Sudhir vs. dfcu Bank: London appellate court orders dfcu and its former managers to pay UGX8.8 bn in costs

A London Court of Appeal has ordered dfcu Bank, its holding company, dfcu Limited, as well as dfcu Bank’s former board chairman, Jimmy Mugerwa (now dfcu Limited Chairman), Juma Kisaame and William Sekabembe, the bank’s former Managing Director and Executive Director respectively, to pay shareholders of the former Crane Bank Limited (CBL), ￡1,875,000 (UGX8.8 billion) in court costs.

This follows the appellate court’s ruling that there are “serious issues to be tried” in a case the former Crane Bank Limited shareholders⏤ Dr. Sudhir Ruparelia, Jyotsna Ruparelia, Meera Ruparelia, Rajiv Ruparelia, Tom Mugenga and Sheena Ruparelia brought against dfcu Bank, for among others being party to a “corrupt scheme as the purchaser of CBL’s assets from the Bank of Uganda (BoU)”. 

CEO East Africa Magazine understands that while CBL’s shareholders had filed for ￡2,500,000 in costs, the court only allowed them 75% of that, equivalent to ￡1,875,000

“The First to Fifth Defendants shall pay 75% of the claimants’ costs of the appeal and of the costs below, such costs to be to subject to detailed assessment if not agreed,” the court ordered.

The quintet were however ordered to first pay ￡700,000 (UGX3.3 billion) within 14 days while the full assessment is ongoing.

Court also ordered that the quintet must refund, within 14 days, with 4.5% interest per annum, the ￡1,250,000 (UGX5.9 billion), that the CBL shareholders paid to them on 27 October 2022 as costs, when the High Court initially dismissed the main case brought up by CBL’s shareholders.   

The Court of Appeal ruling arises from the main case lodged in the Business And Property Courts Of England And Wales Commercial Court by CBL’s shareholders accusing dfcu Bank, its managers and shareholders of being party to a corrupt scheme in which “senior Ugandan government officials and officials of the Bank of Uganda engaged in a corrupt scheme to take control of CBL, making improper use of statutory and regulatory powers to do so, and then to sell its assets” to dfcu. 

In the ￡170 million (UGX798.2 billion) suit, CBL Shareholders are also suing dfcu bank, together with the majority shareholders at the time⏤CDC Group Plc, Norfinance AS, Rabo Partnerships B.V., and Arise BV,  as well as the respective directors of these shareholder companies, namely Stephen Caley, Michael Alan Turner, Albert Jonkergouw, Willem Cramer, Ola Rinnan and Deepak Malik.

However, when the case first came up for mention dfcu Bank and its shareholders, separately challenged the jurisdiction of the London High Court on the case, arguing that the claims were debarred by the foreign act of state rule and therefore there was no serious issue to be tried. 

On 19 October 2022 High Court Judge, HH Pelling KC  agreed with with dfcu Bank and ruled that the matter was out of his jurisdiction. He also ruled that going ahead with the case, would “require the Court to adjudicate on the lawfulness of executive acts of a foreign state (Uganda), under the laws of that state and performed within its territory” which claims “fell within the foreign act of state rule” and that the Court, accordingly, had no jurisdiction to try them. 

CBL shareholders, then appealed to the Court of Appeal, arguing that the sale by the BoU (as receiver) to dfcu Bank was commercial rather than sovereign in character, therefore falling outside the foreign act of state rule. They also argued that the actions of the players in the transaction were within the “English public policy of combatting and not giving legal protection to bribery and corruption, therefore falling outside the foreign act of state rule”. 

The lawyers for the CBL shareholders also submitted that “investigating the acts of bribery and corruption alleged against dfcu Bank “did not require the Court to inquire into or adjudicate on the legality of executive acts of the Ugandan state, and so would not infringe the foreign act of state rule”. They also argued that the “the application of the foreign act of state rule in this case would be incompatible with Article 6 of the European Convention on Human Rights and therefore contrary to s.6 of the Human Rights Act 1998”. 

Details of the bribery allegations against dfcu bank and co-defendants

CBL shareholders are being represented by  Greenberg Traurig LLP while Dfcu is being represented by Freshfields Bruckhaus Deringer LLP.  Jenner & Block London LLP are repressing the CDC, Norfinance A.S and RaBo.

It was submitted by the Crane Bank shareholders that until 2016, the bank was Uganda’s largest locally owned bank and the fourth largest lender with a strong balance sheet, showing total equity of about USD83m and a net operating income of about USD43m at the end of 2015. Its financial statements were audited by KPMG and approved by the BoU as CBL’s regulator.

CBL shareholders further submitted that in the “spring of 2016 senior government officials, including officials at the BoU, formulated a corrupt scheme to seize control of a major Ugandan bank and to sell it or its assets for their personal benefit”. This scheme, “initially involved a Chinese diplomat, Dr Patrick Ho, who sought preferential access for CEFC China Energy in Uganda by bribing various government officials, including the Foreign Minister and the Deputy Governor of the BoU, in respect of which Dr Ho was subsequently convicted by the US District Court, Southern District of New York, a conviction upheld on appeal in 2020”.

“Dr Ho identified to the Foreign Minister that the acquisition of a local bank in Uganda was CEFC’s top priority. In or about June or July 2016 CBL was identified as the target. Pursuant to the corrupt scheme, and notwithstanding its previous approval of CBL’s audited accounts, on 1 July 2016 the BoU adjusted CBL’s capital position by about USD76.5 million and ordered CBL to raise additional capital of about USD46.4 million by 31 July 2016. Further, the BoU withdrew CBL’s authorisation to conduct most financial business and placed a lien over about USD50 million of Treasury Bills held by CBL, seriously inhibiting CBL’s ability to raise the additional capital. In August 2016 the BoU ordered CBL to raise further capital in the sum of about USD26 million,” CBL further contends.

That on the “18th of September 2016 the Governor of the BoU issued a press statement falsely blaming CBL’s problems on weak loan performance and depositor flight. This triggered a run on CBL”.

That despite CBL shareholders, between July and September 2016, raised about USD8.2 million to recapitalise CBL, “the BoU refused to allow that sum to be injected and required that it be held on deposit at the BoU” and that “BoU also took steps to thwart investment in CBL by independent financial institutions”.

“On 13 October 2016 the Deputy Governor of the BoU, through the Foreign Minister’s wife, privately informed Dr Ho of the possible acquisition of CBL. At their request the next day CEFC sent an email to the Deputy Governor’s private email expressing such interest. On 16 October 2016, CBL requested emergency liquidity assistance from the BoU in the sum of USD 115 million, offering prime real estate held by a company owned by the second appellant, worth more than USD115 million, as collateral. The BoU refused the request, offering only USD22.8 million on terms which were impossible for CBL to meet,” CBL shareholders further told the court.

“On 20 October 2016, the BoU placed CBL into statutory management under provisions of the FIA. Between 21 October 2016 and 9 January 2017 the BoU purported to inject about USD135 million into CBL by way of liquidity support, for which CBL is purportedly liable, but the use of about USD79.5m of that sum is unaccounted for by the BoU. CEFC’s interest in acquiring CBL ceased in late October 2016. In November 2016 at the latest, the BoU privately approached dfcu Bank with a proposal to acquire CBL as a going concern, but the transaction then transformed into an acquisition of CBL’s assets, subject to its liabilities. On 9 December 2016, the BoU sent invitations to 13 parties to bid for CBL’s assets and liabilities but had given dfcu Bank preferential terms and early access to information. dfcu’s bid, despite being non-compliant and contemplating a breach of the FIA, was accepted by the BoU on 23 December 2016. On 24 January 2017, the BoU placed CBL into receivership under section 95(l)(b) of the FIA, with the BoU as receiver,” CBL shareholders add in their plaint. 

That on 25 January 2017, the “BoU (in its capacity as receiver of CBL) and dfcu Bank executed a Purchase of Assets and Assumption of Liabilities Agreement (“the Agreement”) whereby the BoU sold CBL’s assets to dfcu Bank (other than specified excluded assets, comprising claims and tax credits) in consideration of dfcu Bank assuming CBL’s liabilities (other than specified excluded liabilities, which included sums due to the BoU under the liquidity facilities in excess of UGX 200 billion (c. USD58m)”.

On 25 January 2017, the BoU and dfcu Bank entered a facility agreement, “permitting dfcu Bank to repay the UGX 200 billion liability over a period of 30 months, but on an interest-free basis. dfcu Bank recognised that the interest-free arrangement as creating a liability of only UGX 149 billion. The BoU subsequently sought to recover interest on the UGX 200 billion from the appellants (CBL shareholders)”.

CBL shareholders further told the court in London that “by a letter to dfcu Bank, also dated 25 January 2017 (“the Side Letter”), the BoU agreed (a) to give dfcu Bank 11 months to bring itself into compliance with FIA capital adequacy and prudential requirements (b) that dfcu Bank’s non-performing loan and advances would be managed off-balance sheet for at least 12 months and (c) that fully provisional loans and advances acquired by dfcu Bank would not be part of its loan portfolio for reporting purposes until rehabilitated. The effect of the Side Letter was to reduce substantially the amount of additional capital required to be injected into dfcu Bank as a result of the acquisition of CBL’s assets and liabilities”.

That “due to the terms of the agreement and the Side Letter, dfcu Bank acquired assets of CBL with a value far exceeding the liabilities dfcu Bank assumed and the costs it incurred. dfcu Bank (or its group) recorded in its annual report for 2017 that it had made an immediate windfall gain of about USD33.4 million”.

“A portfolio of loans valued at UGX l00 billion (about USD27.5 million) was not reflected in the Agreement nor shown in any accounts. The appellants allege that that sum was transferred to the BoU and/or its officers secretly as a quid pro quo (or part of it) for the sale of CBL’s assets and to dfcu Bank at an undervalue. On 7 August 2020, the Ugandan Court of Appeal declared that the receivership of CBL had ended on 20 January 2018. The BoU thereafter purported to place CBL into liquidation, but that action was held to be illegal and in manifestly bad faith by the Supreme Court of Uganda on 4 October 2021 and the Court of Appeal’s declaration was affirmed,” CBL shareholders further contend.

It is upon this background that the CBL shareholders on 23 December 2020 commenced proceedings against dfcu Bank, its managers and shareholders. Following the 19 October 2022  ruling by High Court Judge, HH Pelling KC that dismissed the case under the “foreign act of state” rule, CBL shareholders then went ahead to appeal. 

A sovereign decision with private commercial elements 

The core of the Appeal is that dfcu bank, its managers, directors and shareholders at the time, collectively called the defendants, “were, together with the BoU and/or its officials and/or agents… each a party to a corrupt scheme in relation to the takeover and resolution by the BoU, purportedly pursuant to its statutory powers under the FIA, of CBL during 2016 and early 2017”. 

In their appeal, the CBL shareholders further contend that “by joining the Corrupt Scheme in or about November 2016, the defendants became parties to a conspiracy (or formed a new conspiracy) with each other and the BoU and/or its officers to injure the appellants (CBL shareholders) by unlawful means”. 

Delivering their 26th July 2023 ruling, ruling, in a lead judgement by Sir Julian Flaux, the three Court of Appeal justices unanimously agreed that a course of conduct that is initially sovereign in character can subsequently involve private acts.  

The other two judges are Lord Justice Popplewell and Lord Justice Phillips.  

“There is no doubt that the sale of assets to a commercial third party by the receiver of a company is a quintessentially commercial act, one which can perfectly well be performed by any private person duly appointed as such receiver,” Sir Julian Flaux, observed.

“In the present case, whilst the receiver was the central bank of Uganda, which had placed CBL in receivership and become receiver pursuant to its statutory powers, the BoU, in acting as receiver, must be taken to have owed the usual common law and equitable duties to its principal (CBL) to act in good faith and to obtain a proper price for property under receivership. Further, the sale to dfcu Bank, as set out in the Agreement, was a straightforward commercial transaction on standard commercial terms: indeed the parties expressly declared that it was a commercial contract,” the lead judge added.  

“It follows, in my judgment, that the fact that the sale by the BoU as the receiver was the culmination of a corrupt scheme which was essentially sovereign in character, does not entail that such sale cannot be found to be commercial. Indeed, it is clear that the BoU’s decision to move from statutory management of CBL to receivership effected a significant change in the BoU’s role: it became an agent of CBL and it was in that capacity that it sold CBL’s assets,” Sir Julian Flaux therefore ruled. 

“I am of the view that it is well arguable, at the very least, that the sale by the BoU as the receiver was commercial activity, regardless of the purpose of the BoU in entering it and giving associated dispensations. It is therefore arguable that the claim is not barred by the foreign act of state doctrine and the jurisdiction challenge should therefore have been dismissed. I would accordingly allow the appeal on this ground,” Sir Julian Flaux further ruled.

In conclusion, Sir Julian Flaux “allowed the appeal on the ground that there are serious issues to be tried as to whether part or all of the appellants’ claims fall within the Commercial Activity Exception and/or the Public Policy Exception.”

The judge however disallowed two other pleadings⏤ the Kirkpatrick Exception and the applicability of Article 6.

CBL Shareholders were accordingly granted 75% of their filed costs (￡2,500,000), translating into ￡1,875,000. The defendants were ordered to pay ￡700,000 of this within 14 days as they decide whether to appeal or not as well as content the costs awarded by court or not.