For years, Kampala businessman Patrick Bitature has been an icon of success with his ever-expanding Simba Group of Companies.
However, the veil of success was lifted on May 18 following a threat to auction several properties he owns. What followed was the unravelling and escalation of his financial woes. At the moment, he finds himself in the eye of the storm for defaulting on his loan of $10m attained from South Africa-based lenders Vantage Capital, which has since accrued to $34m in a seven-and-a-half-year period.
On May 9, High court judge Musa Ssekaana ruled that Vantage Capital has no legal basis to sue Bitature because it is not registered in the country. Put simply, the judge centred on the registration of the partnership in South Africa.
The court found that there was no evidence that the partnership was registered in South Africa. Court further found that since the partnership was using a generic name (not the surname of the partners); so, it equally had to be registered in Uganda if it were to be acceptable. On that ground, the court concluded that it was not having a legal existence and couldn’t thus sue.
But the court did not determine the merits of the case or comment on the borrowing. However, this looks to be just a phase of a protracted legal and commercial showdown that will be keenly followed by the business community locally and internationally.
How did this case come to this?
Sources close to Bitature that spoke to The Observer have intimated that the businessman has been battling debts for years and the Vantage issue is just the latest in a long line.
“His financial struggles started around 2010 when he borrowed money from a local businessman of Asian descent who threatened to auction his properties,” the source said.
“Bitature’s property was saved at the last minute when another bank offered to lend him money to pay the ruthless businessman. From then on, he has serviced and paid several loans by getting fresh loans, and by the time he went into the Vantage Capital loan deal in 2014, he was running out of options locally.”
According to another source, what attracted Bitature to the Vantage Capital deal is that if he failed to pay back, the lenders would turn the loan into equity unlike banks that quickly auction off the assets. In other words, Bitature did not need to hand in the titles of his assets as security.
The 80-page agreement, a copy of which The Observer has seen, was drafted by MMAKS law firm. According to sources, Bitature quickly realized he stood little chance of paying back the loan when it accrued to about $15m within two years yet the projects he had borrowed to run were not even complete.
“He feared he had fallen into a trap of vulture funds and started digging into any loophole he could see in the deal,” a source said.
According to an explanation by corporatefinanceinstitute.com, vulture funds are funds that invest in distressed companies or securities that have a high chance of default. The fund buys risky debt instruments at highly discounted prices in the secondary market and benefits by taking legal action against the issuers for debt recovery. Vulture fund portfolio managers seek investments offering very high potential returns due to their high risk of default.
From $10m to $34m in seven years!
According to legal experts, the figure could have grown to that extent because of penalties for defaulting on payment. Some penalties are even higher than the interest and are calculated daily. This is primarily to deter non-compliance. The other issue is that lenders could have compounded their interest.
What next for both parties?
At the moment, Bitature seems to have the upper hand but according to a top legal brain, the Vantage Capital partnership can still bring a case against failure to pay.
“There are other legal ways Bitature can be cornered and it starts with bringing the suit in the names of the partners,” he said.
“The only issue that Vantage Capital may have is exposing all the names behind it which many venture capitals don’t always want.”
The bad side of lawyering up
Interviewed for this story, financial expert Andrew Muhimbise said that if investors like Bitature continue to exploit legal loopholes within the native laws to evade paying back loans, the image of the country would be dented.
“What Bitature and the likes of Hamis Kiggundu have done in recent years dents Uganda’s collective rating. It feeds into the perception that Ugandans are thugs. If our stars that determine our image are playing poorly, Uganda’s image is dented. There’s an underrated fact that capital in Uganda is very hard to get. Very few banks in Uganda can issue a $10 million loan to a single borrower. This can only be done by international companies like Mezzanine. Now see what’s happening to them,” he said.
Kiggundu is battling a similar loan war with DTB, Kenya. Muhimbise wondered why Bitature didn’t refuse the funds offered by the lenders.
“Bitature does not dispute the fact that he received their money. Such callousness has a terrible effect on other local borrowers. It increases the cost of borrowing because most lenders are afraid of lending to Ugandans. This limits access for other local investors to big finances like those accessed by Bitature. One of the key aspects of behavioral finance is the borrower’s willingness to pay. The big capital world works on trust and alignment. If you ignore that, then you are not ready to play among the big players,” he said.
Muhimbise added that the alleged law being taken advantage of by local investors to fleece international lenders had dire consequences for the country and the ease of doing business with other international bodies.
“The law cannot be exhaustive. The arch role of the law is for it to bend towards justice. The international people that trade in government securities are not registered here. This is because big capital runs on trust. Money has feelings and if top Ugandan businessmen continue to trade like this, the cost of borrowing will continue to grow because Ugandan borrowers don’t like paying back loans.”
He opined that since Bitature is the board chairman of electricity distributor Umeme, he (Bitature) should politely be requested to vacate the position for another capable person.
“Bitature as chairman of Umeme has been hobnobbing with South African fund executives. He should even resign as chairman,” he said.
Weighing in on the rift between local investors and international lenders, Kenneth Legesi, the chief executive officer of Ortus Africa Capital, an investments and advisory firm headquartered in Uganda, said, “Some investors domiciled outside Uganda that invest using credit or debit type investment structures will start to look more critically at investment terms as they structure to invest in local companies or do local deals.”
Legesi added, “We may see foreign capital syndicating investments with local investment firms who may hold the financing contract to enforce terms”. This he said would do away with technicalities being used by borrowers not to pay back their loans.
DISCLAIMER: This article has been adapted “as is” from The Observer and DailyExpress owns no responsibility of the contents presented herein
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