BoU takes Sudhir case to the wire

June 30, 2020 in Business, Companies, Finance, Financial Services by Editor

Sudhir Ruparelia in an undated photo

Lender of last resort Bank of Uganda has decided to take to the Supreme Court, a landmark case with serious financial and corporate governance implications for Uganda, after both the High Court and Court of Appeal ruled in favour of Kampala businessman Sudhir Ruparelia.

The decision was revealed today,  in a public statement by BoU governor Emmanuel Tumusiime-Mutebile.

The appellate court dismissed a case filed by Crane Bank Limited (in Receivership) vs. Sudhir Ruparelia and Meera Investments Limited as the former tried to recover assets its says the Ruparelias swindled while they owned the defunct bank. In their rulings however, both the court of first instance in the case (High Court), and the Court of Appeal, reasoned that Crane Bank was not capable if suing or being sued the moment it ceased to exist.

The central banker says the court’s findings set a dangerous precedent that undermines its capacity to get banks in distress out of the market in a manner that ensures accountability for mismanagement of depositor funds.

Bank of Uganda placed Crane Bank under statutory management on October20, 2016 in line with the provisions of the Financial Institutions Act, 2004.  This followed the discovery that Crane Bank was struggling to meet its obligation to depositors and industry peers because of deepening liquidity problems. BoU moved in after the defunct lender failed to raise funds to fill the financial hole from alternative sources.

According to the central banker a subsequent audit by external auditors found that a sharp mismatch between Crane Bank’s assets and liabilities.

“In order to protect the financial system and prevent loss to the depositors of Crane Bank, Bank of Uganda had to spend public funds to pay Crane Bank’s depositors.

“A subsequent forensic investigation as to why Crane Bank became insolvent found a number of wrongful and irregular activities linked to Sudhir Ruparelia and Meera Investments Ltd. These findings form the basis of the claims in the lawsuit by Crane Bank. The suit was necessary for recovery of the taxpayers’ money used to pay depositors’ funds as well as the other liabilities of Crane Bank,” Professor Tumusiime-Mutebile says in today’s statement.

He adds that BoU set about resolving the crisis at Crane Bank in a manner that would safeguard depositors, preserve the safety of the financial system, and restore the taxpayers’ money that had been deployed to prevent loss to depositors and a potential financial crisis.

Sudhir Ruparelia subsequently signed an undertaking with BoU on March 20, 2017 in which he commited to reimburse the bank with USD 60 million and to return land titles of the properties on which Crane Bank built its branches but which he had irregularly appropriated. However, Sudhir Ruparelia only paid USD 8million out of the USD60million he had agreed to pay, before completely reneging on his undertakings.

It was then that BoU which was acting as receiver of Crane Bank sought recovery by taking Sudhir and Meera Investments Ltd.to court under High Court case H.C.C.S 493 of 2017.

In its plaint, the Bank of Uganda said it had found that Sudhir Ruparelia illegally and secretly owned 100pc shareholding in Crane Bank in breach of the Financial Institutions Act, 2004. He had used that position of control, to fleece the Crane Bank of funds amounting to USD 92,830,172 and UGX 8,277,000,000. He had also transferred freehold property beneficially owned by Crane Bank into the

names of Meera Investments Ltd in which he and his family are the majority shareholders, without giving value to Crane Bank and rendering the Bank a tenant on its own property with a liability to pay rent to Meera Investments Ltd.

Without contesting the Bank of Uganda’s claims, Sudhir Ruperalia and Meera Investments Ltd counter argued and later filed an application in which they said Crane Bank had no capacity to sue them while in receivership and that upon transfer of some of its assets to DFCU Bank, Crane Bank had ceased to exist. Both the Justice at the High Court and those at the Court of Appeal upheld Sudhir’s arguments.

BoU however insists that receivership does not take away the corporate personality of a company which includes the right to trace and recover assets and the right to sue for those assets.

Both the High Court and the Court of Appeal have not considered or taken a decision on the Bank of Uganda’s claims for wrongful and illegal extraction of funds from Crane Bank in the main suit.

Mutebile says the implications of the judgments by the lower and appellate courts are that a receiver of a financial institution or bank cannot pursue or seek recovery of assets of a bank in receivership by way of legal proceedings which decision renders the principle of tracing and preserving assets of an insolvent bank during statutory management and receivership futile.

“For these reasons, BoU as receiver of Crane Bank is dissatisfied with the rulings of both the High Court and the Court of Appeal and has taken a decision to appeal to the Supreme Court in addition to pursuit of other legal recovery options,” Mutebile says.