Uganda Legal Information Institute - Bank-Customer Relationship https://old.ulii.org/tags/bank-customer-relationship en Shakil Pathan Vs DFCU Bank Limited (CIVIL SUIT NO. 236 OF 2017) [2019] UGCOMMC 1 (15 January 2019); https://old.ulii.org/ug/judgment/commercial-court-uganda/2019/1 <section class="field field-name-field-flynote field-type-taxonomy-term-reference field-label-above view-mode-rss"><h2 class="field-label">Flynote:&nbsp;</h2><ul class="field-items"><li class="field-item even"><a href="/tags/cl" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">CL</a></li><li class="field-item odd"><a href="/tags/jurisdiction-0" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Jurisdiction</a></li><li class="field-item even"><a href="/tags/bank-customer-relationship" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Bank-Customer Relationship</a></li><li class="field-item odd"><a href="/tags/transfer-employment-obligations" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Transfer of Employment Obligations</a></li><li class="field-item even"><a href="/tags/damages" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Damages</a></li></ul></section><div class="field field-name-body field-type-text-with-summary field-label-hidden view-mode-rss"><div class="field-items"><div class="field-item even" property="content:encoded"><p><strong><u>THE REPUBLIC OF UGANDA</u></strong></p> <p><strong>IN THE HIGH COURT OF UGANDA AT KAMPALA</strong></p> <p><strong>(COMMERCIAL DIVISION)</strong></p> <p><strong>CIVIL  SUIT NO. 236 OF 2017</strong></p> <p> </p> <p><strong>SHAKIL PATHAN ISMAIL </strong></p> <p><strong>(Suing through his lawful attorney ULFAT ALI PIRZADA)::::::::::::PLAINTIFF</strong></p> <p><strong>                                               VERSUS</strong></p> <p><strong>DFCU BANK LTD:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::DEFENDANT</strong></p> <p> </p> <p><strong>BEFORE: <u>THE HON.  JUSTICE DAVID WANGUTUSI</u></strong></p> <p> </p> <p><strong><u>J U D G M E N T:</u></strong></p> <p>Shakil Pathan Ismail the Plaintiff in these proceedings filed this suit against DFCU Bank Limited herein referred to as the Defendant for recovery of UGX. 62,000,000/= being monies unlawfully blocked/deducted from his salary account, general damages, exemplary damages, interest and costs of this suit.</p> <p>The Plaintiff was an employee of Crane Bank Limited earning a monthly salary of USD 2200. It is the Plaintiff’s claim that Crane Bank Limited unlawfully blocked his account and thereafter made multiple deductions totaling to UGX. 62,000,000/= which sum has never been remitted to him.</p> <p>Bank of Uganda in exercise of its powers as the Central Bank under the Financial Institutions Act No. 2 of 2004 took over the management of Crane Bank Limited on the basis that it was significantly undercapitalized as defined by law and placed it under receivership.</p> <p>By way of a purchase of assets and assumption of liabilities agreement dated 25<sup>th</sup> January 2017 the Defendant as buyer took over some of the assets and liabilities of Crane Bank Limited (In Receivership) from the Receiver Bank of Uganda. The Defendant was assigned Crane Bank Limited’s rights and liabilities under all its existing employment contracts subject to certain exclusion clauses.</p> <p>According to the agreement Schedule 3 Clause 2; terminal benefits and all employment dues of Employees terminated by the Buyer within 2(months) from the Completion Date are listed as excluded liabilities.</p> <p>Clause 5.3 provides for employee matters. It states that;</p> <p><em>“The Receiver shall indemnify the Buyer against all liabilities to an Employee arising out of the employment of an Employee during the period prior to and ending on the Completion Date, including arrears of wages or salaries, overtime payments and accrued leave.”</em></p> <p>The Plaintiff was one of the employees of Crane Bank Limited whose employment contract was assigned to the Defendant. The Plaintiff’s employment was terminated by the Defendant. It is the Plaintiff’s claim that despite the termination of his employment no settlement regarding the deductions on his salary account has been made thus he filed this suit seeking recovery of the same.</p> <p>Denying liability the Defendant contends that she is not a successor in title to Crane Bank Limited but only acquired some of its assets and liabilities in January 2017. That the liabilities of Crane Bank Limited were not known to the Defendant and the Statutory Receiver of Crane Bank Limited as at 25<sup>th</sup> January 2017.</p> <p>It is the Defendant’s claim that the liability within Crane Bank Limited books was only presented to the Defendant at the time when the Plaintiff was leaving the Defendant’s employment. The Defendant’s termination of the Plaintiff’s contract did not pass on to it a liability that was within Crane Bank Limited’s books.</p> <p>The issues for determination by the court as agreed by the parties are;</p> <ol> <li>Whether the suit is properly before this court.</li> <li>Whether the Plaintiff’s monies were unlawfully deducted by Crane Bank Limited and if so whether the Defendant is liable.</li> <li>Remedies available to the parties.</li> </ol> <p>Before I delve into this case I would like to deal with an important issue wherein Crane Bank in Receivership applied to be joined as a Defendant. The Application was rejected because of the following reasons;</p> <p>The hearing of the suit had gone half way and at a speed Counsel for the Applicant had vouched for when he submitted;</p> <p><em>“My Lord the matter has been brought ahead because the Plaintiff stays in Canada and has got to go back.”</em></p> <p>It should be noted that the suit had been fixed for 23<sup>rd</sup> April 2018 but because of the reasons given by Counsel for the Defendant it was brought forward. Interestingly the scheduling was held on 13<sup>th</sup> February 2018 but Counsel for the Applicant did not state that they intended to bring in Crane Bank Limited (in receivership) as a Defendant.</p> <p>The Application was filed on 5<sup>th</sup> March 2018 and fixed for 30<sup>th</sup> May 2018 a date after that fixed for hearing the main suit. It is surprising that when the matter was brought forward to 7<sup>th</sup> March 2018 Counsel for the Defendant who was also Counsel for the Applicant reminded court of the need for speedy hearing of the suit and never at all mentioned the need to add Crane Bank in Liquidation, but proceeded to cross examine the Plaintiff instead.</p> <p>The Plaintiff closed his case and it is only when the suit came up for defence that Counsel mentioned the need to dispose of the Application.</p> <p>In my view to wait for the Plaintiff to first close his case and then attempt to add a Defendant of whom the Defendant was always aware of, was something done in bad faith. That being the case, the court did not allow the opening the matter again by filing of pleadings that would in any case now call for counter fillings and recall of the Plaintiff who Counsel for the Defendant himself submitted  would be away in Canada.</p> <p>Furthermore, the Application was filed 20 days after the scheduling conference outside the provisions of Order 12 rule 3 of the Civil Procedure Rules which provides;</p> <p> </p> <p> </p> <p><strong>O X11 r 3 (1)</strong></p> <p>“<em>All remaining interlocutory applications shall be filed within twenty one days from date of completion of the alternative dispute resolution and where there has been no alternative dispute resolution, within fifteen days after completion of the scheduling conference; that date shall be referred to as the cutoff date.”</em></p> <p>In the present case scheduling took place on the 13<sup>th</sup> February 2018. There was no alternative dispute resolution after the scheduling. The Application should have been filed by 28<sup>th</sup> February 2018. It was instead filed on 15<sup>th</sup> March 2018 after the 15 days allowed. No leave was sought. It was beyond the cutoff date and so could only in my view be filed after leave had been sought.</p> <p>It could not be heard because it was in breach of the 1998 amendments to the Civil Procedure Rules.</p> <p>One could add that Clause 9 of the Agreement between the Defendant and the Applicant which provides for indemnity and non hearing of this belatedly filed Application does not prevent the Defendant from proceeding against the Applicant at any time if need arose.</p> <p>Lastly the Application to add Crane Bank in Receivership was filed by MMAKS Advocates. This very firm having represented Crane Bank for several years before it fell under could not again turn and file suits against the same bank albeit in receivership. This matter was settled in <strong>Misc. Application No. 1063 of</strong> <strong>2017</strong> arising out of <strong>Bank of Uganda vs Crane Bank Civil Suit No. 493 of 2017</strong> wherein the court found MMAKS in conflict of interest. Court held that;</p> <p>“<em>It did not matter whether the firm had many lawyers and the one now assigned with the new matter did not personally handle the complainant’s earlier case. Conflict would still be imputed from the “Canteen factor.”</em></p> <p>“<em>Canteen factor in this case included social chat between colleagues or with client that gives away vital information. So if the interaction is between one of the partners, it will be imputed to the others.”</em></p> <p>For those reasons MMAKS Advocates who had been Counsel of Crane Bank were declared “interest conflicted” in that Bank’s case.</p> <p>Following that ruling this Court could now not turn around and proceed with an application brought in by MMAKS intending to bring Crane Bank on board as a Defendant.</p> <p>As to whether the suit is properly before this court it is the Defendant’s claim that because the Plaintiff’s claim is entirely founded on his employment contractual rights, deductions from his salary account by his former employer Crane Bank the matter falls within labour disputes and a complaint ought to have been made to a labour office.</p> <p>When asked whether he had reported the complaint to a labour officer PW1 Shakil Pathan Ismail told court that he had not reported the matter. According to him in August 2015 the system of the head office had been hacked and his password and one of his colleague’s were used to transfer funds into some other account. He further told court that some police inquiries were going on therefore his salary was kept on hold and would be reinstated once the police inquiries were done. This he alleged was never done.</p> <p>To avoid multiplicity of suits and the fact that we are dealing with crediting and debiting of the account creates a situation that would bring this matter into the ambit of a banker-customer relationship.</p> <p>A good example that shows that this was a banker-customer relationship was the entry of 30<sup>th</sup> September 2015 in the Plaintiff’s bank statement wherein Crane Bank credited the Plaintiff’s account with UGX. 5,505,300/= and later on in the day by way of internal transfer it removed the money. Once the sum of money had been credited on his account it now became an issue governed by the banker-customer relationship laws. Therefore the unauthorized removal of the money was a subject of the commercial division of the High Court.</p> <p>It is therefore the finding of this court that it was seized with jurisdiction.</p> <p>On the second issue of whether the Plaintiff’s monies were unlawfully deducted by Crane Bank Limited and if so whether the Defendant is liable, it is not in dispute that his salary was USD 2,200. Furthermore, it is also not in dispute that this money would then be converted into Ugandan currency based on the exchange rate, prevailing at the time. That these conversions took place is well documented in <strong>ExhP4 </strong>a letter of termination dated 24<sup>th</sup> February 2017 addressed to the Plaintiff by the Defendant.</p> <p>In this letter the Defendant makes it clear that the Plaintiff used to earn USD 2,200. It is also clear from <strong>ExhP4</strong> that the exchange rate used was UGX. 3,600/= per dollar. There is therefore no doubt that the sum of money that the Plaintiff earned per month was USD 2,200 multiplied by UGX. 3,600/= which brought the Plaintiff’s monthly earning to UGX. 7,920,000/=.</p> <p>It is clear from <strong>ExhD1 </strong>that for quite some time the Plaintiff’s account was being credited by much less than he was earning which clearly meant that his salary was being deducted. The amounts of deductions are well documented in <strong>ExhD2 </strong>and <strong>ExhD1</strong>.</p> <p>The Defendant has all along contended that at the time she took over the bank certain liabilities were exempted and they remained with Crane Bank in Receivership.</p> <p>The Defendant relied on the Purchase of Assets and Assumption of Liabilities Agreement signed between Bank of Uganda as the Receiver and the Defendant as the buyer. She specifically relied on Clauses 5.3, 9.1 and Clause 2 of Schedule 3 which I find necessary to reproduce. Clause 5.3 provides;</p> <p>“<em>The Receiver shall indemnify the Buyer against all liabilities to an Employee arising out of the employment of an employee during the period prior to and ending on the Completion Date, including arrears of wages or salaries, overtime payments and accrual leave.”</em></p> <p>While 9.1 provides for indemnities as hereunder;</p> <p>“<em>From and after the Completion Date the Receiver shall indemnify, hold harmless and defend the Buyer from and against all claims, costs, expenses , legal cases, losses , liabilities, demands and obligations, which the Buyer may incur or suffer arising out of the Excluded Liabilities or in relation to the Properties in the period between the Completion Date and the transfer of the Properties to the Buyer.”</em></p> <p>The Defendant also relied on Clause 2 of the 3<sup>rd</sup> Schedule which was a summary of Excluded Liabilities namely that amongst those liabilities that would be excluded were;</p> <p><em>“Terminal benefits and all employment dues of Employees terminated by the Buyer within 2 months from the Completion Date.”</em></p> <p>I have considered the clauses relied upon by the Defendant and find that they emphasize that in the event the Defendant be found liable, the Receiver would indemnify her.</p> <p>This is clear from the word indemnify which means compensate (someone) for harm or loss. The Definition therefore includes; “reimburse, recompense, repay, pay back.”</p> <p>The word indemnify in the Purchase Assets and Assumption of Liabilities Agreement makes it clear that the Claimant would first have to establish the liability of the Defendant before the latter is indemnified. It was therefore necessary to sue the Defendant.</p> <p>Secondly, the Plaintiff was not privy to the agreement because legally the Defendant assumed the position of Crane Bank when she took over the Bank. This position is buttressed by the Employment Act. Section 28(2) provides;</p> <p><em>“Where a trade or business is transferred in whole or in part, the contracts of service of employees employed at the date of transfer shall automatically be transferred to the transferee, all rights and obligations between each employee and the transferee shall continue to apply as if they had been rights and obligations concluded between the employee and transferee.”</em></p> <p>The relationship between the Plaintiff and Crane Bank simply shifted to the Defendant by operation of the law. This position would however have been changed if the Plaintiff had been privy to the Purchase of Assets and Assumption of Liabilities Agreement.</p> <p>The Agreement cannot be used to amend the Employment statute. The Governor of the Bank of Uganda must have had this in mind when he wrote the Notice to all staff of Crane Bank Limited, <strong>Exh P3</strong>. He wrote;</p> <p>“<em>As a result your contracts of service with Crane Bank Limited have been transferred to DFCU Bank Limited. This transfer does not affect your statutory rights in anyway. Accordingly your employment with Crane Bank Limited and with DFCU Bank Limited shall be deemed to be continuous. DFCU Bank Limited as the incoming employer will following the integration of Crane Bank businesses make a decision repairing staffing levels.”</em></p> <p>The wording of <strong>ExhP3 </strong>is in accordance with section 28 of the Employment Act. It is therefore not in dispute that the Defendant took over the Employees and the employment contracts that existed between the Employees and Crane Bank Limited.</p> <p>It follows that if there arose any dispute, the contracts to fall back to would be those very ones. It also follows that the Defendant would be the Employer.</p> <p>The sum total is that the Plaintiff rightly sued the Defendant.</p> <p>Turning to the monetary claims the Plaintiff sought UGX 62,000,000/=. It is trite law that this special damages cannot be recovered unless it has been specifically claimed and proved or unless the best available particulars or details have, before trial, been communicated to the party against whom it is claimed; <strong>Uganda Telecom Ltd V Tanzanite Corporation SCCA 17/2004</strong></p> <p>As I have already stated herein above the Plaintiff’s salary was USD 2,200 that was subjected to conversion to Uganda shillings at an interest rate of UGX. 3,600/=. The Plaintiff’s claim is that from March 2015 to February 2016 the Defendant unlawfully deducted monies from his salary account. From ExhD1 the deductions made during that period are as follows;</p> <table border="1" cellpadding="0" cellspacing="0"> <tbody> <tr> <td style="height:55px; width:158px"> <p><strong>MONTH</strong></p> </td> <td style="height:55px; width:155px"> <p><strong>AMOUNT RECEIVED</strong></p> </td> <td style="height:55px; width:157px"> <p><strong>UNLAWFUL DEDUCTIONS</strong></p> </td> <td style="height:55px; width:157px"> <p><strong>AMOUNT THE PLANTIFF WAS DEPRIVED OF </strong></p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>MARCH 2015   </p> </td> <td style="height:35px; width:155px"> <p>4,090,300</p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>3,829,700</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>APRIL 2015      </p> </td> <td style="height:35px; width:155px"> <p>4,140,300 </p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>3,779,700</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>MAY 2015</p> </td> <td style="height:35px; width:155px"> <p>4,230,300</p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>3,689,700</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>JUNE 2015</p> </td> <td style="height:35px; width:155px"> <p>4,410,300</p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>3,509,700</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>JULY 2015</p> </td> <td style="height:35px; width:155px"> <p>         4,925,300</p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>2,994,700</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>AUG 2015  </p> </td> <td style="height:35px; width:155px"> <p>-</p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>7,920,000</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>SEPT 2015</p> </td> <td style="height:35px; width:155px"> <p>         5,505,300</p> </td> <td style="height:35px; width:157px"> <p><strong>5,505,300</strong></p> </td> <td style="height:35px; width:157px"> <p>7,920,000</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>OCT 2015</p> </td> <td style="height:35px; width:155px"> <p>        956,500                                          </p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>6,963,500</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>NOV 2015       </p> </td> <td style="height:35px; width:155px"> <p>1,345,271</p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>6,574,729</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>DEC 2015       </p> </td> <td style="height:35px; width:155px"> <p>1, 33O,721</p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>6,589,279</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>JAN 2016</p> </td> <td style="height:35px; width:155px"> <p>1,460,700</p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>6,459,300</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>FEB 2016        </p> </td> <td style="height:35px; width:155px"> <p>1,687,700                                       </p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>6,232,300</p> </td> </tr> <tr> <td style="height:35px; width:158px"> <p>MAR 2016        </p> </td> <td style="height:35px; width:155px"> <p>1,379,500                                        </p> </td> <td style="height:35px; width:157px"> <p> </p> </td> <td style="height:35px; width:157px"> <p>6,549,450</p> </td> </tr> <tr> <td style="height:57px; width:158px"> <p><strong>TOTAL</strong></p> </td> <td style="height:57px; width:155px"> <p> </p> </td> <td style="height:57px; width:157px"> <p><strong>                                <u>5,505,300</u></strong></p> <p> </p> </td> <td style="height:57px; width:157px"> <p> </p> <p><strong><u>73,012,058/=</u></strong></p> </td> </tr> </tbody> </table> <p> </p> <p>The Plaintiff was expected to earn a monthly salary of UGX. 7,920,000/=. <strong>ExhP1</strong> shows that he was deprived of UGX. 73,012,058/=. The amount he was expected to earn would be US $ 2,200 multiplied by 12 (being the months in which he did not receive his full salary) to arrive at an annual salary of US $ 26,400. This sum of US $ 26,400 would then be multiplied by UGX. 3,600/= to obtain the amount he was expected to earn between the period of March 2015 to March 2016 as UGX. 95,040,000/=. The difference between the amount he was deprived of and his actual salary is UGX. 22,027,942/=</p> <p>The Plaintiff claimed UGX. 62,000,000/=.  It seems the difference had been paid to him as referred to by the Defendant in <strong>ExhP1</strong> as money paid.</p> <p>He prayed for UGX 62,000,000/= and since the Plaintiff cannot be awarded anything outside his claim it is that amount of money as claimed herein above mentioned that he is awarded.</p> <p>The Plaintiff also claimed general damages. The settled position is that the award of general damages is in the discretion of court, and is always as the law will presume to be the natural and probable consequence of the Defendant’s act or omission; <strong>James Fredrick Nsubuga vs Attorney General HCCS No, 13 of 1993.</strong></p> <p>A Plaintiff who suffers damage due to the wrongful act of the Defendant must be put in a position he or she would have been in had she or he not suffered the wrong and when assessing the quantum of damages, courts are namely guided by the value of the subject matter, the economic inconveniences that a party may have been put through and the nature and extent of the breach; <strong>Kibimba Rice Ltd vs Umar Salim SCCA No. 17 of 1992; Uganda Commercial Bank vs Kigozi [2002] 1EA305.</strong></p> <p>In the instant case neither the Plaintiff nor his Counsel guided court on the quantum of general damages to be awarded by this court. Taking into account that the Plaintiff was deprived of part of his salary that caused him inconvenience, this court is left with no other option but to exercise its discretion on the award of these damages. For those reasons, I find an award of UGX. 20,000,000/= appropriate. It is so awarded.</p> <p>The Plaintiff also sought exemplary damages. These form of damages may be awarded, where there has been oppressive, arbitrary, or unconstitutional actions by the Defendant, where the Defendant's conduct was calculated by him to make a profit which may well exceed the compensation payable to the Plaintiff, or where some law for the time being in force authorizes the award of exemplary damages; <strong>Rookes vs Barnard [1964] ALL ER 367.</strong></p> <p>It is my view that in an action where an outrage has been committed against the Plaintiff by the Defendant and the court forms the opinion that it should give exemplary damages to register its disapproval of the wanton and willful disregard of the law, it is entirely proper to award exemplary damages.</p> <p>In the present case the matter before this court involves unlawful deductions from the Plaintiff’s bank account arising from a banker-customer relationship.</p> <p>The reasons for the deductions and withholding of his money were given by the Plaintiff himself when he told court that because of a police inquiry which involved his password, his salary was withheld. This was an obvious step to be taken under circumstances of fear of loss of money. There is nothing to indicate any acts of malice, outrage or impunity by the Defendant.</p> <p>For those reasons, the prayer for exemplary damages is denied.</p> <p>The Plaintiff also sought interest at the commercial rate from the dates of accrual.</p> <p>It is trite that interest is awarded at the discretion of court, but like all discretions it must be exercised judiciously taking into account all circumstances of the case<strong>; Uganda Revenue Authority vs Stephen Mabosi SCCA No.1 of 1996.</strong></p> <p>It is important to note that an award of interest is discretionary and its basis is that the Plaintiff has kept the Defendant out of his money, had use of it himself, so he ought to compensate the Defendant accordingly; <strong>Harbutts Plasticine Ltd vs Wyne Tank &amp; Pump Co Ltd [1970] 1 ChB447.</strong></p> <p>It is without doubt that the Defendant kept the Plaintiff out of use of his money. The bank must have used this money for commercial purposes. It is also without doubt that if the Plaintiff had borrowed that money from the bank, he would have paid it back at commercial interest rate. What is good for the goose should also be good for the gander. I find that since the Defendant must have used the money at commercial rate, it is only fair to treat the Plaintiff in the same manner. The decretal sum shall therefore attract interest of 21% per annum from April 2016 till payment in full in respect of the special damages.</p> <p>As for the general damages an award of 6% per annum from date of judgment till payment in full is awarded. The Defendant will also bear costs of the suit.</p> <p>In conclusion judgment is entered in favour of the Plaintiff against the Defendant in the following terms;</p> <ul> <li>The Defendant paysUGX 62,000,000/=</li> <li>The Defendant pays general damages of UGX. 20,000,000/</li> <li>Interest of on a) at 21% per annum from April 2016 till payment in full and on b) at 6% per annum from date of judgment till payment in full.</li> <li>Costs of the suit.</li> </ul> <p> </p> <p><strong>Dated at Kampala this 15<sup>th</sup> day of January 2019</strong></p> <p> </p> <p><strong>HON JUSTICE DAVID WANGUTUSI</strong></p> <p><strong>JUDGE. </strong></p> </div></div></div><div class="view view-download-button view-id-download_button view-display-id-entity_view_1 view-dom-id-2bee97907b40d1c76ba4579a253e9d45"> <div class="view-content"> <div class="views-row views-row-1 views-row-odd views-row-first views-row-last"> <div class="views-field views-field-field-download"> <div class="field-content"><a href="https://old.ulii.org/system/files/judgment/commercial-court-uganda/2019/1/commercial-court-uganda-2019-1.pdf" target="_blank"><img src="https://africanlii.org/sites/default/files/Download-Button-red.png" width="180"> </a>, <a href="https://old.ulii.org/system/files/judgment/commercial-court-uganda/2019/1/commercial-court-uganda-2019-1.docx" target="_blank"><img src="https://africanlii.org/sites/default/files/Download-Button-red.png" width="180"> </a></div> </div> <div class="views-field views-field-field-download-1"> <div class="field-content"><iframe class="pdf" webkitallowfullscreen="" mozallowfullscreen="" allowfullscreen="" frameborder="no" width="100%" height="600px" src="/sites/all/libraries/pdf.js/web/viewer.html?file=https%3A%2F%2Fold.ulii.org%2Fsystem%2Ffiles%2Fjudgment%2Fcommercial-court-uganda%2F2019%2F1%2Fcommercial-court-uganda-2019-1.pdf" data-src="https://old.ulii.org/system/files/judgment/commercial-court-uganda/2019/1/commercial-court-uganda-2019-1.pdf">https://old.ulii.org/system/files/judgment/commercial-court-uganda/2019/1/commercial-court-uganda-2019-1.pdf</iframe> </div> </div> </div> </div> </div> Thu, 17 Jan 2019 07:54:10 +0000 Eunice Logose 29266 at https://old.ulii.org Standard Chartered Bank Uganda Ltd v The Commissioner General & Uganda Revenue Authority (CIVIL SUIT NO 810 OF 2015) [2017] UGCOMMC 115 (18 August 2017); https://old.ulii.org/ug/judgment/commercial-court-uganda/2017/115 <section class="field field-name-field-flynote field-type-taxonomy-term-reference field-label-above view-mode-rss"><h2 class="field-label">Flynote:&nbsp;</h2><ul class="field-items"><li class="field-item even"><a href="/tags/cl" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">CL</a></li><li class="field-item odd"><a href="/tags/income-tax-0" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Income Tax</a></li><li class="field-item even"><a href="/tags/bad-debt" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Bad Debt</a></li><li class="field-item odd"><a href="/tags/tax-deduction" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Tax Deduction</a></li><li class="field-item even"><a href="/tags/bank-customer-relationship" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Bank-Customer Relationship</a></li><li class="field-item odd"><a href="/tags/tax-accounting" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Tax Accounting</a></li></ul></section><div class="field field-name-body field-type-text-with-summary field-label-hidden view-mode-rss"><div class="field-items"><div class="field-item even" property="content:encoded"><p><strong>THE REPUBLIC OF UGANDA,</strong></p> <p><strong>IN THE HIGH COURT OF UGANDA AT KAMPALA</strong></p> <p><strong>(COMMERCIAL DIVISION)</strong></p> <p><strong>CIVIL SUIT NO 810 OF 2015</strong></p> <p><strong>STANDARD CHARTERED BANK UGANDA LTD}...................................PLAINTIFF </strong></p> <p><strong>VERSUS</strong></p> <p><strong>THE COMMISSIONER GENERAL</strong></p> <p><strong>UGANDA REVENUE AUTHORITY}......................................................DEFENDANT</strong></p> <p><strong>BEFORE HON. MR. JUSTICE CHRISTOPHER MADRAMA IZAMA</strong></p> <p><strong>JUDGMENT</strong></p> <p><strong>Introduction and Background</strong>:</p> <p>By way of introduction and background, the Plaintiff filed this action against the Defendant for the following declarations:</p> <ul> <li>A declaration that the assessed taxes in dispute contained in the Defendant's letter dated 12<sup>th</sup> and 15<sup>th</sup> of June, 2015, are unlawful and unenforceable against the Plaintiff.</li> <li>A declaration that the Plaintiff is mandated to provision for its bad debt provisions on the basis of the Financial Institutions (Credit Classification and Provisioning) Regulations 2005.</li> <li>A declaration that the bad debts provisions calculated in accordance with the Financial Institutions Act and Financial Institutions (Credit Classification and Provisioning) Regulations 2005 are fully deductible expenses in accordance with the Income Tax Act and the URA Practice Note.</li> <li>A declaration that the Defendant is bound by its URA Practice Note issued on 2<sup>nd</sup> November, 2001 (reference you URA/IT/PN 2/01).</li> <li>A declaration that the Bank of Uganda  Circular  (Circular  COB/15 dated 19th of February 2007) does not override the provisions of the Financial Institutions Act or The Financial Institutions (Credit Classification and Provisioning) Regulations 2005.</li> <li>A permanent injunction prohibiting the Defendant’s servants or agents from directly or indirectly taking steps against the Plaintiff to enforce payment of the taxes assessed as contained in the letter dated 15<sup>th</sup> of June, 2015.</li> <li>General damages; and</li> <li>Costs of the suit</li> </ul> <p>The letter dated 15<sup>th</sup> of June 2015 written by the Manager Manufacturing and Finance/Large Taxpayer's Office of the Defendant relates to tax returns and bad debts provisions for the year 2013. By notice of assessment the Plaintiff was assessed in an assessment dated 12<sup>th</sup> June, 2015 for Uganda shillings 13,060,998,533/=. The letter of 15<sup>th</sup> of June 2015 gave the basis of the assessment.</p> <p>In the written statement of defence, the Defendant denied the claims in the plaint and averred that the Plaintiff is not entitled to any of the reliefs claimed or at all. In general, information regarding bad debts written off, bad debt provisions, and schedules for recovery of debts were requested by the Defendant from the Plaintiff and the Plaintiff availed the same. Meetings were held by the parties at which the parties aired their contentions and minutes of the meetings were taken. The Defendant rejected the Plaintiff's contentions and disallowed Uganda shillings 35,025,030,898/= claimed by the Plaintiff as allowable deductions for the reasons given by the Defendant. An additional tax worth Uganda shillings 13,060,998,533/= was assessed by the Defendant against the Plaintiff, which the Plaintiff objected to. The Defendant made an objection decision, disallowing the objection and upholding the tax assessment. The Defendant thereafter made a demand for the assessed tax and the same remains unpaid. Additionally the Defendant averred that having examined the Plaintiffs income returns and financial statements filed with the Defendant, examination disclosed that whereas the audited accounts show that a provision for bad debts was claimed at Uganda shillings 47,697,811,000/=, the income tax returns show that Uganda shillings 82,722,841,898/= was claimed as bad debts for the year 2013. The Plaintiff had claimed for and made provision for allowable deductions in excess by Uganda shillings 35,025,030,898/= in her tax returns which was erroneous.</p> <p>The deductions for specific bad debts are allowed in respect of financial institutions to which the Plaintiff belongs if the bad debt is provided for in accordance with the Prudential Norms on Asset Quality for Financial Institutions/ (Bank of Uganda  Prudential Regulations). The excess of Uganda shillings 35,025,030,898/= claimed by the Plaintiff ought to have been appropriated as retained earnings and as such the same fell within the reserve, and was not an allowable deduction for income tax purposes. For that reason additional tax of Uganda shillings 13,060,998,533/= was properly assessed by the Defendant. Furthermore, the Defendant avers and contends that the sum of Uganda shillings 35,25,030,898/= claimed by the Plaintiff as bad debt written off was properly disallowed by the Defendant as a deduction in establishing the Plaintiff’s chargeable income and ipso facto the adjusted tax rightly accrued and is enforceable in law.</p> <p><strong>Representations:</strong></p> <p>The Plaintiff is represented by Counsel Oscar Kambona appearing together with Bruce Musinguzi of Kampala Associated Advocates while the Defendant is represented by Counsel George Okello of the Legal and Board Affairs Department of the Defendant.</p> <p><strong>Agreed Facts:</strong></p> <p>In the joint scheduling memorandum endorsed by Counsel of the parties some basic facts are agreed. Most of the documentary evidence was also admitted by consent of the parties.</p> <p>The following are agreed facts:</p> <p>On 11<sup>th</sup> May, 2015 the Plaintiff availed to the Defendants its audited accounts showing that a provision for bad debts was claimed at Uganda shillings 47,697,811,000/=, while the income tax returns show that Uganda shillings 82,722,811,000/= was claimed for the bad debts for the year 2013.</p> <p>The Uganda shillings 82,722,841,898/= represents specific bad debt provisions calculated under the Financial Institutions Act, 2004 and the Bank of Uganda  Regulations while Uganda shillings 47,697,811,000/= was calculated in accordance with the International Financial Reporting Standards.</p> <p>In compliance with the Bank of Uganda  Circular  dated 19th of February 2007, the Uganda shillings 47,607,811,000/= was transacted through the 2013 income statement while the access was reflected in the regulatory general credit risk reserve as an appropriation from retained earnings.</p> <p>The Defendant rejected the Plaintiff submission on the mode of preparation for bad debts and disallowed Uganda shillings 35,025,030,898/= (this represents the excess of Uganda shillings 82,722,841 898/= calculated in accordance with the Bank of Uganda Regulation and Uganda shillings 47,697,811,000/= calculated in accordance with the IFRS) claimed by the Plaintiff as allowable deductions. As a result, the tax worth Uganda shillings 12,060,198,533/= was assessed by the Defendant and the Plaintiff objected to the same.</p> <p>The Plaintiff's objection was disallowed. The Defendant issued an objection decision maintaining the assessment.</p> <p>On 2nd of November 2001, the Defendant issued the Practice Note stating that for financial institutions, specific reserves for identified losses or potential losses are allowable as a deduction. It further stated that for this purpose in respect of financial institutions, bad debts provided for in accordance with the Bank of Uganda regulations are allowable as a deduction.</p> <p><strong>Agreed Issues for trial:</strong></p> <p>In the joint scheduling memorandum seven issues were agreed upon for trial of the dispute namely:</p> <ol> <li>Whether the Plaintiff is mandated to provision for its bad debts on the basis of the Financial Institutions Act, 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations 2005 or in accordance with the International Financial Reporting Standards (IFRS), for income tax purposes?</li> <li>Whether the bad debts provisions calculated in accordance with the Financial Institutions Act, 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations 2005 are fully deductible expenses in accordance with the Income Tax Act.</li> <li>Whether the Bank of Uganda Circular dated 19th of February 2007 regulates the deductibility of bad debts for income tax purposes, and whether the Circular binds the Plaintiff?</li> <li>Whether the Defendant is bound by its Practice Note issued on 2<sup>nd</sup> of November 2001?</li> <li>Whether the sum of Uganda shillings 35,025,030,898/= was rightly claimed by the Plaintiff as an allowable deduction for income tax purposes?</li> <li>Whether the tax assessment issued by the Defendant is valid?</li> <li>What remedies are available to the parties?</li> </ol> <p>The Plaintiff called one witness and the Defendant called one witness whereupon the court was addressed in written submissions.</p> <p><strong>Submissions of Counsel of Parties</strong></p> <p>Having set out the agreed facts, the Plaintiff's Counsel submitted on the agreed issues. I will consider issues numbers 1 and 2 together and resolve the rest of the issues thereafter.</p> <ol> <li>Whether the Plaintiff is mandated to provision for its bad debts on the basis of the Financial Institutions Act, 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations 2005 or in accordance with the International Financial Reporting Standards (IFRS), for income tax purposes?</li> <li>Whether the bad debts provisions calculated in accordance with the Financial Institutions Act, 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations 2005 are fully deductible expenses in accordance with the Income Tax Act?</li> </ol> <p>On issue number 1, the Plaintiff's Counsel submitted that the general rule of thumb is that a financial institution that incurs a bad debt during the year of income is allowed to claim a deduction for the same. The dispute that arises in this case is one that relates to the provisioning for the bad debts. The Plaintiff on the other hand is mandated to present its bad debts in accordance with the Bank of Uganda regulations, while on the other hand it is also required to present its bad debts in accordance with the International Financial Reporting Standards (IFRS). Both forms of provisioning are a creature of law that the Plaintiff is mandated to comply with.</p> <p>The Plaintiff's Counsel submitted that based on the law, in determining whether a person is entitled to a bad debt deduction, one has to fulfil the test in section 24 of the Income Tax Act (sometimes referred to as the ITA). According to section 24 (1) of the Income Tax Act, it is provided that subject to subsection (2), "a person, is allowed a deduction for the amount of the bad debt written off in the person’s accounts during the year of income." The Income Tax Act further defines what amounts to a bad debt. This is under section 24 (a) (ii) which provides that a bad debt means: "in relation to a financial institutions, a debt in respect of which a loss reserve held against presently identified losses or potential losses, and which is therefore not available to meet losses which subsequently materialised, has been made;"</p> <p>The Plaintiff's Counsel submitted that save for defining what amounts to bad debt, the ITA further sets conditions for grant of a bad debt deduction. Section 24 (2) (b) of the ITA provides that a taxpayer, and specifically a financial institution, is entitled to a bad debt deduction. It provides that "if the amount of the debt claim was in respect of money lent in the ordinary course of a business carried on by a financial institution in the production of income included in gross income; or…"</p> <p>The Plaintiff's Counsel submitted that it is not in doubt that the Defendant’s witness DW1 confirmed that the Plaintiff is a financial institution and that in fact it incurred a bad debt provision as a result of lending money to its clients during the ordinary course of business. According to the Plaintiffs witness PW1, the provisions in contention fall within the meaning of section 24 (a) (ii) of the ITA because the debt it provisioned for was a loss reserve held against presently identified losses or potential losses made against specifically identified non-performing debts. She contended that on this basis alone, the Plaintiff is entitled to claim a bad debt deduction.</p> <p>In an effort to offer guidance, on 2<sup>nd</sup> November, 2001, the Defendant issued a Practice Note to all financial institutions providing for circumstances under which they could be allowed to make a claim for bad debt deductions. Specifically, under paragraph 2 (b) of the Practice Note it is provided that:</p> <p>"For financial institutions, specific results for identified losses or potential losses are allowable as a deduction. For this purpose is in respect of financial institutions, bad debts provided for in accordance with the Bank of Uganda  Regulations are allowable as a deduction." [Referred to Prudential Norms on Asset Quality for Financial Institutions – paragraph 12 (1) to (6)].”</p> <p>The Plaintiff's Counsel submitted that in the above Practice Note, the Defendant clearly stated that the Plaintiff was entitled to claim a deduction for bad debts provided for in accordance with the Bank of Uganda Regulations. There are two Bank of Uganda Regulations that are crucial in the determination of how bad debts should be treated. These are the Financial Institutions Act 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations, 2005. The Financial Institutions Act is the law that regulates how financial institutions conduct their business. It also regulates the presentation of financial records of financial institutions. It empowers the Bank of Uganda to make regulations governing bad debt provisions. In particular according to section 131 (a) of the Financial Institutions Act, it is provided that: the Central Bank may in consultation with the Minister make regulations prescribing Prudential Norms on Asset Quality, including bad debt provisions and write offs. In accordance with its powers, the Bank of Uganda formulated the financial institutions (Credit Classification and Provisioning) Regulations, 2005. Regulations 10 and 11 prescribe specific subjective and objective criteria for identifying and classifying non-performing credit facilities and the basis for calculating specific bad debt provisions. This requires a financial institution to classify and calculate specific bad debt provisions according to 3 categories namely substandard, doubtful and loss. Regulation 11 (1) provides that financial institutions shall maintain specific provisions for all non-performing credit facilities, and under regulation 11 (8) this is required to be carried out and reported to the Bank of Uganda  on a quarterly basis. It imposes a statutory requirement which the Plaintiff must comply with.</p> <p>The Plaintiff's Counsel submitted that in the year 2013, the Plaintiff prepared its books of accounts in accordance with the above Bank of Uganda Regulations. As a result, the Plaintiff had bad debts totalling to Uganda shillings 97,167,728,952/= for 2013. Out of these the Plaintiff claimed Uganda shillings 82,722,841,898/= as a bad debt deduction. This was calculated in accordance with the regulations issued by the Bank of Uganda and the Plaintiff is entitled to claim them as a deduction.</p> <p>The Plaintiff's Counsel submitted that the assessments arose from the fact that the Plaintiff calculated its bad debt provision on the basis of the Bank of Uganda  Regulations which resulted in a specific bad debt provisioning amounting to Uganda shillings 82,722,841,898/=. However the Defendant insisted on calculating the bad debt provisions in accordance with the IFSR which result in a bad debt provision worth Uganda shillings 47,697,811,000/=. The Defendant insisted that the difference between the IFSR and the FIA is Uganda shillings 32,025,030,898/= which is taxable.</p> <p>The Plaintiff's Counsel submitted that as far as financial institutions are concerned, the Bank of Uganda Regulations takes precedence and therefore should be used as the yardstick for determining bad debts. Under section 133 of the FIA, it is provided that: "for the purposes of any matter concerning financial institutions, this Act shall take precedence over any enactment and in the case of conflict, this Act shall prevail."</p> <p>The Bank of Uganda Regulations take precedence and it is even more specific when it comes to preparation of annual accounts. The Plaintiff is mandated to prepare its annual accounts in conformity with the Bank of Uganda Regulations and regulation 75 of the FIA provides as follows:</p> <p>"The Central Bank shall, before annual accounts of the financial institution are finalised, dividends paid, and the capital requirements in sections 26 and 27 at night, required to be satisfied by the financial institution in respect of-</p> <p>(a) sufficiency of provisions for bad debts;</p> <p>(b) the existence and enforcement of a proper policy of non-accrual of interest on non-performing loans;</p> <p>(c) amortisation of preliminary expenses, goodwill and similar expenses."</p> <p>The Plaintiff's Counsel submitted that for the Plaintiff’s financial statements to be approved by the Bank of Uganda, it had to present them in accordance with the Bank of Uganda Regulations. The Plaintiff had to make provision in its books in accordance with the regulations for bad debt. The Plaintiff in the meeting the requirements of the Bank of Uganda Regulations, established a bad debt provision of Uganda shillings 82,722,841,898/=. He submitted that the bad debt provision amount of Uganda shillings 82,722,831,898/= represents the amount of bad debt that should be allowed. This would be consistent with section 24 (2) of the ITA.</p> <p><strong>Issue number 2</strong></p> <p><strong>Whether the bad debts provisions calculated in accordance with the Financial Institutions Act, 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations 2005 are fully deductible expenses in accordance with the Income Tax Act</strong>.</p> <p>The Plaintiff's Counsel reiterated submissions on issue one that the Plaintiff is mandated to prepare its financial statements in accordance with the Bank of Uganda Regulations. The Defendant issued a binding Practice Note in which it categorically mentioned that by the debts prepared in accordance with the Bank of Uganda  Regulations are deductible. Paragraph 2 (b) of the Practice Note provided that:</p> <p>"For financial institutions, specific results for identified losses or potential losses are liable as a deduction. For this purpose in respect of financial institutions, bad debts provided for in accordance with the Bank of Uganda  Regulations are allowable as a deduction." [Refer to put the insurance norms on asset quality for Financial Institutions – paragraph 12 (1) to (6)]</p> <p>Counsel reiterated submissions that Bank of Uganda has power to make regulations regarding the provisioning of bad debts. Specifically, under section 131 (a) of the FIA, it is provided that the central bank, in consultation with the Minister, may make regulations prescribing Prudential norms on asset quality, including bad debt provisions and write-offs.</p> <p>A similar case had been decided previously by the tribunal in the case of <strong>Bank of Baroda (U) Ltd vs. URA Application No. TAT 1 of 2001</strong>, in which the tribunal found that bad debts calculated in accordance with the Bank of Uganda  probation norms were fully deductible under section 25 (now section 24). The Prudential norms in question issued as regulations under section 51 of the Financial Institutions Act 1993 were a predecessor to the current Bank of Uganda  Regulations and essentially similar. Based on the decision of the tribunal, the Plaintiff is entitled to claim it's deductions for using the Bank of Uganda Regulations to calculate the provisions for the bad debt. Since the Plaintiff calculated its specific bad debt provisions in accordance with the Bank of Uganda  Regulations, this resulted in amounts totalling to Uganda shillings 82,722,841,898/=. The debt was calculated in accordance with the law and is fully deductible.</p> <p>The Plaintiff's Counsel further relied on the evidence elicited in cross examination of DW1 that bad debts were governed by section 24 of the ITA. Counsel submitted that there is no law that mandates that deductible bad debts should be transacted through the income statement. More so, there is no law that restricts the deduction for bad debts if the provision amount is reflected as an appropriation from retained earnings or in a regulatory reserve. It therefore submitted that the basis for the rejection of the bad dated is not the law and should be discarded.</p> <p><strong>REPLY OF THE DEFENDANT ON ISSUES NUMBERS 1 AND 2</strong></p> <p>In reply, the Defendant’s Counsel submitted that it was necessary to highlight and emphasise that the Plaintiff’s tax returns lodged for the period 2011 to 2013 with the Defendant showed unprecedented 108% increase in the total impairment on loans, from Uganda shillings 7,012,041,000/=, in 2011 to Uganda shillings 82,722,841,898/= in 2013. This generated the Defendant’s interest because the Plaintiff had never done it before. The increased amount was calculated to benefit the Plaintiff. Had it bypassed the Defendant's eye, giving astronomical tax benefits to the Plaintiff and loss to the Republic of Uganda as the amount would have been deducted as expenditure, without any legal basis.</p> <p>The Defendant’s Counsel contended that the Plaintiff was in effect claiming huge bad debt provisions, determined in accordance with the provisions of the Financial Institutions Act, and not the International Financial Reporting Standards (IFRS), as the Defendant had hoped and which is supported by the Plaintiff's past conduct as well as the conduct of other local banks within Uganda. The Plaintiff re-engineered a way of arriving at provisions for bad debts and claimed in excess by Uganda shillings 35,025,030,898/= as provisions for bad debts. The Defendant did not succumb easily but found strength under the Income Tax Act and the Bank of Uganda Laws and Regulations and came to the conclusion that the excess amount cannot pass through as an allowable deduction for tax purposes. The sum total of the Defendant's rejection of the Plaintiff’s claim is that the Corporation tax assessment imposed on Uganda shillings 35,025,030,898/= plus penalties and interest coming to a tax of Uganda shillings 13,060,998,532/= is now overdue for payment.</p> <p>As far as the first issue is concerned, it does not require court to determine whether the Plaintiff is entitled to claim for bad debts. The Defendant’s Counsel emphasised that it is not the dispute and the dispute is about the process to be applied in arriving at the bad debt amount. The answer to the question has a final effect on the amount of bad debts deductible. The question as designed helps the parties to know how to arrive at the bad debt amount for purposes of income tax deductions. However the Plaintiff's submission ignores this and mixes up the aspect for "provisioning" for bad debt with "entitlement to bad debt". The application of section 24 of the Income Tax Act is with respect erroneously made by the Plaintiff. The section guides on the conditions for entitlement to, and how to prepare/make bad debts. A cautious approach ought to be taken in resolution of the controversy.</p> <p>The parties are not saying that bad debts have not been recognised by the Defendant but ask the question of how much? The how much is dictated by the method either party took in calculating the bad debt. Should it be done under the FIA or the IFRS or both? The Plaintiff's case is that it prepares the bad debts in accordance with the Bank of Uganda Regulations and the IFRS. PW1 testified that the amount of bad debt provisions calculated in accordance with the Bank of Uganda Regulations exceeded that under the IFRS. The dispute is therefore about the difference between what is prepared in accordance with the two methods. Is it deductible also? In the present case the Defendant only allowed Uganda shillings 47,697,811,000/= but the Plaintiff wanted the claim of Uganda shillings 82,722,841,898/=. This is the difference of Uganda shillings 35,025,030,898/= which the Plaintiff wants to be allowed as part of a further deduction over and above the Uganda shillings 47.6 billion. That amount was recorded in the reserve and rightly so as retained earnings. The Defendant argued that in accordance with the Bank of Uganda Circular exhibit PE 8 paragraphs 4 and paragraph 8 the difference is appropriated as retained earnings and is therefore not deductible. The Circular has not been challenged by either party. The contention of the Defendant is that for the difference to be deducted, it is not a loss and that is not in the profit and loss account but is in the reserves (as retained earnings). The Plaintiff on the other hand the wants the amount taken to the reserves as retained earnings to be allowed as a further deduction. What then would be the retained earnings?</p> <p>The Defendant’s Counsel relied on <a href="http://www.businessdictionary.com">www.businessdictionary.com</a> for the definition of 'retained earnings' as "profits generated by a company that are not distributed to stockholders (shareholders) as dividends but are either reinvested in the business or kept as a reserve for specific objectives (such as to pay off a debt or to purchase the capital asset". The dictionary further expounded that retained earnings are reduced by losses. Consequently in balance sheet figure under the retained earnings would be the sum of all profits retained since the company's inception. The question was whether if the difference is retained earnings, it is still a bad debt and deductible? The answer is no because using the IFRS as explained by the witness, the IFRS method determines the recoverable amount raised on the present value of cash flows, taking into account the value of the security provided. The IFRS method now (GAAP) approach is in consonance with section 40 (1) of the ITA which stipulates that a taxpayers method of accounting shall conform to generally acceptable accounting principles.</p> <p>The treatment of the difference arrived at using the two methods should be in line with section 40 of the ITA which in effect means that the deference should be treated as retained earnings, as buttressed by the Bank of Uganda  Circular . If the Circular had placed it in the profit and loss account, perhaps the Plaintiff's contention could have attracted some lenience. The Plaintiff was not justified why it thinks that what should be in the reserves should be treated differently. She has to strictly prove this and failed to do so. As held in <strong>Crane Bank Ltd vs. Uganda Revenue Authority Civil Appeal Number 96 of 2002</strong>, tax exemptions must be construed <em>strictissimi juris </em>against the entity claiming the same. The law does not look with favour on tax exemptions and that he who would seek to be this privileged must justify it by words to claim to be mistaken and so categorical to be misinterpreted (see <strong>Uganda Revenue Authority vs. Siraje Hassan Kajura Court of Appeal Civil Appeal Number 26 of 2013</strong>).</p> <p>The Defendant’s Counsel further submitted that section 24 of the ITA is largely irrelevant to the dispute because the court is not dealing with deductibility of bad debt per se for income tax purposes, but whether what goes to the reserves as retained earnings is equally deductible as bad debts. The only bit of the section that is opposite is the definition of bad debts. Bad debts is defined to mean a debt claim in respect of which the person has taken all reasonable steps to pursue payment and which the person believes will not be satisfied. In relation to a financial institution, a debt in respect of which a loss reserve held against presently identified losses or potential losses and which is not available to meet losses which subsequently materialise, has been made. (Section 24 (3) of the ITA refers). The bad debt must appear in the profit and loss account asset or loss account according to the definition.</p> <p>The Defendant’s Counsel submitted that in light of the above, there is a need to answer the following is pertinent questions. Was a loss reserve created in the present case? If so, could the 35 billion (among other amounts) be said to have been envisaged by the creation of the loss reserve, even when the amount is retained earnings? The answer is no. The Defendant gave the Plaintiff the due bad debt allowable but the Plaintiff wanted the whole bad debts written off. The existence of the collateral meant that the Plaintiff would still recover the debt and that is why the same is viewed as profits.</p> <p>The Plaintiff cited the Financial Institutions Act (FIA) 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations which also provide for treatment of bad debts. In reply the above regulations are for the purpose of monitoring of financial institutions and not guide on the treatment of difference arrived at as a result of the application of two tax methods for tax purposes. This is buttressed by, for instance, regulation 4 of the Financial Institutions (Credit Classification and Provisioning) Regulations, which provides for the objectives of the regulations. Under the said regulations, the objectives of the regulations are:</p> <ul> <li>To ensure that financial institutions are in proper compliance with the capital adequacy requirements by recognising possible impairment arising from provisions of bad debt and doubtful accounts.</li> <li>To ensure that financial institutions promptly identify their non-performing credit facilities and undertake adequate collection efforts.</li> <li>To ensure that financial institutions present balance sheet and income statements that properly reflect the financial impact of non-performing credit facilities.</li> </ul> <p>The rest of the provisions of the laws are inapplicable to the issue at hand. In conclusion the Defendant’s Counsel submitted that the Plaintiff is mandated provision for how bad debts in accordance with the FIA, Bank of Uganda Regulations, IFRS (ITA), and where there is a difference in the use of the two methods, the same should be treated for tax purposes as retained earnings in line with the IFRS (GAAP) and therefore the ITA.</p> <p><strong>In reply to issue number 2</strong></p> <p>Whether the bad debts provisions calculated in accordance with the Financial Institutions Act, 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations 2005 are fully deductible expenses in accordance with the Income Tax Act?</p> <p>The Defendants Counsel submitted that in light of the analysis of the first issue, the bad debt calculated in accordance with the FIA and the Financial Institutions (Credit Classification and Provisioning) Regulations 2005 are not fully but are partially deductible expenses for income tax purposes.</p> <p>In light of the nature of the current dispute, the issue is not that Uganda shillings 35,025,030,898/= contested was calculated in accordance with the FIA and the 2005 regulation, but rather, that the amount is the result of the application of the FIA and the 2005 Regulations on the one hand, and the ITA (IFRS) on the other hand. The question is whether the difference created as a result of the two methods is deductible under the Income Tax Act (section 24 thereof). The clarification makes the second issue as framed superfluous, because from the pleadings, the dispute is not that the Uganda shillings 35 billion rejected by URA as a deduction was calculated in accordance with the FIA and the 2005 Regulations (not warranting the issue as framed above). This calls for amendment of the second issue under Order 15 rule 5 of the Civil Procedure Rules, which allows the court to amend the issues on such terms as it thinks fit, as may be necessary for determining the matters in controversy between the parties.</p> <p>With reference to the case of<strong> Bank of Baroda (U) Ltd vs. URA</strong> (supra) the case did not deal with the kind of issue as in this suit. The treatment of the amount arrived at as a result of the use of the two rival methods was not canvassed. In the foregoing case, URA had disallowed provision for bad debts because the applicant had not carried out reasonable recovery measures before writing off the bad debts, which is not the case here.</p> <p>In conclusion the Defendants Counsel submitted that with the modification and clarification of the issue, the court should answer that the amount credited as a result of the difference in the two methods is not deductible as a bad debt under the ITA, because the same is profit.</p> <p><strong>In rejoinder the Plaintiff's Counsel submitted as follows:</strong></p> <p>Counsel for the Defendant made certain critical admissions which ought to be mentioned. The first one is that the question is not whether the Plaintiff is entitled to claim for bad debts. That is not in dispute. In other words bad debts are deductible. The Plaintiff's Counsel submitted that his admission is critical because the total amount of Uganda shillings 82,722,841,898/= contained in the Plaintiffs tax returns for 2013 were in fact bad debts and the Defendant admits that they are deductible, it follows that the tax of Uganda shillings 13,060,998,533/= is not due and payable.</p> <p>Furthermore the Defendant admitted that the Plaintiff has the mandate to make provision for bad debts in accordance with the FIA and the Bank of Uganda Regulations. This was a critical admissions because it has been the Plaintiffs contention all along that the total debt provision of Uganda shillings 82,722,841,898/= was written off in accordance with the FIA and Bank of Uganda Regulations. The amount of bad debt provisions calculated in accordance with the Bank of Uganda Regulations exceeded that under the IFRS. The Plaintiff contends that in accordance with section 24 of the ITA, a person is entitled to deduction for any bad debt written off during the persons accounting year.</p> <p>Thirdly, the Practice Note issued by the Defendant on 2<sup>nd</sup> November, 2001, is binding upon the Defendant. The Plaintiff's Counsel contended that this was a critical admission and helps to resolve the matter in contention. The crux of the matter is that under section 24 (1) of the ITA, a person is allowed a deduction from the amount of the bad debt written off in the person’s accounts during the year of income. The Plaintiff's Counsel relied on section 24 (2) (b) of the ITA which he contended clearly applied to the Plaintiff and the debt claims question. The Practice Note issued by the Defendant is still valid and binding specifically it provides as follows:</p> <p>"For financial institutions, specific reserves for identified losses or potential losses are allowable as a deduction. For this purpose in respect of financial institutions, bad debts provided for in accordance with the Bank of Uganda  Regulations are allowable as a deduction."</p> <p>The Plaintiff's Counsel contended that this resolves the dispute because the Plaintiff (as submitted by the Defendant) provided for the bad debts totalling Uganda shillings 82,722,841,898/= in accordance with the Bank of Uganda Regulations and therefore the full amount is deductible. Therefore the total amount falls squarely within the wording of section 24 and the Practice Note and is an allowable deduction in full.</p> <p>With specific reference to other submissions of the Defendant, the Plaintiff's Counsel contended that the Defendant submitted that in accordance with the Bank of Uganda  Circular , the difference between the figure calculated in accordance with the Bank of Uganda  Regulations and IFRS amounting to Uganda shillings 35,025,030,898/= is appropriated as retained earnings and is not deductible. He contended that this is not correct because the Plaintiff’s witness correctly testified and explained that the Bank of Uganda Circular was issued to commercial banks in February 2007 to resolve a practical accounting issue arising from the difference between bad debts provisions calculated under the Bank of Uganda Regulations and those calculated under the IFRS. Paragraph 4.0 of the Circular outlined the specific issue in relation to impairment losses (i.e. bad debt provisions) and concludes as follows:</p> <p>"4.6 Financial Institutions should continue assessing the impairment losses of their financial assets on a quarterly basis as this has been the practice under the Bank of Uganda Regulations".</p> <p>This made it clear that the banks are still required to calculate their specific bad debt provisions in accordance with the rules prescribed in the Bank of Uganda  Regulations and particularly regulation 11 thereof. Paragraph 4.7 of the Bank of Uganda Circular merely deals with the accounting presentation of the excess in the annual financial statements. It does not affect the basis of which the Bank of Uganda specific bad debt provisions are calculated nor does it permit a financial institution to calculate such provision on a low IFRS basis. Furthermore, it does not address the deductibility of bad debt provisions for income tax purposes. This further explains the misunderstanding which is apparent from the Defendant's submission. The Defendant seemed to imply that once the excess between IFRS and Bank of Uganda Regulations is taken to the retained earnings, it ceases to become a bad debt. The Plaintiff's Counsel contended that this was not correct because it remains a bad debt and this is merely dealing with the accounting presentation of the excess. Furthermore, regardless of whether the specific bad debt provisions are reflected in the income statement or in the regulatory reserve, the economic impact on the financial institution is the same. Firstly, the bank suffers an equivalent reduction in its distributable profits. In other words, the amount of retained earnings is reduced in the same way as if the entire amount had gone directly through the income statement. Lastly, the bank suffers an effective reduction in the value of its loan portfolio via the offset of the regulatory reserve.</p> <p>Accordingly the Plaintiff's Counsel maintained that there is no statutory support for a specific bad debt provision falling within section 24 of the ITA to be treated as non deductible solely on the basis that for accounting purposes, it has been reflected in the regulatory reserve rather than in the income statement.</p> <p>The Defendant relied on the case of <strong>Crane Bank Ltd vs. Uganda Revenue Authority </strong>(supra) to expound the notion that the law does not look with favour on tax exemptions. The court however is not dealing with a tax exemption nor is the Plaintiff seeking any privilege. The issue before the court is the provision of section 24 of the ITA and its applicability to the facts in issue. Tax exemptions are dealt with by section 21 of the ITA which is inapplicable and therefore the case of <strong>Crane Bank Ltd vs. Uganda Revenue Authority</strong> (supra) is irrelevant.</p> <p>On the question of whether issue number two should be amended under the provisions of Order 15 rule 5 of the Civil Procedure Rules, this was unnecessary. Both parties agreed on the issues at the scheduling conference without raising any complaint. The issue as framed is irrelevant because it seeks to ascertain whether the bad debts provisions calculated in accordance with the Financial Institutions Act 2004 (FIA) and the regulations are fully deductible expenses in accordance with the ITA. In the premises, the issue should be maintained and are resolved in the affirmative.</p> <p>In conclusion the Plaintiff’s Counsel submitted in rejoinder that the court should enter judgment for the Plaintiff because the basis for the bad debt reduction is fully supported by the specific provisions of section 24 of the ITA, the Practice Note and the case law. There is no provision in the tax legislation, the Practice Note or case law that either imposes a condition that the bad debt provision must be transacted through the income statement in order to be deductible or restricts the deduction in the provisions reflected as an appropriation from retained earnings or in a regulatory reserve. What is clear and undisputed is that bad debts are deductible under section 24 of the ITA and the total amount of Uganda shillings 82,722, 841,898/= which falls squarely within the wording of section 24 and the Practice Note and therefore the tax of Uganda shillings 13,060,998,533/= is not due and payable. In the premises this court should be pleased to vacate the assessment for the said amount with costs to the Plaintiff.</p> <p><strong>Judgment</strong></p> <p><strong>Resolution of issues number 1 and 2.</strong></p> <ol> <li><strong>Whether the Plaintiff is mandated to provision for its bad debts on the basis of the Financial Institutions Act, 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations 2005 or in accordance with the International Financial Reporting Standards (IFRS), for income tax purposes?</strong></li> <li><strong>Whether the bad debts provisions calculated in accordance with the Financial Institutions Act, 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations 2005 are fully deductible expenses in accordance with the Income Tax Act.</strong></li> </ol> <p>I have duly considered the above two issues. The two issues are intertwined because one deals with the method for assessment of tax and the other deals with a point of law which is the crux of the Plaintiff’s appeal to resolve the issue as to whether the assessment, the subject of the appeal, is unlawful.</p> <p>I have carefully considered the Plaintiff’s suit according to the pleadings which have been set up at the beginning of this judgment as well as the written statement of defence and the controversies arising out of the pleadings of the parties under Order 15 rules 1 and 2 of the Civil Procedure Rules. Order 15 rule 2 of the CPR clearly provides that: <em>"Where issues both of law and fact arise in the same suit and the court is of the opinion that the case or any part of it may be disposed of on issues of law only, it shall try those issues first, and for that purpose may, if it thinks fit, postpone the settlement of the issue of fact until after the issues of law have been determined</em>."</p> <p>The primary complaint of the Plaintiff arises from the Defendant's assessment dated 12<sup>th</sup> June 2015 and covering letter dated 15<sup>th</sup> June, 2015. The letter of 12<sup>th</sup> June, 2015 is an assessment notice assessing the Plaintiff for an amount of <strong>Uganda shillings 13,060,998,533/=</strong> income tax which was to be paid on the due date of 27<sup>th</sup> of July 2015. This amount comprises of Uganda shillings 10,507,509,270/= which is the total additional income tax payable as well as penalty tax of Uganda shillings 2,553,489,263/=. It is in respect of the tax period 2013. In a letter dated 15<sup>th</sup> June 2015 Irene Mbabazi Irumba, the Manager Manufacturing and Finance – Large Taxpayers Office of the Defendant wrote to the Chief Finance Officer of the Plaintiff with reference to earlier correspondence and meetings between the parties. The letter reads as follows:</p> <p>            "RE-: TAX RETURNS AND BAD DEBT PROVISION FOR THE YEAR 2013</p> <p>Reference is made to your letter dated the 11<sup>th</sup> of May 2015 and the meeting held on 10<sup>th</sup> of June 2015 in relation to claim the provisions for bad debts for the year ending 31<sup>st</sup> of December 2013.</p> <p>Examination of the filed income tax returns and the financial statements show that whereas the audited accounts show claimed provisions for bad debts of shillings 47,697,811,000/=, the income tax return show claimed provisions for bad debts for 2013 shillings 82,722,841,898/= leading to an excess claimed deduction of Uganda shillings 35,025,030,898/=.</p> <p>In the above-mentioned meeting the excess deduction was explained as being the computed provisions for bad debts arising from different requirements of the Financial Institutions Act and the IFRS.</p> <p>In view of the above explanation, we wish to draw your attention to URA Practice Note Number URA/IT/PN 2/01 on the deductions of bad debts that indicate that specific bad debts are provided for in accordance with the Bank of Uganda  Regulations i.e. Prudential Norms on Asset Quality for Financial Institutions are allowable deductions.</p> <p>Further to the above, Circular COB/15 issued by Bank of Uganda provides in paragraph 4.7 that <strong>"in circumstances where loans losses arrived at using Bank of Uganda Regulations is higher, the difference would be accounted for as an appropriation of retained earnings"</strong> Bank of Uganda confirmed that the Circular forms part of the Bank of Uganda Regulations and hence the excess provisions are accounted for as an appropriation of retained earnings. The implication of this is that specific provisions that go through the income statement are allowable deductions, while the specific provisions that go through the reserves are not allowable deductions for income tax purposes.</p> <p>In view of the above, claimed excess provisions for bad debts of shillings 35,025,030,898/= for the year 2013 that did not go through the income statement have been disallowed.</p> <p>Additional tax arising from the above adjustment is shillings 13,060,998,533/=, as per the attached detailed workings. Please arrange to pay the identified tax to avoid accumulation of interest on outstanding amount.</p> <p>Yours faithfully…"</p> <p>In paragraph 4 (v) of the written statement of defence, it is averred that the Defendant made an objection decision, disallowing the objection and upholding the tax assessment. The objection decision is admitted as exhibit PE 11 in the joint scheduling memorandum of the parties. Date of the objection is 23<sup>rd</sup> of July 2015 while the date of the objection decision is 21<sup>st</sup> of October 2015. The objection decision notice indicates that the objection was disallowed. The grounds for disallowance of the objection are not included. The suit was filed on 4<sup>th</sup> of December 2015. Section <strong>100</strong> of the <strong>Income Tax Act Cap 340</strong> laws of Uganda 2000 provides that a taxpayer dissatisfied with an objection decision may at the election of the taxpayer appeal the decision to the High Court or apply for review of the decision to Tax Tribunal established by Parliament by law for purposes of settling tax disputes in accordance with article 152 (3) of the Constitution. Specifically section 100 (4) of the Income Tax Act provides that an appeal to the High Court may be made on questions of law only. It reads as follows:</p> <p>"(4) An appeal to the High Court under subsection (1) may be made on questions of law only and notice of appeal shall state the question or questions of law that will be raised on appeal."</p> <p>An appeal to the High Court shall be on questions of law only. Specifically the appeal is from an objection decision and at the election of the taxpayer whether to proceed before the Tax Appeals Tribunal for review of the decision or appeal to the High Court on questions of law. The procedure for commencing an appeal in the High Court is by lodging a notice of appeal with the registrar of the High Court within 45 days after service of the notice of objection decision (see section 100 (2) of the ITA).</p> <p>While the suit was commenced by way of a plaint contrary to section 100 (2) of the ITA, the Defendant did not object to the procedure adopted and the issue is one of form and not substance (See <strong>Saggu vs. Roadmaster Cycles (U) Ltd [2002] 1 EA 258</strong> in that case the Court of Appeal of Uganda following other precedents in effect holds that irregularities in form which do not go to jurisdiction do not render the suit a nullity). The Defendant filed a written statement of defence answering the questions of law that are disclosed in the plaint. The questions of law are reflected in the declarations sought under paragraph 3 of the plaint. As a matter of legal doctrine, the High Court can only decide points of law on appeal from an objection decision arising from an assessment for income tax under the Income Tax Act and consequential objection decision. For that reason, it is only the points of law which are disclosed that may be handled by this court and not factual controversies relating to the amounts etc except where a question of principle is involved. Points of law cannot however arise out of the blue without reference to the facts. The facts are primarily not in dispute and the relevant material facts are contained in the joint scheduling memorandum of the parties. The relevant facts are also contained in the letter of the Defendant dated 15<sup>th</sup> of June 2015 and admitted in evidence as exhibit P5. Exhibit P6 is the notice of assessment dated 12<sup>th</sup> of June 2016 while the notice of objection decision is exhibit P 11.</p> <p>In the letter dated 15<sup>th</sup> June, 2015 and which gave rise to this controversy and is admitted in evidence as exhibit P5, issues number 1 and 2 are covered. I have extensively quoted exhibit P5 relating to the tax returns for the year 2013. While it is not in dispute that bad debts are deductible or allowable for income tax purposes as a deduction, the controversy arises out of an excess amount which the Plaintiff claimed as a deduction of Uganda shillings 35,025,030,898/=. The excess deduction was considered as the computed provisions for bad debts arising from different requirements of the Financial Institutions Act and the IFRS. According to the Defendant under the URA Practice Note Number URA/IT/PN 2/01 on deductions of bad debts, specific debts are provided for in accordance with the Bank of Uganda Regulations i.e. Prudential Norms on Asset Quality for Financial Institutions are allowable deductions. The Defendant also noted in the letter of 15<sup>th</sup> June, 2015 quoted above that further to the Circular  COB/15 issued by Bank of Uganda , it is provided in paragraph 4.7 that "in circumstances where loan losses arrived at using Bank of Uganda  Regulations is higher, the difference will be accounted for as an appropriation of retained earnings. According to the Defendant the implication is that specific provisions that go through the income statement are allowable deductions while specific provisions that to go through the reserves are not allowable deductions for tax purposes. The conclusion was that the excess provisions for bad debts of Uganda shillings 35,025,030,898/= for the year 2013 that did not go through the income statement were disallowed.</p> <p>As a matter of fact the alleged excess amount is the difference between using the Bank of Uganda Regulations which gives a higher amount than the IFRS. The Bank of Uganda Regulations is consonant with the Financial Institutions Act. The difference between the two methods gives rise to the amount in controversy. That difference is supposed to be accounted for as an "appropriation of retained earnings". In other words it is not included in the income statement. For the moment there is no controversy about the fact that the assessment relates to the amount of Uganda shillings 35,025,030,898/= which is the difference between 82,722,841,898/= and Uganda shillings 47,697,811,000/=. As far as the amounts are concerned the Defendant's argument is that the amount of Uganda shillings 35,025,030,898/= which was supposed to be an appropriation of retained earnings in the reporting ought not to have been deducted. It is further not in dispute that it is a bad debt. The difference merely arose from the reporting instruction which is to the effect that where the loan losses arrived at using Bank of Uganda Regulations is higher, the difference, would be accounted for as an appropriation of retained earnings. In other words where the loan losses which can be translated as the bad debt arrived at using the Bank of Uganda  Regulations is higher than that using the IFRS method, the difference between the two amounts will be accounted for as an appropriation of retained earnings.</p> <p>For further clarity on the point, the IFRS method leads to a bad debt charge of Uganda shillings 47,697,811,000/= while the Bank of Uganda  method leads to a bad debt provision of Uganda shillings 82,722,841,898/=. There is no controversy about the fact that the stated amounts relate to bad debt provisions for the year 2013 or fall in the category of bad debt provisions. The difference in methodology and the different results are not controversial and the court is not required to determine which methodology is more consistent with the Income Tax Act section 24 thereof. There was no attempt to explain the rationales for the two methodologies in calculating bad debt provisions. I must emphasise that the controversy is complex because it determines the basis for calculating loss or a bad debt in a year of income which controversy does not directly answer the question of whether for a particular year of income there was a profit or loss on the basis of the fact and not accounting principles. The accounting principles deal with reporting of the income status and other matters for purposes of the Central Bank while reporting income for purposes of the Income Tax Act can be separate and severable from the purpose of the Financial Institutions Act.</p> <p>Lastly, I need to emphasise the point that the High Court handles questions of law and does not go into matters of fact. That mere fact generates a complex situation because the two methods used were not interrogated for consistency with the Parent Act and section 24 of the ITA that deals with the Income Tax Matters. Section 18 (4) of the Interpretation Act Cap 3 Laws of Uganda 2000 expressly provides as follows:</p> <p>"Any provision of a statutory instrument which is inconsistent with any provision of the Act under which the instrument was made shall be void to the extent of the inconsistency."</p> <p>The matters concerning income tax ought to be handled under the Income Tax Act and regulations made there-under and not a separate enactment. The rationale for accounting methods adopted should not depart from the rationales under the Income Tax Act. A statutory instrument cannot amend or override the provisions of the Parent Act. Secondly there are two enactments which were referred to in the course of submissions on the points of law raised in this appeal. The first enactment is the Financial Institutions Act 2004 which deals with the reporting of income for accounting purposes and for the objectives of that Act of Parliament. The second Parent Act is the Income Tax Act Cap 340 (the ITA). Counsel for the parties and the witnesses used the Financial Institutions Act 2004 for accounting and reporting purposes and the Income Tax Act and particularly section 24 thereof which deals with the bad debts as well as the Practice Note issued under the ITA.</p> <p>The obvious question is whether reporting income under the Financial Institutions Act 2004 can be considered on the same footing as reporting or assessing income for tax purposes under the Income Tax Act. Furthermore, two authorities are concerned with the issue of classification of bad debts. Under the Financial Institutions Act 2004, reporting is made to the Central Bank/Bank of Uganda while under the Income Tax Act it is made to or income assessed by the Commissioner Uganda Revenue Authority.</p> <p>Without first making reference to the method adopted by the Plaintiff in reporting income for tax purposes, it is obligatory for every taxpayer under section 92 of the ITA to furnish a return of income for each year of income of the taxpayer. Thereafter or at any time, the Commissioner based on the taxpayers return of income and any other information available, will make an assessment of the chargeable income of the taxpayer and the tax payable on it for a year of income within five years from the date the return was furnished under section 95 of the ITA. Where the Commissioner is not satisfied with the return of income for a year of income furnished by a taxpayer, the Commissioner may according to the Commissioner's best judgment, make an assessment of the chargeable income of the taxpayer and the tax payable thereon for that year (see section 95 (2) of the ITA). Where an assessment has been made, the taxpayer may object to the assessment as happened in this case. Under section 92 (2) of the ITA a return of income shall be in the form prescribed by the Commissioner and shall state the information required and shall be furnished in the manner prescribed by the Commissioner.</p> <p>It is not in controversy that there was an assessment of the Plaintiff by the Commissioner and the Plaintiff objected to assessment and this dispute primarily relates to the method used by the Plaintiff which is at variance with the method used by the Defendant in arriving at what is deductible in terms of bad debts.</p> <p>A bad debt is deductible under section 24 of the ITA. Section 24 of the ITA also defines what a bad debt is. It provides as follows:</p> <p>24. Bad debts.</p> <p>(1) Subject to subsection (2), a person is allowed a deduction for the amount of a bad debt written off in the person’s accounts during the year of income.</p> <p>(2) A deduction for a bad debt is only allowed—</p> <p>(a) if the amount of the debt claim was included in the person’s income in any year of income; or</p> <p>(b) if the amount of the debt claim was in respect of money lent in the ordinary course of a business carried on by a financial institution in the production of income included in gross income.</p> <p>(c) If the amount of the debt claim was in respect of a loan granted to any person by a financial institution for the purpose of farming, forestry, fish farming, bee keeping, animal and poultry husbandry or similar operations.</p> <p>(3) In this section—</p> <p>(a) “bad debt” means—</p> <p>(i) a debt claim in respect of which the person has taken all reasonable steps to pursue payment and which the person reasonably believes will not be satisfied; and (ii) in relation to a financial institution, a debt in respect of which a loss reserve held against presently identified losses or potential losses, and which is therefore not available to meet losses which subsequently materialise, has been made; and</p> <p>(b) “debt claim” means a right to receive a repayment of money from another person, including deposits with financial institutions, accounts receivable, promissory notes, bills of exchange and bonds.”</p> <p>The taxpayer is allowed a deduction for the amount of the bad debt written off in the person's account during the year of income as specified in section 24 (2) of the ITA. A deduction can only be allowed if the conditions stipulated under section 24 (2) of the ITA are fulfilled. The first condition is if the amount of the debt claim was included in the taxpayer’s income in any year of income or if the amount of the debt was in respect of money lent in the ordinary course of the business carried on by a financial institution in the production of income included in gross income. The Plaintiffs case falls under section 24 (2) (b) of the ITA quoted above. Similarly section 24 (2) (c) is applicable. The classification of the transaction either in respect of money lent in the ordinary course of the business carried on by financial institution in the production of income included in gross income and in respect of a loan granted to any person by financial institution for the purposes of farming, forestry, fish farming, beekeeping, animal and poultry husbandry or similar operations is not in dispute and does not need to be inquired into. The assumption is that the bad debts involved in the controversy all fall within the provisions of section 24 of the ITA. A bad debt is further defined by section 24 (3) (a) of the ITA in terms of reasonable steps taken to pursue payment and which the person reporting reasonably believes will not be satisfied and in respect of a financial institution, it is a debt in respect of which the loss reserve held against presently identified losses or potential losses, and which therefore is not available to meet losses which subsequently materialise, has been made. A debt claim means a right to receive a repayment of money from another person, including deposits with financial institutions, accounts receivable, promissory notes, bills of exchange and bonds.</p> <p>Section 24 is the subject of a Practice Note issued by the Commissioner under section 160 of the ITA. Section 160 (1) of the ITA provides that the Commissioner may issue Practice Notes setting out the Commissioner’s interpretation of the ITA. The purpose of the Practice Note is to achieve consistency in the administration of the ITA and to provide guidance to taxpayers and officers of Uganda Revenue Authority. In exhibit P4 the Commissioner on 2<sup>nd</sup> November, 2001 issued the Practice Note and item 2 thereof deals with deduction of bad debts. It provides as follows:</p> <p>            "2. Deduction of Bad Debts</p> <ol style="list-style-type:lower-alpha"> <li>For persons other than financial institutions, a bad debt is allowed as a deduction only if all reasonable steps for recovery have been taken and there is a reasonable ground that the debt will not be recovered.</li> <li>For financial institutions, specific reserves for identified losses or potential losses are allowable as a deduction. For this purpose in respect of financial institutions, bad debts provided for in accordance with the Bank of Uganda  Regulations are allowable as a deduction. [Refer to Prudential Norms on Asset Quality for Financial Institutions Paragraph 12 (1) to (6)].</li> <li>Paragraph 12 (7) of the same Bank of Uganda Regulations provides for 1% general provisions of the total outstanding credit facilities. This 1% general provision does not satisfy the requirements of section 25 of the ITA and is therefore not deductible.</li> <li>Any recoveries of previously written off bad debts would be treated as income and taxed in the year in which the recoveries are made."</li> </ol> <p>The simple guidance of the Commissioner in the Practice Note has two faces. On the first ground for financial institutions, specific reserves for identified losses or potential losses are allowable as a deduction. The second aspect is that to determine what is allowable as a deduction, reference is made to the Bank of Uganda  Regulations as to what are allowable as deduction and particularly regulation 12 (1) to (6) of the Prudential Norms on Asset Quality for Financial Institutions is applicable.</p> <p>While an appeal proceeds on a point of law, the Defendants witness DW1 Irene Mbabazi Irumba, a manager in the Domestic Taxes Department in her written testimony made it clear that the controversy arose when there was a 108% increase in what was deductible in 2013 as far as the Plaintiff’s income returns were concerned. Secondly, the deduction was as the result of impairment on loans as allowable deduction for tax purposes. They established that the reason for the 108% increase was that application of the Financial Institutions Act with regard to bad debts provisions which resulted in huge provisions and consequently a huge deduction for tax purposes and therefore less tax payable. On the other hand the application of the <strong>IFRS</strong> which is the <strong>International Financial Reporting Standards</strong> resulted into a less quantum of the amounts deductible and consequently less tax payable. In paragraph 8 she testified that for the year 2013, the varied application of the two distinct methods was that the provision claimed under the FIA was Uganda shillings 82,722,841,898/= while the provision claimed pursuant to the IFRS was Uganda shillings 47,697,811,000/=. Uganda Revenue Authority applied the IFRS treatment which was the past treatment of the Plaintiff and other banks. She testified that this was supported by the Circular issued by the Bank of Uganda on 19<sup>th</sup> February, 2007 and further clarified and confirmed in a letter dated 19<sup>th</sup> March, 2009. The clarifications were annexed.</p> <p>Strangely PW1 Stella Musisi, the Financial Controller of the Plaintiff relied on the Practice Note of the Defendant. In her testimony she indicated that the Practice Note makes reference to the <strong>Prudential Norms on Asset Quality for Financial Institutions</strong> and the relevant paragraphs quoted above. Under section 46 (4) of the FIA, the Plaintiff was supposed to ensure that its financial ledgers and other financial records are kept in accordance with both the International Accounting Standards and such other requirements as the Central Bank could make in writing. Secondly the FIA provided that the Central Bank would make regulations prescribing Prudential Norms on Asset Quality including bad debt provisions and write offs. In 2005, the Bank of Uganda promulgated the <strong>Financial Institutions (Credit Classification and Provisioning) Regulations</strong>. Under those regulations, the Plaintiff was mandated to classify its bad debts according to the three categories namely substandard, doubtful and loss. The regulations mandated that the Plaintiff would maintain a specific provision for all non-performing loans. Finally under section 75 of the FIA, the Plaintiff is mandated to provide its annual financial statements to the Bank of Uganda for the bank to be satisfied on the sufficiency of the Plaintiff’s provision for bad debts.</p> <p>According to PW1, under the IFRS, a financial asset and impairment loss is incurred if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that the loss event has an impact on the estimated future cash flows or the financial asset that can be reliably estimated. The amount of loss is measured as the difference between the asset carrying amount and the present value of estimated future cash flows discounted at the financial assets original effective interest rate. According to PW1 the difference between the IFRS and the FIA is the result of the method used to determine the impairment losses on the loans and advances. Under the FIA, the Plaintiff uses "days past due" method to make provision to its loans whereas the IFRS determines the recoverable amounts based on present value of cash flows which also puts into consideration the value of the security provided among others. Furthermore she testified that in 2007, the Bank of Uganda issued a Circular to all commercial banks regarding the difference in the accounting treatment between the FIA and the IFRS regarding impairment. It stated that the commercial banks are required to calculate their bad debts in accordance with the Bank of Uganda Regulations. Generally, PW1 testified that the accounting classification of the bad debt does not take away the fact that the bad debts already occurred. In other words it is a question of form rather than the substance.</p> <p>The basis of the dispute has already been mentioned above and according to PW1 is simply that the amount of bad debts provisions calculated in accordance with the Bank of Uganda  Regulations exceeded that under the IFRS. The difference between the two methods arose due to the fact that the regulatory reserve credit risk reserve contained in the excess amount as an appropriation of retained earnings. The Plaintiff’s case is that it claimed Uganda shillings 82,722,841,898/= in accordance with section 24 of the ITA, the Bank of Uganda Regulations and the Bank of Uganda Circular. According to PW1 the Defendant rejected the amount of Uganda shillings 35,025,030,898/= on the basis that the specific provision was not claimed through the profit and loss account and was instead taken through the reserves.</p> <p>I have carefully considered the controversy after addressing my mind to the written submissions of Counsel as well as the evidence presented and the pleadings.</p> <p>Practice Note exhibit P4 and paragraph 2 (b) is quite explicit about deduction of bad debts as far as financial institutions are concerned. It provides that specific reserves for identified losses or potential losses are allowable as a deduction. For this purpose, in respect of financial institutions, bad debts provided for in accordance with the Bank of Uganda  Regulations are allowable as a deduction. Under section 160 of the Income Tax Act, the Practice Note is binding on the Commissioner and the officials of Uganda Revenue Authority. The simple question to be asked pursuant to the Practice Note is whether the bad debts are provided for in accordance with the Bank of Uganda Regulations. For this reason the Plaintiff relied on the Financial Institutions (Credit Classification and Provisioning) Regulations, 2005 Statutory Instruments 2005 No. 43 particularly Regulation 11 which deals with provision on classified credit facilities and provides as follows:</p> <p>      "<strong>11. Provision on classified credit facilities </strong></p> <p>(1) Financial institutions shall maintain specific provisions for all non performing credit facilities.</p> <p>(2) All credit facilities classified as Substandard, Doubtful or Loss shall be subject to specific provisions, regardless of whether the subjective or objective criteria were used in determining classification.</p> <p>(3) Specific provisions for substandard assets shall be maintained at not less than 20% of the outstanding balance of the credit facility.</p> <p>(4) Specific provisions for doubtful assets shall be maintained at not less than 50% of the outstanding balance of the credit facility.</p> <p>(5) Specific provisions of loss assets shall be maintained at 100% of the outstanding balance of the credit facility; the loss assets are to be written off against accumulated provisions within ninety days of being identified as loss, unless approval of the Central Bank to defer write-off has been obtained.</p> <p>(6) The outstanding balance consists of principal, interest which has been capitalized and all other charges, fees and other amounts, which have been capitalized to the outstanding balance; interest in suspense may be deducted from the outstanding balance before determining the provisions.</p> <p><em>General provisions </em></p> <p>(7) In addition to specific provisions, financial institutions are required to maintain a general provision of at least 1% of their total outstanding credit facilities net of specific provisions and interest in suspense.</p> <p>(8) The provisioning level shall be reviewed at least on a quarterly basis and shall be reported to the Central Bank using the forms specified in regulation 7.”</p> <p>The above cited regulation 11 deals with the making of provision for non-performing credit facilities in which category falls bad debts. The question of what a bad debt is has not been the subject of controversy at all. The characterisation of a bad debt should be based on section 24 of the Income Tax Act. Secondly and notwithstanding the above, the characterisation of a bad debt also falls under the regulatory authority of the Bank of Uganda /Central Bank. The question still remains as to what a bad debt is for income tax purposes. The Plaintiff bank as a commercial bank has an obligation to keep accurate records and specifically a reference was made to section 46 of the Financial Institutions Act 2004 which provides as follows:</p> <p>            "46. Financial ledgers and other financial records</p> <p>(1) A financial institution shall at all times keep financial ledgers and other financial records which—</p> <p>(a) show a complete, true and fair state of its affairs; and</p> <p>(b) explain its transactions and financial position to enable the Central Bank to determine whether the financial institution has complied and continues to comply with this Act.</p> <p>(2) The financial year of every financial institution shall be the period of twelve months ending on the 31st December in each calendar year.</p> <p>(3) Where the financial year of a financial institution is different from that prescribed in subsection (2), the financial institution shall, within twelve months from the commencement of this Act, change its financial year to comply with subsection (2).</p> <p>(4) The financial ledgers and other financial records to which this section applies shall be kept in Uganda and shall comply with the requirements of—</p> <p>(a) the Companies Act,</p> <p>(b) International Accounting Standards, and</p> <p>(c) such other requirements as the Central Bank may in writing prescribe.</p> <p>(5) All accounting entries in financial ledgers and all financial records to be kept by a financial institution shall be kept and recorded in the English language using the system of numerals employed in Government accounts.</p> <p>(6) A financial institution shall preserve the financial ledgers and other financial records referred to in this section for a period of not less than ten years.”</p> <p>The use of the IFRS is presumably prescribed by section 46 (4) (b) of the Financial Institutions Act cited above because it prescribes that the Plaintiff shall comply with international accounting standards. What are these international accounting standards? However section 46 (4) (b) does not exclude any other requirement that the Bank of Uganda may prescribe for purposes of reporting under the said provision. It is merely a general provision that deals with accounting and reporting to the Bank of Uganda. It deals with general accounting standards and is not definitive on what method should be used in calculating bad debt charges. There is, however, a specific provision in the FIA which deals with bad debts. Where there is a specific provision dealing with bad debts, it is prudent to first consider what it prescribes before resorting to the general provisions of section 46 of the FIA which prescribe the duty to keep accurate accounts by Financial Institutions. In relation to bad debts, the relevant provision in section 75 of the FIA which provides as follows:</p> <p>“75. Requirements on provisions</p> <p>The Central Bank shall, before annual accounts of a financial institution are finalized, dividends paid, and the capital requirements in sections 26 and 27 are met, require to be satisfied by the financial institution in respect of—</p> <p>(a) sufficiency of provisions for bad debts;</p> <p>(b) existence and enforcement of a proper policy of non-accrual of interest on non- performing loans;</p> <p>(c) amortization of preliminary expenses, goodwill and similar expenses.”</p> <p>The cited provision provides that the Central Bank shall be satisfied by the financial institution about the sufficiency of provision for bad debts. Section 75 (a) of the FIA assumes that the bad debts have been disclosed in the accounting. The making of a provision for bad debts assumes that the bad debts are known. The bad debts are deemed to have been disclosed and the satisfaction of the Central Bank should be about the question of whether there was sufficient provision made for the bad debt or bad debts. The phrase "bad debt" is not defined except under section 24 of the Income Tax Act. The Practice Note exhibit P4 refers to specific reserves for identified losses or potential losses and provides that they are deductible or allowable as a deduction. Furthermore, it provides that the bad debts are allowable in accordance with the Bank of Uganda Regulations as a deduction. The conclusion is that the only conclusive definition of a bad debt for income tax purposes is that found under section 24 of the Income Tax Act.</p> <p>As earlier on written in this judgment, any provision of a statutory instrument which is inconsistent with any provision of the Act under which the instrument was made shall be void to the extent of the inconsistency according to section 18 (4) of the Interpretation Act Cap 3  laws of Uganda 2000. In this particular case, the definition of a bad debt cannot be taken from another statute but should be based on the parent Act which is the ITA. Furthermore, the provisioning for bad debts under the FIA is for purposes of the Central Bank and not for income tax purposes. Secondly it is a methodology for purposes of the Act.</p> <p>A bad debt is clearly defined under section 24 (3) (a) of the ITA. A bad debt means:</p> <p>“ ...</p> <ol style="list-style-type:lower-alpha"> <li>“bad debt” means—</li> </ol> <p>(ii) in relation to a financial institution, a debt in respect of which a loss reserve held against presently identified losses or potential losses, and which is therefore not available to meet losses which subsequently materialise, has been made”</p> <p>A bad debt in the context means a debt in respect of which a loss reserve held against presently identified losses or potential losses, and which is therefore not available to meet losses which subsequently materialise, has been made. Contrary to the Defendant's submissions, it includes loss reserves for accounting purposes. For that reason I agree with the interpretation of PW1, the Financial Controller of the Plaintiff that a person is entitled to a deduction for bad debt written off during the persons accounting year. According to exhibit P4 which is the Practice Note issued by the Commissioner, where that debt is recovered in a subsequent year, it would be included as income that is taxable in the year in which the recovery has been made.</p> <p>Finally I have duly considered the written submissions of the Defendant’s Counsel and the controversy is as follows:</p> <ol> <li>Whether a bad debt is fully or partially deductible?</li> <li>The Plaintiff wants the whole bad debt allowed as a deduction for purposes of establishing the taxable income.</li> <li>Whether a bad debt must appear in the profit or loss account for it to be allowed as a deduction?</li> <li>The narrower and overarching issue is whether bad debts which are reported as retained earnings and reported in the reserves for accounting purposes to Bank of Uganda is allowable as a bad debt deduction?</li> </ol> <p>In conclusion on issues 1 and 2, it is established from the Practice Note which has the interpretation of the Commissioner General URA that what is retained as a reserve from bad debts is to be taxed in the year in which recovery of the bad debt is made. What is the implication of this interpretation? It means that the reserve is not taxed but allowed as a deduction from taxable income. If it is not allowed as a deduction from taxable income, it means that it is taxed and the Practice Note to tax what is reserved in the year in which the recovery is made would not be followed. I must point out that this analysis does not consider any security against which the borrowing was made but considers the bad debt as money owing which has not been recovered in due time after reasonable recovery measures have been taken. In other words that failure to recover the specific amount is the bad debt charge. I further agree with the Plaintiffs submission and it is the law under section 160 of the Income Tax Act that a Practice Note is binding on the Commissioner and her Personnel.</p> <p>As part of the conclusion on issues 1 and 2, I have further considered what a deduction is for clarity on the first conclusion. According to section 7 of the ITA the chargeable income of a company (such as the Plaintiff) for a year of income, is charged to income tax at the rate prescribed in Part II of the Third Schedule to the ITA.  Section 15 of the ITA provides that chargeable income is:</p> <p>“Subject to section 16, the chargeable income of a person for a year of income is the gross income of the person for the year less total deductions allowed under this Act for the year.” </p> <p>The deductions are allowed under the ITA and for a year of income. Particularly deductions are generally provided for under section 22 of the ITA which provides in section 22 (1) (a) that all expenditures and losses incurred by the person during the year of income to the extent to which the expenses and losses were incurred in the production of income included in gross income are deductible.  Section 24 specifically deals with deductions of bad debts and the conditions to be fulfilled for deduction to apply. What is material is that as determined by section 22 (1) (a) the bad debt should fall in the category of losses incurred by the person during the year of income. The question of substance whatever methodology is adopted is whether the tax payer incurred a loss in the year of income.  The very fact that a bad debt can be recovered subsequently and factored as taxable income in the year in which the recovery is made proves by logical inference that the bad debt was a loss in the year when the payment should have been made but was not and reasonable steps had been taken in vain to recover the debt. In the context of section 24 (2) (b) the debt must have arisen out of money lent in the ordinary course of the business of a financial institution in the production of income included in gross income. The loss should not be available to meet losses which subsequently materialise, and the loss has been incurred.</p> <p>I have further considered the logic of retained earnings from assets which may earn income in future but which were written off in the year of income as a bad debt and retained in the reserve as retained income for that year of income. Perhaps the policy makers should address their minds critically to this issue and set out clear guidelines for how retained earnings, being a characterisation of a portion of bad debts using the IFRS accounting method, should be treated for tax purposes.</p> <p>The Defendant’s Counsel submitted that the amount of Uganda shillings 35,025,030,898/= was recorded in reserve and rightly so as retained earnings. The Defendant’s Counsel argued that it is not a loss but retained earnings. That the practical effect was that it is not deductible and therefore should be taxed. In other words it is not deductible from taxable income and becomes taxable. He argued that it is like ploughing back income as capital which may earn income.</p> <p>I have further scrutinised the Practice Note which provides that: “Any recoveries of previously written off debts will be treated as income and taxed in the year in which the recovery is made.” In theory it cannot be assumed that a bad debt may be recovered. I agree that where it is secured and a bad debt provision has been made for it, it may still be recovered in future. The interest and penalties, if any, are matters for future accounting for income tax purposes. If it is allowed as a deduction on the footing that it is a loss and inter alia because it is not available for distribution as earnings, the deduction allowance only applies to that year of income. Any recoveries of the bad debt would in future be reflected as taxable income and taxed. If it is reflected as retained earnings and taxed in that year of income, any future recoveries would still be reflected as income. Yet in the previous year it was a loss and not available for distribution. The classification of the bad debt in terms of the difference between the Bank of Uganda Regulation calculations and IFRS calculations become a mere naming of a loss for accounting purposes. Yet there is some substance in the idea that a bad debt can be considered an investment for income if it meets the criteria for potential earning capacity. A bad debt by classification is money which is not available as income and where reasonable steps for recovery of income were taken in vain.</p> <p>In the premises, I agree with the Plaintiff’s submission that the loss remains a loss until and unless reversed by recoveries in subsequent reporting periods. In any case under the binding Practice Note, the bad debt loss can become a recovered income and be reflected in future assessments as taxable income. The long and short conclusion is that a tax payer is not chargeable for a loss in a year of income and a bad debt which falls under the definition of a “bad debt” in relation to a financial institution under section 24 of the Income Tax Act is per se allowable as a deduction under that section.</p> <p>In the premises issues numbers 1 and 2 are answered as follows:</p> <p>On issue number 1 the Plaintiff is obliged to provision for bad debts under the Financial Institutions Act, 2004 and the Financial Institutions (Credit Classification and Provisioning) Regulations 2005 in terms of the statutory instrument and the Financial Institutions Act, 2004. The Plaintiff is also supposed to file accounts with the Bank of Uganda and in addition it has to be up to standard under the IFRS. That notwithstanding for income tax purposes, bad debts must meet the criteria of section 24 of the Income Tax Act and the Practice Note issued by the Commissioner on 2<sup>nd</sup> November, 2001.</p> <p>Issue number 2 is answerable in the affirmative.</p> <ol> <li><strong>Whether the Bank of Uganda Circular dated 19<sup>th</sup> February 2007 regulates deductibility of bad debts for income tax purposes, and whether the Circular binds the Plaintiff? </strong></li> </ol> <p>With reference to issue number three the Plaintiff’s Counsel submitted that in 2007, the Bank of Uganda issued a Circular in which it tried to address issues surrounding the difference between the IFRS and the FIA accounting presentation is. In paragraph 4.6 of the Circular exhibit PE 8, it stated that: "the existing procedures in The Financial Institutions (Credit Classification and Provisioning) Regulations, 2005 in respect of determining the adequacy of specific and general provisions for loan losses will continue to apply in the transition period." The Plaintiff's Counsel submitted that it was in agreement with the analysis of the Plaintiff on the preceding issues because the Bank of Uganda Circular makes it clear that accountability has to be done in accordance with the Bank of Uganda Regulations. To the extent that the statute entitles the Plaintiff to a bad debt provision on the basis of the Bank of Uganda Regulations, he submitted that the court should find that in fact the Plaintiff is entitled to the said bad debt reduction.</p> <p>In reply the Defendants Counsel relied on section 131 (1) of The Financial Institutions Act 2004 for the proposition that the provision gives the Central Bank in consultation with the Minister power to make regulations prescribing Prudential Norms on Asset quality, including bad debt provisions and write offs. Subsequently, the Bank of Uganda made a Circular for all commercial banks dated 19th of February 2007 which forms part of the Prudential Norms on Asset Quality for all commercial banks. Paragraph 4.8 of the Circular provides that in circumstances where a loan losses arrived at using Bank of Uganda Regulations is higher, the difference would be accounted for as an appropriation of retained earnings. The Plaintiff has not disowned the Circular or objected to it and in fact relied on paragraph 4.6 thereof. In conclusion the Circular regulates the treatment of the difference in the amount of bad debts arrived at as a result of the two methods. It mandates that the bank treats the difference not as loss of profits or retained earnings with a condition that it should not be distributed as dividends, unless the permission is obtained from the regulator. The Circular is binding on the Plaintiff.</p> <p>I have carefully considered the issue and both parties are in agreement that the Circular is binding on the Plaintiff. However in issues number one and two, it has been resolved that the Circular or the Regulations regulate reporting to the Central Bank and is not per se relevant for purposes of income tax returns under the Income Tax Act. It may be good evidence for purposes of Income Tax Act but provisions for bad debts for income tax purposes are dealt with under the Income Tax Act. The Circular is not binding on the Defendant for income tax purposes except where it is consistent with the ITA and particularly in relation to whether a bad debt is an allowable deduction or not. The Circular does not answer the question of whether a bad debt is deductible or allowable as a deduction for purposes of calculating income tax.</p> <ol> <li><strong>Whether the Defendant is bound by its Practice Note issued on 2<sup>nd</sup> November 2001?</strong></li> </ol> <p>As far as issue number 4 is concerned, the Plaintiff's Counsel relied on section 160 of the Income Tax Act and submitted that the Practice Note immigration has not been repealed or revoked and is in force up-to-date. The Practice Note is binding on the Commissioner until the revoked.</p> <p>On the other hand, the Defendants Counsel submitted that section 160 of the ITA was repealed and replaced by section 44 of the Tax Procedure Code Act 2014. However section 44 quoted by Counsel indicates that the Practice Note issued by the Commissioner is binding on the Commissioner until revoked by the Commissioner. In the premises both parties are in agreement with the conclusion that the practice note issued on 2<sup>nd</sup> November, 2001 is binding on the Defendant. I do not need to add anything to that conclusion.</p> <ol> <li><strong>Whether the sum of Uganda shillings 35,025,030,898/= was rightly claimed by the Plaintiff as an allowable deduction for income tax purposes?</strong></li> </ol> <p>The Plaintiff's Counsel submitted that the assessment of the Plaintiff was erroneous and therefore the sum of Uganda shillings 35,025,030,898 is an allowable deduction.</p> <p>In reply the Defendants Counsel relied on earlier submissions on issues number one and two.</p> <p>The court’s conclusion on issue number 5 is derived from the resolution of issues numbers 1 and 2. The sum of Uganda shillings 35, 25,030,898/= is a bad debt which may be recovered in the subsequent years of income and may be treated as income only after recovery or recoveries. In the premises the above sum is a bad debt that is supposed to be an allowable deduction under section 22 and 24 of the Income Tax Act.</p> <ol> <li><strong>Whether the tax assessment issued by the Defendant is valid?</strong></li> </ol> <p>Issue number 6 has been resolved by issues numbers 1, 2, and 5. The assessment of the Plaintiff for the sum of Uganda shillings 13,060,998,533/= is not valid or due and payable.</p> <ol> <li><strong>What remedies are available to the parties? </strong></li> </ol> <p>Following the resolution of the above issues, the Plaintiff was correct in providing for bad debt provisions calculated in accordance with the Bank of Uganda  Act and Regulations as well as having correctly interpreted section 24 of the Income Tax Act. The assessment of the Plaintiff on the basis of Uganda shillings 35,025,030,898/= was erroneous and the sum of Uganda shillings 13,060,998,533/= assessed for payment of income tax is hereby set aside.</p> <p>Under section 27 of the Civil Procedure Act, costs follow the event and the appeal succeeds with costs to the Plaintiff.</p> <p>Judgment delivered in open court on 18<sup>th</sup> August, 2017</p> <p> </p> <p><strong>Christopher Madrama Izama</strong></p> <p><strong>Judge</strong></p> <p>Judgment delivered in the presence of:</p> <p>Oscar Kambona appearing with Bruce Musinguzi for the Plaintiff</p> <p>Rodney Golooba for the Defendant</p> <p>Charles Okuni: Court Clerk</p> <p>Julian T. Nabaasa: Research Officer Legal</p> <p> </p> <p><strong>Christopher Madrama Izama</strong></p> <p><strong>Judge</strong></p> <p><strong>18<sup>th</sup> August, 2017</strong></p> </div></div></div><div class="view view-download-button view-id-download_button view-display-id-entity_view_1 view-dom-id-12628a6f57528a6148638a5a3a649c2b"> <div class="view-content"> <div class="views-row views-row-1 views-row-odd views-row-first views-row-last"> <div class="views-field views-field-field-download"> <div class="field-content"><a href="https://old.ulii.org/system/files/judgment/commercial-court-uganda/2017/115/commercial-court-uganda-2017-115.docx" target="_blank"><img src="https://africanlii.org/sites/default/files/Download-Button-red.png" width="180"> </a></div> </div> <div class="views-field views-field-field-download-1"> <div class="field-content"></div> </div> </div> </div> </div> Thu, 19 Oct 2017 06:24:36 +0000 Eunice Logose 27899 at https://old.ulii.org Stanbic Bank Uganda Ltd v Uganda Crocs Limited ((Civil Appeal No.4 of 2004 )) [2005] UGSC 16 (17 August 2005); https://old.ulii.org/ug/judgment/supreme-court/2005/16 <section class="field field-name-field-flynote field-type-taxonomy-term-reference field-label-above view-mode-rss"><h2 class="field-label">Flynote:&nbsp;</h2><ul class="field-items"><li class="field-item even"><a href="/tags/cl" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">CL</a></li><li class="field-item odd"><a href="/tags/fiduciary-duty-bank" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Fiduciary Duty of A Bank</a></li><li class="field-item even"><a href="/tags/bank-customer-relationship" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Bank-Customer Relationship</a></li><li class="field-item odd"><a href="/tags/negligence" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Negligence</a></li></ul></section><div class="field field-name-body field-type-text-with-summary field-label-hidden view-mode-rss"><div class="field-items"><div class="field-item even" property="content:encoded"><p><strong>THE REPUBLIC OF UGANDA&nbsp;</strong></p> <p>&nbsp;</p> <p><strong>IN THE SUPREME COURT OF UGANDA</strong></p> <p><strong>AT MENGO</strong></p> <blockquote> <blockquote><br /> <strong>(CORAM: ODOKI. CJ, ODER, TSEKOOKO. KAROKORA, AND MULENGA, JJ.SC)</strong></blockquote> </blockquote> <blockquote> <blockquote> <blockquote><br /> <strong><u>CIVIL APPEAL NO. 4 OF 2004 </u></strong><br /> <br /> <strong>BETWEEN</strong></blockquote> </blockquote> </blockquote> <p><strong>STANBIC BANK UGANDA LTD ::::::::::::::::::::::: APPELLANTS</strong><br /> <strong>AND</strong><br /> <strong>UGANDA CROCS LIMITED ::::::::::::::::::::::::::::: RESPONDENTS</strong></p> <p>&nbsp;</p> <p><strong><em>(Appeal from the decision of the court of Appeal in Kampala (Okello, Engwau and Kitumba, JJ.A) dated 27/1/2004 in civil Appeal </em></strong><em>NO<strong>. 47 of</strong></em><br /> <strong><em>2003)</em></strong><br /> &nbsp;</p> <p><strong><u>JUDGMENT OF ODER, JSC</u>.</strong></p> <p>This is a second appeal, brought against the decision of the Court of Appeal, which upheld the judgment of the High Court in Kampala (Okumu-Wengi, J) allowing the respondents' suit against the appellant.<br /> &nbsp;</p> <p>The background of the case regarding which the High Court and the Court of Appeal made concurrent findings of law and fact is briefly as follows: On 21<sup>st</sup> November, 1990, Dr. Alex Babitunga (now deceased) and some Zimbabwean investors incorporated the respondent (the company), with the object of rearing crocodiles for purposes of export business, in the process, the company, opened in Kampala two bank accounts with the appellant (the bank) in January, 1991. One account was for foreign currency (U.S Dollars), and the other was a local currency (Uganda Shillings) account. Both accounts were to be operated according to the company's mandate. Dr. Alex Babitunga, the sole resident director, was specifically authorized to operate these bank accounts. There were also clear instructions to the effect that in the event of any changes the same would be communicated to the bank.<br /> <br /> <br /> The Chairman of the Board of Directors of the Company, one U.H Bristow, subsequently advised the bank of some changes, introducing I.A. Cader, Vivian Hector Bristow, Anthony Douglas Bristow and Colin Neil Hewlett as directors of the Company and signatories to its bank accounts. The specimen signature cards were issued and certified by him. The cards were admitted in evidence at the trial of the suit as exhibits P6 (a), P6 (b), P6 (c) and P6 (d) respectively. The Bank was advised to honour cheques duly signed by any two of the authorized signatories. A dispute between the company and the bank arose in respect of exhibit P.7 (b), the specimen signature card allegedly issued for Susan Margaret Howard Bristow (Susan) as a director of the company. The dispute arose because the signature of Dr. Alex Babitunga authenticating Susan's specimen signature card was apparently forged: in addition, the word <strong>ALONE </strong>was written on that card, being an alteration of <strong>ANY TWO TO SIGN </strong>which was previously written on the card, in addition there were cancellations on Exhibits P.6 (a) and P.6 (d) to the effect that the words <strong>ANY TWO TO SIGN </strong>to read <strong>ANY ONE TO SIGN. </strong>These cancellations were done to those specimen signature cards without any initials, signatures, authentication or stamping by the person or persons who cancelled them.<br /> &nbsp;</p> <p>The specimen signature card issued for Susan was also backdated to 30.12.1991, a date prior to the death on 9.2.1992 of Dr. Alex Babitunga who allegedly authenticated it. The dispute led to the company filing the suit against the bank on the grounds, inter alia, that there had been a fraudulent change in the mandate, as a result of which the company's bank accounts were operated by unauthorized signatories to withdraw the monies claimed in the suit. The company also alleged that the bank was fraudulent and had acted in breach of its duty to the company as its customer and had been negligent in permitting the company's accounts to be cleared of all the money in them without the company's authority. The company reported its complaint to the police, who investigated and reported the circumstances in which Susan came to acquire a mandate to operate the company's bank accounts.<br /> &nbsp;</p> <p>in its defence to the suit the bank denied liability, contending, inter alia, that operation of the company's bank accounts by Susan had been authorized by Dr. Alex Babitunga before his death in 1992. The bank further contended that by paying out money, the debiting of which was being attributed to Susan, the bank was honouring instructions of its customer according to mandate. The trial court, however did not agree with the banks' contentions and evidence and found for the company, entering judgment in its favour for US Dollars <strong>346.444,64 </strong>and Uganda <strong>Shs: 181,375,893. </strong>The company was also awarded costs of the suit. The bank appealed unsuccessfully to the Court of Appeal. Hence this appeal. Nine grounds of appeal are set out in the memorandum of appeal.<br /> &nbsp;</p> <p>They are:</p> <blockquote> <table> <tbody> <tr> <td>1.</td> <td>The learned Justices of Appeal erred in law and in fact in disallowing the 1<sup>st</sup> ground of appeal on the ground that the trial judge <strong><em>"did consider that Suzan Margaret Howard Bristow signed the respondents cheques with other directors of the company but that she did so without the authority of the company".</em></strong></td> </tr> <tr> <td>2.</td> <td>The learned Justices of Appeal erred in law and in fact in not holding that the respondent was estopped from saying that Susan Bristow was not authorized signatory to the respondent's accounts.</td> </tr> <tr> <td>3.</td> <td>The learned Justices of Appeal erred in law and in fact in holding that the matters they referred to in their decision showed that <strong><em>"the bank acted irregularly and or negligently in the operation of the company's accounts."</em></strong></td> </tr> <tr> <td>4.</td> <td>in their answer to ground 4 of the memorandum of the appeal the learned Justices of Appeal erred in law and in fact holding that the respondent discovered Suzan Bristow's affairs through PW.1, who - "<strong><em>was really the directing mind and will of the company."</em></strong></td> </tr> <tr> <td>5.</td> <td>The learned Justices of Appeal erred in law and in fact in holding that the suit was not time barred.</td> </tr> <tr> <td>6.</td> <td>The learned Justices of Appeal erred in law and in fact in holding that: <strong><em>"in order to constitute a lawful mandate, Anthony Bristow was supposed to sign cheques with other signatories. When he signed alone, he was in my view, in breach of that authority. He was also in breach of that mandate when he signed with Suzan who was not an authorized signatory."</em></strong></td> </tr> <tr> <td>7.</td> <td>The learned Justices of Appeal erred in law and in fact in holding that there was no double award by the trial judge and that ground <strong>7 </strong>fails.</td> </tr> <tr> <td>8.</td> <td>The learned Justices of Appeal erred in law and misdirected themselves on the burden of proof when they held that <strong><em>The burden of proof shifted to the appellant in view of the clear provisions of section 100 and section 102 of the Evidence Act. The bank should have called evidence to show that the payments withdrawals from the Company Accounts were to discharge legal liabilities of the respondent".</em></strong></td> </tr> <tr> <td>9.</td> <td>The learned Justices of Appeal erred in law and in fact in holding that - <strong><em>"ground 8 fails."</em></strong></td> </tr> </tbody> </table> </blockquote> <p>&nbsp;</p> <p>&nbsp;</p> <p>Dr. Joseph Byamugisha and Mr. Kanyeimbwa represented the bank and Mr. Kimuli and Mr. Bwanika appeared for the company.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>Dr. Byamugisha, who argued the appeal, informed the Court at the commencement of his submission that the appellant was not appealing against the Court of Appeal's decision up-holding the trial Court's answers to issues No. 1 and No. 4 at the trial.</p> <p>&nbsp;</p> <p>Issue No. 1 was <strong><em>"Whether the letter of 6/1/92 Exhibit P.7 (a) and the specimen signature card of Susan Margaret Howard Bristow Exhibit P.7 (b) were signed/executed by the late Dr. Alex Babitunga on behalf of the Plaintiff, and whether the same were lawfully presented to the defendant."</em></strong><br /> &nbsp;</p> <p>Exhibit P.7 (a) was a letter dated 6/1/1992, purported to have been written by Dr. Babitunga, before he died, to the manager of the bank about the company's local and foreign currency accounts.<br /> &nbsp;</p> <p>It said: -</p> <blockquote> <blockquote><br /> <br /> <strong><em>"Please find enclosed duly completed specimen signature Form. Please be advised that Mrs. S.M.H. Bristow has recently been appointed a director of the Company."</em></strong></blockquote> </blockquote> <p>&nbsp;</p> <p>&nbsp;</p> <p>Exhibit P.7 (b) a specimen signature card, purported to inform the bank that Mrs. Susan Bristow was a director of the company, and that the bank was authorized to honour and charge cheques or Bills made on the company's account provided that they were signed by two directors. While it introduced Susan as a director of the company, it did not authorize her to be a signatory to the company's bank accounts.<br /> <br /> <br /> in his answer to the first issue at the trial, which answer was up-held by the Court of Appeal, the learned trial judge, on the evidence available to him, found that signatures of Dr. Alex Babitunga appearing on exhibits P.7 (a) and P.7 (b) were forgeries. They were not signed by him. The learned trial judge also found that the purported specimen signature card for Susan was altered from <strong>"two to sign" to "one to sign."</strong><br /> &nbsp;</p> <p>Issue No. 4, which the learned trial judge answered in the negative, which answer was upheld by the Court of Appeal, was <strong><em>"whether the letter by Susan M.H. Bristow dated 27/7/93 constituted proper instructions/mandate regarding the operation of the plaintiff's bank account." </em></strong>The letter, admitted in evidence as exhibit P.8, was written by Susan M.H. Bristow, to the bank regarding the company's U.S Dollar account with the bank, it instructed the bank to: -</p> <p>(i) Issue a bank draft in the sum of British Pound Sterling 5,250.00 in favour of Cailey and Roberts (U) Ltd;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>(ii) arrange a telegraphic transfer in the sum of US$ 1,1315.00 to E.J. Brook &amp; Company, Newark, N.J,</p> <p>USA;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>(iii) issue a bank draft in the sum of US$ 27,471.00 in favour of Katebo Fisheries Ltd, and;</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>(iv) transfer the sum of ug. Shs: 115,000,000/= into the company's local account at the bank.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>The last paragraph of the letter said:</p> <p>&nbsp;</p> <p>&nbsp;</p> <p><strong><em>(v)</em></strong><em> <strong>"There appear to have been some problems with our signatories in the past, which we would like to clarify, we require only one</strong></em><br /> <strong><em>signatory to sign transactions for both our local and US$ account. We trust this clarifies matters, thank you for your assistance."</em></strong></p> <p>The letter was signed by Susan M.H. Bristow, without indicating the capacity in which she did so.<br /> &nbsp;</p> <p>it is my considered opinion that the appellant's acceptance of, and decision not to appeal against, the concurrent findings of the trial Court and the Court of Appeal on the two issues has a bearing on the appeal, it amounts to an admission by the appellant that Susan Bristow had no authority to operate the company's bank accounts with the bank, and that in so far as the bank honoured her signature and instruction to operate the company's accounts, <strong><em>"the bank acted irregularly and negligently in the operation of the company's accounts", </em></strong>in my view, this disposes of the first and third grounds of appeal, which should fail.<br /> &nbsp;</p> <p>Dr. Byamugisha next argued ground five. He submitted that contrary to the concurrent findings of the trial Court and the Court of Appeal that the company first knew of Susan's fraudulent operation of the Company's accounts, without authority, from the Police investigation report dated 30.8.2001, (exhibit P.13); Susan's fraud was within the knowledge of the company long before that date. Learned counsel contended that Paul Bakashabaruhanga (P.W1) personally knew before the Police report (P.13) that Susan was operating the company's accounts without authority. This, for instance, is indicated by the resolutions passed by the Company's extraordinary general meeting chaired by P.W1 on 23.5.1997 (exhibit D4). The resolutions so passed showed that the company already knew of Susan's fraudulent operation of the Company's bank account. At that meeting it was noted that with effect from 12.5.1997, Susan and her husband, Anthony Bristow, had ceased to be directors of the Company; and it was resolved that the couple should make financial accountability to the Company for the period 1.1.1992 to 31.8.1996 when they were managing the affairs of the company, and that the Board of Directors of the Company should use all legal means to secure such accountability from the couple including criminal proceedings. Learned counsel contended that P.W1 was the directing mind of the company. Consequently, the company's knowledge of the fraud more than six years before the suit was filed disentitled it from benefiting from the provisions of Section 25 of the Limitation Act (Cap.80). Learned Counsel contended that the matters complained of by the company occurred in 1995 and the suit was instituted in 2001 after six years had elapsed. During that period the company was aware of Susan's activities but took no action. The suit was therefore time barred when it was instituted.<br /> &nbsp;</p> <p>Mr. Kimuli, the Company's learned counsel, opposed the bank's grounds of appeal. He adopted the submissions he had made in support of the Company's suit and appeal in the High Court and the Court of Appeal respectively. He contended that the principles which govern the duty of a first appellate court and a second appellate court do apply to the instant case. The trial court and the Court of Appeal having made concurrent findings of fact, this court can only interfere with the conclusions of the Court of Appeal if the latter misapplied or failed to apply the principles set out in the relevant rules of procedure and in decided cases. Learned counsel contended that in the instant, case, there are no reasons for this court to interfere with the concurrent findings on issues of fact by the courts below. The authorities cited by the learned counsel include; <strong><em>Luwero Green Acres Ltd vs. Marubeni corporation, civil appeal No.19 of 1995. (SCU) (unreported) Banco Arabe Espanol vs. Bank of Uganda (1998) LLR 84 (SCU); Kifamunte Henry vs. Uganda (1997) LLR 72 (SCU); Bogere and Another vs. Uganda Criminal Appeal No.1 of 1997 (SCU) (unreported;) Pandya vs. Republic (1957) EA 336; Selle vs. Associated Motor Boat and Another (1968) EA 123; Coghlan vs. Cumberland (1898) Ch. 704 (CA); Thomas vs. Thomas (1947) Ac 484 (HL), etc.</em></strong><br /> &nbsp;</p> <p>in <strong><u>Banco Arabe Espanol</u> </strong>(Supra), this Court referred to what it had said in <strong><u>Kifamunte Henry</u> </strong>(Supra) with approval:<br /> &nbsp;</p> <p><strong><em>"it does not seem to us that except in the clearest of cases, we are required to re-evaluate evidence like a first appellate court. On second appeal, it is sufficient to decide whether the first appellate court in approaching its task, applied or failed to apply such principles. See: D.R Pandya vs. R (1957) E.A 336; Kairu Vs. Uganda (1978) HCB 123 This Court will no doubt consider the facts of the appeal to the extent of considering the relevant point of law or mixed law and fact raised in any appeal, if we re-evaluate the facts of each case wholesale we shall assume the duty of the first appellate court and create unnecessary uncertainty, we can interfere with the conclusions of the Court of Appeal if it appears that in consideration of the appeal as a first appellate court, the Court of Appeal misapplied or failed to apply the principles set out in such decisions such as <u>Pandya</u> (Supra), Ruwala (Supra) Kairu (Supra)".</em></strong><br /> &nbsp;</p> <p>The principles stated in this Passage in <strong><u>Kifamunte Henry </u></strong>apply to the instant case.<br /> &nbsp;</p> <p>Under ground five of appeal, the company's learned counsel submitted that in the instant case, the Court of Appeal rightly up-held the trial court's findings that time of limitation began to run when fraud by Susan, was discovered by the company through the C.I.D report dated 30.8.2001 (exhibit P.13). Before that time the fraud was concealed, as there were alterations on exhibits P6 (a), P6 (c), P7 (a) and P7 (b) in possession of the bank and no outsider could have access to them.<br /> &nbsp;</p> <p>To my mind the provisions of the Limitation Act (cap.80) applicable to ground five of the appeal are clear. Section 3 (1) of the Act provides that actions founded on contract or tort shall not be brought after the expiration of six years from the date on which the cause of action arose. Section 25 provides for postponement of the limitation of time prescribed by the Act where: -</p> <blockquote>(a) the action is based upon the fraud of the defendant or his or her agent and,<br /> (b) the right of action is concealed by the fraud of any such person as is mentioned in paragraph (a) - the period of limitation shall not begin to run until the plaintiff has discovered the fraud or could with reasonable diligence have discovered it.</blockquote> <p>&nbsp;</p> <p>in the instant case, the cause of action was based on both contract and tort.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>in <strong><em><u>"Limitation of Actions" by</u></em></strong> Michael Franks, Sweet and Maxwell Ltd, 1959, at page 202, the provisions of an English Limitation Act, equivalent to our Limitation Act (cap 80) section 25 are discussed, it is stated therein that: <strong><em>"With regard to the meaning of fraud, class (a) covers cases where the cause of action requires the allegation and proof of fraud, eg action for deceit and for rescission on the ground of fraudulent misrepresentation. It is thus of somewhat limited scope. Class (b) brings in cases where a non-fraudulent cause of action is willfully concealed from the plaintiff by the defendant either from the outset or subsequently. The defendant's conduct may be downright dishonest, but it need not be dishonest or involve moral turpitude, provided that it is reckless, or in some way unfair or discreditable having regard to the relationship between the parties-conversely, a good motive will not prevent the defendant's conduct from constituting concealed fraud, it is clear therefore that class (b) is by no means limited to common law fraud or deceit, and extends, as did concealed fraud in equity, to cases where there are no active steps taken towards concealment, on the other hand, it will not suffice to show simply that the plaintiff was in fact ignorant of his cause of action, concealment of it by the defendant, and by the defendant's fraud, must be established."</em></strong><br /> &nbsp;</p> <p>I agree with those views, in the instant case, I am unable to fault the finding of Engwau, JA, learned Justices of Court of Appeal, with which other members of the court agreed, when he said this in his judgment. <strong><em>"Time started to run against the respondent from the date when the fraud was discovered although</em></strong></p> <p><strong><em>PW1 was aware of what the CID had uncovered. Mr. Kimuli pointed out that the appellant was in possession of exhibits P6 (a), P6(c) and P7 (c), all of which were pleaded. The appellant was also in possession of exhibits P7 (a) and P7 (b). It was counsel's contention that the alterations on the specimen signature cards and exhibits P7 (a) and P7 (b) came to the knowledge of the respondent through the report (exhibit P.13). The plaint was filed on 7<sup>th</sup> March 2001, within time, according to counsel, as also found by the trial judge. I agree with those findings and I cannot fault the trial judge on the matter of limitation. The suit was not time-barred, see section 26 of the Limitation Act (cap.70). Time started to run against the respondent from the time fraud was discovered by the police report (Exbt. 13)."</em></strong><br /> <br /> <br /> in the circumstances ground five of the appeal should fall.<br /> &nbsp;</p> <p>The complaint in ground six is that the learned Justices of Appeal erred in law and in fact in holding that: <strong>"in order to constitute a lawful mandate. Anthony</strong></p> <p><strong>Bristow was supposed to sign cheques with two other signatories, when he signed alone, he was in my view, in breach of that authority. He was also in breach of that mandate when he signed with Susan who was not an authorized signatory." </strong>Learned counsel referred to Anthony Bristow's specimen signature card (exhibit P6 (d)), which mandated Anthony Bristow as a signatory, issuance by the company of exhibit P6 (d), according to learned counsel, was in accordance with the company's resolution dated 14/11/1990, (Exhibit P.4 (b). The holding by the learned Justice of Appeal was, therefore, inconsistent with that mandate. With regard to the expression <strong>"ANY TWO TO SIGN" </strong>written in bold letters on top of exhibit P.6 (d), with the word <strong>"TWO" </strong>cancelled and replaced by <strong>"ONE", </strong>learned counsel submitted that the bank should not be blamed for what apparently happened. Byarugaba Francis, (DWD, the bank's internal Manager, testified that the apparent alteration was not done by the bank, and that, in any case, the alteration was of no consequence. The learned counsel then pointed out from exhibits P10 (a), D.16 and D.17 photocopies of numerous paid cheques shown as having been signed by Anthony Bristow alone or with Susan Margaret Bristow. The cheques signed by Anthony Bristow alone, learned counsel contended, were properly honoured as having been validly signed.<br /> &nbsp;</p> <p>in opposition to ground six of the appeal, the company's learned counsel submitted that in paragraph 1 of its written statement of defence the bank admitted paragraph 5 (n) of the company's plaint, in which it was pleaded that- "5 The facts giving rise to the cause of action arose as follows:<br /> &nbsp;</p> <p>(n) Specimen signature cards for the above three signatories whose signatures were duly certified by Dr. Alex Babitunga, the Managing Director of the plaintiff, were submitted to the defendant. The aforesaid cards were endorsed <strong>"Any two to sign."</strong><br /> &nbsp;</p> <p>The <strong>"three signatories" </strong>in question were listed in paragraph 5 (m) of the plaint as:-<br /> &nbsp;</p> <p>i) <u>Anthony Douglas Bristow</u>, ii) Colin Neil Hewlett, iii) Vivian Hector Bristow,</p> <p>(Underlining supplied).<br /> &nbsp;</p> <p>The company's learned counsel submitted that the bank's admission of the company's pleading in question was of critical importance to the company's case. Learned counsel submitted that Anthony Bristow as an authorized signatory could validly sign cheques with another one authorized signatory, but not alone, nor with another person who had no authority, as he did with Susan. When the learned Justice of Appeal said that Anthony was supposed to sign cheques with <strong><u>"other signatories"</u>, </strong>it must have been a slip of the pen, according to learned counsel, because <strong>"other signatories" </strong>should have been <strong>"another signatory". </strong>Anthony Bristow's mandate as pleaded in the company's plaint and admitted in the bank's written statement of defence was clear. He could sign only with another authorized signatory. The bank acted contrary to the company's instructions by honouring cheques signed by Anthony Bristow alone or by him and Susan, who was not authorized. Debit entries resulting from such cheques should not have been made on the company's account, in the circumstances learned counsel submitted that ground six should be rejected. The passage from the judgment of the learned Justice of Appeal which gave rise to the bank's complaint in ground six of appeal was a conclusion reached by the learned Justice of Appeal in his consideration of ground six of the bank's appeal to that Court. The complaint in that ground was that the learned trial judge erred in law in holding that the sums of US$ 345,444.64 and Ug. Shs: 181,373,893/= were drawn from the company's accounts in the period when the impunged signature of Susan Bristow was being honoured by the bank and awarding those sums to the respondent, in the Court of Appeal, the bank's learned counsel argued that Anthony Bristow was an authorized signatory and the learned trial judge should not have awarded to the company the moneys he had signed for as reflected in exhibits D.16 and D.17, Mr. Kimuli, who was also the company's learned counsel in that Court, countered the bank's contention by submitting that Anthony Bristow was a signatory only to the local account and he had to sign with another signatory, not alone. This was pleaded by the company and admitted by the bank in its pleadings: Consequently, when Anthony Bristow signed alone or with Susan, that did not constitute lawful mandate to pay the cheques or honour instructions.</p> <p>The learned Justice of Appeal agreed with Mr. Kimuli's submission, hence the conclusion he reached which is objected to in ground six of this appeal.<br /> &nbsp;</p> <p>As I understand it, the conclusion of Engwau, JA, under ground six in that Court upheld the learned trial judges finding of fact in that regard. It was consistent with the pleadings of the parties and the evidence available. According to the pleadings and evidence, Anthony Bristow was supposed to sign cheques with another authorized signatory; when, therefore, the learned Justice of Appeal said that" <strong>Anthony Bristow was supposed to sign with other signatories", </strong>he could have meant that Anthony Bristow was not supposed to sign alone, but with any other of the authorized signatories, it would be a misconstruction of the learned Justice of Appeal's holding to suggest that he meant that Anthony Bristow was supposed to sign with more than one other signatory, in my view, the holding of the learned Justice of Appeal to the effect that cheques signed by Anthony Bristow together with Susan were invalid and should not have been debited to the company's accounts cannot be faulted. The fact that Susan Bristow who had no authority signed the cheques with Anthony Bristow who had authority did not validate Susan's signatures on the cheques. Consequently, ground six of appeal should fail.<br /> <br /> <br /> Ground two of the appeal, which the appellants' learned counsel argued next, complained that the learned Justices of Appeal erred in law and in fact in not holding that the company was estopped from saying that Susan Bristow was not an authorized signatory to the company's account. Relying on section 114 of the Evidence Act, the bank's learned counsel submitted that the fact that Susan Bristow was signing with Anthony Bristow, who was a director, and subsequently signed with Fred Kamugira, another director, without the company protesting, but instead acquiescing to her signatures on the cheques, estopped the company from asserting at that late stage that Susan Bristow was not authorized. Learned counsel also relied on section 23 of Bills of Exchange Act (Cap. 68). Learned counsel contended that where Susan signed with another authorized signatory, her own signature was inoperative. Where she signed alone the directors of the company did not protest. The learned counsel also relied on sections 147,153 and 157 (2) of the Companies Act (cap.110) and on <strong><u>J. C. Houghton and Company vs. Nothard, Lowe and Wills Ltd</u>, (1928) A.C.I (P.C.) and on <u>Greenwood Vs Martin Bank Ltd (1955) AC. 5 (H.L).</u> </strong>With regard to provisions of the Companies Act in question, learned counsel referred to the testimony of Paul Bakashabaruhanga (PW.1) to the effect that PW1 and Fred Kagumira became active in affairs of the company after the latter was appointed a signatory to the bank accounts of the company; PW.1 was attending board and general meetings of the company; statement of affairs of the company was tabled from August 1992; adherence to the annual budgets of the company were enforced; and the balance sheet and reports of directors were tabled for the end of 1995. Minutes of the extra ordinary General meeting of the company held on 12.5.1997 (Exhibit D. 14) show that PW. 1 attended the meeting as an administrator of the Estate of Alex Babitunga (decease) and was appointed to chair the meeting.<br /> &nbsp;</p> <p>The company's learned counsel made submissions in reply, which, he said, applied to the concurrent findings of the two courts below regarding fraud and estoppel. Learned counsel submitted that evidence of fraud by Susan, Exhibits P.7 (a) and P.7 (b), were in possession of the bank. So were Exhibits P6 (a) to P6 (d) on which there were alterations from <strong>"any two to sign" </strong>to <strong>"any one to sign" or "alone" </strong>Susan Bristow was not an authorized signatory-a fact conceded by the bank in its pleading. She could not be a lawful signatory merely by signing with others who might be lawful or authorized signatories. Learned counsel submitted that the exhibits he has referred to having been in possession of the bank, and the company not being in the know the issue of estoppel did not arise. The exhibits and the alterations on the exhibits only came to the knowledge of the company through the Police investigation Report, P.13. The company did not know, or it was not aware that Susan was signing. He contended that the cases of <strong><u>J.C Houghton &amp; Co. vs. Northard, Lowe and wills</u> </strong>(supra) and <strong><u>Greenwood vs. Martin (supra)</u> </strong>are distinguishable, and do not apply to the instant case. Learned counsel contended that in the instant case estoppel under S.114 of the Evidence Act did not apply, because the company was unaware of Susan's fraudulent signatures on the cheques until the police investigation and report. Nor does section 23 of the Bills of Exchange apply because the company did not ratify Susan's action. Learned counsel submitted that another reason the principle of estoppel does not apply to the instant case is fraud, which the learned trial judge found was perpetrated by the bank against the company, and up-held by the</p> <p>Court of Appeal. The bank cannot therefore benefit from the equitable doctrine of estoppel because its hands were not clean.<br /> &nbsp;</p> <p>Conditions for application of the equitable doctrine of estoppel are set out in section 114 of Evidence Act (Cap. 6). it provides that when one person has, by his or her declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon that belief, neither he or she nor his or her representative shall be allowed, in any suit or proceeding between himself or herself and that person or his or her representative, to deny the truth of that thing. One of the conditions for the doctrine to apply is, therefore that the act or omission by the person against whom estoppel is to be set up, as a defence, must have been intentionally caused, in the instant case the fraud which the two courts below found had caused the bank to act to its detriment believing it to be true was unknown to the company until the police report (P.13). Consequently the defence of estoppel was not available to the bank against the company. For the same reason, the company cannot be said to have ratified what Susan Bristow did. in the circumstances Section 23 of the Bills of Exchange did not apply either. I also agree with the submission of the company's learned counsel that the bank did not have clean hands to benefit from the equitable doctrine of estoppel.<br /> &nbsp;</p> <p>in my opinion, the cases of <strong><u>J.C. Houghton and Co. vs Northard, Lowe, and Wills</u> </strong>(supra) and <strong><u>Greenwood vs. Martin Bank (Supra)</u> </strong>do support the company's case. They are against the bank's case, in the former case, two rival companies, the N. Company and W. Company formed the respondent company to take over certain branches of their business of fruit importers the shares of the new company being equally divided between the two old companies, and the board consisting of two directors of the N Company - namely M. and C. Lowe and two directors of W. Company. By a brokerage agreement embodied in a letter dated in July 1924, between M. Lowe and the appellant, a firm of fruit brokers, it was arranged that the appellant should make certain advances to the N. company and, should receive all fruits consigned either to N. company or to the respondent company and keep back 70 percent of the net proceeds in reduction of the advances, and it was stipulated the respondent company should subscribe to this arrangement. The appellants also</p> <p><strong><em>"it only remains to consider whether negligence on the part of the unincriminated directors can form an estoppel against the company, I am of the opinion that it cannot, it is no part of director's duty to inspect account everyday. There was nothing in the circumstances to arouse the suspicions of the two directors as to the existence of any such agreement. AS soon as they were all at home, the whole thing was found out and the arrangement stopped, and to hold that there was estoppel because Walker, during the month of August, near the end of it, did not inspect the accounts and found out the arrangements, would be, in my opinion, going much beyond what has ever been decided against a Company.</em></strong><br /> &nbsp;</p> <p>Applying this decision to the instant case, my view is that, it would be going too far to attribute knowledge of Susan Bristow's fraud to PW.1, the documents relating to which were in the exclusive possession of the bank, in the case of <strong><u>Greenwood vs Martin's Bank</u> </strong>(supra), the appellant's account alone was opened at the respondent bank. His wife forged several cheques, which the bank paid on the appellant's account. The appellant knew about the obtained a guarantee of the loan from the two Lowes and a third director of the N. company, who was also the secretary of the respondent company. This arrangement was not ratified by any agreement under the seal of the respondent company, but the secretary wrote to the appellants purporting to confirm the arrangement on behalf of his company. The directors of the respondent Company, other than the two Lowes, first became aware of the arrangement after it had been in operation for some months, and it was then put to an end. The appellants had obtained fruit consignment to the respondent company on board several ships without production of the bills of lading, on giving an indemnity to the ships, and they sued the respondent company for delivery of the bills of Lading. The respondents counter claimed for the proceeds of fruit belonging to them and not accounted for. it was held by the House of Loads, inter alia, that the respondent company were not estopped from denying the existence of the arrangement by the knowledge of the Lowes, in as much as they were parties to the wrong done to the company, or by the omission of the other directors to inspect the accounts of the company, which would have disclosed the arrangement. At page l5, Viscount Dunedin said: forgery, but did not inform the bank in order to protect his wife. Eventually he told his wife that he would inform the bank, as a result of which the wife committed suicide. The appellant sued the bank to recover the monies they had paid out by honouring the cheques forged by his late wife. The bank successfully set up estoppel as a defence to the suit. Upholding the decision of the Court of Appeal, the House of Lords said inter alia:<br /> &nbsp;</p> <p><strong><em>"it may be said at once that there can be no question of ratification or adoption in this case. The necessary elements for ratification were not present and adoption, as understood in English Law, requires valuable consideration, which is not even suggested here. The sole question is whether in the circumstances of this case the respondents are entitled to set up an estoppel. Now the essential factors giving rise to an estoppel are, I think:</em></strong></p> <p>&nbsp;</p> <p>&nbsp;</p> <p><strong><em>(i) a representation or conduct amounting to a representation, intended to induce course of conduct on the part of the person to whom the representation is made;</em></strong></p> <p><strong><em>(ii) an act or omission by the person to whom the representation is made resulting from such representation or conduct;</em></strong></p> <p>&nbsp;</p> <p>&nbsp;</p> <p><strong><em>(Hi) a detriment to such person as a consequence of the act or omission. Mere silence cannot amount to a representation, but when there is a duty to disclose, deliberate silence may became significant and amount to a representation."</em></strong><br /> &nbsp;</p> <p>This case (Greenwood vs Martin's Bank), too, does not support the bank in the instant case, because there was no representation or conduct amounting to representation to the bank by the company, who did not know that money was being paid out of its accounts without its authority until the police investigation report (Exhibit P0.13). This is different from what happened in <u>Greenwood</u> where the account holder knew about the fraudulent withdrawal of money from his account by his wife, which he concealed from the bank until the wife committed suicide. in the circumstances, my opinion is that the facts of the instant case as established by the two courts below did not give rise to estoppel or adoption as a defence against the company's suit. The two decided cases I have discussed above therefore do not apply. Nor, in my view, did section 23 of the Bills of Exchange Act provide the bank with a defence against the company's claim, because the company is not precluded in any way from setting up as a defence Susan's fraud or lack of authority in signing the cheques debited to the company's accounts; nor did the company ratify her action.<br /> &nbsp;</p> <p>The bank's learned counsel further submitted that by virtue of the provisions of sections 147, 153(1), 157(1) and (2) of the companies Act (cap 110) and from the company's audited account at the end of every year, the company's directors, including PW.1, ought to have known that Susan Bristow was signing the company's cheques without authority. The trial court and the Court of Appeal did not make any finding on the application of these sections of the Companies Act to the instant case. This should not be surprising, because the matter was not argued before them. I shall comment briefly on the appellant's submission in this regard. Firstly there was no evidence that PW.1 and the other directors were involved in the day-to-day management of the company affairs. On the contrary, the minutes of the extra ordinary meeting of the company held on 12.5.1997 (Exhibit D.14) states:<br /> <br /> <br /> <strong>" 0.5/97 Management of the company, it was noted that:</strong></p> <p>&nbsp;</p> <p>&nbsp;</p> <p><strong>(i)</strong> <strong>with effect from 31<sup>st</sup> August 1992. the following were the duly appointed directors of the company.</strong></p> <blockquote> <table> <tbody> <tr> <td><strong>(a)</strong></td> <td><strong>S.M.H Bristow (Mrs)</strong></td> </tr> <tr> <td><strong>(b)</strong></td> <td><strong>Anthony D. Bristow</strong></td> </tr> <tr> <td><strong>(c)</strong></td> <td><strong>Paul Bakashabaruhanga, and</strong></td> </tr> <tr> <td><strong>(d)</strong></td> <td><strong>Fredie Kamugira.</strong></td> </tr> </tbody> </table> </blockquote> <p>&nbsp;</p> <p>&nbsp;</p> <p><strong>(ii)</strong> <strong>The first two directors were the only active ones involved in the day to day management of the company,</strong></p> <p>&nbsp;</p> <p><strong>(iii) The Dormant directors did not have any inkling about the state of affairs of the company particularly finances, for example, the proceeds of the skin sale of October 1993 amounting to us Dollars 108,538.85 as well as those of 1996 were no where to be seen.</strong></p> <blockquote><strong>(iv) Since September 1994 the two Bristows ceased to live at the farm. A.D. Bristow left Uganda in February 1995 whilst Mrs S. M. H. Bristow settled in Kampaala (sic) not attending to the farm,"</strong></blockquote> <p>&nbsp;</p> <p>in his evidence, PW.1 appears to confirm this on the one hand, but on the other he said that in 1995, Fred Kamugira became active particularly as regards finance.<br /> &nbsp;</p> <p>Secondly PW.Ts evidence that he was attending both general and directors meetings of the company did not, nor did other evidence, disclose what were discussed at those meetings consequently, there was no evidence that PW1 and other directors were able to know from the meetings the fraudulent activities of Susan Bristow.<br /> &nbsp;</p> <p>in the circumstances, ground two of the appeal should fall.<br /> &nbsp;</p> <p>in my considered opinion, my discussion and conclusions on grounds two and five of the appeal also dispose of ground four, which should also fail.</p> <p>The appellants' learned counsel next argued grounds seven, eight and nine of appeal together. He submitted that the three grounds are based on the appellant's evidence that:</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>(i) the deposits on the Uganda shillings account were transfers from the U.S. Dollar account. Exhibits D.16 and D.17 show how the monies on the Uganda shillings account and on the US Dollar account were used respectively. The monies were not lost.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>(ii) Many cheques were signed by Anthony Bristow and Fred Kamugira, who were authorized signatories. Consequently, cheques were not paid in breach of<br /> the contract between the bank and the company as its customer.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p>(iii) Some cheques were paid to the company's creditors.<br /> &nbsp;</p> <p>The learned counsel referred to the Report and Financial Statements of the company for the year-ended 31.8.1996 (Exhibit D.9). The report contains the report of the auditors, and a statement of the company's operation for the years 31/12/1992 to 1996. Learned counsel submitted that under SS. 101 and 102 of the Evidence Act, the company had the burden to prove that the bank acted recklessly and negligently by paying cheques signed by Susan Bristow. in the instant case, that is where the company stopped, it should have also proved that it thereby incurred loss. This the company did not do. It left it to the Court to assume that loss ensued.<br /> &nbsp;</p> <p>Under these grounds the company's learned counsel replied that as exhibit P.7 (c) showed, there was no person to operate the dollar account from 12.2.1992, because Collin Neil Hewlett had resigned from the company; Alex Babitinga had died, Anthony Douglas Bristow and Cader were living in Zimbabwe, <strong>o</strong>nly one director, namely: Vivian vector Bristow was in Uganda. Learned counsel contended that, as there was no person to operate that account, the bank should not have transferred money from that account to the local account from 12.2.1992. The Company was consequently entitled to recover from the bank monies which were debited on the accounts without its instruction. With regard to the amount of money lost by the company as a result of the bank's unauthorized payments out of the accounts, the learned counsel submitted that as found by the two courts below the testimony of PW.1 and statements of account tendered in evidence as exhibits P. 12 (a), P. 12 (b), D.16, D.17 showed that the company lost money, <strong>o</strong>n the bank's contention-that payments debited on the company's accounts were made to parties to whom the company owed debts as suppliers of goods or services to the company, the learned counsel submitted that the bank had the duty to adduce evidence to prove that withdrawals or payments from the company's accounts went to discharge the company's lawful liability. The bank did not adduce such evidence. Relying on the case of <strong><u>B. Ligget (Liverpool) Ltd. vs. Barclays Bank Ltd. (1927) All.E.R. 451</u>, </strong>learned counsel contended that the bank cannot benefit from the payments shown on exhibits D.16 and D.17 to have been made to various recipients. Mere indication of the payees, or beneficiaries of the cheques is not evidence of the company's lawful liabilities.<br /> &nbsp;</p> <p>With regard to the Report and Financial Statements for The Year Ended 31.8.1996 (Exhibit D.9) on which the bank's learned counsel relied to show that the company incurred expenditures during the five years covered by that Report, the company's learned counsel adopted his submission in the lower court to the effect that the bank called no witness to support its case that the total expenditure of shs 487,006 for the period 1992 to 1996 was legitimately incurred. Learned counsel concluded that Exhibit D.9 like exhibits D.16 and D.17 was of no use to the bank.<br /> &nbsp;</p> <p>Legal principles which govern the relationship between a bank and its customer are well settled. The duty of a bank is to act in accordance with the lawful requests of its customer in normal operation of its customer's account consequently, a banker who has paid a cheque drawn without authority or in contravention of the customer's orders or negligently cannot debit the customers account with the amount. A banker is under a duty of care to its customer which may require him to question payment. See: <strong><u>Banex Ltd vs. Cold Trust Bank civil Appeal No 29 of 1995 (SCU) (unreported), Harsbry's Laws of England, 4<sup>th </sup>Edition, volume 3 (1) paragraph 175</u>. I</strong>f the banker pays and debits it's customers in reliance on signature being his customer's, which is not so, he cannot charge its customer with that payment, in paying cheques, a banker must not be negligent and cannot charge its customer with money lost through his negligence. See: <strong><u>Pagets Law of Banking 11<sup>th</sup> Edition by Megrah, Butterworths, 1966 at page 365 and 269; Consultant Surveyors &amp; Planners vs. Standard Bank (U) Ltd. (1984) HCB, </u></strong>where a red signal manifests itself the banker's duty may be even more stringent. See: <strong><u>Barclay's Bank PLC Vs. Quin-acre Ltd &amp; Another (1992) 4 All.E.R 331.</u></strong><br /> &nbsp;</p> <p>In instant case the learned trial judge made a finding of the loss caused to the Company as follows:</p> <blockquote><br /> <br /> <strong><em>"Consequently issue No. 6 is obviously answered to say that the bank unlawfully wrongly, recklessly and negligently honoured cheques signed by Susan Bristow to the detriment of its customer. There was evidence (Exhibit P.12 (a) and P. 12 (b) to show that a sum of US$ 345,444.64 and Ug. Shs: 181,373,893/= were drawn from the company's accounts in the period when the impunged signature of Susan Bristow was being honoured by the Bank, indeed the bank has argued that it only honoured the customer's mandate, which mandate I have concluded to have been illegitimate. I only have to emphasize that the Bank in this case had to exercise due care to ensure that what happened did not occur or if it did, to rectify it".</em></strong></blockquote> <p>&nbsp;</p> <p>The Court of Appeal upheld the trial court's findings on the amounts of money paid out by the appellant from the respondent's bank accounts without the letters of authority. The finding were made by Engwau J.A in his lead judgment with which the other members of the Court agreed. He did so in disagreement with the appellant's complaints in grounds of appeal, numbers six, seven and eight. The gist of appellant's complaint in grounds six was that Anthony Bristow was authorized signatory and the trial judge should not have awarded the moneys he had signed for as reflected in exhibits D16, D17. Even if those cheques were signed by Anthony Bristow and Susan Bristow, both were signatories and the sums involved should not have been awarded to the respondent Engwau J.A in his lead judgment found, rightly so in my view, that Anthony (Bristow was a signatory, but Susan was not. In order to constitute a lawful mandate Anthony was supposed to sign cheques with another signatory. When he signed alone, he was in breach of that authority. He was also in breach of that mandate when he signed with Susan who was not an authorized signatory, in the premises, there was no justification in interference with the amounts awarded by the learned trial judge.<br /> &nbsp;</p> <p>The gist of the appellants complaint in ground seven was that the learned trial judge was wrong in holding that the credits on the Uganda shillings accounts were transfers from the US dollars accounts. Reliance was placed on exhibit D.17 for that, in the view of the appellant's counsel, it would amount to double award because Shs: 200 million came from the dollar account. The respondent's counsel replied that as from 12.2.1992 nobody had the mandate to operate the foreign currency account consequently if there were transfers from that account, those transfers were unauthorized.<br /> &nbsp;</p> <p>The learned Justice of Appeal agreed with the submission of the respondent's counsel. The respondent's learned counsel further argued that according to exhibit D.17, the total amount on the dollar account was US 75,000. According to the learned counsel's calculation, the balance on the debit side would be US$ 275,388, which was unlawfully debited to that account and that would have been the money due to the respondent, in this regard the learned Justices of Appeal found: -</p> <blockquote><strong><em>"Whether not counsel is correct in his calculations, my finding is that there was no double award by the trial judge on the matter, in that regard ground 7 also fails."</em></strong></blockquote> <p><br /> <br /> I am unable to fault the learned Justice of appeal's finding in this regard.<br /> &nbsp;</p> <p>The appellant's compliant in ground 8 was that issue No.7 at the trial was not determined. The issue was "whether the payments from the plaintiff's accounts were made to the plaintiff's creditor or for the benefit of the plaintiff." The appellant's learned counsel submitted that the payments, details of which appear on exhibits D.16 and D.17 were made to discharge the respondent's obligations-According to counsel, exhibit P.9 shows expenditures from 1992 - 1996 and, therefore, the respondent was not entitled to claim them. The respondent's learned counsel responded that the burden under sections 100 and 102 of the Evidence Act was on the appellant to show that they had mandate to effect those payments on behalf of the respondent. The appellant had not adduced any evidence at all to show that the payments from the respondent's accounts were to discharge its legal liabilities. The mere indication of the payee's or beneficiaries of cheques or instructions as in exhibits D.16 and D.17 was not evidence of legal liabilities of the respondent. Those payments could have been made by way of gifts or as part of a fraudulent scheme to Siphon the respondents' funds.<br /> &nbsp;</p> <p>In this regard, the summary of the findings of the learned Justice of Appeal, Engwau, J.A, is found in the following passage of his judgment: -<br /> &nbsp;</p> <p><strong><em>"it was incumbent, in my view, upon the appellant bank to prove that the payments en-exhibit D.16 and D.17 and the expenditures shown in Exhibit D.9 were made with authority to the respondent's creditors/beneficiaries or for the benefit of the respondent company. This burden of proof shifted to the appellant in view of the clear provisions of sections 100 and 102 of the Evidence Act. The bank should have called evidence to show that the payment/withdrawals from the company accounts went to discharge legal liabilities of the respondent company, in the absence of such evidence, Exhibits D.16, D.17 and D.19, are of no use to the appellant's case."</em></strong></p> <p>After I had considered these grounds (seven, eight and nine), it became necessary for me to obtain from the parties to the appeal clarification of certain exhibits and evidence relevant to the determination of the issue of quantum of damages, which is the substance of the appellant's complaints in those grounds. Such clarifications appeared necessary from points raised by the appellant's learned counsel.<br /> &nbsp;</p> <p>After the hearing of the appeal, the Court sought from the parties clarification of certain exhibits and evidence which we considered relevant to the issue of quantum of damages. Such clarifications appeared necessary from the points raised by the appellant's learned counsel.<br /> &nbsp;</p> <p>The exhibits in question are D.16 and D.17. Pages 220 to 223 of exhibit D.16 are shown to have been signed by Anthony Bristow, who was an authorized signatory; by Susan H. Bristow, who was an unauthorized signatory; and by A. Bristow together with F. Kamugira, both authorized signatories. The clarification we sought was, whether those cheques shown as signed by the authorized signatories were counted against the bank or not. Pages 226 and part of page 227 of exhibit D.17 do not show who were the signatories to the debit entries; whereas signatories on the second part of pages 227 are shown to be either Susan H Bristow alone or A. Bristow with Susan H. Bristow. The clarification we sought was whether all the debit entries on both pages of exhibit D 17 were unauthorized. We also sought clarification of where in the record were exhibits p. 12 (a) and p.12 (b) to be found. Exhibit p12 (a) was absent from the record altogether.<br /> &nbsp;</p> <p>The Registrar of the Court conveyed to the Lawyers of the parties in writing the clarifications we had sought, and they replied, the respondents' lawyers doing so first.<br /> &nbsp;</p> <p>In my opinion the clarifications filed by the parties mostly repeated the submissions made by them in this Court and the Court of Appeal. Exhibit P.12 (a) was filed by the appellant as a supplementary record. Further in my view, the clarifications do not affect the concurrent findings of the trial court and the Court of Appeal on the issue of the quantum of damages.<br /> &nbsp;</p> <p>In considering the quantum of damages, an important factor, which must be borne in mind, is that all documents concerning the respondent's accounts were in the possession and custody of appellant bank. Only the bank knew and was responsible for entries on the bank accounts, it bore responsibility as the banker to what entries were made on those accounts without respondent's authority.<br /> &nbsp;</p> <p>In the circumstances I am satisfied that the Court of Appeal was justified in up-holding the trial court's conclusion that the bank was liable for the respondent's moneys claimed in the suit, namely US dollars 346,444,64 and Uganda shillings 181,375,893,<br /> &nbsp;</p> <p>The appeal should therefore be dismissed with costs to the respondent in this Court and Courts below.</p> <p>&nbsp;</p> <p><strong>JUDGMENT OF ODOKI, CJ.</strong></p> <p>I have had the advantage of reading in draft the judgment prepared by my learned brother, Oder JSC. I agree with him that this appeal should be dismissed with costs to the respondent.</p> <p>As the other members of the Court also agree, this appeal is dismissed with costs to the respondent in this Court and the Courts below.</p> <p>&nbsp;</p> <p><strong><u>JUDGMENT OF TSEKOOKO. JSC</u>:</strong></p> <p>&nbsp;</p> <p>I have had the benefit of reading in advance the draft judgment prepared by my learned brother, the Hon. Mr. Justice A.H.O.Oder, JSC, which he has just delivered. I agreed with his conclusions and the orders which he has proposed.</p> <p>I have observations to make concerning the value and importance of scheduling conference in Civil Cases. A suit in these proceedings was instituted in the year 2001. By then the Civil Procedure (Amendment) Rules, 1998 (S.I. 1998 No.26) had been operational for three years. By the time the trial began on 31/8/2001, lawyers in</p> <p>this case were expected to know the scheduling conference procedure introduced by S.I. 1998 No.26 and the value and importance of such conference. None appears to have been held in this case.<br /> &nbsp;</p> <p>The scheduling conference was introduced by the new Order XB of the Civil Procedure Rules. Because of Rule 1 (1) of that Order, a trial Court is expected to hold a scheduling conference to sort out points of agreement and disagreement, the possibility of mediation, arbitration and any other form of settlement. Because the central issue in this case is reconciliation of figures, I expected that at a scheduling conference stage, parties in this case should have produced properly audited accounts of the respondents as part of expert evidence and try to narrow down points of disagreement. That is the stage when proper issues would emerge and parties and the court would settle the real issues to be tried and determined.<br /> <br /> <br /> It puzzles me that counsel for both parties were content with throwing at the trial judge just a mass of documents such as the numerous cheques which had been signed and paid out and numerous documents involved in the payments. In this case the amount of money claimed by the plaintiff or denied by the defendant was central. Since the transaction involved spanned over a period of time, it seems to me that the most helpful evidence would have come from the said experts (accountants or auditors) which would have reflected what was paid out, through which cheques and how much of it was paid on the business transactions of the respondent and the time of payment.<br /> &nbsp;</p> <p>Rather than calling Mr. Erongot <strong>(PW3) </strong>to testify only on banking practices, accountants or auditors should have been engaged to examine relevant documents and ascertain the money which was in dispute and produce a true position as the experts saw it.<br /> &nbsp;</p> <p>As it is, parties left court to harzard a guess at what money was missing. No wonder that the learned trial judge arrived at the quantum in the manner he did. This forced us to seek clarifications from both parties. The clarifications provided have not helped matters either. This case is yet one of the increasing number of cases where parties do not help courts to decide cases by assembling and presenting relevant evidence with appropriate deligence.</p> <p>&nbsp;</p> <p>&nbsp;</p> <p><strong><u>JUDGMENT OF KAROKORA, JSC:</u></strong></p> <p>I have had the advantage of reading in draft the judgment prepared by my learned brother, the Hon. Justice A. H. O. Oder, JSC and I agree with him that the appeal has no merit and ought to be dismissed with costs here and in the courts below.</p> <p>&nbsp;</p> <p><strong><u>JUDGMENT OF MULENGA JSC.</u></strong></p> <p>&nbsp;</p> <p>I had opportunity to read in draft, the judgment that my honorable and learned brother, Oder JSC, has just delivered. I agree with him that this appeal should be dismissed with costs to the respondent. For emphasis only, I wish to add brief remarks concerning the 7th, 8th and 9th grounds of appeal.<br /> <br /> <br /> It is not necessary for me to outline here the facts and background of the appeal as they are adequately set out in the judgment of Oder JSC. It suffices to say that the respondent company, which at all material times maintained with the appellant bank, two bank accounts in dollars and in shillings respectively, sued the appellant for, inter alia, recovery of sums of money that the appellant debited on the said accounts in breach of its mandate. The appellant's main defence was that the debits were in respect of payments made out of the accounts by authorized signatories. Further, in addition to other technical defences like estoppel and limitation on which I do not intend to comment, the appellant contended that the payments in respect of the debits complained of, were for the respondent's benefit, and that consequently the debits did not result into any loss to the respondent. That contention is the basis of grounds 7, 8 and 9 whose substance may for clarity be recast thus –</p> <p><strong><em>That the Court of Appeal erred -</em></strong></p> <blockquote> <table> <tbody> <tr> <td>•</td> <td><strong><em>in failing to hold that the credits on the shilling account were transfers from the dollar account;</em></strong></td> </tr> <tr> <td>•</td> <td><strong><em>in holding that the burden was on the appellant to prove that the withdrawals from the said bank accounts were for discharging the respondent's legal liabilities; and</em></strong></td> </tr> <tr> <td>•</td> <td><strong><em>in failing to hold that the payments from the said accounts were to the respondent's creditors or for the respondent's benefit</em></strong></td> </tr> </tbody> </table> </blockquote> <p><sup>There are two prongs in the submissions of counsel for the appellant in respect of these grounds of appeal. The first is that the respondent had the burden to prove, not only that the withdrawals from its bank accounts were in breach of mandate, but also that they resulted in loss to the respondent. The second is that compensating the respondent for the sums withdrawn from both accounts would amount to double compensation because the sums on the shillings account were transfers from the dollar account.</sup></p> <p><sup>With due respect to learned counsel for the appellant, there is no basis for the latter prong. I have not found any evidence on record showing the source of the credits on the respondent's shillings account. The only semblance of such evidence is Exh.D17, which is a list of debits made on the dollar account between 13.1.93 and 8.11.95. Out of about 80 debits, 14 are classified as transfers to the local currency account, i.e. the shillings account. In my view, that is not proof that all the sums credited to the shillings account were sourced from the dollar account.</sup><br /> <br /> <br /> <sup>The Court of Appeal considered the issue of the burden of proof and in my view rightly held in effect that upon the respondent showing that the withdrawals from its accounts were made in breach of mandate the burden shifted to the appellant to prove its claim that the withdrawals were for discharging the respondent's liabilities or otherwise for the respondent's benefit, and did not occasion loss. In this regard, the appellant relied mainly on Exhs. D16 and D17. The former is a list of debits made on the shillings account between 6.1.93 and 31.12.96; while the latter as I have just noted is the list of debits on the dollar account. The appellant compiled both lists for the purpose of the suit and while the suit was pending hearing. Both lists commence from January 1993 apparently because the bank's records for 1992 were destroyed. In my view the lists do not assist the appellant to discharge its burden to show that the debits were in respect of payments to discharge the respondent's legal liabilities or otherwise for its benefit. Their inadequacy may be illustrated in two respects. On both exhibits many debits are listed with no indication of the signatory that made the payment.</sup><br /> <br /> <sup>Secondly none of the listed payments is supported by any invoice or other evidence to show that the payee is a legitimate creditor of the respondent.</sup></p> <p>&nbsp;</p> <p><sup>The nearest I would have considered to be acceptable are debits for ledger fees and other bank charges, but they negligible and were not pursued in the submissions.</sup></p> <p><sup>In conclusion I would hold that the Court of Appeal did not err in upholding the award of damages made to the respondent by the trial court. The appellant has not made out a case for disallowing or reducing it.</sup><br /> <br /> &nbsp;</p> <p><sup><strong><em>DATED at Mengo the 17th day of August 2005.</em></strong></sup></p> </div></div></div><div class="view view-download-button view-id-download_button view-display-id-entity_view_1 view-dom-id-2283a32c1df641a2703295084e9b72ef"> <div class="view-content"> <div class="views-row views-row-1 views-row-odd views-row-first views-row-last"> <div class="views-field views-field-field-download"> <div class="field-content"></div> </div> <div class="views-field views-field-field-download-1"> <div class="field-content"></div> </div> </div> </div> </div> Mon, 27 Jul 2015 13:35:48 +0000 Anonymous 15717 at https://old.ulii.org Fredrick J.k Zaabwe v Orient Bank Ltd and 5 Others ((Civil Appeal No.4 of 2006)) [2007] UGSC 21 (10 July 2007); https://old.ulii.org/ug/judgment/supreme-court-uganda/2007/21 <section class="field field-name-field-flynote field-type-taxonomy-term-reference field-label-above view-mode-rss"><h2 class="field-label">Flynote:&nbsp;</h2><ul class="field-items"><li class="field-item even"><a href="/tags/bank-customer-relationship" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Bank-Customer Relationship</a></li><li class="field-item odd"><a href="/tags/fraud-0" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Fraud</a></li><li class="field-item even"><a href="/tags/agency" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Agency</a></li><li class="field-item odd"><a href="/tags/breach-fiduciary-duties" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Breach of Fiduciary Duties</a></li><li class="field-item even"><a href="/tags/fiduciary-duty-bank" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Fiduciary Duty of A Bank</a></li><li class="field-item odd"><a href="/tags/mortgage" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">Mortgage</a></li><li class="field-item even"><a href="/tags/cl" typeof="skos:Concept" property="rdfs:label skos:prefLabel" datatype="">CL</a></li></ul></section><div class="field field-name-body field-type-text-with-summary field-label-hidden view-mode-rss"><div class="field-items"><div class="field-item even" property="content:encoded"><p>&nbsp;</p> <p><br /> <strong>THE REPUBLIC OF UGANDA</strong><br /> <br /> <br /> <strong>IN THE SUPREME COURT OF UGANADA</strong><br /> <br /> <strong><u>AT MENGO<br /> &nbsp;</u></strong><br /> <strong>&nbsp;</strong><br /> <strong>CIVIL APPEAL NO. 04/2006</strong><br /> &nbsp;</p> <p><strong>(CORAM</strong><strong>: TSEKOOKO, KAROKORA, MULENGA, </strong><strong>KANYEIHAMBA<br /> &nbsp;</strong><strong> </strong><strong>KATUREEBE,JJ.SC)</strong><strong>.</strong><br /> <br /> &nbsp;</p> <p><strong>BETWEEN</strong><br /> &nbsp;</p> <p><strong>FREDRICK J.K. ZAABWE :::::::::::::::::::::::::::::</strong><strong>::::::::::::::::</strong><strong>:</strong><strong> </strong><strong>APPELLANT</strong><br /> &nbsp;</p> <p><strong>AND</strong></p> <p>&nbsp;</p> <p><strong>1. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; ORIENT BANK LTD&nbsp; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; )<br /> 2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; MARS TRADING CO. LTD&nbsp;&nbsp;&nbsp;&nbsp; )<br /> 3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; ALLAN SHONUBI&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; )<br /> 4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; MARTIN NKUTU&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </strong><strong>)</strong><strong>:</strong><strong>:::::::</strong><strong>:::::::::::::: </strong><strong> RESPONDENTS.<br /> 5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; TITO TWIJUKYE&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; )<br /> 6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; RENZIGYE BYARUHANGA&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; )</strong><br /> <br /> &nbsp;</p> <p>&nbsp;</p> <div><strong><em>(Appeal from the Judgment of the Court of Appea</em></strong><strong><em>l , at Kampala</em></strong><strong><em> (Twinomuju</em></strong><strong><em>ni, Byamugisha and Kavuma, JJA)</em></strong><strong><em> dated 23</em></strong><strong><em><sup>rd</sup></em></strong><strong><em> December 2005 i</em></strong><strong><em>n Civil Appeal No. 10 of 2003).</em></strong></div> <p>&nbsp;</p> <p><strong><u>JUDGMENT OF KATUREEBE, JSC.</u></strong><br /> &nbsp;</p> <div>This is a second appeal by the appellant, both his original suit in the High Court and his subsequent appeal to the Court of Appeal having been dismissed.<br /> <br /> The facts of the case are not in contention. The appellant, who is an experienced Advocate, found himself indebted to the Law Council, in the sum of Shs.1,000,000/= which he was required to pay within a given time. He did not have the money. He then approached a friend, also his client, one Livingstone Masambira Sewanyana to assist him to pay the money. Mr. Sewanyana agreed but required the appellant to execute a power of attorney in favour of 2<sup>nd</sup> respondent, a limited liability company, in which Sewanyana was a shareholder and director which would then borrow the money<strong> </strong>from a bank. On 7<sup>th</sup> November 1996, the appellant executed a Power of Attorney in respect of his land comprised in Kibuga Block 9 Plot 534. The appellant was the registered proprietor of that land. Sewanyana then gave to the appellant a personal cheque for Shs.1,000,000/= written in favour of the Law Council to settle the appellant’s obligations to that body. The cheque was never honoured by the bank for want of sufficient funds on the account. The appellant reported this to Sewanyana, who advised that the cheque be re-banked. The appellant accordingly advised the Law Council to re-bank the cheque, which it did. The cheque bounced once again. In the meantime, Sewanyana had also introduced two of his fellow shareholders/directors in the 2<sup>nd</sup> respondent to the appellant, and the appellant surrendered to them not only the power of attorney but also the certificate of title in respect of his said land. The Power of Attorney was then registered with the Registrar of Documents.<br /> <br /> Thereafter, and on the basis of the Power of Attorney, the 2<sup>nd</sup> respondent mortgaged the appellant’s property to the 1<sup>st</sup> respondent to secure its borrowing from the 1<sup>st</sup> respondent. A mortgage deed was duly drawn to this effect. The 2<sup>nd</sup> respondent defaulted and failed to pay back the money it borrowed from the 1<sup>st</sup> respondent. In consequence thereof the 1<sup>st</sup> respondent sold the property,&nbsp; Kibuga Block 9 Plot 534, to one Ali Hussein for Shs.35,000,000/= on 11<sup>th</sup> December 1998. On 19<sup>th</sup> May 1999, the appellant was evicted from his house on the property aforesaid by the 5<sup>th</sup> and 6<sup>th</sup> respondents. He and his family have consequently had to live away from his property. His law office or chambers which were also on the same property had to close. The appellant filed a suit in the High Court challenging the mortgaging and sale of his property and alleging fraud on the part of the respondents. He was unsuccessful. He appealed to the Court of Appeal which also concurred with the High Court that there was no merit in the case and dismissed his appeal, hence this second appeal.<br /> <br /> The appellant filed six grounds of appeal and filed written submissions in support thereof. For ease of reference, I reproduce the grounds of appeal in full.<br /> <br /> <strong>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </strong></div> <div><strong>“THAT the learned Justices of Appeal erred in law in that they allowed the trial Judge’s conclusion that the mortgage was made in consequence of the appellant’s power of attorney to stand when that conclusion </strong><strong>was not supported by evidence on</strong><strong> record.</strong></div> <div><br /> <strong>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </strong></div> <div><strong>THAT the learned Justices of Appeal erred in law </strong><strong>in </strong><strong>that they h</strong><strong>eld that the mortgage against the appellant’s land was valid when it did not comply</strong><strong> with the provisions of the law.</strong></div> <div><br /> <strong>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </strong></div> <div><strong>THAT the learned Justices of Appeal erred in law in that they held that no fraud was committed against the appellant when oral and documentary evidence on record clearly indicated that fraud was committed against him.</strong></div> <div><br /> <strong>4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </strong></div> <div><strong>THAT the learned Justices of Appeal erred in law in that they failed to consider, review, appreciate the evidence on record and draw just conclusions.</strong></div> <div><br /> <strong>5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </strong></div> <div><strong>THAT the learned Justices of Appeal erred in law in that they ignored the documents which the Court of Appeal under Reference No.90/2003, allowed the appellant to produce at the time of hearing his appeal and that this act denied the appellant of his right.</strong></div> <div><br /> <strong>6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </strong></div> <div><strong>THAT the learned Justices of Appeal erred in law in that they dismissed the appellant’s appeal in complete disregard of the facts;</strong></div> <div><br /> <strong>(i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </strong></div> <div><strong>That D.W.1’s evidence was false and unreliable</strong><br /> <strong>(ii)&nbsp;&nbsp;&nbsp;&nbsp; </strong><strong>That D.W.2’s evidence was unreliable because it was hearsay.</strong><br /> <strong>(iii)&nbsp;&nbsp;&nbsp; </strong><strong>That the 2</strong><strong><sup>nd</sup></strong><strong> respondent did not file any defence or defend the suit or contradict the appellant’s evidence.</strong><br /> <strong>(iv)&nbsp;&nbsp;&nbsp;&nbsp; </strong><strong>That the 4</strong><strong><sup>th</sup></strong><strong>, 5</strong><strong><sup>th</sup></strong><strong> and 6</strong><strong><sup>th</sup></strong><strong> respondents did not appear before the court and adduce any evidence to contradict that of the complain</strong><strong>an</strong><strong>t.”</strong></div> <div><br /> Before I consider the arguments in support of these grounds, I wish to comment on the grounds generally. Rule 81(1) of the Rules of this Court requires a memorandum of appeal to “set forth concisely and under distinct heads numbered consecutively, <u>without argument or narrative</u>, the grounds of objection to the decision appealed against,……..”<br /> <br /> Clearly, some of the grounds set out in the memorandum of appeal infringe the above rule, in so far as they are argumentative and narrative. Parties or their counsel should always take care to file memorandum of appeal which comply with the rule. In the interests of justice, however, we decided to determine the appeal despite the defect.<br /> <br /> In support of ground one, the appellant submits that the mortgage was not made on the basis of the appellant’s power of attorney in that the mortgage deed referred to Kyadondo Block 9 Plot 534 and named the 2<sup>nd</sup> respondent as beneficial owners but did not refer to the appellant’s name, power of attorney or Kibuga Block 9 Plot 534.<br /> <br /> He submitted further that Section 114 of the Registration of Titles Act (R.T.A) only authorised the registered proprietor or holder of a power of attorney to mortgage the land, and that under the Eleventh Schedule to that Act, the mortgagor had to state the capacity under which he mortgaged the land. He submits that Kyadondo Block is different from Kibuga Block and therefore the land referred to in the mortgage was not his land. He further argues that powers of attorney are construed strictly, and the instrument will not bind the parties unless it complies with the provisions of the power of attorney. Therefore, he argues, in so far as the mortgage deed did not refer to the appellant or his title, it was unlawful to register the mortgage on the appellant’s title. He cites the Privy Council decision in the case of <strong><em>POWIS</em></strong><strong><em> </em></strong><strong><em>AND BYANT –Vs- Lc QUEBEC BANK, 1892 AC 170 </em></strong>and also cites<strong><em> SINPRA –Vs- UGANDA REHABILITATION DEVELOPMENT FOUNDATION HSCS NO. 199 OF 1995</em></strong> for the proposition that the contracting party is bound to inquire into the extent of the agent’s authority, if he is dealing with an agent, and that a power of attorney must be strictly construed.<br /> <br /> In reply, counsel for the 1<sup>st</sup>, 3<sup>rd</sup>, 4<sup>th</sup> , 5<sup>th</sup> and 6<sup>th</sup> respondents, argued that the learned Justices of Appeal correctly found that the mortgage was made pursuant to the power of attorney given by the appellant to the 2<sup>nd</sup> respondent. He argues that the power of attorney was unconditional and did not state what the funds borrowed were to be applied to, nor did it provide a borrowing limit. He concedes that there was an error in the description of the property as Kyadondo Block 9 Plot 534 instead of Kibuga Block 9 Plot 534 as given in the power of attorney, but argues that there was never any doubt as to the property that was in contention in the minds of all the parties involved. He argues that since the appellant had himself visited the offices of the 1<sup>st</sup> respondent and confirmed that he had issued the power of attorney, he could not turn around to argue that the property mortgaged was not his property. The power of attorney had been duly registered with the Registrar of Documents as required by section 146(2) of the Registration of Titles Act, and this was submitted to the Registrar together with the mortgage. He argues that it is not necessary in law to expressly reference the power of attorney, in the body of the mortgage deed, nor is it necessary to state that the 2<sup>nd</sup> respondent was a mortgagor by virtue of power of attorney, and failure to so state did not invalidate the mortgage. He submits that the Eleventh Schedule to the RTA is optional and does not require the capacity of the mortgagor to be stated. The language of the power of attorney was clear and was followed. He prays that ground one be rejected.<br /> <br /> It is necessary to look at the record and consider the evidence that was adduced in court and which the lower courts evaluated. Ground one is similar to ground one of the memorandum which the appellant filed in the Court of Appeal. Twinomujuni, JA., who wrote the lead judgment, correctly in my view, directed himself with regard to the law as to the duty of the first appellate court. He states at page 5 of his judgment,</div> <div><strong><em>“The duty of this court as the first appellate court is well settled. It is to evaluate all the evidence which was ad</em></strong><strong><em>duced before the trial court an</em></strong><strong><em>d to arrive at its own conclusions as to whether the finding of the trial court can be supported …..I have studied the record of the trial …………..and all the evidence which was adduced before the learned trial judge. I now proceed to evaluate the evidence and to pronounce </em></strong><strong><em> </em></strong><strong><em>myself</em></strong><strong><em> on the conclusion reached by the trial court”.</em></strong><br /> &nbsp;</div> <div>Having so properly directed itself as to its duty, the question is whether the Court of Appeal did actually evaluate the evidence in arriving at its decision. The crucial document in this case in my view, is the power of attorney. The appellant himself testified thus.</div> <div><strong><em>“In October 1996, I was required to pay Shs.1,000,000/= to Law council in a matter that was pending there. I did not have the money to pay them. My client Livingstone </em></strong><strong><em>Masambira Sewanyana</em></strong><strong><em> learned that I was not able to pay. He offered to assist me. </em></strong><strong><em><u>He proposed to me that his company called Mars Trading Company Ltd could borrow the money on my behalf if I executed a power of attorney in the company’s favour over my land Kibuga Block 9 Plot 534”</u></em></strong><strong><em>. (Page 43 of record). </em></strong>(Emphasis added).</div> <div><br /> Even under cross-examination, the appellant maintained this position and in his evidence was not shaken. The appellant then proceeded to testify how Sewanyana introduced to him the other shareholders / directors of the company, and how Sewanyana gave to the appellant a cheque for shs.1,000,000/= in the names of the Law Council. The appellant then further testified at page 45 thus:<br /> &nbsp;</div> <div><strong><em>“On 4</em></strong><strong><em><sup>th</sup></em></strong><strong><em> November 1996, Sewanyana, Martin </em></strong><strong><em>Wetay</em></strong><strong><em>a</em></strong><strong><em> one </em></strong><strong><em>S</em></strong><strong><em>atyanarayana</em></strong><strong><em> and another person whose name I did not know came to my home. On 5</em></strong><strong><em><sup>th</sup></em></strong><strong><em> November 1996, a valuer came and made a valuation report to Martin Wetaya. The property was valued at Shs. 40,000,000/=. At the time Wetaya worked for immigaration department.</em></strong></div> <div>&nbsp;</div> <div><strong><em>On 7</em></strong><strong><em><sup>th</sup></em></strong><strong><em> November 1996, I executed a power of attorney in favour of Mars Trading Company Ltd.”</em></strong></div> <div><br /> Apparently that same day 7<sup>th</sup> November 1996, he was invited to the offices of the 1<sup>st</sup> respondent where he signed a declaration that the property had no incumbrances. The power of attorney was then put in as exhibit P.II. In my opinion, the language of the power of attorney is crucial in the determination of this case. The power of attorney exhibited is quite clear. It states that:- the appellant “<strong><em>appoints M/s MARS TRADING COMPANY LTED P.O. BOX 7528, KAMPALA my attorneys in fact in law</em></strong><strong><em><u> and in my name and on my behalf to do</u></em></strong><strong><em> and execute the following acts and things that is to say:-<br /> 1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; to use, mortgage or give in as security for a loan or loans my land and house situated at Kagugube Hill, Makerere and comprised in KIBUGA BLOCK 9 PLOT 534.</em></strong><br /> <br /> Clearly one of the acts authorised by the power of attorney is to mortgage his land comprised in Kibuga Block 9 Plot 534. There is no apparent doubt as to the property in question, i.e. his land and house at Kagugube Hill, Makerere . But it is important to note the language of the power of attorney. The 2<sup>nd</sup> respondent was appointed to act as attorney in <em>the</em><strong><em> </em></strong><strong><em><u>name of</u></em></strong><strong><em> and on behalf of</em></strong> the appellant. It could not act on behalf of itself. It is therefore necessary to examine the nature and effect of a power of attorney in law. Can a donee of a power of attorney use it to his benefit and to the exclusion or detriment of the donor? Can a donee borrow money from the bank solely to finance his own business even where the donor of the power of attorney has no interest, and secure such borrowing by mortgaging the property of the donor?</div> <div>&nbsp;</div> <div><strong><em>“BLACK’S LAW DICTIONARY defines “power of attorney” as “an instrument in writing whereby one person, as principal, appoints another as his agent and confers authority to perform certain specified acts or kinds of act on behalf of principal …….an instrument authorising another to act as one’s agent or attorney………such power may be either general (full) or special (limited).” </em></strong></div> <div><br /> Section 146(1) of the Registration of Title Act states:</div> <div><strong><em>“(1)</em></strong> <strong><em>The proprietor of any la</em></strong><strong><em>nd under the operation of this A</em></strong><strong><em>ct or of any lease or mortgage may appoint any person to act for him or her in transferring that land, lease or mortgage or otherwise dealing with it by signing a power of attorney in the form in the Sixteenth Schedule to this Act.”</em></strong></div> <div><br /> The point to note here is that the donee of a power of attorney acts as agent of the donor, and for the donor. He cannot use the power of attorney for his own benefit. The Privy Council decision, on an appeal arising from the Supreme Court of Canada, in the case of <strong><em>IMPERIAL BANK OF CANADA –Vs- BEGLEY [1936] 2 All ER 367 </em></strong> is good authority for the principal that where an agent, who has been given a power of attorney to do certain things, uses the power to do something for a proper purpose, but the act done is for the agent’s own purposes to the exclusion and detriment of the principal, the actions of the agent will be outside the scope of the power of attorney and are not even capable of ratification by the principal.<br /> <br /> In the words of Lord MAUGHAM at page 374:</div> <div><strong><em>“The first essential to the doctrine of ratification, with its necessary consequence of relating back, is that the agent shall not be </em></strong><strong><em>acting for </em></strong><strong><em> </em></strong><strong><em>himself, but shall be intending to bind </em></strong><strong><em>a named or ascertainable principal. If the suggestion of ratification in this case is analysed it comes to this, that </em></strong><strong><em>the agent having put some of the principal’s money in his pocket, the latter “ratifies” the act. For the reasons given this is not possible as a legal conception, since the agent did not take, and could not be deemed to have taken, the money for himself </em></strong><strong><em>as agent</em></strong><strong><em> for the principal.”</em></strong></div> <div>In that case, a person who had been given a power of attorney by the respondent to operate her bank account with the appellant bank for purposes of carrying out some investment for her, had actually used the power to draw money from her account to pay off his own debts with the bank. This he had done with the full knowledge and concurrence of the bank. It was held that both the agent and the bank would be liable to the respondent.<br /> <br /> In this instant case, the agent used the power of attorney to secure its own indebtedness to the 1<sup>st</sup> respondent with the full knowledge and participation of 1<sup>st</sup> respondent. The extent of the borrowing and the purpose for which the loan facilities were required was not disclosed to the appellant.</div> <div><br /> In</div> </div></div></div><div class="view view-download-button view-id-download_button view-display-id-entity_view_1 view-dom-id-9cf691cfd04811e7216d233d2e1fec60"> <div class="view-content"> <div class="views-row views-row-1 views-row-odd views-row-first views-row-last"> <div class="views-field views-field-field-download"> <div class="field-content"><a href="https://old.ulii.org/system/files/judgment/supreme-court/2007/21/supreme-court-2007-21.rtf" target="_blank"><img src="https://africanlii.org/sites/default/files/Download-Button-red.png" width="180"> </a></div> </div> <div class="views-field views-field-field-download-1"> <div class="field-content"></div> </div> </div> </div> </div> Mon, 27 Jul 2015 13:33:11 +0000 Anonymous 15419 at https://old.ulii.org