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THE REPUBLIC OF UGANDA
IN THE HIGH COURT OF UGANDA AT
KAMPALA
(COMMERCIAL COURT DIVISION)
HCT-00-CC-CS-0496 OF
2003
NATIONAL BANK OF COMMERCE LTD ::::::::::::::::::::
PLAINTIFF
VERSUS
1. SAAD TRADING CO. (1991) LTD ]
2. SAAD HAJI MIGDAD
]
3. JAMAL M. SAAD ] :::::::::::::::::
DEFENDANTS
BEFORE: THE HONOURABLE MR. JUSTICE YOROKAMU
BAMWINE
J U D G M E N T:
The
Plaintiff’s suit against the Defendants is for recovery of
Shs.19,920,000-, interest and costs. From the records, sometime
in February
2002, the Plaintiff granted to the 1st Defendant an overdraft
facility of Shs.35m. The overdraft was for one year. The Defendants secured
the loan with a mortgage over
2 Plots of their land in the city. They held a
lease interest in that property. The 1st Defendant defaulted in
repaying the loan and the debt accumulated to Shs.45m. The Plaintiff then
exercised its right to sell the
mortgaged property. The sale fetched a sum of
Shs.25m. This suit is for the recovery of the said balance on the principal
sum.
The Defendants have contested the suit. They claim that the sale
was grossly undervalued and/or that the Plaintiff did not attempt
to obtain the
true market value of the property which would have off set the loan.
When
the case came up for hearing, both parties were of the view that the nature of
the case did not require adducing of oral evidence.
They opted for written
submissions. Two issues were framed for determination:
1. Whether before the sale of the mortgaged property the Plaintiff attempted to obtain the true market value of the property that would have offset the whole loan.
2. Whether the Plaintiff is entitled to the suit
sum.
The thrust of the Defendant’s case as regards the sale is that
in selling the two plots the Bank had a duty to act in good faith
and to take
reasonable steps to sell them at the true market value or the proper price
prevailing at the time of sale. I take this
to be the correct position of the
law.
The leading authority is Cuckmere Brick Co. Ltd –Vs- Mutual
Finance Ltd [1971] 2 All ER 633.
In that case the mortgagee exercised
the power of sale and sold the property by auction. In the advertisement of the
property for
sale, the auctioneer failed to describe that there was in existence
in relation to the property a planning permission for 100 flats.
This was drawn
to the attention of the mortgagee before the sale, but they nonetheless
proceeded with the sale and their auctioneers
merely mentioned this fact at the
auction. The property was sold for 44,000 pounds and the mortgagor alleged that
the true market
value was 75,000 pounds. The trial Judge held that the
mortgagee had failed in their duty and assessed the true market value to
be
65,000 pounds. On Appeal, the Court of Appeal dismissed the Appeal as regards
the breach of duty of the mortgagee (but ordered
an inquiry on the question of
damages). In the course of his Judgment, Salmond LJ said (at P. 643):
“It is well established that a mortgagee is not a trustee of the power of sale for the mortgagor. Once the power has accrued, the mortgagee is entitled to exercise it for his own purposes whenever he chooses to do so. It matters not that the moment may be unpropitious and that by waiting a higher price could be obtained. He has the right to realise his security by turning it into money when he likes. Nor, in my view, is there anything to prevent a mortgagee from accepting the best bid he can get at an auction, even though the auction is badly attended and the bidding exceptionally law. Provided none of those adverse factors is due to any fault of the mortgagee, he can do as he likes.”
I need not say more on the
above. The message is very loud and clear. Salmond LJ then discussed the
question whether a mortgagee
in exercising the power of sale was also under duty
at the time of sale to take reasonable care to obtain the true market value of
the property to be sold, and he said (at P. 644):
“Given that the power of sale is for the benefit of the mortgagee and that he is entitled to choose the moment to sell which suits him, it would be strange indeed if he were under no legal obligation to take no reasonable care to obtain what I call the market value at the date of the sale.”
And finally he concluded thus (at P.
646):
“I accordingly conclude, both on principle and authority, that a mortgagee in exercising his power of sale does owe a duty to take reasonable precautions to obtain a true market value of the mortgaged property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty, the facts must be looked at broadly and he will not be adjudged to be in default unless he is plainly on the wrong side of the line.”
Cross LJ, another member of the Court, said
(at 646-647) that the sale must be a genuine sale by the mortgagee to an
independent purchaser
at a price honestly arrived at. He added that a mortgagee
is liable in damages to the mortgagor for negligence either of the mortgagee
or
his agent in connection with the sale. Cairns LJ, the 3rd member of
the Court, held (at 654) that the mortgagee has a duty to take reasonable steps
to obtain the proper price in the interest
of the mortgagor. The decision in
Cuckmere has been followed in this country in Mubiru –Vs- Uganda
Credit & Savings Bank [1978] HCB 109.
The Defendants have
complained that the Plaintiff did not sell the plots at the best price then
available. I have already indicated
that no oral evidence was adduced in this
matter. I must therefore decide it on the strength of available
documents.
The Defendants were in default and in consequence of that
default, the bank was entitled to sell the security. It sold the same in
exercise of that right. The Defendants now contend that the Plaintiff had
failed to exercise their duty of care towards them by
selling the plots at an
under value. In such event, the burden rests upon the Plaintiffs to show that
they are entitled to the balance
on the mortgage loan. Likewise, the Defendants
must show that the price at which the plots were sold was not true market price
or
the proper price at the time of sale.
There is no doubt in my mind
that the property was in a poor state at the time of sale. But this did not
happen over night or even
during the pendency of the mortgage. Before the
Plaintiff committed its money to the Defendants, the property was in this poor
state.
The business of lending money itself entails risks. However, in
my view, considering the dilapidated nature of the property at the
time of the
valuation and the fact that the borrower’s lease was left with less than 3
years to expire, the Bank assumed an
unnecessary high risk for such a hefty sum
of money. But that’s how the parties wanted it. It is not necessary for
me to
interfere with their bargain.
I now turn to the sale itself.
First, the advertisement. The property was advertised in the New Vision of
November 14, 2002. There
is no evidence of the detailed offers received. The
Defendant’s complaint in this regard is that once the mortgagee decided
to
advertise the property for sale, he had to give it adequate publicity in order
to attract as many potential bidders as possible.
I agree with that argument.
It is inline with the position in the Cuckmere case, supra, and Tse Kwong Lam
–Vs- Wong Chit Sen [1983] 3 All ER 54. In the latter case the advert
was placed in 3 Newspapers and appeared on 3 occasions. In the instant case,
the advert appeared
in only one Newspaper (New Vision) and only once. The size
of the advert was small at p.5 of the paper. I got the impression that
the
property was inadequately advertised. The Plaintiff is a Bank with presumed
means to afford a reasonable number of advertisements
prominently placed in
Newspapers. I think the Plaintiff earns no credit for that lapse in
Judgment.
Secondly, it is argued that the property was not given a full
description so as to raise interest in potential buyers. From the advert,
the
property was merely described as LRV 376 Folio 14 plot 237 at Mengo Kisenyi and
LRV 371 Folio 6 plot 238 at Mengo Kisenyi. It
is stated in the main body of the
advert that the property would be sold with full improvements and developments
thereon. No indication
as to what those improvements or developments were.
This was property in down town city. A description of it as suitable for
commercial
or residential purposes would in my view have made a difference. It
would most likely have aroused interest of the big property
developers in the
city. I’m inclined to accept the argument that the advert was too brief
to arouse interest of potential
buyers.
Thirdly, it has been argued that
the 14 days notice was too short for any meaningful bids. May be it was, may be
it was not. As
Lord Templeman said in Tse Kwong Lam’s case, supra, a
procedure which is appropriate for the sale of second hand furniture
is not
necessarily appropriate for the attainment of the best price for free hold or
leasehold. I have not formed any definite opinion
on this point because after
all the sale did not take place on 28/11/2002 as advertised. But I’m
certainly persuaded by the
argument that the mortgagee and/or its agent, the
auctioneer were negligent in the way they advertised the mortgaged property. In
my view, if the property had been given a wide publicity, had been described in
the advert in greater detail and had given potential
buyers time to inspect and
make bids, the property could have fetched a little more money.
As
regards the sale itself, there is evidence that it was supposed to take place on
28/11/2002 before an auctioneer. The auctioneer
has not given evidence, by
affidavit or otherwise, but according to a letter, P. Exh. 9 dated 28/1/2003,
the sale he had managed
to arrange hit a snag when the Landlords rescinded their
offer of renewing the lease on the said lands and as such the buyer they
had got
pulled out of the deal as it was no longer viable. The auctioneer then gave
what I consider to have been appropriate advice
to the mortgagee:
“Start considering other ways of making the loan defaulters to pay as we cannot sell the securities with that time left on the lease.”
I have considered this to have been
appropriate advice because this would have been the right time for the mortgagee
and the mortgagor
to reflect over the security and together determine the way
forward. There is no evidence of the advice being followed up. Rather,
from
the records, the property was never auctioned. What we have on record next
after the position stated in P. Exh. 9 is a letter
from the auctioneers to the
Plaintiff, P. Exh. XI, indicating a received offer of Shs.5m. There is no
evidence of the Plaintiff
responding to that offer. Then on 28/3/2003 Kalungi
Estates Ltd offered Shs.1m for the 2 plots directly to the Plaintiff and on
7/5/2003 took the 2 plots for Shs.25m. It is significant to note that plot 238
had been given a current open market value of Shs.50m
and a forced sale mortgage
value of Shs.30m on February 15, 2002.
There is no evidence of the
property being re-valued to raise inference that the sale was in line with that
re-valuation.
From the evidence, the sale was by private treaty,
organised by the Bank itself. There was no competitive bidding. The Plaintiff
may have been free to conduct the sale in the manner determined by itself but
the evidence before Court does not show that the Defendants
were even aware of
what was going on to raise inference that they consented to meet the short fall
on the mortgage loan after the
sale. The Plaintiff owed a duty to the
guarantors, 2nd and 3rd Defendants, since they are liable
to the same extent as the first Defendant, to know what was going on if the
Plaintiff’s intention
was to make them pay the difference between the
purchase price and the mortgage debt. The legal position is that if it should
appear
that the mortgagee or the receiver has not used reasonable care to
realise the assets to the best advantages then the mortgagor,
the company, and
the guarantor are entitled in equity to an allowance. They should be given
credit for the amount which the sale
should have realised if reasonable care had
been used: Standard Chartered Bank Ltd –Vs- Walker & Anor [1982] 3
All ER 938.
In the instant case, the valuation done at the instance
of the Defendants in respect of plot 237 did not give the forced sale mortgage
value of that plot. The report gave Shs.20m as the current unencumbered open
market value of the plot. It was some estimate by
some obscure registered
surveyor, Lucy U. Kabege. Inspite of that glaring omission in the valuation
report, the Plaintiff unwittingly
accepted and acted on it. The other report in
respect of plot 238 was authorized by Associated Consulting Surveyors of Stephen
H.
Bamwanga. It gave it the forced sale mortgage value of Shs.30m. The amount
realised from the sale of the 2 plots was less than
the estimated forced sale
mortgage value of one plot by Shs.5m. Taking Mr. Bamwanga’s assessment of
Shs.50m to reflect the
open market value and Shs.30m the forced sale mortgage
value, this gives a ratio of 5:3. Doing the best I can, I would take the
likely
forced sale value of plot 237 to be Shs.12,000,000-, that is, 3/5 of the current
market value of Shs.20,000,000-. This means
that the forced sale value for the
2 plots could utmost be Shs.42,000,000-. The debt was
Shs.45,002,572-.
For the reasons stated above, I have come to the
conclusion that the Plaintiff did not obtain the true market value of the
property
and that even if it had done so, the proceeds would not have offset the
loan.
As to whether the Plaintiff is entitled to the suit sum of
Shs.19,920,000-, I think it is not. The Plaintiff accepted to risk its
money in
the manner I have already described herein above. In my view, the
Defendants’ liability to the Plaintiff, jointly
and severally, ought to be
in the difference between the amount the property would have fetched if the
Plaintiff had used reasonable
care to realise the assets to the best advantage,
that is, Shs.42,000,000-, and the mortgage debt at the time, that is,
Shs.45,002,572-.
This difference is Shs.3,002,572-.
I enter Judgment for
the Plaintiff against the Defendants in the sum of Shs.3,002,572-. It shall
have accruing interest of 25% per
annum as prayed from the date of filing till
payment in full. In view of the Defendants’ partial success, the
Plaintiff shall
have half the taxed costs of the suit. I so order.
Dated
at Kampala this 11th day of July, 2005.
Yorokamu
Bamwine
J U D G E
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