Guaranty Trust Bank (U) Limited v Dokwals Uganda Limited and Another (Civil Suit Originating Summons 1 of 2021) [2021] UGCommC 189 (10 November 2021)

THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA SITTING AT KAMPALA (COMMERCIAL DIVISION)

CIVIL SUIT No. 0001 OF 2021 (OS)

5 GUARANTY TRUST BANK UGANDA LIMITED ……………………… PLAINTIFF

VERSUS

| 1.<br>DOKWALS UGANDA<br>LIMITED | } | ………………………… | DEFENDANTS | |---------------------------------|---|------------|------------| | 2.<br>DOKWAL RUPESH KUMAR | } | | |

Before: Hon Justice Stephen Mubiru.

JUDGMENT

a) The Plaintiff's claim;

The second defendant is a director of the 1st defendant. On or about 25th October, 2019 the 1 st defendant applied for and obtained an overdraft credit facility from the plaintiff in the sum of shs. 196,000,000/= at an interest rate of 23% per annum, repayable within a period of twelve months, for re-capitalisation of its business. As security for that borrowing, the 2nd defendant offered his 20 personal guarantee and his title deed to land comprised in FRV 4364 Folio 25 Kiwafu Close Plot 20 in Entebbe Municipality in respect of which the plaintiff registered a legal mortgage. When the 1 st defendant defaulted on the loan, it was issued with a default notice dated 9th December, 2019 to rectify the default. The 1st defendant has since then failed to rectify the default, hence this suit for foreclosure, in respect of which none of the defendants filed a defence.

b) The issues to be decided;

According to Order 37 rule 4 of *The Civil Procedure Rules*, any mortgagee, whether legal or equitable, may take out as of course an originating summons, returnable before a judge in 30 chambers, for such relief of the nature or kind following as may be by the summons specified, and as the circumstances of the case may require; that is to say, sale, foreclosure, delivery of possession by the mortgagor, redemption, re-conveyance or delivery of possession by the Mortgagee.

Originating Summons (OS) is one of the two modes of commencing a civil suit. A suit is commenced by this mode where the dispute concerns matters of law, and there is unlikely to be any substantial dispute of fact. The affidavits are the pleadings for the case. The affidavit filed in support serves as the plaint, while the affidavit in reply serves as the written statement of defence.

- 5 This procedure exists in the interests of efficiency and cost. It provides a simple, informal, expeditious and inexpensive method of obtaining a final judgment, where no oral evidence is required, and the proceedings can be determined by way of affidavit evidence. An originating summons is the appropriate procedure where the main point at issue is one of construction of a document or statute or is one of pure law. It is not appropriate where there is likely to be any - 10 substantial dispute of facts that the justice of the case would demand the settling of pleadings.

The plaintiff should set out in the originating summons a concise statement of the questions which the plaintiff seeks the court to decide or answer, or, a statement of the relief or remedy claimed (where appropriate). The originating summons should also contain sufficient particulars to identify 15 the cause of action in respect of which the plaintiff claims the relief or remedy. In the instant case, the issues raised for trial are as follows:

- 1. Whether the plaintiff (mortgagee) is entitled to foreclose and sell the mortgaged property of the mortgagor to recover all sums of money due in respect of the principal debt, interest and other incidental charges. - 20 2. Whether the mortgagee is entitled to sell the property by private treaty of public auction. - 3. Whether the plaintiff is entitled to an order of vacant possession of the suit property. - 4. Whether the plaintiff should be granted the costs of the suit.

c) The submissions of counsel for the plaintiff;

Counsel for the plaintiff Mr. Amanya Mishambi submitted that the 1st defendant obtained an overdraft from the plaintiff during the year 2019 for a sum of shs, 196,000,000/= It was secured by a tripartite legal mortgage of FRV 4364 Folio 25 Kiwafu Close Plot 20 in Entebbe Municipality. The funds were disbursed by the plaintiff on the strength of the security having been confirmed to

be registered in the name of the 2nd 30 defendant who is a director, shareholder and principal guarantor of the facility. The 1st defendant breached the terms of the agreement by failing to repay the sum owed to the bank and the interest. It was on that premise that the plaintiff as legal mortgagee commenced the recovery process by issuance of notices under section 19 of *The Mortgage Act*. The last notice was served on them on 9th December, 2019 and 21 months later no effort had been made to clear the outstanding amount. Citing *Housing Finance Bank Limited v. Mugisha Charles*

5 *Lwanga, H. C. Civil Suit No. 14 of 2014 (OS)* and *Barclays Bank of Uganda v. Mugisha Joshua Wilber Musimani and another, H. C. Civil Suit No. 06 of 2011 (OS)* he argued further that it is on that premise that the plaintiff applies for the orders; to sell the property, obtain vacant possession and costs. This is in light of section 24 and 26 of *The Mortgage Act*.

10 d) The decision;

In all civil litigation, the burden of proof requires the plaintiff, who is the creditor, to prove to court on a balance of probability, the plaintiff's entitlement to the relief being sought.

- 1 st 15 issue; whether the plaintiff (mortgagee) is entitled to foreclose and sell the mortgaged property of the mortgagor to recover all sums of money due in respect of the principal debt, interest and other incidental charges. - Foreclosure is the legal process that allows lenders to recover the balance owed on a defaulted loan 20 by taking ownership of and selling the mortgaged property as collateral. The equity of redemption is a right given to the mortgagor over the mortgaged property, which includes the right to redeem the property on full repayment of the secured debt (see sections 8 (1) and 32 of *The Mortgage Act, 8 of 2009*). The mortgagor may redeem the mortgaged property on paying the full amount, including costs found due to the plaintiff. A final order of foreclosure usually puts an end to the 25 equity of redemption and is valid against all defendants. Once obtained, the plaintiff obtains title to the property free and clear of the interests of the defendants and may therefore proceed to take possession or transfer the property to a purchaser.

Through a suit for foreclosure, the mortgagee becomes the owner of the mortgaged property and 30 those interests subsequent to the mortgage in priority will lose their interest in the mortgaged property. Suits for foreclosure appeal to mortgagees where the value of the property at the time is not sufficient to repay the mortgage debt. If a mortgagee seeks to take possession of the mortgaged property, (because the property value exceeds the mortgage debt, or the estate market is depressed, and the value may increase over time) a suit for foreclosure may be more favourable. Court will order a foreclosure where it appears the value of the property is unlikely to satisfy the plaintiff's

5 claim.

The mortgagee has the option of taking possession until the default which was the cause of the entry into possession has been rectified through the possession of the mortgagee, or until the mortgagee has exercised the power of sale (see section 25 (c) and (d) of *The Mortgage Act, 8 of* 10 *2009*). In a suit for foreclosure, following a final order of foreclosure, the mortgagor and subsequent encumbrancers are absolutely debarred and foreclosed of and from all right, title and equity of redemption of, in and to the mortgaged lands. This means that the mortgagors no longer have equity in the property which could support a claim to any right to request relief. An order of "foreclosure and sale" would thus be preferable for a defendant in situations where the value of

15 the property exceeds the amount owing on the mortgage.

Borrowers may stop the process of foreclosure by redeeming their property before a foreclosure sale. To redeem the property, the borrower need to pay the full balance due before the foreclosure sale. Alternatively, the borrower may prove that the foreclosing mortgagee did not comply with

- 20 the foreclosure laws or the terms of the mortgage. The defendants not having sought to assert their right of redemption, and not having challenged the process, it is hereby ordered and adjudged that the right, title and equity of redemption of both defendants to and in the mortgaged property described as FRV 4364 Folio 25 Kiwafu Close Plot 20 in Entebbe Municipality, is hereby foreclosed. - 25

2 nd issue; whether the mortgagee is entitled to sell the property by private treaty of public auction.

A mortgagee has the option to enforce their mortgage security through a foreclosure or judicial 30 sale but for the most part, the exercise of a contractual or statutory power of sale is the more favourable remedy for mortgagees. If the mortgage contract does not contain a power of sale

provision, statutory power of sale provisions are set out in Part V of *The Mortgage Act, 8 of 2009* and are deemed to apply unless expressly excluded.

If a mortgagee seeks to enforce their security as quickly and cost effectively as possible, a sale by 5 private treaty is the appropriate remedy. In the instant case, the mortgage did not reserve that power in the mortgage deed. However, according to section 28 (1) (d) of *The Mortgage Act, 8 of 2009*, 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. In the instant case the defendants have not consented to a sale by private treaty. Furthermore, according to Regulation 8 (1) of *The*

10 *Mortgage Regulations, 2012* a mortgagee exercising a power of sale under the Act must subject to the Act and the Regulations, sell the mortgaged property by public auction.

Sales by public auction provide the mortgagor with a lengthier notice period and a court supervised process. The theory of the public auction is that the mortgagor as owner of a substantial equity is 15 assured of having its value returned to him as "surplus moneys," or at worst, that in case the competitive bidding for the property fails to bring a price equal to the debt and costs, it will at any rate fix the true value of the mortgaged property and so limit to a just amount any deficiency judgment which may be entered.

20 That notwithstanding, sale by public auction can also be much more costly. This is because section 28 (2) thereof requires that where a sale is to proceed by public auction, it is the duty of the mortgagee to ensure that the sale is publicly advertised in advance of the sale by auction in such a manner and form as to bring it to the attention of persons likely to be interested in bidding for the mortgaged land may include but not be limited to the mortgagee placing an advert including a 25 colour picture of the mortgaged property, in a newspaper which has wide circulation in the area concerned, specifying the place of the auction, and the date of the auction, being no earlier than thirty days from the date of the first advert.

For all intents and purposes, the lengthy judicial foreclosure process is intended to benefit the 30 mortgagor by giving him or her every opportunity to remedy the default, modify the terms of the loan, and redeem the property prior to foreclosure. In the same vein, statutory provisions for sale

favour a public auction to a sale by private treat mainly because matters of foreclosure are uniquely equitable in nature despite certain limitations stemming from the nature of the *in rem* proceedings. Accordingly, it is ordered and decreed that sale of the mortgaged property in the instant case shall by public auction in accordance with the relevant provision of *The Mortgage Act, 8 of 2009* and

5 *The Mortgage Regulations, 2012*.

3 rd issue; whether the plaintiff is entitled to an order of vacant possession of the suit property.

The power of sale allows the mortgagee to convey the mortgaged property to a purchaser, free and 10 clear of the interest of the mortgagor and any other subsequent interests in the property. The defendants' right, title and equity of redemption to and in the mortgaged property described as FRV 4364 Folio 25 Kiwafu Close Plot 20 in Entebbe Municipality, having been foreclosed, it is ordered and adjudged that the defendants forthwith deliver to the plaintiff or as the plaintiff directs, possession of the mortgaged property or of such part of it as is in the possession of the defendants.

4 th issue; whether the plaintiff should be granted the costs of the suit.

The general rule under section 27 (2) of *The Civil Procedure Act* is that costs follow the event unless the court, for good reason, otherwise directs. This means that the winning party is to obtain 20 an order for costs to be paid by the other party, unless the court for good cause otherwise directs. I have not found any special reasons that justify a departure from the rule. Therefore in conclusion, judgment is entered for the plaintiff against the defendants jointly and severally, as follows;

- a) The right, title and equity of redemption of both defendants to and in the mortgaged 25 property described as FRV 4364 Folio 25 Kiwafu Close Plot 20 in Entebbe Municipality, are hereby foreclosed for purposes of sale. - b) Sale of the said mortgaged property shall by public auction in accordance with the relevant provision of *The Mortgage Act, 8 of 2009* and *The Mortgage Regulations, 2012*. - c) For the purposes of that sale, the defendants are ordered forthwith to deliver to the plaintiff 30 or as the plaintiff directs, possession of the mortgaged property or of such part of it as is in the possession of the defendants.

d) The costs of the suit.

Delivered electronically this 10th day of November, 2021 ……Stephen Mubiru…………..

Stephen Mubiru 5 Judge, 10th November, 2021.