The Landmark Ruling in Uganda HCCS Misc. Application No 654 of 2020
The Landmark Ruling in Uganda HCCS Misc. Application No 654 of 2020 (Arising from HCCS No. 43 of 2020 Ham Kiggundu and others Vs Diamond Trust Bank (U) Ltd and Diamond Trust Bank (K)
On 7th October 2020, the High Court of Uganda made a landmark ruling in the Ham Kiggundu Vs Diamond Trust Bank (K) Ltd case which has stirred a lot of debate within the Banking industry. The background of the case is that Diamond Trust Bank Kenya Ltd (DTB Kenya) had offered credit facilities to Ugandan Companies Ham Enterprises Ltd and Kiggs International (U) Ltd, owned by Ugandan businessman Hamis Kiggundu in Kenya which were secured by various borrowers’ properties in Uganda. The Borrowers defaulted on their repayment obligations and DTB Kenya then commenced the recovery of outstanding loans in the sum of about USD$ 10,000,000 (UGX.36.9 billion). It was then that the Borrowers filed HCCS No.43 of 2020 claiming that all the loans had been repaid and the release of the securities.
Subsequently, the Borrowers filed an amended plaint, indicating that Diamond Trust Bank (K) Ltd conducted an illegality by conducting a financial institutions business in Uganda without a license from Bank of Uganda and also engaging in agency banking without approval of Bank of Uganda both contrary to the Financial Institutions Act, 2004 (as amended). The Defendants in their statement of defence ‘admitted’ that DTB Kenya was not licensed in Uganda but contended that the facility extended to the Borrowers did not amount to conducting financial institutions business in Uganda as it was issued in Kenya and that DTB Uganda’s role was not one of an agent relationship but contractual. It is then that the Applicants (Borrowers) filled a Miscellaneous Application No 654 of 2020, to strike out Defendants written statement of defence for being a ‘perpetration’ of illegalities on the ‘admission’ the Defendants.
The court in its ruling allowed the Applicants’ Application holding that going by the definition of a Foreign Bank in section 3 of the Financial Institutions Act 2004 as amended (FIA), Diamond Trust Bank, Kenya was indeed a foreign bank for the purposes of the transactions between the parties hence ought to have obtained prior authorization from the Bank of Uganda. Further, in regards to whether the DBK Uganda acted as an agent of the DBK Kenya, the court referred to Regulation 5 of the Financial Institutions (Agent Banking) Regulations 2017 where in order to conduct agent banking in Uganda one ought to seek prior written approval from the Bank of Uganda.
It was based on the foregoing and other reasons that the court allowed the Applicants’ application, holding that the joint written statement was a perpetuation of illegalities and thus the defence be struck off, that the credit facilities were void ab initio and unenforceable and lastly the subsequent release of the collateral securities.