Everything Wrong with the Sudhir and Bank of Uganda Ruling

29th Aug 2019 10:07:01 Tibugwisa Damalie

On the 26 th , August 2019, Honorable Justice David Wangutsi delivered a landmark decision in Miscellaneous Application No. 320 of 2019 arising from High Court Civil Suit Number 0493 of 2017 filed by Sudhir Ruparelia and Meera Investments
against Crane Bank in Receivership. By the detailed 22 paged ruling, the said judge dismissed the Bank of Uganda suit against Sudhir and Meera Investments.

Whereas the decision was received with jubilation by the Sudhir camp, my opinion is
that the decision:

1. Is a blow to good corporate governance of financial institutions especially at atime such as now when Bank of Uganda has been embroiled in several controversies. The dismissal of the suit denied us the chance to delve into the real issues surrounding takeover, management, Receivership and Liquidation of financial institutions especially in regard to the accountability role of Bank of Uganda.
2. Denied us a chance to effectively assess the corporate governance issues arising from what Bank of Uganda alleged were acts of misappropriation, mismanagement and abuse of dominant position by Sudhir as shareholder. These issues are so pertinent and have remained unresolved for long not just in the case of crane bank but several other banks including the National Bank of Commerce where similar issues arose.
3. It is also a blow to rights of aggrieved parties for banks in receivership who the decision says cannot petition court for redress in case of any wrong including employees.

 In this article I critically analyze in detail and with due respect the decision of the Honourable judge.

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Genesis of the case.
In 2016, Bank of Uganda took over Crane Bank and in January 2017 put it underReceivership. On the 30 th of June, 2019, Bank of Uganda in the name of Crane Bank in Receivership filed a suit against Sudhir and Meera Investments where it made several allegations which briefly were;

1. Allegations on Ownership and shareholding.
   Bank of Uganda alleged that Sudhir was the effective and beneficial owner of 100% shares in Crane Bank an act that is illegal under Section 18 and 24 of the Financial Institutions Act. Bank of Uganda alleged that he was the actual recipient of dividends in respect of 47.3% of shares purportedly registered in the names of Rasikal Chotalal Kantaria in White Sapphire Ltd which was the majority shareholder in Cranebank and was also the beneficial owner of shares held in the names of his wife and children in the bank.
2. Allegations of extraction of money.
   Bank of Uganda alleged that Sudhir wrongfully extracted millions of dollars from Crane Bank to pay entities for his own benefit, made a fictitious payment to Technology Associates and fraudulent cash transactions made through Infinity Investments a company he co owns.
3. Allegations of unremitted NSSF contributions.
   Bank of Uganda alleged that upon an audit by NSSF, it was discovered that Crane Bank had not remitted over 52,000,000,000/= of arrears, interest and penalty for the period between 2007-2016.

In light of the above allegations Bank of Uganda sought to recover all monies purportedly extracted by Sudhir, NSSF arrears, and an account of all monies received in breach of fiduciary duty and trust by Sudhir.

Against Meera Investments, Bank of Uganda alleged that Meera Investments had dishonestly appropriated the land of Crane Bank in respect of 48 properties comprising of Crane Bank branch network. Bank of Uganda therefore sought a transfer of the said titles into the names of Crane Bank.

In opposition of this suit, Sudhir and Meera Investments filed an application seeking to have the suit by Bank of Uganda on preliminary objections revolving around the locus standi(right to sue) by Crane Bank in Receivership which they argued was non existent and also the fact that the orders sought against Meera Investments were unsustainable in law since transfer of titles of Freehold to Crane Bank is prohibited by the Land Act since according to them Crane Bank was a non citizen that could only hold leasehold interest.

In agreeing with them, the honourable judge went at length to dissect provisions of the Financial Institutions Act (FIA) and the Land Act for the two respective grounds.

On the issue of locus standi, Sudhir and Meera Investments argued that from the 20^th January, 2017, the Respondent (Crane Bank in Receivership) could not be sued nor could it sue and the suit having been brought on 30 th June, 2017 within the receivership period, the same was unsustainable. Bank of Uganda in return
argued that Section 96 of the FIA barred proceedings against a financial institution in receivership but did not bar the financial institution in receivership from commencing legal action.

In dealing with this issue, the judge reaffirms that supremacy of the FIA over any other law in accordance with Section 133 of the FIA and adds that the said Crane Bank could only bring an action during the period of statutory
management or liquidation.

He concluded that the law under Section 96 of the FIA does not allow proceedings to be brought by or against a financial institution in receivership. He rightly disagrees with Bank of Uganda and says;

‘Having insulated the Respondent against suits, they would not have enabled it to sue because suits against the Respondents were not allowed.’

This finding is powerful as it clarifies the position on Section 96 of the FIA which specifically prohibits proceedings against financial institutions in receivership but does not specifically state whether such institutions can institute proceedings. This would have the unfortunate effect of creating double standards in favor of the receiver.

However, besides this finding, I disagree with the rest of the reasoning of the judge on the issue of locus standi.

The judge states reasons why the law prohibits proceedings against banks in receivership to be;

1. The short span of time for receivership.
   The time span for receivership is 12 months and the judge said it is too short to conclude a case. The judge goes on it detail to expose the inefficiencies of the justice system in Uganda where he notes that the first hearing of any case may be anywhere between 6-9 months. Whereas this might be true due to the challenges faced by the Justice system, I respectfully opine that we cannot deny access to justice due to inefficiencies in the justice system. To assume that the matter will only conclude after 6-9 months is also speculative as sometimes indeed matters are resolved at the point of mediation.
2. The cost of suits
   The other reasoning the judge espouses is that the costs of the suit would further deplete the financial institution which the receiver is trying to strengthen financially. Although legal costs maybe high, first of all they are
   negotiable as between client (bank in receivership) and its counsel and the receiver would be expected to exercise prudence in negotiating legal costs. Secondly, these costs would arise anyway even during statutory management
   or liquidation where at all times, the manager or liquidator is also trying hard to optimize the resources of the embattled institution. Thirdly, cost is relative. The cost of not being able to access justice maybe far higher can the
   cost of legal representation. Fourthly, as between parties, costs are awarded at the discretion of court and therefore can be capped or minimized to prevent the much feared depletion.
3. The role of the receiver would not require court to intervene.
   The other reason the judge gives is premised on the role of the receiver being
   to arrange a merger, or purchase of assets and assumption of liabilities by
   another financial institution or liquidation. He argues that;

‘This would not normally require court in any case for the receiver to do it properly diversions of Court should be avoided.’

With due respect, I also disagree with this argument, world over mergers and acquisition or purchase of assets and assumption of liabilities of another company are highly contentious issues and rightly so for the main reason of
accountability. It is the most unfair and improper thing to prevent an aggrieved party from seeking recourse whilst they feel that their assets are being sold off in a dubious and fraudulent manner as Sudhir and previously National Bank of Commerce alleged was the conduct of Bank of Uganda.

In fact, in his own decision, the judge notes that:

‘Central Bank sold and did away with Crane Bank in 4 days after receivership’.

Four days after receivership means that the central bank transitioned from statutory manager, receiver, and liquidator in a very short span of time. Unless there was premeditation by Bank of Uganda, what level of diligence, scrutiny was paid to the transaction involving the purchase of assets and assumption of liabilities of Crane Bank by DFCU. Was 4 days all it needed to carry out a proper audit, valuation, solicitation of bids for purchase? That kind of heist conduct is bound to fall short of standards. To therefore argue that whilst it was glaringly apparent that Bank of Uganda in this case was abusing its dominant position as regulator, it is okay to let aggrieved parties fold their
arms without recourse to court all because of a provision of the law that is apparently being abused would lead to the most absurd effect. What about the principle of mitigation of loss. Shouldn’t court help the aggrieved party
mitigate any loss?

It must be noted that the subsequent purchaser except for fraud takes good title and therefore the aggrieved party in this case cannot run to the third party for accepting such a good deal as was allegedly grabbed by DFCU bank.

Reliance on literal interpretation of the statute.
The judge also heavily relied on previous decisions of court which support the literal interpretation and application of the law. He said that;

‘It is not upon court to imagine and say the legislature forgot this, we should
insert it for them’

Whereas the literal rule of interpretation and construction of statutes is the most preferred, the courts have in the past gone against it where it is clear that the literal interpretation leads to absurdities, repugnancy, and injustice and is contrary to the constitution.

The purchase of assets and assumption of liabilities, directly affects the right to property that is guaranteed under Article 26 of the 1995 Constitution of Uganda. Article 26 specifically prohibits any compulsory acquisition of
another’s property under any law that deprives such person the right to access a court of justice. In my opinion, Section 96 of the FIA contravenes the Constitution in so far as it bars anyone from bringing proceedings against a receiver and the FIA empowers the receiver to compulsorily sell off the assets of the embattled institution. If the
learned judge had been alive to this perhaps he would have found a basis to deviate from the literal interpretation of the law.

In the past, Courts have gone against the literal rule. For example, in the case of Ostraco Ltd V AG( 2003) 2 EA reaffirmed in the case of Ryanyarere and Others V. Attorney General (2003) 2 EA 664 the provision of the Civil
Procedure and Limitations ( Misc. Provisions) Act, which barred execution against government was read into and found to be repugnant for being discriminatory. Similarly the Supreme Court in the case of KCCA V Kabandize and 20 others found that the requirement to give 45 days’ notice prior to commencing a suit though couched in mandatory terms under the Civil Procedure and Limitations (Misc. Provisions) Act was not mandatory.

The reason that Crane Bank was not in existence at the time of filing the suit.
The judge concluded that by the 30 th of June, 2017 Crane Bank in receivership was not in position to do so as all its assets and liabilities had been exhausted. I with due respect also disagree with this finding. From the ruling, what DFCU acquired were assets and liabilities of Crane bank. DFCU did not acquire the shares of the respective shareholders of Crane Bank. My opinion is that a company’s existence or nonexistence is not determined by its assets or liabilities. Crane Bank may have lost its identity as a financial institution but not its personality as a body corporate under the Companies Act. For all intents and purposes, a financial institution is first a company and that
personality subsists even after its assets and liabilities are sold unless completely wound up.

If indeed like the Judge states Crane Bank lost its identity and personality to DFCU upon the laters’ acquisition of assets and assumption of liabilities, could it be argued that DFCU can commence an action against Sudhir for
accrued rights of Crane Bank? This would be more complex and would create issues of privity as well.

What the decision means for claims by Sudhir against Bank of Uganda.

The judge’s conclusion that no proceedings could be commenced by or against Crane Bank in receivership also means that Bank of Uganda cannot be sued for acts done by it during the period when it acted as receiver since
it was clothed with immunity from proceedings at that time. This gets me wondering whether Sudhir can safely pursue Bank of Uganda to account as receiver or whether this ruling is a road block for Sudhir as well.

How about employees whose NSSF contributions were not remitted by  Crane Bank? These too have no recourse since Crane Bank no longer exists as the judge says!

The other question that pops to my mind is, can Bank of Uganda in its supervisory capacity sue Sudhir and Meera Investments in respect of the allegations made out in the aborted suit? I believe so.

The Second Issue on Land
The second issue that the judge made a finding on was the issue of the order sought by Bank of Uganda that Meera Investments transfers land to Crane Bank. Meera Investments argued that such order would be illegal as it would amount to a transfer of freehold or mailo land to a non-citizen which is prohibited by the Land Act.

My opinion is that this issue too could have been resolved otherwise had the judge delved deeper into the pleadings of Bank of Uganda and I believe it was the kind of issue that required further evidence. The judge found that White Sapphire Ltd was the majority shareholder of Crane Bank Ltd and since it was a company incorporated in Mauritius it was non citizen and therefore could not own freehold or mailo land. However, this conclusion was arrived at without regard to two things;

1. 1. That a company was registered in Mauritus does not of itself make it a non-citizen for purposes of Section 40 of the Land Act. Section 40 of the Land Act, prescribes a non-citizen corporation to be that where the
      controlling interest is held by non-citizen. This could be regardless of the area of incorporation. Secondly, Section 40(7) further provides for a non- citizen corporation to be a company where shares are held in trust for a non-citizen. Bank of Uganda argued that the shares of Kantaria the majority shareholder of White Sapphire were held in trust and for the benefit of Sudhir who is presumably a citizen of Uganda and therefore the deep application of this would mean that Crane Bank’s controlling interest having been in the hands of a citizen, the titles of Meera Investments for freehold and mailo land could be transferred
      into Crane Bank as prayed by Bank of Uganda.
      

Conclusion
The allegations against Sudhir and Meera investments ought to be resolved not only for the good of either party but also for the good of the financial sector. Similarly, Sudhir’s allegations against Bank of Uganda for what Sudhir calls ‘Mafias’ in the system who should render an account ought to be investigated and resolved by court. For this reason, I would have hoped that the Judge would over look this technicality and seeing as he was so convinced about Crane Bank’s nonexistence, he should have ordered for a substitution of Crane Bank in Receivership with perhaps Bank of Uganda an act which is well within his power and discretion under the Civil Procedure Rules. This would have been logical considering that in awarding costs, the judge ‘lifted the veil’ and found that the actual and effective Plaintiff/Respondent is Bank of Uganda and ordered that Bank of Uganda should pay the costs of the suit.

About the Author;
The author is a commercial law practitioner and founder of M/s Tibugwisa and
Co. Advocates. For comments and inquiries contact her at
damalie@tibugwisaadvocates.com or +256787461139.