High Court shocks financial sector
"Ham Enterprises Ltd and others Vs. Diamond Trust Bank (U) Limited and Diamond Trust Bank (K) Limited."
on the decision of court in HCMA No. 654 of 2020 (arising from CS No. 43 of
2020) Ham Enterprises Ltd and others Vs. Diamond Trust Bank (U) Limited and
Diamond Trust Bank (K) Limited.
On 7th October 2020, the High Court
of Uganda delivered a ruling that sent shock waves through the banking and
financial services industry and one that is sure to elicit a reconsideration of
external debt into Uganda.
The crux of
the decision of the High Court is that a foreign bank may not provide
credit facilities to Ugandan entities or persons in Uganda without obtaining
the approval of Uganda’s Central Bank or being regulated as a financial
institution in Uganda. The court decision is anchored on three main positions,
that is, i) providing credit to Ugandan entities by a foreign bank amounts to conducting
financial institutions business, for which a license is required; ii) nominating
a local bank to manage a lending transaction including collections on behalf of
a foreign bank amounts to agent banking, for which the approval of the Central
Bank must be obtained; and iii) a foreign bank that lends/intends to provide
lending to persons in Uganda must establish a representative office in Uganda.
The facts of the case are in and as of themselves
quite unremarkable. Indeed, even though similar facts have previously come up
in Ugandan courts, not once before has a Ugandan court come to a conclusion
such as the one under consideration?
The facts indicate that Ham Enterprises Ltd,
Kiggs International (U) Ltd and Hamis Kiggundu obtained a facility from DTB (U)
Limited, a Uganda bank and another facility from DTB (K) Limited, a Kenyan bank.
DTB (K) appointed DTB (U) as an agent to manage and collect payments on its
behalf and remit the same to it. DTB (K) also took security offered by the
It appears there was a default on the loans. The
borrowers raised concerns with regard to monies allegedly deducted off their
accounts illegally and filed a suit for the two banks to account for the
alleged deductions and, presumably, to forestall enforcement action. A
statement of defence was filed by the banks. In response, the borrowers filed
an application seeking for court to strike the banks’ defence off its record on
the ground that it was a perpetration of illegalities by the banks that is,
illegally conducting financial institutions business in Uganda or conducting
business contrary to the Financial Institutions Act, 2004 as amended.
The application was opposed by the banks on the
grounds that no financial institutions business was conducted by the Kenyan bank
and that there was no breach of the Financial Institutions Act. In its ruling, court agreed with the
borrowers, and in nullifying the transactions and striking out the defence,
also allowed the borrowers to succeed on the prayers in the plaint, without having
gone through a full blown trial.
In the aftermath of the decision, the Uganda
Bankers’ Association, an umbrella organization of Ugandan banks issued a strong
statement objecting to the decision of court and vowing to join efforts to
overturn it. The Central Bank, as the regulator against whom a direct order was
made by court; to ensure that the Financial Institutions Act is complied with,
issued a statement indicating that it did not have the mandate to regulate the activities
which court alluded to. The Government of Uganda through the Ministry of
Finance Planning and Economic Development also issued a general statement
reassuring its partners that it intends to honour its financial obligations
under the myriad of agreements signed, where it is, invariably, a borrower. An
appeal was swiftly filed against the decision.
We have reviewed the decision and the law on
which it is hinged and are of the opinion that court manifestly erred on the
application of the Financial Institutions Act and the holding that the banks
were engaged in illegalities.
Court held that the provision of credit outside
Uganda to a Ugandan entity by a foreign
bank amounted to conducting financial
institutions business. This was an error.
· The conduct of financial institutions business is regulated by the Central Bank
under the Financial Institutions Act, 2004 as amended in 2016. This business is
a preserve of Ugandan companies licensed as such. The Act has provisions relating
to foreign banks but what they do in or
outside Uganda is not financial
institutions business within the meaning of the Act. In the context of this
case, to provide financial institutions
business one must be ‘accepting
deposits’ and ‘lending or extending
money held on deposit or any part of that money’. In our view, such
deposits should be taken from the public in Uganda and held in Uganda and the
lending primarily undertaken in Uganda.
· DTB (K) is not involved in accepting deposits
in Uganda and could not be taken to be lending money held on deposit to bring
it within the purview of the law. The Financial Institutions Act does not
regulate DTB (K)’s business in Kenya nor concern itself with how DTB (K)
generates and or utilizes its funds in Kenya. To conclude otherwise, would to
be to confer upon the law, a Ugandan court and the Central Bank as regulator,
extra territorial reach. In our considered opinion, this is not the intention and
letter of the law.
· A foreign
bank can take deposits (in its country of operation and in accordance with the
laws of such country) from persons in Uganda. Similarly, it can extend credit
outside Uganda to persons in Uganda.
· Court held that in appointing DTB (U) as a
collecting bank and to manage its loan portfolio with the borrowers, DTB (K)
was conducting agent banking and
therefore required Central Bank regulation and approval. This too was an error.
was introduced in Uganda in 2016 as part of the wider effort of financial
inclusion and deepening; to enable local banks (financial institutions) to
reach the unbanked population and bring services closer to people. It would
appear that court did not consider the policy approach behind the enactment.
Neither did it differentiate agent
banking within the meaning of the financial institutions law from an agent
under loan based transactions or other typical agency functions that a bank may
is not designed for agency roles performed by local banks such as collecting
payments, holding collateral on behalf of lenders and handling communications
between a borrower and lender(s). Indeed the provisions of the law relied on by
court clearly reference agents of financial institutions in Uganda, and as
indicated above, DTB (K) cannot be taken to be a financial institution within
the meaning the Act. As such, it could not have appointed, and indeed no foreign bank can appoint, an agent pursuant
to the terms of the Act.
· It also follows that for one to be an agent,
they must be providing financial
institution business on behalf of the appointing financial institution. The mere collection of payments (not being
deposits) and such other administrative tasks do not fall within the ambit of financial institutions business.
· The Financial Institutions Act does not stop
DTB (K) or any foreign bank from
appointing a local bank as an agent for purposes of collecting its proceeds
under a facility or as a security or collateral agent. Equally, and without
more, a local bank may act as an agent for a foreign bank.
Foreign bank office:
· Court held that DTB (K) did not comply with the
provisions of the Act that required it to open an office in Uganda as a foreign bank. Again this was an error.
· In the first place, court interchangeably uses
the phrases foreign bank with financial institution in reference to
DTB (K). Within the provisions of the Act, one cannot be both. Whereas DTB (K)
is a foreign bank, it is not a financial institution. This mix up led
court to find that as a financial
institution, DTB (K) was conducting business without regulatory approval.
· The provision of the law on foreign banks states that foreign banks may
have representative offices in
Uganda. There is no mandatory requirement for a foreign bank to have an office in
Uganda. This is a commercial decision left to the foreign bank as to how it wishes to be projected in the country.
When it chooses to have an office however, it must be approved by the Central
The reasons why a foreign bank may wish to have a representative office are many and
may include a need to market its products and to create a liaison office. In
particular however, a foreign bank,
whether through its representative office or otherwise, may not, undertake
deposit taking business in Uganda. Further, the business conducted by a foreign
bank through the representative office is termed as ‘activities’ under
the Act rather than financial
· For context in this case, it was an agreed fact
between the parties that the lending in question happened in Kenya. A foreign bank can extend credit
facilities in Uganda and obtain security without the need for regulation by the
Central Bank and more particularly, in the absence of a representative office.
· The decision also appears to frown upon the practice
of syndication (without Central Bank approval) when court says that; ‘the matter shows syndicated financial
institutions business by … aimed at dodging the seeking of a license from the
relevant authority which actions are clearly illegal’.
This was not a syndicated facility. The two
facilities were given separately with the only commonality being the group
ownership of the lenders and of the borrowers.
It is however a fact that many syndicated
transactions in Uganda will be and are shored up by foreign banks. To that extent, and in light of the fact that court
has held that foreign banks must
obtain approval before extending facilities to Ugandan businesses, this
decision poses a challenge to existing, pipeline and future financing transactions.
· As stated however, we are of the opinion that
court erred in this regard. We have not come across a law that prohibits foreign banks from lending into the
country; and syndicated facilities are lawful. Until the decision is set aside
however, it remains a cause for concern.
Recovery under ‘illegal’
Consequent upon court’s finding that the banks
illegally conducted financial institutions business in Uganda without the
necessary regulatory authorizations, court declared the credit facilities advanced
by DTB (K) illegal, void and unenforceable. Court also found that the credit
facilities between the parties had since been settled at law. The basis for the
latter finding (especially given that court didn’t hear the evidence on the
matter) remains unclear.
· Whereas it is correct to say that a contract may
be void at law, there are provisions under the Contracts Act of 2010 where protection
for recovery is available to a party. There
also exists judicial precedent where actions have successfully been based on
the principle of unjust enrichment and restitution. The decision of
court has no consideration of these positions of the law one way or the other.
If court had considered the provisions of the
Contracts Act and the available jurisprudence, it would have been easier to
understand the finding of court that the facilities had been settled at law. Similarly, the decision would have been better
understood if court had assessed the law and shown the basis upon which
borrowers were entitled to recover the monies claimed, notwithstanding that the
transaction has been declared illegal, void and unenforceable.
The decision of court focuses on foreign banks and makes no mention of
facilities that are provided by non-bank lenders such as equity, venture
capital and other investment funds, DFIs and finance companies. Such entities
may extend credit to persons in Uganda, solely or in syndication with other
lending institutions and appoint agents for purposes of administering
facilities, without giving rise to the need for regulation under the financial
institutions regime in Uganda.
To that extent, the decision offers no
immediate challenge or risk to such non-bank lending institutions. The decision
however creates a very unnerving environment that would worry any credit
provider as to what reasoning and application of the law, a Ugandan court may
provide in future.
By and large, this case appears to be one where
a borrower had fallen on hard times. It may be that the lenders needed to
explain the transactions and account operation to the borrowers. Whatever the
case, in the borrowers’ moment of struggle to stay afloat, an argument was made
to and accepted by court, albeit, in our opinion, with less than the necessary degree
of scrutiny. The premise of the decision of court was, in our opinion, flawed. It
does not address the policy considerations behind the legislation or explore
what is or has been acceptable practice; it does not properly apply the
provisions of the law to the facts and is indifferent to the impact of the
decision on the financial services sector and the economy at large.
We are aware that this decision has been
challenged. Until it is set aside however, it is difficult to see what comfort
credit providers, in particular foreign banks, can take from the argument that
the court got it wrong on the day, save that the correct position will be
stated by higher courts at the earliest. It is expected that this will happen
given the provisions of the law, the bearing the decision may have on the
economy and the keen interest of significant market players shown.
it is now, only time will tell.