Loan syndication in limbo in wake of controversial Court ruling on Ham-DTB deal, Bankers say
The banking industry and some lawyers are upset by a commercial court ruling in the case of local business man Hamis Kiggundu popularly known as ‘Ham’, his two companies – Ham enterprises (U) Ltd and Kiggs International (U) Ltd, against Diamond Trust Bank (DTB), Uganda and Diamond Trust Bank, Kenya.
Justice Henry Peter Adonyo ruled Wednesday that the loans extended to the business man, through his companies, by DTB Kenya were illegal and unenforceable because the Kenyan bank did not have a license or permission from Bank of Uganda to carry out banking business in Uganda as required under the Financial Institutions Act (FIA).
Syndicated facilities are standard practice within the #banking industry. The essence of the Commercial Court ought to be a specialist and well-informed dispute resolution body that gets such simple basics right. pic.twitter.com/twlU7NXO4r
— Silver Kayondo (@SilverKayondo) October 8, 2020
The learned Judge, further found that DTB Uganda had committed an offence under the Act by acting as a collection and lending agent for DTB Kenya in respect of the loan facilities without the approval of the Central Bank as required under the Financial Institutions ( Agent Banking) Regulations and the Financial Institutions Act.
Lawyer Fred Muwema ( Right) of Muwema & Co. Advocates was lead counsel for business man Hamis Kiggundu in the matter/ Courtesy photo
In the end, Justice Adonyo ordered the banks to pay the business man 34 Billion Uganda Shillings and $23M, at a court interest rate of 8% per year from the date he filed the case against them – the sums, apparently, being the money the banks unlawfully withdrew from his loan accounts.
” The facts of this matter show syndicated financial institution business by [DTB Uganda and DTB Kenya] aimed at dodging the seeking of a license from the relevant authority which actions are clearly illegal ” Justice Adonyo said, ordering the Bank of Uganda to:
” take such necessary actions and measures to ensure that the provisions of the law are implemented in accordance with the intention of the law such as to protect the Ugandan economy from illegal hemorrhages and uncontrolled flows of financial resources and to ensure that financial institution business in Uganda is operated within the letter of the law to protect the nascent banking business industry in Uganda.”
So what really happened?
Ham, a long time customer of DTB Uganda, through Muwema and Co. Advocates sued the two sister banks in March this year, accusing them of fraudulently withdrawing about 34 Billion Uganda Shillings and $23 M from his loan and dollar accounts without his knowledge and/or consent.
He claimed he had been repaying the banks’ loans and that when he carried out an audit of his accounts, he discovered the banks had been siphoning the sums from his accounts.
The business man had obtained several loans from DTB Uganda including an $8.3M loan facility, part of which ( $4.5M) was sought and obtained from DTB Kenya. He mortgaged his properties in Kawuku, Wakiso and Makerere.
When his suit came up for hearing in August, Ham through his lawyers asked the Court to throw out the defense filed by the Banks and rule in his favour because the banks’ defense was a ” perpetration of illegalities” in that they claimed the business man owed them money on the basis of illegal loan agreements given that DTB Kenya was not authorised to do financial business in Uganda.
Justice Adonyo agreed with Ham and his lawyers on Wednesday and discharged the business man of all mortgages created over his properties by the banks. He further issued a permanent injunction restraining the banks from enforcing the mortgages over Ham’s properties.
The decision in Ham v. DTB is going to keep us talking for a while. It does have very wide reaching implications. I guess we wait and see.
— Robert Kirunda (@RKirunda) October 7, 2020
‘Concerned’
In response to the Court Judgement, Diamond Trust Bank (DTB) suggested the case had not been determined on its merits, apparently because the Court decided it on a technical ground and that they planned to appeal.
” Diamond Trust Bank (DTB) has noted with concern the Judgement on October 7, 2020, by the High Court in the case between the Bank and Ham enterprises Limited. DTB in consultation with its legal advisers, has filed a notice of appeal against the Judgement of Justice Henry Peter Adonyo.
” We look forward to the expeditious resolution of the matter in the Court of Appeal and are confident that the case will be determined on its merits ” The company said in a statement Thursday.
Syndication illegal?
Loan syndication is a global practice in the banking industry where a group of banks make a huge loan to a single borrower. This usually happens when the borrower wants a big sum of money beyond an individual bank’s risk exposure levels and thus syndication is a risk management tool. In some cases, a loan syndicate is essential when funding is not sufficient and thus enables mobilization of funds.
In other scenarios, banks may want to diversify their loan portfolios by lending to borrowers in countries or industries they would not otherwise lend to. Capital constraints also lead to loan syndication where a bank finds themselves with capital-asset ratios below or close to regulatory minimum capital caps and may not want to increase assets by adding huge loans onto their balance sheets.
A loan syndicate involves a ” lead agent” – a bank that is responsible for the coordination of the syndication ( in this case, DTB Uganda) and a “participating bank” ( in this case, DTB Kenya).
I can't shake these three cases off my mind: Jamwa v. Uganda, BoU v. CBL, Ham v. DTB. The window for attracting FDI into Uganda is closing slowly but steadily.
— Robert Kirunda (@RKirunda) October 7, 2020
The implication of the Commercial Court’s Judgement is that a loan syndicate must be approved by the Central Bank.
Uganda Bankers’ Association, the umbrella body of at least 35 financial institutions including commercial banks, development banks and Micro Deposit taking institutions (MDIs), said the court judgement ” sent shockwaves across the industry and relevant stakeholders.”
” The message this Judgement is sending to other borrowers with foul intention [ is that they] can now anchor their default on this Judgement that declared syndication illegal ” the Association said in a statement Thursday.
The bankers’ lobby have enlisted five key implications arising out of the Judgement including putting at risk a 5.7 trillion syndicated loan portfolio currently seated with commercial banks across various sectors such as road construction, real estate, electricity generation, among others excluding loans to the Government which they describe as ” the largest beneficiary of syndicated lending for various development programmes in the country.”
Wilbrod Humphrey Owor, the Executive Director of Uganda Bankers’ Association told NTV Uganda Thursday that the Judgement further ” casts the country in bad light as an investment destination.” The Bankers have vowed to combine effort, as an interest party, with DTB Bank to see the ruling overturned in the Court of Appeal.
Meanwhile, the Government of Uganda through the Ministry of Finance has in a statement assured its ” financing partners in respect to all procured and future syndicated loans” that ” it will undertake all its obligations and duties. ” The Bank of Uganda said it would give its position upon receipt of the Court’s detailed Judgement.
Benjamin M. Ahikiiriza is the founder of thelegalreports.com. He is also its Chief Editor and writes about legal news.
