Ugandan borrower told to pay international lender Shs17b

The High Court has ruled against a Ugandan businessman and his company, ordering them to pay more than Shs10b owed to a Mauritius-based lender.

The case reflects a growing trend where Ugandan businesses and individuals borrow from international lenders, only to later dispute the legitimacy of the lending agreements as a means to avoid repayment.

Kare Distribution Ltd and its managing director, who doubles as principal shareholder, Geoffrey Karegyeya, have also been ordered to pay 11.5 percent from August 2019 on the amount until fully clearing the debt. This means Mr Karegyeya and his company currently owe the lender—African Rivers Limited (ARL)—more than Shs17.2b, interest inclusive.

High Court judge Anna B Mugenyi in a March 25 decision also condemned Mr Karegyeya and his company to court costs.

“In the present case and as seen above, the defendants not only failed to adduce any evidence to prove that the lending transactions in issue were illegal, but they also failed to demonstrate that the said transactions were governed by any of the laws they referred to as explained by counsel for the plaintiff in their submissions,” Judge Mugenyi ruled.

Background
Court documents show that Kare Distribution Limited first approached ARL through its local agent XSML Capital Uganda Limited. It sought a loan of $1,650,000 (Shs6.4b) to finance the purchase of the property comprising Block 244 Plot 8096 Vol. 4308 Folio I Muyenga Kampala from Canaanze Construction Limited. 

ARF by its letter of March 15, 2017, agreed to advance Kare the Shs6.4b at an interest of 11.5 percent per annum, which Kare acknowledged. Evidence was presented to court that XSML Capital (“XSML”) is an investment fund manager focused on frontier markets in East and Central Africa. XSML manages the African Rivers Fund (ARF), investing in private companies in Uganda, Democratic Republic of Congo and Republic of Congo.

It was agreed that the loan would be secured with a legal mortgage over the property comprised in Block 244 Plot 8096, Vol 4308, Folio 1, Muyenga, Kampala, condominium titles for the apartments thereon, and the personal guarantee of Mr Karegyeya; that by Loan Agreement of April 24, 2017, ARF advanced Kare a loan of Shs6.4b. Court, according to the loan agreement and other documents, determined that the lender is African Rivers Fund with Kare Distribution Limited as the borrower.

The ARF, through its director Jarl Heijstee, told court that it is their practice that, upon execution of loan agreements, its clients (in this case Kare) separately sign off loan disbursement request forms.

This is before the actual disbursement of the loan money. Consistent with this practice, Kare by Disbursement Request Form dated April 28, 2017, duly signed by Mr Karegyeya, requested a disbursement of $1,216,500 (Shs4.7b), of which a sum of $1.2m (Shs4.6b) was to be remitted to the Account of Canaanze Construction Limited at KCB Bank Uganda Limited and a sum of $16,500 (Shs64.1m) appropriated towards settlement of front end fees (loan agreement fees).

This money was in accordance with the Kare’s instructions remitted from the RAF’s Barclays Bank of Mauritius Limited (Barclays Bank) Account to the said account.

How things panned out
Mr Heijstee told the court that the funds paid out to Canaanze Construction Limited were to finance the purchase by Kare of properties, which were eventually pledged to ARF.

Upon this money being remitted, the properties were transferred into Kare’s names and the mortgage deed in favour of ARF registered.

As agreed in both the letter of March 15, 2017 and the loan agreement, Kare executed a mortgage deed pledging the properties to the ARF, and its managing director executed a personal guarantee in favour of the ARF guaranteeing repayment of the loan.

Mr Heijstee further testified that Kare, by Disbursement Request Form dated May 25, 2017, duly signed by its managing director, requested for a disbursement of $433,500 (Shs1.68b) to be remitted to the Kare’s account with dfcu Bank Limited; that this money was in accordance with Kare’s instructions remitted from ARF’s Barclays Bank of Mauritius Account to the said account; and that as clearly acknowledged by Kare on the request form, a sum of $1,216,000 (Shs4.7b) had as of the date of this request been disbursed to Kare.

Further that by another loan agreement dated December 7, 2017, ARF advanced Kare a $200,000 (Shs777m) loan and Kare by Disbursement Request Form dated December 7, 2017, duly signed by its managing director requested a disbursement of the $200,000 to be remitted to the Kare’s account with dfcu Bank Limited; that this money was in accordance with Kare’s instructions remitted from ARF’s Barclays Bank account to the said account minus $4,000 (Shs15.5m) appropriated towards front end fees; and that as clearly acknowledged on the request form, a sum of $1,650,000 (Shs6.4b) had as of the date of this request been disbursed to Kare.

By yet another loan agreement of July 18, 2018, ARF advanced Kare a $200,000 loan and Kare by an undated Disbursement Request Form duly signed by its managing director requested for a disbursement of the Shs777m to be remitted to the Kare’s Account with dfcu Bank Limited. Mr Heijstee testified that Shs727m of the Shs777m was in accordance with Kare’s instructions remitted from ARF’s Barclays Bank of Mauritius account to the said account.

The balance was retained as front end fees, legal fees, and interest for the month of June that year. Mr Heijstee also told court that Kare defaulted in servicing and, or repayment of the facilities in accordance with the terms on which they were advanced. 

ARF’s demands
Consequently, ARF, through its lawyers, asked to be paid $2,477,433 (Shs9.6b), which was the sum owed as of May 23, 2019, and on which interest continued to accrue. ARF additionally made a demand on the guarantor (Mr Karegyeya), and issued a Notice of Default in relation to the security held in accordance with the Mortgage Act.

“No evidence whatsoever was adduced by the defendants to rebut or challenge the coherent and reliable evidence adduced by the plaintiff in this regard,” Justice Mugenyi ruled, adding, “In any case, the 2nd defendant, by his own volition, rudely walked out of court during the hearing of the case and is, therefore, deemed to have not contested the plaintiff’s claims since he gave up his right to cross-examine and also testify to his own defence, if at all.”

Court records show that Mr Karegyeya and his company, who had first sued African Rivers Limited seeking a declaration that the various loan facilities made by the lender were illegal, abandoned the case after the lender countersued them.

Defendant walks out
Although Mr Karegyeya and his company had told court that the transactions entered between Kare Distribution Ltd and African Rivers Limited “are illegal and of no legal impact since the plaintiff [African Rivers Limited] has no right to carry on business in Uganda” among other things. Mr Karegyeya, Judge Mugenyi observed, “discourteously and rudely” walked out of court when the matter came up for hearing. This, the judge observed, rendered the contentions by Mr Karegyeya and his company “unproved and unsubstantiated”.

“In any case, the defendants did not bother to prove their contentions as they abandoned defending their case by contemptuously walking out of court during the hearing and in the absence of any evidence to the contrary. I find that the lending agreements and the guarantee deed were legal and enforceable,” Judge Mugenyi added.

Ham precedent
Judge Mugenyi cited the Supreme Court decision in which the top court ruled against businessman Hamis Kiggundu and his companies in a move in which the businessman sought to dodge paying loans owed to Diamond Trust Bank’s subsidiaries in Kenya and Uganda on account of illegality.

In Ham Enterprises Ltd and two others v Diamond Trust Bank (U) Ltd and another SCCA No. 13 of 2021, the Supreme Court held that syndicated lending transactions between foreign banking/non-banking institutions and Ugandans is legal.

Chief Justice Alfonse Owiny-Dollo, in the lead judgement, said it is not illegal for foreign financial institutions to extend credit facilities to any financial institution or person in Uganda and such credit agreements are legal and enforceable.

Judge Mugenyi agreed with African Rivers Limited lawyers—MMAKS Advocates—that Mr Karegyeya and his company “mistakenly” believed that the lender had contravened certain laws during the lending process, a trick they sought to use to convince the court to nullify their liability.

Common occurrence 
In recent years, numerous Ugandan businesses and individuals have found themselves entangled in complex financial disputes, attempting to circumvent multi-billion loan obligations owed to international lenders.

Among the most prominent cases are those involving businessman Hamis Kiggundu and his enterprises, Ham Enterprises Ltd and Kiggs International Ltd, embroiled in legal battles against DTB Uganda and DTB Kenya worth more than Shs120b.

Tycoon Patrick Bitature (pictured), along with his family and associated companies, has also faced challenges from South African financiers of Vantage Mezzanine Fund II Partnership and Vantage Mezzanine Fund II Proprietary Limited worth more than Shs244b. 

Aya Investments (U) Limited, responsible for the Pearl of Africa Hotel, is engaged in a contentious dispute with South African lender Industrial Development Corporation of South Africa, with outstanding dues exceeding Shs624b.

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