THE POSITION OF UGANDAN BORROWERS UPON DEFAULT
ON BANK LOANS: WHAT BORROWERS NEED TO KNOW ABOUT
POST-LOCKDOWN FORECLOSURES OF DISTRESSED
PROPERTY IN UGANDA.
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Recent data from the World Bank
showed that Uganda’s real GDP grew
by 2.9% in the Financial year 2020, less
than half of the 6.8% recorded in the
financial year 2019, due to the effects of
the Covid-19 pandemic with the GDP
expected to grow at a similar level in
the Financial year 2021 thereby painting
a grim picture of the months ahead.
Consequently, upon revision of the
Covid-19 measures issued in June, 2021;
besides relaxation of various
restrictions, it became evidently clear
that the reinstatement of restrictions to
combat the second wave of the
pandemic had financially impacted
Borrowers in Uganda. As some of the
restrictions on public transport were
lifted, debt recovery was back on the
agenda for most Banks in Uganda.
What is “distressed property”?
Distressed property can be defined as
property under foreclosure or is being
sold by a Bank to recover monies under
a credit facility due to the property
owner defaulting on their loan
obligations. As we move out of the
second phase of the pandemic, we
highlight how existing measures have
impacted borrower’s rights and what
potential buyers of distressed property
need to know before closing any
transaction
When does property become distressed?
Ugandan Banks are required to classify
their loan portfolios in accordance with
the criteria set forth in the Financial
Institutions (Credit Classification and
Provisioning) Regulations, 2005. A
credit facility with a pre-established
repayment plan is considered
non-performing when the principle/
interest is due and unpaid for 90 days
or more. The definition in the
regulations serves as a guide for Banks
when determining Non-Performing
Loans (“NPLS”).
Furthermore, Financial institutions are
required to make provisions for
Non- performing loans depending on
the classification of the loan. It is
noteworthy that in dealing with NPLs,
the conduct of Financial Institutions is
guided by the principles that underlie
Bank of Uganda’s Financial Consumer
Protection Guidelines.
In contrast with the Statutory local
reporting requirements, IFRS 9 which
commenced in January 2018, requires a
Bank to not only assess loans that have
already gone into default but must also
identify and assess the probability to
determine which Borrowers are likely to
default, what the expected losses are
and how that impacts on the capital
they must hold to provision for those
potential losses. This gives Banks
enough planning in dealing with NPLs.
Consequently, it can be argued that
property becomes distressed when a
loan is Non-performing and the Bank
commences procedures for realisation
of their money through sale of the
pledged property. However, during the
period of the lockdown, management of NPLs was in addition to existing regula-
tions guided by the Bank of Uganda
credit relief measures.
Supervised Financial Institutions (SFIs)
were advised to obtain proof of
consent to all restructuring offers
presented to borrowers inorder to
obtain the proper authorizations.
– SFIs were also permitted to make
unsolicited offers for a restructuring to
their customers during this 12-month
period.
Credit Relief measures: an overview
In anticipation of the economic shocks
caused by the Covid-19 pandemic, Bank
of Uganda (“BOU”), the Central Bank in
its supervisory role extended the
one-year credit relief measures of April
2020, for another 6 months. Additional-
ly, in the monetary policy statement of
August, 2021, BOU noted that the
Credit Relief Measures (CRMs) shall
expire on 30th September, 2021, but
BOU shall on a case- by- case basis, put
in place policy interventions for those
sectors that remain under lockdown.
The credit relief measures in brief
provided for the following;
– Repayment holidays for a maximum of
12 months
– Loan tenor extensions
– Suspension of payment of arrears as a
pre-condition to restructuring of loans
– Supervised Financial Institutions (SFIs)
were advised to obtain proof of
consent to all restructuring offers
presented to borrowers inorder to
obtain the proper authorizations.
– SFIs were also permitted to make
unsolicited offers for a restructuring to
their customers during this 12-month
period.
These credit relief measures proved to
be a timely intervention with recent
statistics showing that up to UGX 7.9
trillion worth of facilities were restruc-
tured thereby mitigating the impact of
the pandemic on distressed borrowers
with NPLs.
By and large, the discretion left to SFI,
meant that a Borrower had to rely on
the SFI to have sufficient expertise to
determine what kind of loans qualified
for relief.
Inevitably the technical and complex
nature of managing loans would
eventually give rise to a concern that
too much power to decide the fate of
Borrowers had been placed in the
hands of the Banks, rather than the
regulator.
While the credit relief measures
suspended the operation of some
statutory provisions, the measures did
not subordinate the current regulations
in dealing with Non-Performing Loans
but provided some direction to deal
with the prevailing circumstances in the
Country and reiterated BOU’s
overarching regulatory mandate to
ensure the economy’s stability as well
as consumer protection.
Assets provided as security
The kind of assets given as security in
Uganda usually depends on the type of
financing. However, the security
arrangements most popular among
Banks in Uganda are usually;
a) An asset debenture with a fixed and
floating charge over fixtures.
b) Mortgages over real estate. Other
forms of security include: Motor
vehicles, shares, Bank accounts, con-
tractual rights, insurance proceeds and
Intellectual property.
Perfection of security interests
a) Mortgages
Mortgage financing is a loan in which
land is used as collateral for repayment
of a loan obligation by way of a charge,
or lien over any estate or interest in
land.
In Uganda, any person holding land in
any recognisable form of tenure has the
power to create a mortgage over
his/her land. The charge or lien can be
by way of deposit of title or registration
of one’s interests at the relevant land
offices. It is formal where it is registered
and the mortgage takes effect thereon
and informal where the mortgage
interest is not registered but there
exists a clear undertaking to charge the
Borrower’s land with the repayment of
the loan.
b) Chattels
A Borrower may also obtain a loan on
moveable property through the
Security Interest in Moveable Property
Registry System (“SIMPO”) which
enables lodging of security interests in
collateral such as motor vehicles in a
secure manner. SIMPO replaced the
manual Chattels Registry and its
financial inclusion objective is aimed
towards allowing those who cannot
access credit because they do not own
real property (land) to access credit.
Key risk areas
a) Matrimonial homes
In a situation where the land to be
charged is land on which is situated the
ordinary residence of a Borrower and
his/her legally married spouse, the prior
consent of the spouse has to be
obtained before charging such land.
The basic idea is that both spouses in a
valid marriage are given an opportunity
to make an informed decision over
mortgaging a matrimonial home and
absence of this can nullify the
transaction as the other spouse does
not have depository power over that
land.
Consequently, any prospective
Lender has two major concerns namely:
– To establish the marital status of the
potential Borrower and;
– Whether the said security is a
matrimonial home.
For a potential buyer of Bank property,
due diligence must be made to
ascertain whether spousal consent was
given prior to the Bank charging the
matrimonial home.
In mitigating the risks involved with
dealing with a matrimonial home, the
following can be done:
a) Banks should additionally require
Borrowers to submit statutory
declarations or single status letters as
further evidence of the marital status
and should take reasonable measures
to substantiate the information in the
documents provided.
b) For a spouse whose name does not
appear on the Certificate of Title,
prudency may require obtaining
registration on the title as a Joint tenant
or Tenant in common. In the event that
your spouse deems to be
uncooperative, lodging a caveat may be
an alternative to bar any land
transactions on the land.
b) Dealings in Company land
For Companies, the proper authority
authorised to act on behalf of the
Company before a security is perfected
has to be ascertained. Banks need to
ensure they deal with the proper
persons appointed by the Company in
order not to have such a transaction
nullified1.This requirement should
however, rarely present a problem for
Banks because a person dealing with a
Company is not required to inquire on
whether or not the Directors have
authority; but recent Court decisions
may require Bankers or a potential
buyer of distressed property to carry
out greater due diligence than beforeAnother sub set of intellectual property that may come into issue with the creation of covidex are restrictive covenants especially on the side of employer. Covenants are able to protect employer’s interests. An otherwise reasonable non complete clause may have the effect that it reasonably prevents former employees from holding a passive or minority interest in a competitor which is necessary to protect the employer’s interests as a subsequent employment may form into a genuine threat of competition. More importantly, these restrictive covenants when drafting employee contracts for academics in research institutions and universities may assist them to mitigate the risk and confidently issue cease and desist letters or commence legal action upon a breach.
Commencement of debt recovery
Measures to enforce a charge on a
mortgage can only be commenced
where the Borrower is in default for a
period of 30 days from the date the
obligation to pay becomes due. Upon
default, the first notice requires the
Borrower to rectify the default in
payment within 45 days, adequately
informing the borrower of the nature
and extent of the default.
Where the Borrower defaults on these
timelines, the Bank may proceed with
the following options;
a) Foreclosure
Upon lapse of the 45 days’ notice under
the Mortgage Act, before exercising the
power to sell the mortgaged land, the
Bank is required to serve the Borrower
with notice to sell, and cannot proceed
to complete any contract for the sale of
the mortgaged land until twenty-one
(21) working days have lapsed from the
date of the service of the notice to sell.
The Bank is further required to
ascertain the current market and forced
sale value of the property made 6
months prior to the sale.
In a well-received intervention for the
Borrowers, the High Court in the case of
Sendagire Stephen and anor v DFCU
Bank Limited and anor HCCS No.26 of
2008 laid down the best practices that
underpin a lawful foreclosure and these
include;
• The Bank should not act in secret,
should obtain the best price and act in
good faith.
• The Bank should establish the value of
the property before sale to establish the
current market value and forced sale
value. Additionally, the Bank should not
sell under forced sale or undervalue.
• Before sale, the property should be
advertised after the Borrower has been
notified
• A Public auction should be the
preferred mode of sale because it is
competitive. In the event that a sale is
to be concluded by private treaty, it is
preferable that the Borrower is involved
and given access to information.
b) Additional measures
The Bank has the option to appoint a
receiver of the income of the
mortgaged land, lease the mortgaged
land and exercise the power of entering
into possession of the mortgaged land
by taking physical possession of the
land or a part of it or taking control
over the land. This may also be done by
an order of Court.
What next for the Borrower after debt
recovery has commenced?
Hardly anybody would disagree with
the statement that Borrowers need
protection from Banks. However,
protecting the Borrowers is further
complicated by the ability of Banks to
accommodate some kind of exposure
without undergoing significant loss on
their part.
A few of the options available for
Borrowers are highlighted below;
a) The right of redemption
The Borrower has an option to redeem
their property if they are able to repay
their obligations in time.
At any time before an agreement is
reached between the Bank and any
purchaser of the security, the Borrower
may discharge the mortgage in whole
or in part by paying to the Bank all
monies secured by the loan at the time
of the discharge.
b) Application to Court for relief by the
Borrower
The Borrower may apply to Court for
relief against the exercise by the Bank
of any remedies after the service of the
relevant notices as discussed above.
This application for relief is not taken to
be an admission by the Borrower or any
other person applying for relief.
In a well-received intervention for the
Borrowers, the High Court in the case of
Sendagire Stephen and anor v DFCU
Bank Limited and anor HCCS No.26 of
2008 laid down the best practices that
underpin a lawful foreclosure and these
include;
• The Bank should not act in secret,
should obtain the best price and act in
good faith.
• The Bank should establish the value of
the property before sale to establish the
current market value and forced sale
value. Additionally, the Bank should not
sell under forced sale or undervalue.
• Before sale, the property should be
advertised after the Borrower has been
notified
• A Public auction should be the
preferred mode of sale because it is
competitive. In the event that a sale is
to be concluded by private treaty, it is
preferable that the Borrower is involved
and given access to information.
c) Injunction granted by Court
Court may grant an injunction to
restrain a Bank from taking further
steps against the mortgaged property
upon payment of a security deposit of
30% of the forced sale value of the
mortgaged property 2
This
Requirement recognises that the
protection of the Borrower cannot be
considered in isolation from the rights
of a Bank to recover on a
Non-performing credit facility.
That requirement notwithstanding, the
Court retains the discretion to
determine whether or not a spouse
should make the security deposit.
Debt recovery involving chattels
For moveable property, the security
interest becomes enforceable upon
default and a notification is required to
be served upon the Borrower to pay
the money owing, and in case this is not
remedied then a default and
enforcement notice are registered. The
Bank, being the secured creditor, may
then sell the collateral by auction.
Conclusion
In a nutshell, Borrowers should always
keep in mind that a credit facility is
based on a contractual relationship
which is underpinned by two
fundamental principles namely;
Freedom of contract and Caveat
emptor which means that when
Borrowers enter into loan financing
agreements with the Banks, they are
bound by the terms of these
agreements that they sign, and that in
the event of default therein, all property
pledged as security will be sold to
recover all outstanding money.
It is therefore imperative on a Borrower
to always monitor their loan obligations
and renegotiate with the Bank
whenever they are having difficulties
with compliance with the terms of the
Loan Agreements. Consequently,
inorder for Banks to reduce risk
exposure from the defaults arising from
the second lockdown of June 2021, they
need to adopt a proactive approach of
identification, assessment and effective
management of loans before they
become permanently irredeemable.