Bank of Uganda-Sudhir legal showdown: Why the chips are down

A photo montage of Crane Bank proprietor Sudhir Ruparelia (L) and Bank of Uganda governor Emmanuel Tumusiime-Mutebile.

What you need to know:

  • Law suit. When BoU took over, put under receivership and eventually sold Crane Bank Limited, until recently billed one of Uganda’s big three banks, it would have been farfetched to envision a critical legal battle out of the fog of uncertainty that followed the sudden twist of events for one of East Africa’s moneyed businessmen, once tiered by Forbes magazine as East Africa’s richest man at $1.1 billion.

KAMPALA.

Uganda’s central bank is on trial. Real estate magnet Sudhir Ruparelia is on trial. Meera Investments Limited is on trial. The Judiciary, too, is on trial.
When Bank of Uganda (BoU) took over, put under receivership and eventually sold Crane Bank Limited, until recently billed one of Uganda’s big three banks, it would have been farfetched to envision a critical legal battle out of the fog of uncertainty that followed the sudden twist of events for one of East Africa’s moneyed businessmen, once tiered by Forbes magazine as East Africa’s richest man at $1.1 billion.

And yet, sure as night followed day, BoU managers and Mr Ruparelia, who have since October 2016 when the former took over the bank, have been in back and forth meetings with President Museveni chairing some.

At the heart of those meetings at least on the surface, was a win-win situation for both the central bank and the businessman.

The more the two sides met, the foggier the solution engineering got. The last meeting happened a fortnight ago at State House Entebbe.

Days later, local media was awash with headlines reporting a first in Uganda. The BoU had filed a case in the commercial division of the High Court against Mr Ruparelia and his investment arm Meera Investments Limited.

Case file HCCS No. 493 of 2017 (Crane Bank Limited (In Receivership versus Sudhir Ruparellia and Meera Investments Limited) is unique. First, it is the culmination of stalled talks between government of Uganda and Mr Ruparelia.

Uganda, like any other Commonwealth countries, has an adversarial court system. People sue after failing to agree. At times out of anger. Sometimes to blackmail. You either win or lose.

There is no middle ground as each side desperately makes moves to outsmart the other. For a businessman who had grown in his trade, almost attaining larger than life status, the case represents frosty relations between the businessman and the Kampala establishment, erstwhile two darlings.

On Thursday July 13, 2017, BoU, as Receiver of Crane Bank Limited and regulator of the banking sector announced it had sanctioned the filing of a suit against Ruparelia and Meera to recoup funds that, “were fraudulently extracted from, as well as losses that were caused to Crane Bank.

The suit seeks to recover a total of $93.8 million and Shs60.3 billion, together with the Freehold titles to Crane Bank’s branches, general damages, interest and costs”.

In this suit, the BoU instructed MMAKS Advocates and AF Mpanga Advocates (Bowmans Uganda) to represent Crane Bank.

Court filing fees of Shs398.2 million were assessed and paid to Uganda Revenue Authority.

It is good business for the lawyers but a trying moment for BoU which now finds itself embroiled in suits that punch holes in its own regulation.

This week, the central bank was dragged to court by a citizen, Mr Derrick Nsereko, who wants court to declare BoU officials culpable of statutory negligence and failure to comply with the Financial Institutions Act, claiming, “the central bank acted in bad faith, negligently and in breach of duties in giving the bank a clean bill of health”.

Bank of Uganda, in 1995, licensed Crane Bank to carry out business of a financial institution, only to shut its operations and sell it to dfcu in 2016.

A day before that National Bank of Commerce (NBC), owned by businesspersons, among others, former premier Amama Mbabazi, current prime minister Ruhakana Rugunda, retired Justice of the Supreme Court George Kanyeihamba and Amos Nzeyi, wrote to the deputy registrar, commercial division of the High Court requesting for the Sudhir file. They were given a copy of the voluminous file the next day and on Friday sued Mr Ruparelia and BoU.

In a way, the hunter is not only hunted, but also haunted by its past actions.

“Our clients have learnt that BoU, which revoked the NBC banking licence and sold its assets to Crane Bank on September 27, 2012, is now accusing its proprietors of engaging in serious bank fraud committed before and after the sale of NBC. Our clients believe that the rush take over, winding up, liquidation, closure and sale of NBC to Crane Bank without following the due process of law, is a continuation of and/or part of the fraud orchestrated by Crane Bank and its proprietor, which is the subject of the suit,” NBC lawyers Fred Muwema, Severino Twinobusingye and John Mary Mugisha said in their letter on Monday July 17, 2017.

In November 2016, after Crane Bank had been taken over by BoU, NBC shareholders protested against it being sold to dfcu, pointing to a petition they had filed in the Constitutional Court challenging the takeover of their bank and hand over to Crane Bank.

BoU ignored their protests and proceeded to handover Crane Bank to dfcu. They argue Mr Ruparelia and BoU are culpable for the loss and damage caused to NBC.

The closure of NBC is itself clothed in controversy and goes deep into the shadowy politics in Kampala. One of the reasons the case has not been cause listed, according to sources in the Judiciary, is what in Uganda is commonly called, “orders from above”.

The invisible above, whoever they are and whatever their interests, is not interested in seeing the matter disposed, sources say.

So this is a test for the courts. To hear or not to hear the NBC shareholders who for the last five years have been denied audience before court?

And yet, to settle the issues NBC raises now would be to once and for all settle their earlier plaint that, among others, challenged BoU’s closure, winding up and liquidation of the bank as well as Crane Bank’s takeover of the assets.

There are political calculations in there as Mr Museveni and his erstwhile political soul mate Mbabazi are yet to remove the barrier to an over 40 year comradeship fractured by the once all powerful minister’s attempt to pull the rug from under his commander in chief’s feet when he threw his hat in the ring in the 2016 general election.

He garnered 1.3 per cent of the total votes cast, lost a petition in the Supreme Court and has since retreated to his expansive Mukono farm, few kilometres from the capital and private work, often time at Crested Towers attending to private business, only watching from one of Kampala’s tallest buildings, the goings on in the country’s politics from his glass window before strolling back to his palatial Kololo home to imbibe what appears the waters of early retirement.

Some analysts argue NBC’s closure was tied to neutralising a possible financial muscle for Mbabazi’s presidency project and the case stalling is more political than case backlog, the standard explanation from the Judiciary.

The commercial division of the High Court, a fairly more efficient division, now has to deal with that reality too.

At the centre of this, however, is BoU. Unless Mr Ruparelia opts for an out of court settlement or the matter is resolved at mediation, now a key component and requirement of litigation as part of the Judiciary’s alternative dispute resolution model of settling civil disputes, the matter going to full blast trial is worth the bated breath.

“Much as Sudhir will be on trial, the Central Bank too will be on trial. It will be interesting to watch the defence Sudhir comes with and the witnesses that will testify,” veteran lawyer Peter Walubiri told Sunday Monitor in an interview on Thursday.

The Sudhir-BoU legal showdown is akin to, in more ways than one, the situation the Central Bank of Kenya found itself in late last year.

The Daily Nation reported that in December 2016 a complaint to the ethics and anti-corruption agency calling for investigation of Central Bank of Kenya governor Patrick Njoroge over alleged abuse of office filed by a law firm owned by Ahmednasir Abdullahi, acting for his Nairobi Law Monthly publication, raised questions about decisions the governor took on Imperial, Dubai and Chase banks, which had been placed under receivership.

By that time there were at least seven cases in court cross filed between Imperial Bank directors, shareholders, depositors against either the CBK, the governor, KDIC and the Capital Markets Authority. Out of this, only two rulings have been made with CBK appealing on one.

But Uganda is not Kenya. Sometimes, or just perhaps often time, scandals such as this can be well managed, if not choreographed with the controllers of the country’s political direction sitting back, watching the moves in the courts of law with a remote and changing channels to suit their needs.

When the multibillion shilling Office of the Prime Minister and Ministry of Public Service corruption scandals erupted a few years ago, heads rolled. But whose head rolled and how far appeared to be determined by forces beyond the court process.

Convicting the culprits who have since appealed, Justice Lawrence Gidudu asserted the fraud to steal Shs88.2 billion was hatched in the Public Service, smoothened in Finance ministry and executed in Cairo Bank where the money was finally paid out to ghost pensioners.

In either case, there were sacred cows on who the arm of the law’s reach was limited by politics. Large scale scandals like these are also a delicate meeting point between the law and politics.

How that balance plays out in the Sudhir-BoU case and the subsequent suits therein, will be an interesting space to watch.

What is true, however, is that the Judiciary in Uganda also finds itself on trial as it did in 2006 when four time presidential, Dr candidate Kizza Besigye challenged Mr Museveni’s election and nearly got an annulment by a difference of one justice.

Retired Justice Kanyeihamba has since recounted the delicate nature of that case and how the chips were down.

The direction the case takes could largely be shaped by the configuration of politics and the power play. How for instance, if BoU’s allegations are anything to go by, was the bank able to run for years with that rot? Add to that the National Social Security Fund (NSSF) too coming out at the last hour to bemoan how the bank was not complying with its statutory obligations to remit workers’ savings in the excess of Shs39 billion.

A senior manager at NSSF told this writer in an interview: “Sudhir was untouchable then and we couldn’t do much.” To be beyond the reach of such institutions is to be at proximity with the powers that be. What happened to that relation?

Mr Walubiri says: “I think it is important in the sense that it will show whether the Central Bank performed its duties well, and whether it can be trusted if there is a default to recover money because they authorised an audit when it went into receivership so this will be a test of how thorough the audit was. It is a very important case that will test if the standards set can be implemented.”

He adds: “One would be interested to know whether the bank was doing a good job at supervision, how did this take place without Central Bank’s knowledge? The audited reports the Central Bank apparently didn’t reveal everything that went on in Crane Bank. Was Ruparelia so skillful to cheat that much and go unnoticed?”

Ironically, the Central Bank office located at the heart of the capital, on Kampala road, is a spitting distance away from the headquarters of the once successful Crane Bank that spread wings to Rwanda.

If there was a stench at the bank, it would have accosted the nostrils of the regulator faster, being its closest neighbour, except if the power play insulated either side from the same.

The Ernest & Young case in which the audit firm attempted to block Kenya’s Capital Markets Authority from summoning it as part of its probe on accounting malpractices at Uchumi is instructive on how proactive the regulator can get.

Will BoU for instance, turn its guns on the audit firms that Mr Walubiri says gave it the impression all was well? The audit firms now find themselves in the dock too.

Releasing its financial statement, which was audited by KPMG in May 2016, for instance Crane Bank announced its paid-up capital stood at Shs210b, which was almost 10 times the BoU requirement of Shs25b. Shortly after BoU announced its financial health had become so feeble that it held less than Shs12b of the required amount. Who fooled who?

For now, Justice David Wangutusi, who will hear this matter, has a blockbuster case on his hands. The court has a chance to shape jurisprudence the way the Supreme Court in the USA did with the Lehman Brothers case.
The court could also shape accounting and audit practice as the USA court did with the Enron case.

The Enron scandal, publicised in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and dissolution of Arthur Andersen, one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganisation in American history at that time, “Enron was cited as the biggest audit failure”.

The courts have their work cut out. If that, however, will depend more on the politics than the facts and law remains to be seen in what promises to be one of the most important cases in Uganda’s recent civil litigation history.

Accusations

Fraud. BoU states that the property mogul fraudulently took out $92.8m (about Shs334b) and another Shs8.2 billion of depositors’ money from Crane Bank for personal gain.

Breaking the laws. The Central Bank submitted evidence showing that Mr Ruparelia had been violating the laws which had been put in place to regulate and prevent commercial banks from failing or collapsing.

Failure to make payments. According to the court documents, BoU accuses Mr Ruparelia of failing or refusing to remit morethan Shs52 billion in workers’ contributions to the National Social Security Fund.