The Sembule Group, a local steel milling company, is the prime beneficiary of the settlement.
Following pressure from the government, the central bank asked its external lawyers â Mugerwa & Masembe Advocates â on February 22 to withdraw civil suit No. 246/2004 against the PTA Bank, which had seized the BoU's $6.6 million security for a PTA Bank loan of the same amount to the Sembule Group. The case was before the High Court in Kampala.
In December last year, State House asked the ministries of finance and industry to have the case settled out of court after the Sembule Group appealed to President Museveni.
Sembule argued in its request for the government help that the company would create jobs and generate taxes if bailed out.
"A protracted and prolonged legal battle between the stakeholders will only lead to income loss, further expense and loss of public confidence for all of us," Mr C. Sebunya, the chairman of the Sembule Group, wrote in a February 3 letter to Mr Mwesigwa Rukutana, the minister of state for finance (general duties).
According to the Sembule letter, also copied to Museveni legal aide Hussein Kashillingi, the government would recoup the money through taxes paid by the company and its employees.
"All our competitors who actually have less infrastructure each pay in excess of $1,000,000 to government in taxes every year. Our major competitor, Roofings Ltd last year paid $6,000,000 to government. The government will therefore recover this money in a few years," Sebunya wrote.
Background
The Sembule Group borrowed $6.6 million from the New York-based Republic National Bank (RNB) through the PTA Bank in 1998.
The money was to help the company expand its operations.
The BOU then deposited the $6.6 million with RNB as security in case of failure to service the loan.
Under the arrangement, the PTA Bank took over the supervision of the management of Sembule Group during the time of servicing the loan. However, due to managerial problems, which Sembule Group has pinned on the PTA Bank supervisors, the company failed to service the loan.
The PTA Bank then seized the Sembule securities such as titles for land, plant and machinery.
And the RNB successor, Hong Kong Shanghai Bank Corporation, seized the BoU security of $6.6 million in November 2002 upon which the central bank sued the PTA Bank contesting the action.
Sources say the BoU case was watertight. But if the BoU had pressed ahead and won, as expected, it would have left Sembule in a lot more trouble. Sensing that, Sembule made its patriotic pitch to the President seeking cover.
Sebunya argued that the Ugandan economy benefited from the loan anyway.
"Some of the funds paid off Ugandan banks and other monies though misused, were utilised in our economy," he wrote.
Sebunya then argued that once the Sembule Group got back its titles following the settlement of the case, the company would have a clean balance sheet, and projected cash flows that would enable it pay Shs2.4 billion in taxes and earn Shs2.9 billion in exports in the first year.
"We will be able to start our steel rolling mill in our second year of production. This will result in more employment for Ugandans and a substantial saving in foreign exchange through this import substitution," Sebunya said in the letter also copied to Mr Tumusiime Mutebile, the BoU governor.
"Due to the growing economy and the current predictable macro factors, ... our steel products are growing everyday. Our target is to see ourselves in Uganda's dailies as one of the top 100 tax payers in the country within two years," Sebunya wrote.
Government acts
On receiving the Sembule letter, Rukutana instructed the central bank to withdraw the suit in a February 7 letter to Mutebile.
Rukutana's letter followed a February 1 meeting involving himself, Mutebile, Sebunya and Kashillingi in the Ministry of Finance boardroom.
"Please note that the withdrawal of the suit by Bank of Uganda is premised on the conditions proposed by the Minister of Finance and stated in our letter to you of 16th February 2005," BoU wrote to their lawyers.
According to the instructions, BoU has asked for a consent judgement that would make the PTA Bank renounce and forego all claims it holds against Sembule and undertake to lift all the encumbrances being mortgages and debentures and surrender the titles to the company.
Mr Juma Walusimbi, the central bank publicist, declined to comment saying he had been on leave and was not familiar with the matter.
"It was for very noble reasons that we intervened to assist that company," Rukutana said yesterday.
The minister said if BoU had pursued the case, the PTA Bank would have attached the assets of Sembule Group.
"We thought that if we intervened and restarted the company, it would be the best way of saving the money because we would get it back as Sembule was one of the indigenous companies doing very well," the minister added.
Rukutana said that in effect, it is the PTA Bank, which had failed to service the loan, and Sembule Group was being made to suffer the consequences.
Said Rukutana: "Sembule was not responsible. They got a loan to expand their operations. But the loan was in such a way that once they got it, the PTA Bank took over the supervision of the management of the company. In effect, it is the PTA Bank which failed to service the loan."
Kashillingi also defended the settlement. "I don't see it as losing," he said. "All parties won and lost."
He said the central bank suit, if followed, would have reversed the gains made so far, after government had convinced the PTA Bank to hand over management of the company back to the Sembule Group.
"But the most important thing is that government is trying to help an indigenous company. Sembule has the best steel rolling machines in the whole of East Africa and we had to help it get back on its footing," Kashillingi said.
He said BoU had even written off the $6.6 million as a bad debt.
