High Court Draws the Line on Predatory Lending, Inviting Exemplary Damages: Title Transfer, Notice to Guarantors, and the Rule of Law in the Security Interest in Movable Property Act, Cap 293

Waboga David
Jun 26
12 min read

By Waboga David

Introduction

In Uganda’s expanding credit market, car logbook loans and other forms of collateral-based lending involving movable property, such as cars, motorcycles, and machinery, are increasingly popular.

Financial institutions such as Goldmine Finance Ltd, Mogo Uganda, Platinum Credit Uganda, Bayport Financial Services, Access Financial Services, and ASA Microfinance Uganda Ltd offer such loan products, often requiring borrowers or guarantors to pledge movable assets as security.

To regulate such transactions and protect all parties involved, especially third-party guarantors, the Security Interest in Movable Property Act, Cap 293 (SIMPA) was enacted. SIMPA provides a formal, transparent, and predictable legal framework for the creation, perfection, priority, enforcement, and redemption of security interests in movable property.

Notably, Section 3(5) of the Act clarifies that creating a security interest does not transfer ownership of the collateral, while Section 3(6) renders void any transfer of title made by a guarantor solely for purposes of securing a loan. These provisions are essential to prevent abuse by lenders and to protect guarantors from losing property unjustly.

This case at hand highlights the legal consequences of failing to comply with SIMPA, particularly the failure to give notice to a guarantor before enforcing the security. As the Court found, the 2nd Defendant's transfer and sale of the Plaintiff’s motor vehicle, without proper notice, was unlawful and in breach of contract.

The Court reaffirmed that notice is not a procedural formality but a substantive safeguard, ensuring the guarantor has a fair opportunity to redeem the property or challenge the enforcement process.

Importantly, this judgment emphasises that financial institutions must honour both statutory duties under SIMPA and contractual obligations to guarantors. Any assumption of ownership upon default, without following proper legal procedures, may lead to a finding of illegality, exposure to punitive damages, and loss of the ability to enforce the loan.

Facts

The Plaintiff, Kato Alex, brought this suit against the 1st Defendant, Johnny Wycliffe Matsiko, and the 2nd Defendant, Goldmine Finance Ltd, alleging breach of contract and illegal sale of his motor vehicle.

The 3rd Defendant, Uganda Microfinance Regulatory Authority (UMRA), was initially joined to the suit but was later removed for lack of a cause of action.

Background of the Loan Transaction

On 24th January 2020, the 1st and 2nd Defendants entered into a Loan Agreement (PEX 1) whereby the 2nd Defendant disbursed a loan of UGX 14,000,000/= to the 1st Defendant.

The Plaintiff acted as a guarantor to the transaction and pledged his motor vehicle, Toyota Hilux Pick-up, Reg. No. UAZ 087E, Model 2005, as security for the loan. The agreement had a repayment period of four months with interest at 5% per month.

Subsequently, on 13th June 2020, the parties executed an Addendum to the Loan Agreement (PEX 3), extending the repayment period until 24th March 2021. Despite the extension, the 1st Defendant defaulted on his repayment obligations.

Plaintiff's Partial Loan Repayment

The Plaintiff, in his capacity as guarantor, made partial payments amounting to UGX 7,500,000/= (although this was later contested during trial and the Court found that he had paid UGX 4,500,000/=).

Nevertheless, the default persisted.

Alleged Illegal Transfer and Sale of the Vehicle

Upon default, the 2nd Defendant proceeded to transfer the Plaintiff’s motor vehicle into its own name without issuing any default notice to the Plaintiff. The Plaintiff later discovered that the vehicle had been sold to a third party, Mr. Paul Kaahwa Mugisa, by the 2nd Defendant.

The Plaintiff contended that:

He was not notified of the sale or any default proceedings;
The transfer of the vehicle into the 2nd Defendant’s name was illegal, since it was done without his knowledge or consent, and contrary to law;
The sale was fraudulent and done in bad faith, depriving him of his property rights without due process;
He suffered loss of income, as he used the motor vehicle in his work as a building contractor.

The Defence

The 2nd Defendant admitted that the vehicle was sold but maintained that:

The Plaintiff consented to the transfer of the vehicle;
The Plaintiff failed to meet his obligations as a guarantor after the 1st Defendant defaulted;
The sale was lawful, based on a valuation conducted prior to the sale;
The proceeds of UGX 20,000,000/= from the sale were applied to clear the outstanding loan balance, including interest and penalties.

The 1st Defendant did not file a defence, despite being duly served. The 3rd Defendant was struck out of the suit by order of the Court on 28th November 2022, on grounds that there was no cause of action disclosed against it.

Issues

Whether the 1st Defendant liable for breach of contract?
This issue examined the 1st Defendant’s default under the loan agreement and whether it triggered liability under the guarantee arrangement.
Whether the sale by the 2nd Defendant of motor vehicle Reg. No. UAZ 087E to Mr. Paul Kaahwa Mugisa was in breach of contract, fraudulent and illegal?
This issue addressed the legality of the transfer and sale of the Plaintiff’s motor vehicle, particularly under the Security Interest in Movable Property Act, and the alleged fraud or irregularity in its execution.
Whether there are any proceeds from the sale of the motor vehicle, Reg. No. UAZ 087E, to be paid by the 2nd Defendant to the Plaintiff?
The Court considered whether the sale generated surplus funds and whether the Plaintiff was entitled to a share as the owner or guarantor.
Whether the sale of motor vehicle Reg. No. UAZ 087E imputes liability in negligence on the 3rd Defendant?
This issue pertained to the Uganda Microfinance Regulatory Authority (UMRA) and whether it could be held liable for failing in its regulatory duties. (Note: This issue was disregarded as the suit against the 3rd Defendant was dismissed for lack of a cause of action.)
What are the remedies available to the parties?
This issue addressed what reliefs the Plaintiff was entitled to, including compensation, general and special damages, exemplary damages, interest, and costs.

Holding

Issue 1: Whether the 1st Defendant is liable for breach of contract?

The Court held that the 1st Defendant, having been the principal borrower under the Loan Agreement dated 24th January 2020 (PEX 1), breached his obligations by defaulting on the loan repayment schedule, including the extended schedule under the Addendum dated 13th June 2020 (PEX 3). Evidence from PEX 4 (Loan Statement) showed consistent defaults starting July 2020. The Plaintiff, as a guarantor, had to pay part of the loan (UGX 4,500,000/=).

The Court relied on Section 70(1) & (2) of the Contracts Act, Cap 284, which provides that the guarantor’s liability arises upon the principal debtor’s default and is co-extensive with that of the principal debtor unless otherwise agreed.

The Court found the 1st Defendant liable for breach of contract for failing to indemnify the Plaintiff (a guarantor) following the sale of his motor vehicle by the 2nd Defendant to settle the 1st Defendant’s debt.

The Court cited Section 84 of the Contracts Act, which provides an implied obligation on the principal debtor to indemnify a guarantor for any payment or loss suffered under the contract of guarantee. It held that:

The 1st Defendant’s failure to indemnify the Plaintiff constituted a breach of the guarantee contract.

The use of the Plaintiff’s TIN to transfer the vehicle, under the pretense of placing a caveat, amounted to misrepresentation and trickery, undermining the mutual consent required for valid contracts.

The Court emphasized that deviation from agreed contract terms, such as transferring and selling the car without authority, is evidence of breach.

Issue 2: Whether the sale by the 2nd Defendant of motor vehicle Reg. No. UAZ 087E to Mr. Paul Kaahwa Mugisa was in breach of contract, fraudulent and illegal?

The Court addressed three aspects

(a) Illegality of Transfer

The Plaintiff, as guarantor, had transferred the vehicle to the 2nd Defendant as security for the loan. However, under Section 3(6) of the Security Interest in Movable Property Act, Cap 293, a transfer executed by a guarantor as a condition for security is void. Thus, the transfer was illegal, and the Plaintiff was stripped of his right of redemption.

(b) Timing of Sale

Evidence showed that the vehicle was sold after the default occurred and after a valuation was conducted by DW2 on 23rd November 2020 (PEX 5). Though the report bore the date 15th December 2020, the Court accepted the explanation that it was a clerical error. Therefore, the valuation was valid, and the sale was not fraudulent or premature.

The 2nd Defendant failed to notify the Plaintiff of the default and intended sale. PEX 12, 13, and 14 were only addressed to the 1st Defendant. The failure to notify the guarantor was a breach of the guarantee contract (PEX 2, Clause 9).

The Court relied on the case of Don Muwanguzi v Pride Microfinance Ltd, HCMA No. 49 of 2016, where it was noted that failure to notify a guarantor amounts to breach of contract.

Furthermore, under Order 6 Rule 7 of the Civil Procedure Rules (SI 71-1), fraud must be specifically pleaded.

The court referenced the decision of Fam International Ltd v Mohamed Hamid El-Fatih, SCCA No. 16 of 1993; and Kampala Bottlers Ltd v Damanico (U) Ltd, SCCA No. 22 of 1992, which states that fraud must be specifically pleaded with particulars.

Key Holding : The court found that the sale was not fraudulent and was not in breach of contract in terms of valuation or procedure after default, but the transfer of ownership was illegal, and the failure to notify the guarantor violated the contract of guarantee.

Findings

The court found that the Plaintiff had voluntarily transferred the vehicle to the 2nd Defendant, but Section 3(6) of the Security Interest in Movable Property Act renders such a transfer void if made as a condition for securing a loan. The Court held that the transfer to the 2nd Defendant’s name was illegal.

Furthermore, the court found that the sale occurred after default: The 1st Defendant defaulted as early as July 2020, and the sale occurred on 30th November 2020.

The valuation (PEX 5) conducted on 23rd November 2020 preceded the sale and was accepted by the Court. The vehicle was valued at UGX 30 million (market) and UGX 20 million (forced sale). It was sold for UGX 20 million, meeting the forced sale threshold.

Allegations of fraud were dismissed for failure to plead and particularise them as required under Order 6 Rule 7 of the Civil Procedure Rules

Importantly, no notice of sale was issued to the Plaintiff as guarantor, breaching Clause 9 of the Personal Demand Guarantee (PEX 2). The only notices issued were to the 1st Defendant. This omission was held to be a breach of the contract of guarantee, in line with Don Muwanguzi v Pride Microfinance Ltd.

Issue 3: Whether there are any proceeds from the sale of the motor vehicle Reg. No. UAZ 087E to be paid by the 2nd Defendant to the Plaintiff?

Evidence showed that the motor vehicle was sold at UGX 20,000,000/=, its forced sale value as per the valid valuation report (PEX 5).

PEX 4 (Loan Statement) and PEX 8 (Statement of Loan Utilization) confirmed that all proceeds were applied to clear the outstanding loan, penalties, and charges. No surplus remained.

The Plaintiff had submitted PID1, a one-page valuation report with higher values (UGX 45M market / UGX 40M forced), but the author (Mr. Katumba Mohammed) was not called to testify. Hence, its authenticity was rejected.

Holding: There were no proceeds due to the Plaintiff from the sale of the vehicle.

The entire amount was applied to clear the 1st Defendant’s outstanding loan, including principal, penalties, and incidental charges (PEX 4 and PEX 8).

The accountability statement (PEX 8) showed no surplus after the deductions.

The Plaintiff did not contest this evidence, and the Court found no basis for any further sums to be paid to him.

❌Key holding on Issue 3: The Court found that there were no sale proceeds remaining to be paid to the Plaintiff. The entire sale value was legally applied to offset the outstanding debt.

Issue 5: What are the remedies available to the parties?

The Court declared the 1st and 2nd Defendants jointly and severally liable for breach of contract.

The Court relied on Section 60(1) of the Contracts Act, Cap 284, compensation for loss due to breach.

In considering the award for damages, the court relied on Takiya Kashwahiri & Anor v Kajungu Denis, CACA No. 85 of 2011 – general damages should be compensatory; also, Kabandize John Baptist & 21 Ors v KCCA, CACA No. 36 of 2016, damages should restore the Plaintiff to their original position.

Referring to Uganda Commercial Bank v Deo Kigozi [2002] 1 EA 305 – consider economic inconvenience, value, and extent of loss.

Award: UGX 8,000,000/= in general damages.

iii) Special Damages

The Plaintiff proved payment of UGX 4,500,000/= as part of the loan repayment.

The Court relied on:

Bonham Carter v Hyde Park Hotel Ltd [1948] 64 TLR 177 – special damages must be specifically pleaded and strictly proved.
W.M. Kyambadde v Mpigi District Administration [1983] HCB 44;
Haji Asuman Mutekanga v Equator Growers (U) Ltd, SCCA No. 7 of 1995;
Gapco (U) Ltd v A.S. Transporters (U) Ltd, CACA No. 18 of 2004 – proof can be oral or documentary.

Award: UGX 4,500,000/= as special damages

iv) Exemplary/Punitive Damages

The Court relied on:

Luzinda Marion Babirye v Ssekamatte & Ors, HCCS No. 366 of 2017 – exemplary damages aim to punish and deter.
Obongo Orude v Municipal Council of Kisumu [1971] 1 EA 91 – exemplary damages must be proportionate.
O’Connor v Hewiston [1979] Crim. LR 46;
Archer Brown [1985] QB 401 – all circumstances must be considered.

Award: UGX 5,000,000/= to punish the 2nd Defendant for illegal transfer.

v) Interest

The Court cited:

Section 26 of the Civil Procedure Act, Cap. 71 – discretionary power to award interest.
Wallersteiner v Moir [1975] 1 All ER 849 – interest compensates for loss of capital use.
Milly Masembe v Sugar Corporation (U) Ltd & Anor, SCCA No. 1 of 2000 – interest should be just and reasonable.
Mohanlal Kakubhai Radia v Warid Telecom (U) Ltd, HCCS No. 224 of 2011 – interest should reflect inflation and economic value.
Surgipharm (U) Ltd v Anatoli Batabane, SCCA No. 11 of 2020 – distinction between interest on special vs general damages.

Award

Interest at 6% per annum on general and exemplary damages from date of judgment until payment in full.

vi) Costs

The Court cited:

Section 27(2) of the Civil Procedure Act – costs follow the event.
Uganda Development Bank v Muganga Construction Co. Ltd [1981] HCB 35 – successful parties should not be deprived of costs without cause.

Costs to the Plaintiff, payable jointly and severally by the 1st and 2nd Defendants.

🔍 Legal Takeaways:

Illegality of Title Transfer as Security
Under the Security Interest in Movable Property Act, transferring title of collateral to a creditor is void if done as a condition of security, creditors must only hold a security interest, not full ownership.
Notice to Guarantor is Mandatory
Failure to notify a guarantor before the sale of secured property constitutes breach of the guarantee, even if the sale is otherwise lawful.
Proper Valuation and Transparent Sale
A forced sale conducted after proper valuation and advertising, even at a lower value than the market estimate, can still be considered lawful.
Doctrine of Collateral Contract Overrides Privity
The Plaintiff could enforce rights under a collateral contract (Personal Guarantee) despite not being a party to the primary loan agreement.

Conclusion

While the 2nd Defendant's actions were partially validated by the Court (as to the sale price and timing), the illegal transfer of ownership and failure to notify the guarantor amounted to a violation of statutory and contractual obligations. However, due to full recovery of the loan from the proceeds, the Plaintiff was not entitled to any residual payment.

Key Takeaways

Transfer of Title by Guarantor as Security Is Void under SIMPA
Under Section 3(6) of the Security Interest in Movable Property Act (Cap 293), any transfer of title by a guarantor solely to secure a loan is void. Creditors can only hold a security interest, not ownership, over collateral. The Court held the 2nd Defendant’s assumption of title in the Plaintiff’s vehicle was illegal and contrary to law.
Notice to Guarantors Is a Mandatory Precondition to Sale
A guarantor must be formally notified of any default and intended enforcement action, including the sale of pledged property.
The failure to issue notice breached the contract of guarantee (Clause 9) and violated the duty of good faith.
Notice is not a formality; it is a substantive right under both SIMPA and contract law (Don Muwanguzi v Pride Microfinance Ltd).
Lawful Sale Requires Proper Valuation and Procedure
Even where the title is wrongly transferred, the Court can uphold a sale if it follows a valid valuation and is conducted after default.
The forced sale value (UGX 20 million) matched the professional valuation, and the sale was thus not fraudulent or procedurally defective. This reinforces that transparent enforcement is key, even when ownership is disputed.
Guarantor's Right to Indemnity from Principal Debtor
Once a guarantor pays part of the loan, the principal debtor becomes liable to indemnify the guarantor (Section 84, Contracts Act). The 1st Defendant's failure to reimburse the Plaintiff after the forced sale was held to be a clear breach of contract.
Predatory Practices Invite Exemplary Damages
The Court awarded exemplary damages for the 2nd Defendant’s high-handed conduct, transferring and selling the vehicle without legal basis or notice. This serves as a warning to lenders and microfinance institutions that disregarding borrower protections may trigger punitive liability.

⚖️ Practice Implications
For Lenders
Always perfect security interests through registration under SIMPA—not by demanding outright title transfer. Follow due process, including issuing default and sale notices to guarantors.

For Guarantors
Be cautious when pledging property. You retain ownership under the law, and any waiver of rights, like title transfer, may be invalid. You’re also entitled to notice, indemnity, and remedies for unauthorised sale.

For Regulators and Legal Practitioners
The case affirms the judicial enforceability of statutory borrower protections under SIMPA and reasserts the importance of regulatory compliance in microfinance lending.