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Formular Feeds Limited and 3 Others v KCB Bank Limited [2023] UGSC 46

Supreme Court · 2023 Appeal Dismissed ✦ AI-generated summary ↓ Download
Jurisdiction
Uganda
Case Type
Second civil appeal from the Court of Appeal in a loan and mortgage dispute, heard together with an application for stay of execution
Decision
Appeal dismissed; concurrent findings of the lower courts upheld and the application for stay of execution refused

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Holding

The Supreme Court dismissed a second appeal in a loan dispute. It held that a mortgage is a security collateral to, and independent of, the underlying loan; the illegality of the mortgage did not extinguish the 1st appellant's indebtedness, so the bank could recover the outstanding loan by other valid means. The personal guarantees were an independent, lawful security unaffected by the illegal mortgage and were enforceable under the Contract Act 2010. The bank did not breach the facility agreement: the appellants themselves directed it not to open fresh letters of credit, the contested accounts managed disbursed loans, interest adjustments were permitted by the agreement, and the currency conversion was made on the appellants' express instruction. The appeal and stay application were dismissed.

Facts

The 1st appellant borrowed about UGX 4,531,000,000 from the respondent bank under two facility agreements. The loan was secured by a debenture and a legal mortgage executed by the 1st appellant, and by personal guarantees from the 2nd, 3rd and 4th appellants. The 1st appellant defaulted, and the bank treated the loan as due and demanded payment. The 1st and 2nd appellants sued, alleging breach of the loan agreements; the bank counter-claimed for the outstanding sum. The High Court found the mortgage illegal because the 1st appellant could not lawfully own the pledged land, but held that the loan and the guarantees remained valid and that the appellants were indebted for some UGX 4,272,740,118. A partial judgment on admission of UGX 2,159,000,000 was also entered. The Court of Appeal upheld these findings and dismissed the appeal, leading to this further appeal.

Issues

  1. Whether the illegality of the mortgage rendered the bank's counter-claim for the outstanding loan illegal and barred by the ex turpi causa doctrine.
  2. Whether the judgment on admission for part of the debt was illegal and appealable, or a non-appealable consent judgment under section 67(2) of the Civil Procedure Act.
  3. Whether the respondent bank breached the loan contract by failing to open fresh letters of credit, creating illegal loan accounts, charging illegal interest, and unilaterally converting US Dollars to Uganda Shillings.
  4. Whether the personal guarantees executed by the 2nd, 3rd and 4th appellants were unenforceable because the mortgage was found illegal.

Orders

  • Appeal dismissed with costs to the respondent.
  • Costs of the courts below awarded to the respondent.
  • Civil Application No. 007 of 2023 for stay of execution dismissed with no order as to costs.

Key headnotes

Banking & Finance — Loan Securities — Independence of Mortgage from Underlying Loan
A mortgage is a security collateral to and independent of the loan it secures; where the security is found defective or illegal, the lender is not absolved from recovering the outstanding loan and may proceed against any valid security or treat the loan as unsecured and recover from the borrower.
Contract Law — Illegality — Ex Turpi Causa Not Applicable to a Valid Loan Behind an Illegal Mortgage
The illegality of a mortgage does not render illegal a counter-claim that seeks repayment of the underlying loan; a proper reading of pleadings that seek recovery of outstanding monies, rather than enforcement of the mortgage, is not barred by the ex turpi causa doctrine.
Contract Law — Guarantees — Independence from Co-existing Illegal Security
A personal guarantee is an independent security by which the guarantor undertakes to pay on the principal debtor's default; the existence of an unenforceable mortgage over the same loan does not invalidate the guarantee, whose liability under the Contract Act 2010 takes effect upon the principal debtor's default.
Civil Procedure — Judgments — Judgment on Admission and Consent Judgment Not Appealable
There is no practical distinction between a judgment on admission and a consent judgment for the purpose of appeal; both rest on the parties' voluntary agreement and are not appealable under section 67(2) of the Civil Procedure Act, and a consent judgment need not be signed by counsel to be valid.
Banking & Finance — Interest — Contractual Power to Revise Interest Without Notice
Where a facility agreement empowers the bank to revise interest and provides that failure to advise the borrower does not prejudice the bank's right to recover the revised interest, charging adjusted interest without notice is not a breach, provided the rates remain within those permitted by law; section 12 of the Mortgage Act 2009 does not govern interest adjustment under such a facility agreement.
Banking & Finance — Foreign Exchange Conversion — Acting on Customer's Express Instruction
A bank that converts a customer's funds from foreign currency to local currency at the prevailing exchange rate on the customer's express written instruction does not breach its contractual or fiduciary duty, particularly where no evidence of a more favourable available rate is adduced.
Civil Procedure — Second Appeal — Limited Duty to Re-evaluate Evidence
On a second appeal the Supreme Court is not required to re-evaluate the evidence as a first appellate court must, except where it is clearly necessary, such as where the first appellate court failed to properly re-evaluate the evidence.

Legislation cited (8)

  • Civil Procedure Act, Cap. 71 s.67(2)
  • Mortgage Act 2009 s.12
  • Contract Act 2010 s.71(1)
  • Contract Act 2010 s.71(2)
  • Civil Procedure Rules, S.I 71-1 Order 13 Rule 6
  • Supreme Court Rules Rule 70(1)
  • Bank of Uganda Financial Consumer Protection Guidelines para G(1)(a)
  • Bank of Uganda Financial Consumer Protection Guidelines para G(1)(b)(iv)

Cases cited (7)

  • Juliet Kalema v William Kalema (Civil Appeal No. 95 of 2003)
  • SINBA (K) Ltd and 4 Others v Uganda Broadcasting Corporation (Civil Appeal No. 03 of 2014)
  • Makula International Ltd v Cardinal Nsubuga (Civil Appeal No. 4 of 1981)
  • Buwembo vs. Kiwanuka and Another, Supreme Court Civil Appeal No. 1670 of 2013 (unreported)
  • Masembe v Sugar Corporation and Another [2002] 2 EA 434
  • Esso Petroleum Co (supra)
  • the General Parts case (supra)
Source: this page presents Wakilii’s issue analysis and metadata for a publicly reported Ugandan judgment. Any AI-generated summary is marked as such. Judgment text is sourced from the Uganda Legal Information Institute (ulii.org). Wakilii is not affiliated with ULII.