Formula Feeds Limited and Others v KCB Bank Limited (Civil Appeal No. 13 of 2020 and Civil Application No. 7 of 2023)

Observed later treatment

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Holding

The Supreme Court dismissed the second appeal. It held that a mortgage is collateral to and independent of the credit facility, so the illegality of the mortgage did not extinguish the borrower's indebtedness; the lender could recover the outstanding loan through its counter-claim, which was founded on the facility agreement and not the void mortgage. Personal guarantees were independent securities enforceable despite the illegal mortgage. A judgment based on the parties' voluntary admission of part of the debt was not appealable under section 67(2) of the Civil Procedure Act. The bank did not breach the contract on letters of credit, loan accounts, interest variation, or the currency conversion, which the borrower itself had instructed.

Outcome

Appeal dismissed; the lower courts' judgment in favour of the respondent bank stands, and the application for stay of execution was dismissed.

Facts

The first appellant company borrowed about UGX 4,531,000,000 from the respondent bank under two facility agreements, secured by a debenture and a legal mortgage over land, with the second, third and fourth appellants (its directors) giving personal guarantees. The first appellant defaulted, and the bank treated the loan as due and demanded payment. The appellants sued, alleging breach of the loan agreements through failure to open fresh letters of credit, creation of illegal accounts, charging of illegal interest, and an unfair conversion of USD 549,000 into shillings. The bank counter-claimed for the outstanding loan. The High Court found the mortgage illegal because the company could not lawfully own the pledged land, but held that this did not extinguish the debt; it found the appellants indebted and the guarantees enforceable. The Court of Appeal upheld these findings. The appellants appealed to the Supreme Court.

Issues

1. Whether a counter-claim to recover an outstanding loan is barred or rendered illegal under the ex turpi causa doctrine because the mortgage securing the loan was found illegal.
2. Whether a judgment on admission (or consent judgment) for part of the debt was illegal for arising from the illegal mortgage, and whether it is appealable 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 converting USD to Uganda Shillings.
4. Whether the personal guarantees executed by the directors were unenforceable because the related mortgage was illegal.

Orders

• All three grounds of appeal disallowed.
• Appeal dismissed with costs to the respondent in this Court and the courts below.
• Civil Application No. 007 of 2023 for stay of execution dismissed with no order as to costs.

Rules and key headnotes

Legislation cited (7)

• Civil Procedure Act, Cap. 71 s.67(2)
• Contract Act 2010 s.71
• Mortgage Act 2009 s.12
• 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)

• Masembe v Sugar Corporation and Another [2002] 2 EA 434
• Juliet Kalema v William Kalema (Civil Appeal No. 95 of 2003)
• SINBA (K) Ltd and 4 Others v Uganda Broadcasting Corporation (Civil Appeal No. 3 of 2014)
• Makula International Ltd v Cardinal Nsubuga (Civil Appeal No. 4 of 1981)
• Buwembo v Kiwanuka and Another (Civil Appeal No. 1670 of 2013)
• Esso Petroleum Co (supra)
• the General Parts case (supra)

Cases citing this judgment (1)

How later Ugandan judgments in the Wakilii corpus have cited this case. Treatment labels come from Sequitur — Uganda’s citator — each backed by a verbatim span from the citing judgment, and are not an assertion that this case is, or is not, good law.

• Vision Fund (U) Limited v Buwembo (Civil Appeal 98 of 2017)

The original judgment as reported. Read the original PDF before relying on any passage.