BACKGROUND

In December 2012, the Plaintiff companies obtained a lease financing facility of $397,985 to buy five trucks and trailers worth $478,000, paying the remaining 20% upfront with monthly payments of $12,842, the Plaintiff’s also secured an additional UGX 650 Million in loans backed by land mortgages, company debentures, and personal guarantees of the directors. The Plaintiff companies defaulted on their debt and requested a restructuring of the facility in February 2014; however, the bank instead repossessed and privately sold all five trucks by May 7, 2014.

By an agreement in September 2014, the second company assumed these debts and in default, they were sold by private treaty. The Plaintiff aver that the bank acted unlawfully by selling the one-year-old trucks at half price via an unannounced private treaty instead of a public auction, misallocating deposits, and applying illegal interest charges

Conversely, by way of counterclaim, DFCU Bank argued that its repossession and private sale were entirely lawful and backed by valid valuations and the company’s approval, the bank asserted that the debits on the Plaintiff’s accounts and the interest rates charged were lawful and prayed that the bank assert its rights to enforce the mortgages and personal guarantees to recover the outstanding balances.

At trial, the following issues were presented for determination;

1. Whether the sale of the 1st plaintiff’s trucks by the defendants was lawful.?
2. Whether the defendant overcharged interest and unlawfully debited the plaintiffs’ bank accounts?
3. Whether the counter-defendants breached their contracts or facilities with the counter-plaintiff?
4. Whether the mortgage deed and further charge registered on the suit land are legal and enforceable?
5. Whether the debenture, corporate guarantees and personal guarantees are legal and enforceable?
6. Whether the plaintiffs are entitled to recover from the defendant a sum of shs. 313,224,081/= or any part thereof?
7. Whether the counterclaimant is entitled to recover from the counter-defendants a sum of shs. 1,246,732,712/= or any part thereof?
8. What remedies are available to the parties?

Analysis;

1. In resolution of Issue, one on whether the sale of the 1st plaintiff’s trucks by the defendants was lawful.

The court found in favor of DFCU Bank ruling that the repossession and private sale were lawful, the courts finding was on the basis that under a financial lease structure, title and absolute legal ownership remain with the lessor which is the Bank until all lease obligations are fulfilled and the option to purchase is formally exercised.

The court held that whereas a lessee retains possessory right with a conditional option to buy, defaulting on monthly payments entitles the lessor to repossess its asset. In the instant case, the company’s director had unequivocally approved the private sale based on the valuation and the court found that they have fulfilled their duty to act in good faith and did not sell the vehicles at an unlawful undervalue.

2. In jointly resolving the second and sixth issue on whether the defendant had over-charged interest and unlawfully debited the plaintiffs’ bank accounts and on whether the plaintiffs are entitled to recover from the defendant a sum of shs. 313,224,081/= or any thereof;

The Plaintiffs argued that DFCU Bank applied illegal debits, penal interest rates, and unauthorized fees to their bank accounts following the restructuring agreement. They alleged that the bank wrongfully misallocated a huge deposit of UGX 733,607,547/= to other loan lines instead of using it to clear the primary lease credit facility as contractually agreed, artificially inflating the lease arrears.

In their defense, the Defendants asserted that all interest rates, default penalties, and administrative account debits including the UGX 733.6 million were calculated in accordance with the signed offer letters, facility agreements, standard banking terms and in accordance with the agreed debt consolidation structure and banking practice to satisfy matured cross collateralized debts across the plaintiffs’ multiple accounts.

The court resolved in favor of DFCU that unless specific uncontracted debits are proved by expert audit. The court reasoned that interest, penalty rates, and administrative fees applied pursuant to signed offer letters and standard banking terms are contractually binding. Banks are entitled to charge agreed-upon interest upon default. The burden of proof lies on the borrower to show specific mathematical errors or uncontracted debits.

For the sixth the court dismissed the Plaintiffs’ claim and thus recovered nothing. This is because the initial 20% down payment of approximately $80,015 was a condition precedent to lease activation, not an equity contribution giving them co-ownership of the trucks. Because the repossession was lawful and interest calculations complied with contract terms, there was no illegal enrichment or overcharge to refund.

3. In resolving issue three on Whether the counter-defendants breached their contracts or facilities with the counter-plaintiff and issue seven on whether the counterclaimant is entitled to recover from the counter defendants a sum of sh. 1,246,732,712/= thereof;

The plaintiffs (Counter- defendants) argued that they did not willingly default; their failure to pay was driven by the loss of their primary logistics contract with DHL Global Forwarding Uganda Limited at the end of 2013. They acted in good faith by requesting a debt restructuring in February 2014, but the bank acted unreasonably by demanding an immediate lump-sum payment instead of negotiating working terms.

The defendants (counterclaimants) argued that the plaintiffs committed fundamental breaches of contract by repeatedly failing to pay the monthly rental installments of $12,842 on the lease, as well as defaulting on the term loan, overdraft, revolving loan, and commercial loan. The termination of the DHL contract was a commercial business risk, not a legal defense or force majeure event that absolved them of their clear contractual repayment obligations.

The court resolved in favor of DFCU Bank on the third issue that the plaintiffs committed a fundamental breach of contract. The court reasoned that non-payment of installments under both the original lease facilities and the restructured in September 2014 debt consolidation agreement constituted an explicit repudiatory breach. The loss of the DHL contract was a commercial risk borne by the borrower, not a force majeure event relieving them of debt service obligations. Loss of a major client is a standard commercial risk borne exclusively by the borrower and does not excuse debt default or bind a financial institution to grant restructuring.

4. In resolving the seventh issue on whether the counterclaimant is entitled to recover from the counter-defendants a sum of shs. 1,246,732,712/= or any part thereof.

The court ruled in favor of DFCU Bank as having established default on the restructured loan, the bank is entitled to recover the outstanding principal balance plus accrued contractual interest and fees remaining after deducting the net proceeds of the truck sales (UGX 690 Million).

5. In resolving the fourth and fifth issue on whether the mortgage deed and further charge registered on the suit land are legal and enforceable and whether the debenture, corporate guarantee and personal guarantees are legal and enforceable

The Plaintiffs’ (counter-defendants) argued that the mortgage deeds over the land, the corporate debentures, and the personal guarantees signed by Mr. Bob Ewange and Mrs. Miriam Ewange were unenforceable because the underlying debt was inflated by illegal bank charges and the unlawful sale of the fleet. The bank should have exhausted the recovery from the sale of the primary security (the trucks) before seeking to realize land mortgages or enforce personal guarantees against the directors.

The Defendants argued that the mortgages, corporate debentures, and personal guarantees were executed legally, voluntarily, and for valuable consideration to secure all credit facilities. That in under guaranteed law, a guarantor’s liability is co-extensive with that of the principal debtor. The bank is not legally required to exhaust all company assets before suing the guarantors directly for the outstanding balance.

The court regarding enforceability of Land securities the courts resolved in favor of DFCU Bank as the registered mortgage deeds and further charges are valid and enforceable. The courts reasoned that Mortgages are created to secure valid credit facilities so that they remain enforceable as long as an outstanding debt balance exists following default. The bank is entitled to exercise its statutory power of sale over mortgaged properties to recover unpaid sums.

Regarding enforceability of Guarantees and Debentures, the courts resolved in favor of DFCU Bank as the personal guarantees, corporate guarantees, and debentures are fully enforceable. Reasoning that personal and corporate guarantees are independent, co-extensive obligations. Upon default by the principal debtor, the bank is legally entitled to proceed directly against the guarantors (the directors) without first exhausting all other remedies, up to the value of the guaranteed sum.

At conclusion, the court ordered the plaintiffs and the individual directors (as guarantors) to pay UGX 1,246,732,712/= jointly and severally, alongside contractual interest, post-judgment interest, and court costs.

Congratulations to Mr. Brian Kalule (Partner) and Mr. Jeffrey Kaddu(Associate) on this well-deserved win.