The Legal Framework for the Recovery of Non-Performing Loans and the Rights of Guarantors in Uganda

The recovery of non-performing loans is a matter of first importance both to the stability of Uganda's financial institutions and to the continued availability of credit to its economy. Lenders protect themselves against default by taking security over the borrower's assets and by requiring the personal guarantees of third parties, so that, when a loan becomes nonperforming, recovery may be pursued against the borrower, against the security and against the guarantor. This article examines the legal framework for the recovery of non-performing loans in Uganda and, in particular, the rights of guarantors within that framework. It sets out the concept of a non-performing loan and of the contract of guarantee; it examines the legal and regulatory framework, comprising the Constitution, the Financial Institutions Act Cap 57 and the Bank of Uganda prudential regime, the Contracts Act Cap 284, the Mortgage Act Cap 239, the Security Interest in Movable Property Act Cap 293, the Insolvency Act Cap 108 and the Civil Procedure Act Cap 282; and it analyses the avenues of recovery and the rights, liabilities and defences of guarantors through a body of case law, including Zaabwe v Orient Bank, Housing Finance Bank v Musisi, Ganafa v DFCU Bank, Stanbic Bank v Cellular Galore, Barclays Bank v Jing Hong and ABC Capital v Muyanja, together with the comparative authority of Moschi v Lep Air Services, Holme v Brunskill and Hamilton v Watson. The article argues that, while the framework affords lenders a serviceable range of recovery remedies, the position of the guarantor, often a director, spouse or relative who undertakes a heavy liability without full understanding, is inadequately protected, and it recommends enhanced pre-contract disclosure, the clear enforcement of the surety's statutory and equitable defences, and the conduct of enforcement with due regard to the guarantor's exposure.