The Commercial Division of the High Court has ordered Equity Bank to pay Shs 200 million to Gombe Educational Services Limited for breach of a loan facility agreement.
On November 8, 2019, Gombe Educational Services Limited requested a combined facility of Shs18.5 billion from Equity Bank (U) Ltd. Equity Bank commenced its due diligence, Regents Estates Limited assessed the value of the proposed collateral security, and a firm of auditors provided a report on Gombe Educational Services Limited’s financial position, all of which cost the plaintiff Shs 222.2 million.
Based on the above reports and the securities, Equity Bank made a combined facility loan offer of Shs17.8 billion in a letter dated February 21, 2020, which was varied on March 19, 2020 and accepted by Gombe Educational Services Limited.
The combined facility included a term loan of Shs17.2 billion and a finance termly overhead facility of Shs600 million. The term loan was intended to facilitate the acquisition of East High School Ntinda, buy off outstanding loans from KCB Bank Uganda Limited and Tropical Bank, and renovate the school structures.
Since part of the facility was intended to clear Gombe Educational Services Limited’s outstanding loans, on March 10, 2020, Equity Bank notified KCB Bank Uganda Limited and Tropical Bank, on behalf of East High School Ntinda and Gombe Educational Services Limited respectively, and requested the banks to release certificates of title for the mortgaged properties after the bank had approved the plaintiff’s credit facility.
On March 12, 2020, the plaintiff wrote to the Buganda Land Board seeking consent to mortgage Kyadondo Block 203 Plot 11234, which was duly granted. On March 17, 2020, Equity Bank wrote to East High School Ntinda requesting certificates of title, a registered resolution to sell the properties and transfer forms for the land, which were duly handed over.
On March 31, 2020, the schools operated by the plaintiff were closed as a result of the Covid-19 pandemic, prompting the defendant to halt disbursement of the facility pending the reopening of the schools.
On May 28, 2020, the plaintiff wrote to the defendant expressing concern over the delayed disbursement of the facility and warned of possible litigation because of non-performance of its pending obligations to third parties who were supposed to benefit from the facility. In response, on June 10, 2020, the defendant explained the delay, citing a fundamental change in circumstances that had affected performance of the loan offer due to Covid-19, and said it was monitoring the situation.
In October 2020, following the phased reopening of academic institutions countrywide, the plaintiff resumed operations for candidate classes. Despite providing everything required under the facility letter, Equity Bank refused to disburse the facility even after the schools had reopened.
The Equity Bank continued holding onto the certificates of title pledged on behalf of Gombe and the plaintiff was unable to obtain alternative financing in the circumstances since almost all its property documents were in the possession of Equity Bank.
To mitigate its losses, on October 22, 2020, the plaintiff made interest payment proposals to the head of credit of the defendant in a bid to salvage projects that had stalled due to the delayed disbursement of the facility. For several months, the defendant allegedly gave the plaintiff assurances that the combined facility would be disbursed while holding onto the plaintiff’s certificates of title for the pledged properties.
On March 25, 2021, Equity Bank rescinded the facility agreement on the basis of an unfavourable operating environment surrounding the education sector. The plaintiff, however, argued that it had complied with all conditions precedent to disbursement of the facility and had incurred costs of Shs2.4 billion, making it entitled to compensation.
Equity Bank denied Gombe’s claim, contending that the plaintiff had not complied with all conditions precedent to disbursement of the funds. The bank also argued that the loan facility was at all times subject to availability of funds and that it released the pledged certificates of title as soon as the loan offer was rescinded.
Justice Patience Rubagumya observed that Gombe Education Services had pleaded that, due to Equity Bank’s failure to fulfil its obligations, it suffered financial loss, inconvenience, lost other business opportunities and lost the opportunity to procure the loan facility from other banks.
“I find that Equity Bank breached the contract when it failed to refund the valuation fees and auditor’s fees incurred by Gombe Education Services in connection with securing the combined facility,” Justice Rubagumya ruled.
The judge declared that Equity Bank had breached the loan facility agreement and ordered the bank to pay Gombe Education Services Shs122.2 million being costs and expenses incurred by the plaintiff for valuation and audit in connection with the facility.
The court also awarded Gombe Education Services Shs80 million in general damages and ordered Equity Bank to meet the costs of the suit.
