High Court Upholds Bank of Baroda’s Right to Recall Demand Credit Facilities, but Rejects Foreclosure Remedies for Failure to Comply with Statutory Notice Requirements under the Mortgage Act.

Facts

The first plaintiff, Shumuk Aluminium Industries Ltd, had been a customer of Bank of Baroda (Uganda) Ltd since 1992. By a sanction letter dated 29 June 2018, the defendant advanced an overdraft facility of UGX 6,360,000,000 and a letter of credit facility of USD 350,000 for a period of twelve months, guaranteed by the second plaintiff, Mukesh Shukla. The facilities were secured by mortgages over the first plaintiff's properties at Plot 24 Mukabya Road and Plot M700 at UMA Lugogo Naguru Showground, Kampala.

The plaintiffs contended that the first plaintiff had been diligently servicing the facilities when, on 25 January 2019, before the expiry of the twelve-month tenure, the defendant issued a notice recalling the credit facilities and threatening sale of the mortgaged securities, on grounds the plaintiffs characterised as false. The plaintiffs further alleged that the defendant had converted USD 1,250,000 instead of USD 1,100,000, applied an unjustifiably high exchange rate of 1 USD = UGX 3,884, and levied erroneous processing charges.

The defendant, in its defence and counterclaim, maintained that the recall was lawful: the first plaintiff had failed to service monthly interest on the overdraft for three consecutive months, rendering the accounts non-performing, and had failed to maintain the required 20% cash margin on the letter of credit facility. The defendant sought recovery of all outstanding sums and an order of foreclosure over the mortgaged properties.

Issues for Determination

1. Whether the suit disclosed a cause of action against the Defendant.

2. Whether either party breached the terms of the overdraft and letter of credit facilities.

3. What remedies were available to the parties.

Legal Representation

For the Plaintiffs/Counter Defendants

1. Learned Counsel Badru Bwango of M/s Bwango Araali & Co. Advocates.

2. Learned Counsel Akena Alex Timothy of M/s Apwono Advocates & Associates.

   
   

For the Defendant/Counterclaimant

1. Learned Counsel John Fisher Kanyemibwa of M/s H&G Advocates.

2. Learned Counsel Rushongoza Begumya of M/s H&G Advocates.

Submissions of the Parties

Plaintiffs’ Submissions

On Issue No. 1 (Cause of Action), Learned Counsel for the Plaintiffs/Counter Defendants did not submit .

On Issue No. 2 (Breach of Contract), Learned Counsel for the Plaintiffs/Counter Defendants submitted that the Defendant failed to issue a proper default notice to recall the facility, failed to disburse the whole amount in the credit facility, wrongfully converted USD 1,250,000 instead of USD 1,100,000 as specified in the mortgage and debenture deeds, and that there was an unjustified exchange rate loss from the use of an exchange rate of 1 USD = 3,884 UGX, which was not the agreed rate for the overdraft conversion .

They further contended that the statutory notice dated January 25, 2019, relied upon by the Defendant, did not specify the extent of the default or the specific credit facility in default, rendering the termination illegal. They also argued that only USD 52,859 was disbursed, and there was no proof of disbursement for UGX 6,360,000,000/=.

The Plaintiffs also argued that erroneous processing charges of UGX 59,695,890/= were levied without justification and that the conversion rate of 1 USD = 3,884 UGX was exorbitantly high and not agreed upon, suggesting a rate of 1 USD = 3,646.66 UGX. They also contended that the recall of the credit facilities was unlawful and illegal

Defendant’s Submissions

On Issue No. 1 (Cause of Action), Learned Counsel for the Defendant/Counterclaimant submitted that the suit disclosed no cause of action against the Defendant and was therefore incompetent and an abuse of Court process. They relied on Order 7 rules 1 and 11 of the Civil Procedure Rules and case law to define a cause of action, arguing that the 1st Plaintiff lost its right to benefit from the facilities due to default in repaying monthly interest and failing to maintain required amounts in the letter of credit account. They concluded that the Plaintiffs’ suit disclosed no cause of action and ought to be dismissed .

On Issue No. 2 (Breach of Contract), DW1 testified that the overdraft facility attracted interest at 18% per annum with monthly rests, and the letter of credit facility attracted interest at a USD prime lending rate of 10.00% per annum. DW1 explained that the 1st Plaintiff defaulted in paying accrued interest for three consecutive months, triggering a recall of the facilities .

The Defendant also presented evidence that the conversion of USD 1,250,000 was at the 1st Plaintiff’s request, as evidenced by a letter dated June 18, 2018, signed by the 2nd Plaintiff . DW1 further testified that the recall was based on the terms of the sanction letter, which provided that credit facilities were subject to demand prior to the expiry of the 12-month period and were repayable on demand .

Regarding the counterclaim, the Defendant averred that the Plaintiffs breached the contract by failing to pay accrued interest, failing to maintain required amounts in the letter of credit account, and refusing to settle their indebtedness . DW1 stated that as of September 11, 2025, the outstanding amount was UGX 16,029,628,120.90/= and USD 122,900.05 .

Court’s Findings

On Whether the Plaint Disclosed a Cause of Action

The Court reaffirmed that a cause of action is disclosed if the plaint shows that the Plaintiff enjoyed a right, that right was violated, and the Defendant is liable, as established in Auto Garage & Others Vs Motokov and Tororo Cement Co. Ltd Vs Frokina International Limited. The Court also noted that in determining a cause of action, it must look only at the plaint and its annexures, as held in Kapeka Coffee Works Ltd & Another Vs NPART.

In this case, the Court found that the Plaintiffs’ claim, based on the 1st Plaintiff obtaining overdraft and letter of credit facilities, secured by mortgages, and the Defendant’s alleged wrongful recall of these facilities without prior demand or warning, prima facie disclosed a cause of action against the Defendant.

The Court noted that the 1st Plaintiff, as a borrower, had the right to use the facilities, and the 2nd Plaintiff acted as a guarantor. The alleged violation of this right by the Defendant’s recall on grounds of non-payment, despite the 1st Plaintiff servicing the same, was sufficient to establish a cause of action at this stage. The Defendant’s argument that the 1st Plaintiff lost this right due to default was deemed premature, to be addressed under Issue No. 2 .

On Whether either party breached the terms of the overdraft and letter of credit facilities between them?

The Court addressed the Plaintiffs’ allegations of non-disbursement of funds, wrongful conversion amounts, and exorbitant exchange rates. The Court found that the Plaintiffs’ allegation that UGX 6,360,000,000/= was not disbursed was a material departure from their pleadings, as paragraph 4(e) of the plaint stated that the Defendant granted this facility.

Furthermore, the Court noted that bank statements (DEX 10 and DEX 11) showed the credit facilities were disbursed, and both PW1 and PW2 identified and confirmed these accounts belonged to the 1st Plaintiff, without disputing any entries or providing evidence to disprove them.

Regarding the Plaintiffs’ claim that some deposits were not credited, the Court found no evidence to support this. PW1 confirmed that the 1st Plaintiff did not pay bank dues and lacked deposit slips to show uncredited deposits. The assertion of an ongoing reconciliation also lacked evidence.

Consequently, the Court found that the issuance of default/demand notices was justified because the 1st Plaintiff had defaulted on paying accrued interest on the credit facilities.

Concerning the wrongful conversion of USD 1,250,000 instead of USD 1,100,000 and the exorbitant exchange rate, the Court referred to a letter dated June 18, 2018 (PEX 16), signed by the 2nd Plaintiff, which explicitly requested the conversion of USD 1,250,000. Thus, the conversion was at the 1st Plaintiff’s request. The Plaintiffs also failed to provide evidence to prove the prevailing exchange rate or how the Defendant’s applied interest rate was exorbitant and unjustified, amounting to adducing evidence at the bar.

Regarding the lawfulness of the credit facility recall, DW1 testified that the recall was based on the terms of the sanction letter (PEX 3/DEX 1), which stipulated that facilities were subject to demand before the expiry of the 12 months and were repayable on demand. This was acknowledged by PW1 and PW2.

DW1 further explained that accounts become non-performing and subject to recall if accrued interest is not paid for three consecutive months, a point undisputed by the Plaintiffs. The Court, examining DEX 10 and DEX 11, found that the 1st Plaintiff had defaulted on paying accrued interest on the overdraft from June 2018 and on the letter of credit facility from November 2018 when the facilities were recalled on January 25, 2019. Therefore, the Court concluded that the recall of the credit facilities was legal and lawful, and the Plaintiffs failed to prove the Defendant breached the terms.

In its counterclaim, the Defendant alleged the Plaintiffs breached the contract by failing to pay accrued interest, failing to maintain required amounts in the letter of credit account, and refusing to settle their indebtedness. PW1 and PW2 acknowledged that the 1st and 2nd Plaintiffs had not settled their indebtedness . The Court found that the 1st Plaintiff failed to pay accrued interest on the credit facilities and failed to maintain the required 20% cash margin (USD 70,000) on the letter of credit account, as evidenced by DEX 10 and PEX 11/DEX 7.

Regarding the 2nd Plaintiff’s breach, the Court noted that the 2nd Plaintiff executed a personal guarantee (PEX 6/DEX 19) for the credit facilities and was served with a demand notice (PEX 1/DEX 9). Citing Section 67 and 70 of the Contracts Act and Bank of Uganda Vs Banco Arabe Espanol, the Court affirmed that a guarantor is liable upon the principal debtor’s default. The 2nd Plaintiff’s failure to pay the outstanding amount, up to the guaranteed limit of UGX 6,360,000,000/=, constituted a breach of contract.

Therefore, the Court found that the 1st Plaintiff’s failure to pay monthly interest and maintain required funds, and both Plaintiffs’ failure to pay outstanding amounts (UGX 16,029,628,120.90/= and USD 122,900.05 as of September 11, 2025), amounted to a breach of contract.

What remedies are available to the parties?

The Court considered the remedies sought by both parties. For the Plaintiffs, who sought declarations of breach, wrongful recall, injunction, damages, and costs, the Court found that in light of the resolution under Issue No. 2, the Plaintiffs were not entitled to the remedies sought, and thus, their suit was dismissed with costs.

For the Defendant’s counterclaim, which sought a declaration of liability, an order of foreclosure, interest, and costs, the Court addressed each remedy;

On Foreclosure

Although the Court found that the Plaintiffs were indebted to the Defendant, it declined to grant the order for foreclosure.

The Court noted that foreclosure is triggered by default, and Sections 18(1), (2), (4), 19, 25(2), and 27(2) of the Mortgage Act mandate specific notices (demand notice, further notice, notice of intention to exercise remedies, notice to sale, and advertisement) before an order to sell can be granted.

The learned Judge clarified that compliance with the statutory notice regime under the Mortgage Act is mandatory before foreclosure remedies can be exercised.

The Court found that the Defendant only issued the statutory 45-working-day notice (PEX 2/DEX 8) and a notice to vacate (PEX 18), but no evidence was adduced to show that all requisite notices were issued. Therefore, the Court refrained from granting the order to foreclose at this stage due to non-compliance with the Mortgage Act.

The Court therefore refused to grant foreclosure at that stage.

b) Interest;

The Defendant sought interest at 24% per annum from the date of filing the counterclaim. The Court, citing Section 26 of the Civil Procedure Act and case law (Milly Masembe Vs Sugar Corporation (U) Ltd and Another, Wallersteiner Vs Moir, Mohanlal Kakubhai Radia Vs Warid Telecom Uganda Ltd), noted that interest awards are discretionary but should be judicious, considering inflation and depreciation.

However, the Court observed that the sums sought by the Defendant (DEX 20 and DEX 21) already included interest and penal interest up to September 11, 2025. Given that the credit facilities were written off in 2019, and drawing from Barclays Bank of Uganda Limited & Others Vs Emerald Hotel Limited & Others, the Court awarded a simple interest rate of 10% per annum on the decretal sum from the date of Judgment until payment in full.

c) Costs.

The Court, guided by Section 27(2) of the Civil Procedure Act and Uganda Development Bank Vs Muganga Construction Co. Ltd, held that costs follow the event, and a successful party is entitled to costs unless their conduct caused the action to be brought. As the Defendant/Counterclaimant was the successful party, they were awarded the costs of the suit and the counterclaim.

Holding

In the final result, the counterclaim succeeded, and the Court issued the following orders;

1. The 1st Plaintiff/Counter Defendant was ordered to pay UGX 16,029,628,120.90/= and USD 122,900.05, representing the total outstanding balance from the overdraft and letter of credit facilities advanced to the 1st Plaintiff/Counter Defendant.

2. The 2nd Plaintiff was held liable to pay the outstanding balance up to UGX 6,360,000,000/=, as per the terms of the personal guarantee deed.

3. Interest was awarded on the sums in (1) above at a rate of 10% per annum from the date of Judgment until payment in full.

4. Costs of the suit and the counterclaim were awarded to the Defendant/Counterclaimant.

5. The Plaintiffs’ suit was dismissed with costs

Read the full case

Shumuk Aluminium Industries Ltd and Another v Bank of Baroda (Uganda) Ltd 2026 UGCommC 264.

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Key Takeaways

1. An overdraft facility is repayable on demand and may be recalled before the expiry of its stated tenure upon default. There is no concept of "premature recall" of an overdraft.

2. A default and demand notice that specifies the outstanding amount and the relevant credit facilities satisfies the requirement of adequate notice under the Mortgage Act; the demand need not itemise each default event separately.

3. A borrower who requests a specific currency conversion amount and rate in writing is bound by that request and cannot, at trial, attribute the resulting figures to the lender's unilateral misconduct.

4. Bare assertions of overpayment or miscrediting of deposits will not avail a borrower who cannot produce deposit slips or reconciliation evidence to support those claims.

5. A guarantor's liability arises automatically upon default by the principal debtor and extends to the limit stipulated in the guarantee instrument, pursuant to Sections 67 and 70 of the Contracts Act.

6. Even where a borrower is in breach and a bank is entitled to recover, foreclosure requires strict compliance with all mandatory notices under Sections 18, 19, 25 and 27 of the Mortgage Act. Issuance of the forty-five working days' notice alone is insufficient to ground a court order of foreclosure.

7. Where credit facilities have been written off and outstanding amounts computed to a future date inclusive of interest, the court will award simple interest from the date of judgment rather than from the date of filing the counterclaim, to avoid double-counting of interest.

8. A plaintiff who departs at trial from a material fact pleaded in the plaint, such as alleging non-disbursement of a facility whose receipt was pleaded, weakens its case irreparably.