The Duty Of Care Of A Bank Selling Mortgaged Property: Lessons From The Macdowel Case

Cultural wisdom posits that he who pleads guilty is treated leniently (gunsinze aliwa bitono). This wisdom appears to have been at play in Macdowel Food & Beverages -v- Stanbic Bank and Myriad Investments Club Ltd. (Misc. Application No. 568 of 2020).

The facts

Macdowel borrowed from Stanbic and mortgaged property to secure the loan, however it defaulted on its loan obligations. A consent judgment was entered into which Macdowel honoured with varying degrees of compliance.

Stanbic sold Macdowel's mortgaged property to Myriad, an investment club that morphed into a limited liability company admittedly with the sole aim of purchasing the Macdowel property.

The fly in the ointment was that the Myriad shareholders and directors were all employees of Stanbic.

Macdowel was not notified of the sale of the property to Myriad until several months later when after repaying the debt, it sought to redeem the mortgaged property. Macdowel sued Stanbic to set aside the sale of its property and for damages. Macdowel claimed that the sale of its property to insiders of Stanbic was fraudulent and illegal.

Stanbic consented to a nullification of the sale transaction and a return of the property to Macdowel, who had since paid off its outstanding loan.

What remained for the court was the question of damages. Macdowel sought not only compensation for the inconvenience it had suffered but it also wanted Stanbic punished for its conduct.

The Mortgage Act 2009

Allegations of banks impropriety in sales of mortgaged property has long done rounds in the borrower community. This was one of the issues addressed in the Mortgage Act 2009.

The Act codified a duty of care on a bank selling mortgaged property to ensure the highest price is obtained, going so far as to specify that the property must be advertised with colour pictures. The Act expressly prohibits the sale of mortgaged property to employees of the mortgagee or to persons who can influence the decisions of the mortgagee unless the transaction is sanctioned by court. The Act makes such transactions voidable at the instance of the borrower and further criminalises a violation of the bank's duty of care.

The decision

Hon. Justice Wejuli ruled that Myriad was a sham company set up only to circumvent the Mortgage Act. He ordered Stanbic and Myriad to pay UGX100-million in general damages and UGX300-million in punitive damages. Macdowel had asked for UGX500-million relating its claim to Stanbic's profits from the year before and saying a punitive award must cause the errant party to "feel the pinch".

What Macdowel means to the market

The decision is commendable for the speed with which it was made, fully vindicating the specialist commercial court. The conduct of counsel in entering a part settlement also served to expedite the resolution of the case. The courts are littered with cases in which an errant defendant lamely still insists that the plaintiff must prove its case.

The market whispers on insider property sales should also be silenced by this decision. Borrowers should be comforted that their right to redeem mortgaged property is protected. The long arm of the law has reach. The Mortgage Act has bite.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Phillip Karugaba
ENSafrica
150 West Street
Sandton
Johannesburg
SOUTH AFRICA
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URL: www.ENSafrica.com

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