HIGH COURT AFFIRMS THAT MONEY LENDING AGREEMENTS THAT LACK STATUTORY COMPLIANCE ARE VOID AND UNENFORCEABLE

The High Court has reaffirmed the legal requirements governing money lending agreements under the Tier 4 Microfinance Institution and Money Lenders Act, Cap 61, emphasizing that non-compliance renders such agreements void and unenforceable.

Section 84(1) of the Act mandates that a money lending contract must be in writing, signed by both the lender and borrower, and witnessed by a third party.

The court found that the loan agreement (PEXH.1) was not signed by the lender nor witnessed by a third party, thus violating statutory requirements and rendering the contract void.

The court found that the Appellant denied acknowledging receipt of certain top-up loans, leading to the conclusion that there was no mutual agreement (consensus ad idem).

Citing the precedent in Wakwale & Anor v. Bumutsukhu Financial Services (U) Ltd (Civil Appeal No. 106 of 2023) [2024] UGHC 897 where it was held that the absence of a party’s signature or third-party witness on a loan agreement implies a lack of consensus, rendering the contract invalid.

Facts

The case revolved around a loan dispute between the Plaintiff (Respondent) and the Defendant (Appellant). On November 1, 2021, the Defendant borrowed Ugx 350,000 as a top-up loan to an existing Ugx 837,000 loan at an interest rate of 10% per month. To ensure repayment, the Defendant handed over his ATM card, authorizing the Plaintiff to withdraw monthly repayments from his bank account.

The Plaintiff claimed that due to insufficient funds in the Defendant’s account at the end of each month, the loan balance accumulated to Ugx 2,230,614, which remained unpaid. The Defendant, however, argued that the Plaintiff had been withdrawing funds since November 2021, amounting to Ugx 3,420,000, exceeding the loan amount.

The trial court ruled in favor of the Plaintiff, finding the Defendant in breach of the loan agreement and ordering him to pay Ugx 2,230,614, general damages of Ugx 1,000,000, and 12% interest, plus costs. Dissatisfied, the Defendant appealed, arguing that the trial magistrate erred in enforcing an illegal loan agreement, misinterpreted the evidence, and failed to recognize excessive withdrawals by the Plaintiff. He sought to have the judgment overturned and costs awarded in his favor.

Holding

1. Mandatory Formalities of a Money Lending Contract:

   1. Section 84(1) of the Act mandates that a money lending contract must be in writing, signed by both the lender and borrower, and witnessed by a third party.

   2. The court found that the loan agreement (PEXH.1) was not signed by the lender nor witnessed by a third party, thus violating statutory requirements and rendering the contract void.

2. Illegality of Contracts in Violation of Statutory Provisions:

   1. The court referred to Stanbic Bank Uganda Ltd v. Ssenyonjo & Anor (Civil Appeal No. 47 of 2015) and Bostel Brothers Ltd v. Hurlock [1948] 2 ALL ER 312, which held that contracts executed in contravention of statutory provisions are void.

   2. The Court of Appeal in Masaka Municipal Council v. Takaya Frank (Civil Appeal No. 173 of 2015) upheld that no court will enforce a contract founded on illegality, citing Patel v. Mirza [2016] UKSC 42.

3. Failure to Document Loan Top-Ups:

   1. The Respondent’s actions contravened Clause 5 of their own loan agreement, which prohibited issuing top-up loans unless the outstanding balance was cleared.

   2. The Respondent issued additional loans without proper documentation, violating Section 84(2) of the Act, which requires all terms of a loan contract to be recorded in a written note or memorandum.

4. Illegality of Using ATM Cards as Collateral:

   1. The Respondent accepted the Appellant’s ATM card as security, which directly violates Regulation 18(1)(a) & (b) of the Tier 4 Microfinance and Money Lenders Regulations, 2018, which prohibits money lenders from demanding or accepting bank ATM cards as collateral.

   2. The court deemed this practice unlawful and exploitative, emphasizing the fiduciary duty of money lenders to adhere to legal provisions.

5. Lack of Consensus Ad Idem:

   1. The court found that the Appellant denied acknowledging receipt of certain top-up loans, leading to the conclusion that there was no mutual agreement (consensus ad idem).

   2. The High Court in Wakwale & Anor v. Bumutsukhu Financial Services (U) Ltd (Civil Appeal No. 106 of 2023) [2024] UGHC 897 held that the absence of a party’s signature or third-party witness on a loan agreement implies a lack of consensus, rendering the contract invalid.

      
      

Court’s Determination:

The High Court held that the loan agreement was invalid due to multiple statutory violations.

The illegality of the agreement made it unenforceable before the court.

The appeal was upheld, setting a precedent on the enforceability of non-compliant money lending contracts.

Implications for Money Lenders and Borrowers:

1. Money Lenders 

   Must ensure full compliance with statutory requirements, including proper documentation, witnessing, and avoidance of prohibited collateral practices.

2. Borrowers 

   Should be aware of their rights under the Act and contest illegal lending agreements to avoid exploitative practices.

   
   

Conclusion

This ruling reinforces the principle that contracts violating statutory provisions are void and unenforceable. Money lenders must operate within the confines of the law to protect their interests and those of borrowers. Stakeholders in the financial sector should take note of this decision to ensure strict adherence to the law.

Read the full case below

Wambette v Bumutsukhu Financial Services (U) Limited 2025 UGHC 49 (19 February 2025).pdf

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