How Uganda Development Bank and its appointed receivers, Kabiito Karamagi and Joshua Ogwal, illegally dispossessed Edward Kasole Bwerere Lwanga of his money and school in Mubende town. CEO Magazine analyses the case;
Justice Richard Wejuli Wabwire, of the Commercial Court, has found that Uganda Development Bank (UDB), unlawfully sold the property of their client, Mubende Parents School; illegally appointed Kabiito Karamagi and Joshua Ogwal of Ligomarc Advocates as receivers/managers, to recover a debt that did not exist. Their unlawful appointment aside, the two receiver/managers, according to court, also went ahead to unlawfully attach monies on the school’s bank accounts as well as unlawfully dispose of the remaining properties of the school and as if that was not enough, they misused and failed to properly account for the funds ‘grabbed’ from Mubende Parents School.
For this, the Ugandan taxpayers who own UDB as well as the two lawyers have been ordered to compensate the owners of Mubende Parents School, the equivalent of the current market value of the properties they illegally sold, less the Shs 716,384,349 that the school owed Uganda Development Bank.
Given that the school was valued at Shs1,270,000,000 in 2011 at the time of borrowing, and thereafter, the dispossessed owners had invested in the Shs620,000,000 they borrowed from the bank, the current value of the school could have since tripled, putting the value of the compensation at anywhere around Shs2 billion.
Court also dismissed a claim of Shs116,384,349 by UDB on the school, which claim had been used as a basis to appoint the receivers and managers to recover the said claim and associated costs and fees and said that in the first place, the Shs116,384,349 was overstated by at least Shs60 million and secondly the said claim would not have arisen if UDB had not deliberately underpriced the mortgaged property by at least Shs129 million. Justice Wejuli Wabwire then proceeded to declare that since there was no money owed by Mubende Parents School, the decision to progress the school into receivership and therefore the appointment of the two Ligomarc lawyers, Kabiito Karamagi and Joshua Ogwal, as receivers/managers, was unlawful.
The Judge, therefore, ordered the lawyers to refund the Shs150,000,000 that they transferred from the school’s account in Equity Bank Limited, as well as the UGX22,500,000 that they transferred from the school’s account in Centenary Bank, to purportedly pay for a debt that has now been found by the court to be non-existent. The judge also faulted the two lawyers for misusing the money and failing to account for it appropriately both to court and to Mubende Parents School, the owners of the money and to whom they owed a fiduciary duty as receivers/managers.
To ‘atone’ for their unlawful misconduct, over and above compensating the school owners the value of their illegally sold building, UDB and its wrongfully appointed receivers/managers- Kabiito Karamagi and Joshua Ogwal, have been ordered to pay Mubende Parents School Shs 50,000,000/= in general damages and Shs10,000,000 in exemplary damages. The damages will be charged interest, at 8% per annum from the date of judgment till payment in full.
However, in a comment to CEO East Africa Magazine, both UDB and the lawyers said they will appeal the ruling.
“Uganda Development Bank Limited (UDBL) is in receipt of the Judgement in the Matter of Mubende Parents School Ltd Vs UDB and 2 others. As one of the Defendants, UDBL is dissatisfied with the judgment of the High Court and is preparing an appeal to the Court of Appeal,” UDB said in an emailed statement on April 1st 2022.
“We will be appealing the decision in the Mubende parents case,” Kabiito Karamagi, wrote in an email to CEO East Africa Magazine.
Mubende Parents School was owned by Edward Kasole Bwerere Lwanga the former founder and proprietor of Kampala Parents School.
Background: How it all started
Mubende Parent’s School on 28th March 2011, applied for a loan facility of Shs620,000,000 from UDB, a government-owned bank and offered as security, land and buildings comprised in leasehold Register 3071, Folio 12 Plot M46; Leasehold Register 3071, Folio 13 Plot M47 and Leasehold Register 3071, Folio 14 Plot M48 at Mubende. A legal mortgage was executed and a collateral debenture was also signed and executed in favour of UDB.
At the time of the Mubende Parents School applying for the loan, the property was valued by CB Richard Ellis (CBRE) as having an open market value of Shs1,270,000,000 and a forced sale value at Shs740,000,000. Around 2015, the loan went bad and UDB advertised the properties for sale, prompting Mubende Parents School to file suit CS No. 59/2015 at Nakawa against UDB stopping the sale.
The suit was resolved via a consent judgement dated 15th May 2015 wherein Mubende Parents School agreed to pay UDB a sum of Shs 766,384,349/= within four months. Thereafter, Mubende Parents School paid UGX50,000,000/ vide cheques dated 14th May 2015, leaving an outstanding balance of Shs 716,384,349/= and failed to pay the remaining balance within the stipulated time.
Curiously, upon Mubende Parents School’s default on the Consent Judgment, UDB through SM Calhan Ltd revalued the school, but this time around, the open market value had gone down to Shs930,000,000 with a forced sale value of Shs605,000,000!
On the 26th of August 2015, UDB, without readvertising, sold the school’s land and buildings to a one, Muramira Alexander for a mere Shs610,000,000.
The sale agreement, on behalf of UDB, was singularly signed by a one Patrick Oketta, instead of the required two signatories, leaving out the second signatory, a one Millie Kasozi, something that the judge says made the agreement and the sale invalid.
As if undervaluing Mubende Parents School’s property was not enough, UDB was not satisfied and still went after Mubende Parents School’s remaining properties and cash at the bank, claiming that even after selling the school, there was an unpaid balance of Shs225,093,907, being a balance on the loan (Shs11 6,384,349) as well as auctioneer’s fees and security charges.
To collect this allegedly outstanding balance, on 25th September 2015, UDB further issued a Notice of Appointment of Joshua Ogwal and Kabiito Karamagi as receivers/managers of the school. The notice was signed by UDB’s Bank Secretary, Dorothy Ochola and registered with the Registrar of Companies on the 5th of October 2015. The deed poll appointing the receivers/managers was again unlawfully singularly signed by a one Patrick Oketta, which practically made the appointment illegal as well.
The illegality of their appointment notwithstanding, the court found out that, the receivers/managers, Kabiito Karamagi and Joshua Ogwal- collected a total of Shs182,5000,000 in cash held at the bank amounting to Shs172,500,000) and Shs10,000,000 from underpricing other movable assets, but only used 19% of this money to settle the debt. The rest was used for other expenses that the court said were wasteful.
Mubende Parents School challenges indebtedness and the appointment and conduct of the receivers
After the sale of the school and appointment of receivers/managers, Mubende Parents School went to court vide Civil Suit No. 662 of 2015) seeking the court to declare that the sale of Mubende Parents School’s mortgaged property by UDB was done unlawfully.
The school also asked the court to declare that Mubende Parents School was not indebted to UDB and therefore the progression of the school into receivership and the appointment of the receivers/managers was unlawful. The school also challenged the conduct of the receivers/managers, whom they say underpriced their assets, misused and failed to account for the realised funds, amongst other misconducts.
The court was also asked to declare that cash held on Mubende Parents School’s Bank accounts in equity Bank Limited vide account No. 103020044187 and Centenary Bank Ltd vide account No. 901600785 belonged to Mubende Parents School and should never have been attached by the receivers.
They also asked Court for General, special, punitive and aggravated damages, interest and costs.
Mubende Parents Schools were represented by Kaggwa & Kaggwa Advocates while UDB and the receivers were represented by Kalenge, Bwanika, Kisubi & Co. Advocates.
Mubende Parents School filed two witness statements deponed by Edward Kasole Bwerere Lwanga, a director of Mubende Parents School and Adam Kakande, the Mubende Parents School’s auditor.
The defendants also filed two witness statements deponed by Emmanuel Kwihangana, the Senior Monitoring and Recoveries Officer with UDB and Joshua Ogwal, the 2nd Defendant. All the witness statements were admitted on the Court record. The defendants called a third witness whose evidence was admitted orally. All the witnesses were accordingly cross-examined. The Parties all filed written submissions.
Court makes its rulings, finds UDB and its receivers guilty of negligent and unlawful misconduct
In preliminary objections, the defendants said that since the matter being raised by Mubende Parents School had been raised in an earlier suit (HCCS No. 59 of 2015) which matter was resolved by mutual consent, which among others meant that Mubende Parents School had lost the right to re-litigate the case. The judge however dismissed the preliminary objections, saying they lacked merit as what was at trial was not the indebtedness but rather the illegal sale, the illegal appointment of the receivers and their subsequent negligent and unlawful misconduct.
“I find no merit in the preliminary objections raised by the defendant and they are accordingly dismissed,” Justice Wabwire ruled.
On whether the sale of Mubende Parents School’s property was lawful, the judge agreed with the school’s lawyers that the omission to re-advertise after the initial intended sale had been stayed and instead, selling by private treaty combined with the sale at what was an undervalued price and the improperly executed Sale Agreement, all made the sale illegal.
Justice Wabwire ruled that while by consent Judgment, Mubende Parents School agreed to pay UDB a sum of Shs766,384,349/= within four months and that since pursuant to paragraph 2 of that Consent, Mubende Parents School had paid, Shs50,000,000, leaving an outstanding balance of Shs716,384,349, this amounted to rectification of the default and therefore, fresh notices in terms of section 19 of the Mortgage Act ought to have to be served.
“Section 28(1)d) of the Mortgage Act, 2009, provides that where a mortgagee becomes entitled to exercise the power of sale, that sale may be by public auction, unless the mortgagor consents to a sale by private treaty,” ruled Court, adding: “ It is this Court’s finding and conclusion that the omission by the 1st defendant (UDB) to comply with the procedural requirements stipulated under S.19 of the Mortgage Act, after a stay of the initial sale had been granted, invalidated the purported sale.”
Court also agreed with Mubende Parents School’s lawyers that while Mubende Parent’s School was valued at Shs1,270,000,000 with a forced sale value of Shs740,000,000 in 2011, nearly 5 years later the same property couldn’t be assigned a forced sale value of Shs605,000,000, yet the school had undergone expansion.
“From the evidence and submissions on record for Mubende Parents School, I am convinced that the value of Mubende Parents Schools property was understated. The shortfall of Shs129m between the 2011 forced sale value and the price at which the property was sold is significantly out of an acceptable margin of error. The possibility of getting a better price was not adequately explored. The sale at Shs610, 000,000 was indeed an understatement of the prevailing market and forced sale value of the property,” ruled the judge.
Court also voided the sale, saying that Patrick Oketta, who signed the Sale Agreement which concluded the purported sale, did not have the power to sign the Sale Agreement alone without another signatory, Millie Kasozi, named in the bank’s Power of Attorney, contrary to Article 89 of UDB’s Articles of Association which required that at all times, instruments with seals shall be signed by two individuals on behalf of the Bank. As such, the Sale Agreement was not properly executed by those mandated to do so, which made the sale unlawful.
“In the instant case, there was a deviation from the mandate of the Power of Attorney when Oketta executed the Sale Agreement alone without Millie Kasozi the second donee. This was a fatal irregularity which renders his actions null, void and ineffectual and the Agreement unlawful. Premised on all the foregoing findings, this Court finds that the sale of Mubende Parents School’s mortgaged property by UDB was unlawful,” ruled Justice Wejuli Wabwire. Issue No.1 is answered in the affirmative.”
Was Mubende indebted to UDB and if so, by how much?
While UDB and its lawyers contended that even after the sale of the school’s properties, Mubende was still indebted to the bank to the of Shs225,093,907, which indebtedness led to the appointment of the receivers/managers to recover the said sum, the court established that the alleged indebtedness had been overstated by Shs60 million.
Court agreed with Mubende Parents School’s lawyers that, had the sale of the mortgaged property been properly advertised and sold to the highest bidder and had UDB’s deliberate actions that resulted in the lapse of time, eventually gave rise to the claimed interest and costs of security, the said indebtedness would not have arisen.
“Since there was no re-advertisement after the stay of the initial recovery process, the possibility of getting better value propositions was lost,” ruled the judge, adding that had the receivers/managers properly utilized the school’s money held in the bank accounts, all indebtedness would have been settled.
“According to clause 4 of DEX27, the Receiver’s Preliminary Report on the state of affairs of Mubende Parents School in Receivership, Joshua Ogwal stated that Mubende Parents School had cash at bank totalling Shs150,000,000/. The cash in Bank of Shs150,000,000/ and the sum of Ugx. 10,000,000/ from the sale of business assets received by the receivers made a total of Ugx. 160,000,000/ which the Receivers never accounted for. This was enough money to clear the outstanding balance of 106,384, 349,” the court further said.
Court also said that UDB and the receivers/managers failed to adduce evidence that Shs118, 709,558/ was spent as additional costs as Auctioneer’s fees and security charges.
“The defendants never adduced any evidence to show how much fees were paid to the auctioneers. Premised on the foregoing, all efforts by the defendants to prove a claim against Mubende Parents Schools come to nought. The Defendants have not been able to prove that they were entitled to the sum claimed in their counterclaim,” Justice Wejuli Wabwire ruled, adding: “The finding and conclusion of this Court, based on the foregoing, is that Mubende Parents School is not indebted to the defendants at all.”
The judge also ruled that the appointment of Joshua Ogwal and Kabiito Karamagis as receivers was unlawful because, among others, there was no debt to recover hence no default to warrant the appointment of the Receiver.
“The conclusion that Mubende Parents School was not indebted to the defendants is a foregone conclusion of this Court. Had the Defendants (UDB) been diligent in managing Mubende Parents School’s matters, it would have been apparent that when they decided to appoint a Receiver, there was actually no debt to recover and hence no justification for their action in appointing the Receiver. In consequence, Court finds the appointment of Joshua Ogwal and Kabiito Karamagis as Receivers was unlawful since there was no debt to recover given that the money on Mubende Parents School’s Bank account exceeded what would have been required to clear the outstanding obligation after the sale of his property,” the judge reiterated.
Curiously, according to the ruling, Joshua Ogwal, one of the lawyers had a difficult time trying to explain how the money attached from the school’s accounts and transferred to Ligomarc Advocates bank accounts was used, often tripping himself on record, leading the judge to conclude that the receivers had neglected their fiduciary duty.
“According to clause 4 of DEX27 (Defence Exhibit 27), the Receiver’s Preliminary Report on the state of affairs of Mubende Parents School in Receivership, the 2nd defendant (Joshua Ogwal) stated that Mubende Parents School had cash at Bank totalling to UGX150,000,000. This cash in Bank and the sum of UGX10,000,000/from the sale of business assets received by the Receivers made a total of UGX 160,000,000,” observed the judge, adding: “DW1 (Joshua Ogwal) contradicted himself by stating that the only money they received from Mubende Parents School was a total of Ugx. 160,000,000 and again stated that it did not get to UGX160,000,000 but rather was UGX121,710,663. Out of that, UGX13,783,000 was sent to UDB leaving a balance of Ugx. 107,288,663.”
“The 2nd defendant (Joshua Ogwal) and the 3rd defendant (Kabiito Karamagi) as Receivers had a duty to exercise their powers in the best interests of Mubende Parents School for whom they were appointed. As noted earlier, upon the sale of Mubende Parents School’s mortgaged property at a sum of UGX 610,000,000l there was an outstanding balance of UGX106,384,349. The Receivers’ fundamental duty should have been to clear that outstanding balance. No convincing explanation was proffered as to why the Receivers only sent a sum of UGX13,783,000 to the 1st defendant (UDB), leaving a balance of UGX107,288,6631 yet the same amount would have cleared all Mubende Parents School’s indebtedness to UDB. The choice to spend the sum of UGX 107,288,663 on the above expenses instead of first clearing Mubende Parents School’s indebtedness was in total disregard of Mubende Parents School’s plight and prejudicial to Mubende Parents Schools’ interest. The defendants breached this duty, the duty to act in the best interests of Mubende Parents School to apply his assets towards resolving the indebtedness. The Receivers’ actions transcended mere negligence and were unlawful,” he concluded.
Final orders and remedies for Mubende Parents School
Justice Wejuli ruled that the “the appointment of Joshua Ogwal and Kabiito Karamagi as Receivers was unlawful since there was no debt to recover, given that the money on Mubende Parents School’s Bank account exceeded what would have been required to clear the outstanding obligation after the sale of his property.”
He also ruled that the “advertisement of Mubende Parents School’s business as under Receivership was unlawful because, upon sale of the mortgaged property, the amount from the sale was sufficient to extinguish the whole debt.”
He also ruled that the 2nd defendant’ (Joshua Ogwal) and 3rd defendant’ (Kabiito Karamagi) actions as Receivers/Managers of the Mubende Parents School’s business were laced with illegalities and therefore unlawful.
He also ordered that the 2nd defendant (Joshua Ogwal) and 3rd defendant (Kabiito Karamagi) as Receivers, the illegality of their appointment notwithstanding, have since completed their tasks and the receivership is extinguished, but that their actions, together with those of UDB, had “disposed of Mubende Parents School’s property without following the proper procedure as stipulated under the Mortgage Act and the Regulations.”
“The defendants are in consequence jointly and severally ordered to compensate Mubende Parents Schools, the equivalent of the current market value of the property comprised in Leasehold Register Volume 3071, Folio 12, Plot M 46, Leasehold Register Volume 3071, Folio 1 3, Plot M47, Leasehold Register Volume 3071, Folio 14, Plot 48 land at Mubende illegally sold by UDB less the money agreed under the consent,” he ordered.
“Mubende Parents School is not indebted to the 1st Defendant at all,” he further ordered.
He also ruled that the prayer for a permanent injunction against the Defendants restraining them from taking over Mubende Parents Schools Bank Accounts and Assets was overtaken by events because the Receivers already took over Mubende Parents School’s Bank accounts and disposed of the assets. Nonetheless, the court granted Mubende Parents School UGX50,000,000 in general damages as well as UGX10,000,000 in exemplary damages at an interest rate of 8% per annum from the date of judgment till payment in full and costs to the suit.
He also ordered that “all the money held on Mubende Parents Schools Bank accounts in equity Bank Limited vide account No. 103020044187 and Centenary Bank Ltd vide account No. 901600785 belongs to Mubende Parents School” and should therefore be refunded.
“Having found that the sale was unlawful, I find no good reason to deny Mubende Parents School costs of the suit and I accordingly award the costs of this suit to Mubende Parents School,” concluded Justice Wejuli Wabwire.
Source: CEO Magazine
