad faith and is frivolous and vexatious. - (c) The 1st Respondent was put in receivership and has no capacity to commence the 35 counterclaim.

- 5 (d) The 1st Respondent was struck off the register of companies on 16 December 2023 for non-compliance. - (e) The Applicant is a bonafide transferee of the mortgages without any notice of defect, default or fraud and accordingly, it has a good defence against the counterclaim. - 10 The Applicant contends that is has incurred significant expenses in defending the main suit which continue to increase as it remains undetermined. The Applicant contends that a part from the mortgaged property, the 1st Respondent does not have any other known assets which can be used to satisfy the judgment and the 2nd and 3rd Respondents being Chinese nationals pose a high flight risk if judgment is rendered against them. - 15

The Applicant contends that the Respondents haven't paid court filing fees for the main suit and were questioned about the same on the last appearance before the court on 9 May 2023 and to date have not paid the court filing fees. Further, the Applicant contends that the 1st Respondent has a habit of commencing actions and abandoning them and to date has never

20 paid costs in HCCS 156/2008 or those in the consequent appeal to wit CACA 135/2012.

The 1st Respondent does not have clean hands as it has never paid the decretal sum of USD 2,450,00 in HCCS 156/2008 and that the Applicant is being unduly subjected to harm by defending a frivolous action. The Applicant further contends that given the subject matter in 25 the main suit, and the work involved, the Respondents should be required to furnish security

of UGX 500,000,000.

The Application was opposed by the Respondents. The Respondents contend that;

- (a) The Application doesn't disclose grounds for grant of the reliefs sought - 30 (b) The Respondents have a merited claim in the main suit and the Applicant does not have a plausible defence. - (c) The Applicant cannot bring an application for security yet it is in possession of the 1st Respondent's property worth billions. - (d) The transfers referred to are only in respect of the mortgages and not the proprietary - 35 interest in the mortgaged property which still belongs to the 1st Respondent. - (e) The 1st Respondent was properly joined to the counterclaim as a principal borrower.

- 5 (f) The cause of action in the counterclaim arises from the fraudulent and illegal transfer/sell of the mortgages to the Applicant and accordingly, the claim is not time barred and, in any case, the same cannot arise in the present application. - (g) Receivership was concluded and all creditors paid and accordingly, the 1st Respondent is no longer under receivership. - 10 (h) The reliefs sought in the main suit are different and unrelated to the previous actions referenced by the Applicant. - (i) The 1st Respondent has capacity to institute the counterclaim, and in any case the same cannot arise herein. The 1st Respondent's documents are duly filed and certified at URSB and accordingly, this would not have been the case had the company been 15 struck out from the register. - (j) The fact that the 2nd and 3rd Respondents do not have assets in Uganda is not a basis for ordering security for costs. - (k) Failure to pay court fees is not a ground for grant of an order for security for costs. - (l) The 2nd and 3rd Respondents are shareholders in Guo Star Enterprises ["GEL"] with

- 20 shares having proprietary value. - (m) The Applicant has not demonstrated that the failure to pay costs in HCCS 156/2008 and CACA 135/2012 are because there are no assets to attach. - (n) The present application is merely intended to derail the hearing and determination of the main suit.

In Rejoinder, the Applicant contended that:

- (a) The 2nd Respondent does not have capacity to depone an affidavit on behalf of the 1st Applicant as the same is in receivership and it has never been discharged. - (b) The 1st Respondent is under receivership and has no capacity to prosecute the main 30 suit. - (c) The affidavits in reply of the 2nd and 3rd Respondents are similar both in numbering of the paragraphs and word for word with a standalone deponing page which is contrary to law. - (d) The Respondents have no interest in the suit property.

- 5 (e) HCCS 156/2008 and CACA 135/2012 dealt with similar issues with the main suit from which this application arises. - (f) The 1st Respondent was struck off the register for being non-compliant and this fact has not been disproved/disputed by the Respondents. - (g) The 2nd and 3rd Respondents have not provided detail as to the physical address of 10 GEL or the proprietary value of its shares. - (h) The 2nd and 3rd Respondents have admitted that they do not have property in Uganda, something that the court should consider in determining this application. - (i) The Respondents have not disputed that they have not paid the costs and decretal amounts in in HCCS 156/2008 and CACA 135/2012. - 15

# **Representation**

The Applicant was represented by M/s Tumusiime, Kabega & Co. Advocates while the Respondents were represented by M/s Muwema & Co. Advocates.

# 20 **Evidence and Submissions**

The Applicant led evidence by way of an affidavit in support and an affidavit in rejoinder deponed by Amdan Khan, the Applicant's Managing Director. The 2nd Respondent deponent an affidavit in reply in his individual capacity and on behalf of the 1st Respondent, being a director of the same and the 3rd Respondent deponed an affidavit in reply deponed by

25 himself.

All parties made written submissions written submissions in support of their respective cases which I have read but I have not seen the need to reiterate the same below but will refer to them where appropriate in the decision.

# **Decision**

# **Order 26 Rule 1** provides:

"The court may if it deems fit order a plaintiff in any suit to give security for the payment of all costs incurred by any defendant."

- 5 The purpose of security of costs as provided under Order 26 rule 1 of the CPR is to secure a defendant who may incur costs to defend a suit instituted by a plaintiff who cannot pay his/her costs. The main considerations in such applications are whether the applicant is being put to undue expense of defending a frivolous and vexatious action, whether the defendant has a good defence to the suit, and whether such a defence is likely to succeed. See - 10 **Hellen Aloyo v Roy Ogwok HCOS 10/2013, Amrit Goyal v Harichand Goyal CACA 109/2004, Kabaka of Buganda v Male Mabirizi CACA 184/2017**

The grant of an order for security of costs before judgment is a judicial discretion, and in determining an application for the same relief, the court considers a number of factors

### 15 including:

- (a) the prospects of success or merits of the proceedings, - (b)the genuineness of the proceedings, - (c) the impecuniosity of the Plaintiff, - (d) whether the Plaintiff's impecuniosity is attributable to the Defendant's conduct, - 20 (e) whether the Plaintiff is effectively in the position of a Defendant, - (f) whether an order for security for costs would stifle the proceedings and/or impede access to justice, - (g) whether the proceedings involve a matter of public importance, - (h) whether there has been an admission or payment in court, - 25 (i) whether delay by the plaintiff in commencing the proceedings has prejudiced the Defendant, - (j) the costs of the proceedings, - (k) whether the security sought is proportionate to the importance and complexity of the subject matter in dispute, - 30 (l) the timing of the application for security for costs, - (m) whether an order for costs made against the plaintiff would be enforceable within the republic of Uganda, - (n)the ease and convenience or otherwise of enforcing a Ugandan court judgment or order in the country of a non-resident plaintiff or appellant.

- 5 (o) if the plaintiff is a natural person, an order for security for costs cannot be made merely on account of his or her impecuniosity. - (p) security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct. - (q)the provisions of any Act under which the court may require security for costs to be - 10 given - (r) There are no hard and fast rules, each application is considered in its own circumstances.

# See **Deepak Shah & Ors v Manurama Limited & Ors HCMA 361/2001, Westmont Holdings SDN BHD v Central Bank of Kenya & 2 others [Petition No. 16 (E023) of 2021]** 15 **(SCK).**

I will therefore proceed to use the above threshold to assess the Applicant's application.

# Merits of the Counterclaim

For the Applicant, the major challenges to the merits of the Respondent's counterclaim were

- 20 (a) The 1st Respondent is not capably joined as they have been struck off the register and/or are in receivership - (b) From 2009, the Respondents did not counterclaim against ABSA and accordingly, their claim is time bad, having been brought after fourteen years. - (c) The claim is brought in bad faith and is frivolous and vexatious. - 25 (d) The 1st Respondent was put in receivership and has no capacity to commence the counterclaim. - (e) The 1st Respondent was struck off the register of companies on 16 December 2023 for non-compliance. - (f) The Applicant is a bonafide transferee of the mortgages without any notice of defect, - 30 default or fraud and accordingly, it has a good defence against the counterclaim.

# Limitation

The Applicant claims that the Respondents' claim is out of time, being barred by limitation. This, is essentially a preliminary point of law regarding the competence of the counterclaim.

35 A preliminary objection raises a pure point of law which is usually on the assumption that all


- 5 the facts pleaded by the other side are correct. It is thus based on a commonly accepted set of facts as pleaded by both parties. It cannot be raised if any fact has to be ascertained or if what is sought is the exercise of judicial discretion. Preliminary objections relate to points of law, raised at the outset of a case by the defence without going into the merits of the case. In any preliminary objection therefore, there is no room for ascertainment of facts through - 10 affidavit oral evidence. See **Yaya Farajallah v Obur Ronald & Ors HCCA 81/2016**

Matters that require evidence cannot be entertained as preliminary objections but must instead be resolved in the main suit. See **Lweza Clays & Another vs Tropical Bank & Another SCCA 31 of 2018, Mukisa Biscuit Manufacturing Co. Ltd v. West End** 15 **Distributors Ltd [1969] EA 696, Ssekabira Herbert v Ssuna Mulema & Anor HCMA 186/2022**

It is trite law that a preliminary point of law can be raised any time before judgment. See **Charles Sserunjogi v Tony Nkuubi HCOS 7/2019.**

In determining a preliminary point of law, the court must consider the pleadings and assume the contents therein to be correct. See **Mukisa Biscuit Manufacturing Co v West End Distributors [1969] EA 696, N. A. S. Airport Services v Attorney General [1959] EA 53, Rev George Lubega & Anor v Luwero Town Council & Anor HCCS 193/2009.**

From the pleadings, the Respondents in the counterclaim allege, as against the Applicant, that it illegally/fraudulently purchased the mortgages. The Respondents at para 11(m)-(p) aver that they became aware of this in 2023. The Applicant avers that the said mortgages were transferred in 2019, about five years ago. It follows from the above that the 30 Respondent's claim, on the face of the pleadings is not time barred, except if evidence is adduced during the hearing that the reverse is true.

# Receivership

It was not disputed as between the parties that the 1st Respondent was placed in receivership

35 by the ABSA. The Respondents contend that such receivership ended when the mortgages


5 were transferred to the Applicant while the Applicant avers that such receivership is still ongoing as the 1st Respondent is yet to be discharged.

In receivership, the company's corporate existence is not affected, and the company's operations largely continue, except that legal control of the company shifts to the receiver

10 who directs the operations of the company. See **Corporate Insolvency Law: Principles and Perspectives, 2nd Edition by Vanessa Finch and Donald Korobkin P.332, Re Joshua Shaw & Sons Ltd [1989] BCLC 362, Corporate Insolvency Law, 2nd Ed.**

**Section 181(2)(b)** of the Insolvency Act empowers the receiver to manage the affairs of the 15 company and exercise the powers of the directors. Accordingly, when a company is in receivership, the powers and functions of its directors are suspended for the period of such receivership.

Typically, a creditor who has exercised their power to appoint a receiver may terminate 20 receivership (such as where receivership is no longer viable or where the debt is discharged). Additionally, the receivership may also be terminated under Section 197 of the Insolvency Act.

The determination as to whether the receivership of the 1st Respondent ended is one 25 requiring evidence as this was not a court-based receivership process where a termination under Section 197 would have constituted conclusive proof. Accordingly, this matter is best reserved for trial.

Striking Off

30 The Applicant contends that the 1st Respondent was struck off the register of companies and accordingly does not have capacity to bring the present action.

**Section 265A** (1) of the Companies Act (as amended) provides:

"The registrar may, at the request of the company or on his or her own accord, cancel the 35 registration of a company under this Act in accordance with regulations made by the Minister."

5 **Section 265(2)** of the same law provides that a company struck off the register under subsection

(1), shall cease to carry on business. These provisions are operationalized by **Regulations 41-43** of the Companies Regulations 2023.

10 It must be noted that **Section 134 (5) and (6)** of the Companies Act provides for striking off a company from the Register. It provides thus

"(5) If after expiry of five years from date specified in subsection (1), the company has not filed any annual returns, the registrar shall require the company file a statement of solvency 15 and show cause why a company should not be struck off the register.

(6) Where the company does not show cause why it should not be struck off the register in accordance with subsection (5), the registrar and publish in the gazette and newspaper of wide national circulation a notice of the striking-off of that company the registar."

Clearly, from the law, it appears that until a company is dissolved in accordance with **Regulation 43** of the Companies Regulations 2023, the same remains in existence, albeit that it may not be entitled to carry on its business if the same has been struck out under Section 265A. This is because (a) Regulation 43(3) provides for the cessation of existence of a 25 company on the register and this process is not capable of being reversed except perhaps by order of court and (b) The procedures for striking out a company under Section 134 and Section 265A provide for restoration of the same which would be at odds with the assertion that such striking out, by itself alone, constitutes a cessation of the existence of the company. See **Jodrell v Peaktone Ltd (2013) 1 WLR 784**

The Respondent contended that its documents are still being filed and certified by the Registrar of Companies and thus it hasn't been struck out. In my view, the determination of this objection requires ascertainment as to the circumstances in which the 1st Respondent was allegedly struck off the register and whether it has been registered and is accordingly

35 best reserved for trial where evidence on the same can be presented and carefully examined. The Respondent's claim versus the Applicant's defence 5 The Applicant contended that the Applicant's claim is frivolous, vexatious and an abuse of court process. Whereas they are often taken together, "frivolous" and "Vexatious" are not the same thing.

In **John Garuga Musinguzi & Anor v Dr. Chris Baryomunsi & Anor HCMC 817/2016**, 10 court defined frivolous and vexatious claims thus:

- "A frivolous claim or complaint is one that has no serious purpose or value. Often a "frivolous" claim is one about a matter so trivial or one so meritless on its face that investigations would be disproportionate in terms of time and cost. The implication is that the claim has not been brought in good faith because it is obvious that it has no reasonable prospect of success - 15 and/or it is not a reasonable thing to spend time complaining about. A "vexatious" claim or complaint is one (or a series of many) that is specifically being pursued to simply harass, annoy or cause financial cost to their recipient."

## In **King's College Budo Staff Savings Scheme Limited v Zaverio Samula & Ors HCCS**

- 20 **26/2020**, the court defined abuse of court process thus: "The term abuse of court process has the same meaning as abuse of judicial process. The employment of judicial process is regarded as an abuse when a party uses the judicial process to the irritation and annoyance of his opponent and the efficient administration of justice. It is a term generally applied to a proceeding, which is wanting in bona fides and is frivolous, - 25 vexatious or oppressive. The term abuse of process has an element of malice in it. The concept of abuse of judicial process is imprecise, it implies circumstances and situations of infinite variety and conditions." See also **Deox Tibeigana v Vijay Reddy HCMA 665/2019, Uganda Land Commission and Another V James Mark Kamoga and Another, SCCA No. 8 of 15 2014.**

The heart of the Respondents' contentions in the counterclaim is that there was a failure to render an account during receivership, the mortgages were wrongly transferred to the Applicant and that the loans have been discharged and so should the personal guarantees. For its part, the Applicant asserts that it is a bonafide transferee of the mortgages with no

35 notice of such illegality or fraud if any.

5 In my considered view, at this stage, without evidence, both cases are plausible and I have found nothing to suggest that the Respondents' case is frivolous, vexatious and an abuse of court process or that the Applicant's defence is not plausible or lacks merit.

## Likely Cost/Contribution of Applicant

- 10 I have reviewed the pleadings in the counterclaim. The pleadings are in respect of financing transactions, and the consequent receivership as a mode of recovery which lead to the transfer of mortgages to the Applicant. Considering the applicable scale under the Advocates (Remuneration & Taxation of Costs) Regulations, it is likely that significant sums of money will be incurred in prosecuting the same. - 15

Moreover, a review of the counterclaim shows that the Respondents do not assert that the Applicant has actively and significantly contributed to any financial distress on their part. Essentially, they contend that the receivership recovered the entire amount due and owing and that the transfer of the mortgages was illegal and/or fraudulent. In applications of this 20 nature, evidence that the impecuniosity of the Claimant can, at least on the face of the pleadings, be attributed to the defendant is a consideration against the grant of an order for security as this would in essence be a party offending another and consequently crippling the ability to vindicate the ability of the offended party to seek relief. In my considered view,

Impecuniosity/Failure to Pay Previous Costs/Assets in the Territory/Ease of Enforcement In the present proceedings, it was not asserted that the Respondents are impecunious per se. The 2nd to 3rd Respondents asserted that they are shareholders in GEL which is a shareholder in the Applicant.

no such circumstances exist in this case on the face of the pleadings.

From a review of the evidence, it does appear that the Respondents do not dispute that they do not have any other assets in Uganda outside of the mortgaged property. As correctly noted by Counsel for the Respondents, the failure to have assets in the jurisdiction by its nature alone is not a basis for grant of security. See **Deepak Shah & Ors v Manurama Limited &**

35 **Ors HCMA 361/2001**

- 5 The Respondents were said to be based in China and this was not denied in their replies. The Respondents did not present evidence as to the existence of other assets available to discharge an order as to costs were it to arise. Further, neither Uganda nor China are parties to the Convention of 2 July 2019 on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters. I am also not aware of a bilateral or multi-lateral agreement - 10 between Uganda and China. In my view, at the very least, it is probable that, in the event of an award of costs, the Applicant is likely to meet some delay or incur additional cost to recover the same.

One must then also consider the issue of costs in HCCS 156/2008 and CACA 135/2012. As 15 correctly noted by counsel for the Applicant, the Respondents did not dispute that the costs in the above causes have not been paid. For their part, the Respondents assert that the Applicant has not demonstrated that there aren't sufficient assets to satisfy those orders for costs from. I found this response, at best, dishonest. A party who is condemned to costs has a duty to make payment of the sum to the person in whose favour they are adjudged. Whereas

- 20 mechanisms exist for enforced recovery, a party ought to take it upon themselves to pay the sums owed unless they are incapable of doing so at law, such as where they are insolvent. Even without the judgment creditor pursuing enforced recovery, the party who owes costs ought to take it upon themselves to make payment of the same, rather than dismiss the judgment creditor off to a puzzle where the judgment creditor must use money and time to - 25 find which assets belong to the judgment debtor for purposes of recovering costs.

Further, the Respondents contended that the Applicant already has in its possession a mortgaged asset which it can recover the order of costs from. The Respondents in their submissions contended that they are reliably informed that the Applicant is deriving rent to

30 the tune of UGX 100,000,000 a month. This was not reflected in the Respondents' affidavits and constitutes evidence from the bar which is inadmissible. See **Mayanja v Wasswa & Anor HCMA 44 of 2016**

It must be noted that a transfer of mortgages essentially places the transferee in the place of the mortgagee. This means that, without a contrary agreement or bar, the transferee can

35 claim the sums owing on the loan disbursed by the mortgagee. It was not demonstrated that

5 the asset's forced sale value can retire both the indebtedness and leave sufficient provision for security of costs. I therefore did not find this argument compelling.

One must consider that, subject to the determination of the questions in the main suit as regarding whether the receivership recovered the 1st Respondent's debt, the 1st Respondent

- is heavily indebted to the Applicant and the 2nd 10 and 3rd Respondents as guarantors may be called in to meet that debt. This should be considered together with the receivership report adduced by the Respondents which indicated that the receivership was complicated and the previous lenders, UDB and ABSA had to compromise on their debt amounts and take the payments (which were smaller compared to the accumulated loan amounts) made by the - 15 Applicant in full and final satisfaction of their debts. This is proof that the Respondents could not satisfy the loan sums, which were already adjudged by the Court of Appeal as owing. See **G. M Combined V A. K Detergents SC [1996] 1KALR 51**

Even more, the Respondents did not disprove the contention that court fees in this cause had 20 not been paid. This, on its face, points serious concerns at the ability of the Respondents to make payment of costs should they be so compelled in the decree.

In my view, the failure to make payments of pre-adjudged costs, coupled with the lack of assets in this jurisdiction, the above-mentioned debt status of the respondents, the failure to 25 disprove the assertion that the Respondents haven't paid the court fees of this cause, as well as the fact that there isn't an agreement for reciprocal recognition of and enforcement of judgments between Uganda and China makes the Applicant's arguments more compelling than those of the Respondent.

30 Access to Justice/Matter of Public Importance

In applications of this nature, one must consider whether ordering the provision of security for costs will preclude the Respondents from pursuing their claim. Here one must balance the need to remove barriers to accessing the court with the need to provide the respondent with security for the satisfaction of an order as to costs should it prevail. I have considered

35 all the circumstances of this case and I take the view that the same will not. In my view, the above-mentioned financing standing of the Respondents creates a real need to provide 5 security for costs and I do not see how it can derail the Respondents' prosecution of their cause, especially if such security is not a cash security.

Moreover, the present dispute neither raises novel questions of law nor is it of significant public importance as to warrant the concern that such order as for security would impair the

10 litigation of a case in which the public has a serious interest. The counterclaim is essentially an ordinary commercial dispute without a significant public interest and accordingly, this consideration lies in favour of the Applicant.

On the whole, I take the view that the circumstances of this case, considered together, 15 warrant the grant of an application for security for costs.

## Character of Security

In **Ropani Investments Limited & Anor v DFCU Bank HCMA 1919/2023** I considered the character of security in respect of stoppage of a sale under the Mortgage Act. I will reproduce 20 the relevant part of that decision in some detail:

"The Appellants criticized the Learned Registrar for requiring the Appellants to make a cash payment of the stated sum of money when the Appellants had offered to provide Real Estate equivalent to 30% of the forced sale value of the suit property.

In my view, in determining whether the payment of monies in Regulation 13 of the Mortgage Regulations allows placement of securities such as real estate, it is important to revisit the intention of the regulations which we have considered above.

- 30 As I have already held, Regulation 13 of The Mortgage Regulations, 2012 is an enactment of the principle "pay now, argue later. It is designed to restrict the ability of the mortgagor to use litigation or the courts, to vexatiously delay the realisation of money due to the mortgagee. It is intended to reduce the number of frivolous objections to sales by a mortgagee and guarantee that the mortgagee will not be unnecessarily prejudiced by a delay - 35 in payments, inevitably occasioned by litigation.

5 **Regulation 13(1)** of the Mortgage Regulations provides thus:

"Adjournment or stoppage of sale.

The court may on the application of the mortgagor, spouse, agent of the mortgagor or any other interested party and for reasonable cause, adjourn a sale by public auction to a specified date and time upon payment of a security deposit of 30% of the forced sale value

10 of the mortgaged property or outstanding amount."

What does payment mean? **Black's Law Dictionary, 9th Edition at Page 1243** provides thus: "Performance of an obligation by the delivery of money or some other valuable thing accepted in partial or full discharge of the obligation. [Cases: Payment G':::C 1.) 2. The money 15 or other valuable thing so delivered in satisfaction of an obligation."

In **Stanbic Bank Limited v Kesacon Services Limited & Anor HCMA 724/2023**, I explored the policy considerations underpinning provisions such as Regulation 13. I held thus:

- "It must be recalled that money is an asset and a lengthy period of its retention means credit 20 will become more expensive as lenders are precluded from putting their monies to use and will shift to prefer institutional borrowers that are unlikely to default as opposed to other borrowers. This has the effect of raising the cost of money and making it difficult, if not impossible, especially for domestic borrowers to access credit. - 25 To ensure that a lot of money is not unnecessarily rendered unusable because it is tied down in long winding litigation, the resolution of disputes between lenders and borrowers, as well as the resolution of dispute relating to securities, should be done quickly and fairly. Moreover, with respect to disputes regarding securities for lending, if the processes of realizing securities is marred with lengthy delays, third parties may begin to shun purchase - 30 of loan securities from lenders, thereby making it difficult to liquidate securities and recover sums lent. This is on top of the fact that deposit/investment taking lenders can easily go under if loan/security recoveries face the bottleneck of lengthy and winding litigation."

5 The Applicants pointed this Court to the fact that 30% of the outstanding amount on the facility as UGX 7,849,531,113 which would be a colossal amount of money to pay before the applicant can pursue its application and suit pending before this court.

In **Luwa Luwa Investments v URA HCMA 1336/2022**, I considered this issue with respect 10 to stays of execution. I held thus:

"As this a commercial court, the decisions of the court should be cognizant of economic realities in Uganda today. For a business, loss of cash flow can be akin to driving a dagger at the heart of a person, who will most certainly die. Surely, that should be a consideration that court should look at to identify the justice of the case. Moreover, Uganda, like many African

15 countries experiences high costs of credit, which mean that borrowing to replace lost cash flow can be difficult or ruinous. This, coupled by inflation, that can affect the value of money retained means that the retention of money from a business can cause "irreparable damage"."

The above case is different because it did not deal with a requirement to provide a specific 20 quantum of security as a function of a legal obligation. Further, the interpretation of provisions of law is an objective one, and not a subjective one to be guided by extrinsic considerations such as the quantum of money in issue, among others.

In my view, payment under Regulation 13 includes the provision of property other than 25 money as security. It follows that the regulation is permissive of other means of providing security as opposed to cash.

Therefore, courts have a discretion, depending on the circumstances of the case, to direct how that security is to be provided. In doing so, courts must recognize that a mortgage is

30 essentially a swap of non-liquid assets for liquid ones (cash). See **Luwa Luwa Investments v URA HCCA 43/2022**

In that sense, mortgagees pursue sale of mortgaged property to obtain cash from the credit market and it might be unhelpful for the court to allow security to provided by assets like

35 land, which the mortgagor has already provided when the mortgage was created. Such assets

5 are typically more difficult to liquidate as opposed to other assets such as bank or insurance bonds or guarantees.

It is important to explore how other courts have handled this question. In **Harvey v Perpetual Nominees Ltd (2009) NSWSC 1379**, the court allowed the provision of an 10 absolute and unconditional offer to provide immediate refinance as sufficient security to stop a mortgagee's sale.

In **Six Bruce Pty Ltd v Jadig Finance Pty Ltd (2018) VSC 552**, the court allowed an injunction without a payment of security, finding that the requirement for security was 15 unduly harsh and uncommercial. This case is obviously at odds with Regulation 13 of the Mortgage Regulatins.

In **Inglis v Commonwealth Trading Bank Of Australia (1972) HCA 74**, the court held that nothing short of actual cash payment of the sums owing under the mortgage was enough to 20 prevent a stoppage of sale and promises of repayment, further security or incoming refinancing was not sufficient. This position was reiterated in **Mavgalia Investments Pty Limited v BKSL Investments Pty Ltd & Ors (2017) NSWSC 490**

This case was criticized in the article **Restraining Sales By Mortgagees And A Crucial Myth** 25 **by Justice John Bryson. [Australian Bar Review 11(1), 1-26, 1993**].

In **Limpark Investments Pty Ltd v Macquarie Property Deveopment Finance Lttd (2002) WASC 272,** the court held that, where the application for the injunction involves an underlying challenge of the right of a mortgagee to sell (such as regarding whether the

30 mortgagor is indebted or is in default), there is greater discretion regarding the payment of security.

In my view, where the purpose of the stoppage/adjournment of sale is redemption, courts should, save in exceptional circumstances, require cash or similar assets that are capable of

35 quick liquidation. Where, however, the purpose of the stoppage or adjournment is a determination of the rights of the parties under a mortgage, the court may accept assets that

- 5 may not, compared with cash, be quicker to liquidate, such as real estate. This is because litigation may be lengthy, and, cause a person or business to collapse/fail owing to a significant concentration of their liquid assets in court by way of security. A balancing act needs to be found, but should at all times be guided by the purpose of the enactment of Regulation 13 of the Mortgage Regulations which has been explored at length above. - 10

In the circumstances of this case, a significant commitment of cash assets by way of security may have adverse impacts on the Appellants' businesses, yet the interest of the Respondent can also be secured."

- 15 Whereas the circumstances in the above case were different, in my view, the concepts being dealt with in that case and this one are a little similar. Both cases deal with the question of security albeit under a different legal framework and a different set of proceedings. However, the underlying ratio, in my view, can be borrowed into the circumstances of this case; it is essentially that the circumstances under which the security is needed to be provided will - 20 determine the most appropriate character of security.

An order for security for costs is essentially one that requires a party against whom it is made to make provision for a contingent liability; they may or may not be ordered to pay costs and until judgment, such liability is contingent/probable rather than certain. Accordingly,

25 requiring a party to make security of a liquid asset (such as cash) especially of a very high quantum may be unduly prejudicial especially where the party against whom the order is made is in business and may suffer from tying down significant sums of cash for long periods of time.

Accordingly, in my view, a balancing act ought to be achieved by requiring the Respondents

30 to provide a type of security and a quantum which is not unduly prejudicial, as would make them struggle to prosecute this case or continue their own operations/sustenance.

## **Conclusion**

In Conclusion, the Applicant's application succeeds and I make the following orders:

- 5 (a) The Respondents jointly and severally provide security, to the quantum of UGX 350,000,000 for of all costs as may be decreed to the Applicant in defending the Counterclaim in HCCS 35 of 2009 within 45 days from the date of this ruling. - (b) The security shall be in any of the following forms: - i) Payment into court a sum of UGX 350,000,000 - 10 ii) An irrevocable and unconditional lien on a bank account charging the sum of UGX 350,000,000 in a framework which shall enable direct payment of the quantum of costs that may be awarded to the applicant and taxed, such lien not being capable of being vacated in anyway until the payment is made to the applicant or a contrary order of this court is issued. - 15 iii) Provision of an unconditional, unlimited on demand payment guarantee to the tune of UGX 350,000,000 - iv) Provision of an item of real property, such as land, with a forced sale value of UGX 350,000,000. - (c) The main suit shall be called for mention within the 45 days given for purposes of

- 20 determining, within the (b) of this order, if so elected by the Respondents the appropriate security to be provided and this court shall give such consequential orders as may be necessary. - (d) Costs of this application are awarded to the Applicant. - 25 I so order.

Delivered electronically this\_\_\_\_\_\_\_ day of \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_2024 and uploaded on ECCMIS. 3rd May

**Ocaya Thomas O. R Judge 3rd May, 2024**