THE website of Tanzania’s CRDB Bank makes much of this being the country’s largest private bank, of its awards for progressive policies and practices and of its good relations with customers. It even advertises itself as “the bank that listens”. With all that energy and hype around a friendly, efficient and profitable profile, it must have been devastating when the high court ordered the bank to pay a massive USD 30m plus interest in damages and lost business opportunities to an unhappy businessman and client.
Why was the bank found to be responsible for the litigant’s loss of business opportunities? A good question, and one that the court of appeal has now decided was incorrectly answered.
The story begins with businessman Issack Bugali Mwamasika who wears a number of hats. For one, he chairs the Dar Es Salaam International School Trust Fund and he is also managing director of a construction company.
The school trust fund opened an account with CRDB Bank in 1999 and some years later Mwamasika asked the bank for a loan for the school. When he arranged for the school to access the funds, Mwamasika put up personal guarantees as well as some property in his name. Further overdrafts followed, to the school and to his own business. But though the school cleared its debt as scheduled, the loan to Mwamasika’s own enterprises fell behind with payments.
At some stage Mwamasika asked for the return of his security documents, lodged initially in respect of the loan to the school. He expected to have them returned because the school loans had been fully paid up. But the bank refused to comply with his request in view of the still outstanding loan for his own business that was rapidly falling behind with repayments.
Mwamasika was not happy with this refusal. He would later tell the high court that without the security documents he could not go ahead with promising business opportunities. To prepare for these opportunities, he had hired a consultant and they finalized a business plan and feasibility report. These documents showed vast growth potential for his road construction business – but it all came to nothing. In Mwamasika’s view that was because of CRDB’s obstinate and to his mind unwarranted refusal to return the documents to him. Without those documents he was unable to raise a loan elsewhere and the opportunity passed him by.
The high court accepted his argument and awarded Mwamasika USD30m against the bank. But it was an award that raised many questions, not least how the judge had arrived at the quantum, since no indication was given of how it had been calculated.
After the bank indicated it would appeal, Mwamasika launched a cross-appeal saying the high court ought to have given him far more by way of damages. But it was all a pipedream: the court of appeal has now firmly decided that the high court was wrong and its award should be set aside.
In court, during argument of the appeal, the two sides skirmished over minor issues like whether an appeal could be set aside on the grounds of pages missing from the record. But the central question, at least in the view of the appeal judges, was whether the bank was legally justified in refusing to return the securities even after the two loan debts had been cleared.
“We have no doubt that as long as Mwamasika is one of the guarantors of a non-performing loan (advanced to his company) the (bank) retains the justification in the form of lien priority over his assets still in the bank’s custody.”
Mwamasika could not “escape the legal consequences awaiting loan guarantors” when their principal debtor fails to pay loans or defaults in repayment schedules. He had put up a personal guarantee and indemnity to facilitate the loan – and that, in law, was “a binding contractual agreement which left it open to the (bank) to enforce the terms of that guarantee” if the principal debtor failed to liquidate the debt. The wording of Mwamasika’s personal guarantee and indemnity to facilitate the loan, made that consequence quite clear.
Key authorities left no doubt that if a person executes a personal guarantee to support the principal debtor’s application for a loan, the guarantor concerned “puts all his property at risk if the debtor defaults.”
The high court judge had failed to take this into account properly. The personal guarantees signed and executed by Mwamasika and his colleagues not only committed them to pay the load debts of the principal debtor – or face seizure of their personal assets – but it also gave the bank “legal justification to withhold … security documents”, even those related to another loan that had been cleared.
For this reason alone, the appeal had to succeed and the appeal judges said they did not need to consider any of the other grounds raised before them.
With costs to follow the result the bank will feel a huge weight off their shoulders. Mwamasika, on the other hand, will no doubt be thinking back to that brief time when he imagined USD 30m was about to become his.
