“A loan agreement with a foreigner or a foreign entity whether the contract is executed in Uganda or outside Uganda would be enforced by a Ugandan court in accordance with the terms of agreement between the parties, the laws of respective countries in which the agreement is made and or is executed and international laws and obligations as applicable in the respective countries.” Buteera, DCJ
Ham Enterprises Limited and 2 other customers of Diamond Trust Bank (DTB) Uganda acquired different credit facilities from Diamond Trust Bank Uganda and Diamond Trust Bank Kenya Limited totaling to Uganda Shillings 41 billion from 2011 and 2016.
Ham Enterprises Limited and the associate company later discovered that Diamond Trust Bank had deducted money from its accounts without its consent, and sued the 2 banks citing breach of contractual, fiduciary and statutory duties.
Diamond Trust Bank Kenya upon advancing the credit facilities, appointed Diamond Trust Bank Uganda as its agent for purposes of enforcing the said facility in Uganda.
Paragraph 6 of the letter of offer dated 23rd October, 2017 provided that, “…. by accepting this letter of offer, you irrevocably authorize DTB Uganda who are our appointed agents for this facility to debit your account held with them with the said appraisal fee and taxes simultaneously with establishment of the facility in the bank’s books and on each anniversary of the term loan and remit funds to us.”The trial Judge, Honorable Justice Dr. Peter Adonyo held, interalia; that the credit facilities advanced by a foreign bank – Diamond Trust Bank -Kenya were illegal and subsequently unenforceable hence settled at law.
The trial Judge relied on section 117(1) of Uganda’s Financial Institutions Act 2004 (as Amended) which provides that a foreign bank may, in such form and in such manner as shall be prescribed by the Central Bank by Statutory Instrument apply to the Central Bank for permission to establish a representative office in Uganda to engage in such limited activities, excluding the taking of deposits as the central bank may approve.
The Financial Institutions Act, 2004 (as amended) makes it an offence for a foreign bank to conduct business without prior approval of the Central Bank under section 117(4) of the Act.
The trial Court also held that the principal – agent relationship which was established under paragraph 6 of the letter of offer of 23rd October, 2017 was illegal since it was created in contravention with the Financial Institutions Act, 2004, Regulation 5(1) of the Financial Institutions (Agent Banking) Regulations 2017 and section 33(4) of the Banking Act of Kenya.
Regulation 5(1) of the Financial Institutions (Agent Banking) Regulations 2017 provides that a financial institution shall not conduct agent banking in Uganda without the prior written approval from the central Bank.
Furthermore, section 33(4) of the Banking Act of Kenya provides that The Central Bank (of Kenya) may issue directions to institutions generally for better carrying out of its functions under the Act and in particular with respect to the standards to be adhered to by an institution of its business in Kenya or in any country where a branch or subsidiary of the institution is located. (author’s emphasis).
The trial Judge while dismissing the suit held that Diamond Trust Bank Uganda acted as an agent of a foreign bank (DTB Kenya) as its agent without obtaining a license from the Bank of Uganda in contravention of the law which act is criminal and illegal.
Conclusively, the Judge held that the illegal credit facilities issued from the period between 16th February 2011 to 16th November 2019 were settled at law.
On appeal, the Court of Appeal granted an order remitting the suit back to the Commercial Division of the High Court to be expeditiously fixed and heard by another Judge.
Whereas we shall not discuss the merits of the case since the matter is still ongoing, the Court made pronouncements which are key to note in regard to syndicated credit facilities and illegal credit facilities.
Enforcement of syndicated loans
A syndicated loan, also known as a syndicated bank facility, is financing offered by a group of lenders referred to as a syndicate who work together to provide funds for a single borrower.
In cases of syndicated loans, there is typically a lead bank or underwriter, known as the arranger, the agent, or the lead lender.
The lead bank may put up a proportionally bigger share of the loan, or it may perform duties such as dispersing cash flows among the other syndicate members and administrative tasks.
Ugandan banks rely heavily on syndicating big credit lines or loans with parent banks in bigger markets to serve major customers like telecoms and manufacturing companies.
For struggling economies like Uganda, syndicated loans assist in offering credit to borrowers where the bank does not have adequate liquid to advance to their customer.
Accordingly, the Financial Institutions (Limits on Credit Concentration and Large Exposures) Regulations, 2005 provides that Financial Institutions are not allowed to advance more than 25 percent of its total capital to a single borrower.
Regulation 6(1) provides that a financial institution shall not grant or promise to grant to a single person or to persons with a common interest, an advance or credit accommodation which is more than 25% of its total capital.
This law therefore encourages financial institutions to arrange facilities with the parent or other international institutions to get more liquid and satisfy their corporate high-level clients.
The Single Borrower Limit (SBL) principle is not applicable to credit facilities arranged between financial institutions and their parent / affiliated institutions outside Uganda, this provision covers syndicated loans as well.
Regulation 10(2) provides that placements by a financial institution in Uganda with a financial institution outside Uganda shall not be subject to these Regulations, but to the applicable criteria under the prevailing financial institutions’ foreign exchange laws and regulations.
On the legality of such credit facilities, Deputy Chief Justice held “the legal point I find relevant to clarify is that I know of no law that it makes it illegal for a Ugandan citizen or a foreign resident in Uganda to borrow or pay back money borrowed by a foreigner or a foreign institution unless the transaction involves the perpetuation of a criminal offence such as Terrorism, money laundering, human trafficking or any other offence. The loan tainted with perpetuation of a criminal offence would not be enforced by a Ugandan Court”
While stating the general principle, His Lordship did not specifically address section 117(1) of the Financial Institutions Act, 2004 which provides that; a foreign bank may, in such form and in such manner as shall be prescribed by the Central Bank by statutory instrument apply to the Central Bank for permission to establish a representative office in Uganda to engage in such limited activities, excluding the taking of deposits as the Central Bank may approve.
The main question here is whether a single syndicated loan amounts to “engaging in such limited activities” as provided for under section 117(4) of the Act. From the understanding of what a syndicated credit facility is, it is clear that it is governed by one contract document and may sometimes be a one-time arrangement hence does not fall under the scope of limited activities which would require a foreign bank to appoint a representative.
Secondly, not all syndicated credit facilities involve foreign banks and therefore it could not have been the intention of Parliament that syndicated loans should require the arranger to appoint a representative in Uganda.
Section 2 of the Act defines a foreign bank to mean a body corporate or entity incorporated or formed under the laws of a country other than Uganda, that is a bank according to the laws of any foreign country where it carries on business, carries on a business in a country other than Uganda that if carried out in Uganda would be wholly or to a significant extent, financial institution business.
Section 3 of the Act defines “financial institution business” to mean the business of acceptance of deposits, issue of deposit substitutes, lending or extending credit, including consumer and mortgage credit; factoring with or without recourse; the financing of commercial transactions; the recovery by foreclosure or other means of amounts so lent, advanced or extended; forfeiting, namely, the medium term discounting without recourse of bills, notes and other documents evidencing an exporter’s claims on the person to whom the exports are sent; acceptance of credits.
Reading section 117(1) and 3 of the Financial Institutions Act together infers that one- time off transactions like syndicated loans do not need the approval of the central Bank since section 117(1) only applies to a foreign bank that seeks to conduct continuous limited financial institutions business whose scope is limited under section 3 of the Act.
Enforcement of illegal/ void credit facilities.
On enforceability of illegal contracts, Justice Madrama held that in law, it is not possible for a plaintiff to recover by a claim based on the medium of and by aid of an illegal transaction to which he was himself a party.
Section 54(1) of the Contracts Act is to the effect that where an agreement is found to be void or when a contract becomes void, a person who received any advantage under that agreement or contract is bound to restore it or to pay compensation for it, to the person from whom he or she received the advantage.
Sub section 2 provides that where a party to a contract incurs expenses for the purposes of performance of the contract, which becomes void after performance under section 25(2), the court may if it considers it just to do so in all the circumstances allow the other party to retain the whole or any part of any advantage received by him or her, discharge the other party, wholly or in part, from making compensation for the expenses incurred; or make an order that the party recovers the whole or any part of any payments, discharge or other advantages not greater in value than the expenses incurred.
The Court of Appeal ruling therefore infers that;
Syndicated loans are enforceable in Uganda in accordance with the terms of the facility, therefore, a loan agreement with a foreigner or a foreign entity whether the contract is executed in Uganda or outside Uganda would be enforced by a Ugandan court in accordance with the terms of agreement between the parties, the laws of respective countries in which the agreement is made and or is executed and international laws and obligations as applicable in the respective countries.
The processes of negotiating, drafting and executing such high value facilities must be in strict compliance with applicable laws. Financial Institutions are encouraged to engage independent advisors before executing such high value transactions.
Bank of Uganda should encourage consumers to seek legal advice before executing such agreements.