The Supreme Court of Uganda gave its judgment last week in the much-anticipated appeal by Ham Enterprises against Diamond Trust Bank Uganda and Diamond Trust Bank Kenya. The court held that a lending transaction between a foreign bank and a Ugandan borrower does not constitute "transacting financial institutions business" as defined by the Financial Institutions Act 2004 ("FIA"). This finally clarifies that a foreign lender does not require a licence from the Bank of Uganda ("BoU") under the FIA in order to extend credit to Ugandan borrowers.
Regardless of the finding of the court on the alleged illegality, this does not absolve a borrower from repaying its debts.
Background
In 2020, the High Court shook the Ugandan market when it held that it was illegal for a foreign bank to lend money to a Ugandan borrower without a licence from BoU under FIA. The High Court further held the loan agreement between the foreign bank and the Ugandan borrower unenforceable.
Ham Enterprises (the "borrower") borrowed money from Diamond Trust Bank Uganda ("DTBU") and Diamond Trust Bank Kenya (DTBK). A dispute arose when the borrower defaulted on its loan repayments and the borrower instituted a suit in the High Court against DTBU and DTBK. At trial, the borrower argued that the loan agreements with DTBK were illegal and unenforceable due to DTBK carrying out financial institutions business in Uganda without a licence from BoU. The High Court agreed. The decision of the High Court threw the market into disarray, given the large number of foreign lenders to Ugandan businesses. The High Court allowed the borrower to escape liability on the loan and walk away without repaying the borrowed funds, inflicting financial loss to DTBK's investors.
The decision was appealed to the Court of Appeal and then to the Supreme Court.
The decision
The Supreme Court determined whether DTBK, as a foreign bank, engaged in transacting financial institutions business within Uganda and thereby required a license under the FIA.
The FIA prohibits a person from transacting any deposit-taking or other financial institutions business in Uganda without a valid licence. The court stated that the key criterion to determine if a person is transacting financial institutions business in Uganda is whether that person holds money on deposit from Uganda, from which it extends loans to borrowers.
In this case, the court found that the funds disbursed to the borrower had been transmitted by DTBK and were not deposits from Uganda. DTBK did not receive or hold any deposits in Uganda and indeed did not lend the borrower out of any such deposits.
As a result, the court found that the FIA did not apply to DTBK as a foreign bank. Furthermore, it held that the syndicated loan transaction between DTBK was lawful and referred the case back to the High Court for retrial before another judge to determine the outstanding obligations owed by each party. .
This case settles an important point of law on the legality of transactions between foreign lenders and Ugandan borrowers. Foreign lenders can carry on their business in Uganda with confidence, knowing that their lending transactions are enforceable under Ugandan law.
Much ado about nothing
Even if the court had found it illegal for a foreign lender to advance a loan to a Ugandan borrower without a licence from the BoU, the borrower would still have been obligated to repay the loan. Under the Contracts Act 2010, a person who receives advantage under a void agreement is still bound to restore it or pay compensation to the person from whom they received the advantage. In other words, the borrower would still have to repay the debt to DTBK.
A similar conclusion was arrived at by the Supreme Court of Zambia in almost identical circumstances. In the case of Zambia Extracts Oils and Colourants Ltd v Zambia State Insurance Pension Trust Fund (SCZ Judgment No. 31 of 2016), a borrower from an entity not licensed under the Zambian Banking and Financial Services Act challenged a borrowing as illegal and sought to evade repayment. The court found that, where a statute (as does the FIA) imposes a penalty for contravention of its provisions, it cannot be the intention of the legislature to also void the contracts entered into in contravention of the law or at punishing the transgressors twice, that is, by imposing criminal sanctions and by voiding their contracts as this would amount to double jeopardy. The court further stated that to allow the borrower to walk away with such a substantial sum without repaying it would be unconscionable and contrary to public policy and public interest.
The courts must consider public policy concerns before invalidating such contracts. For example, a finding that a contract made with an unlicensed banker is invalid would mean that persons who had deposited money with such unlicensed banker would be unable to recover money that such unlicensed banker had lent as it would be disabled from performing its own obligations, including those owed to its depositors.
Given the great demand for affordable credit in the Ugandan market, this confirmation by the highest court, that doors are open to foreign lenders without a requirement for licensing, is good news for the market.
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