Payback time for those who milked banks to death?

By WAHOME THUKU

KENYA: In the mid and late 1990s, several banks and other financial institutions collapsed and went into oblivion with billions of shillings deposited by individuals, private companies and even state corporations.

According to the Central Bank of Kenya (CBK) database, some 20 financial institutions are currently in liquidation, having gone under in late 1990s. Some of them collapsed due to poor economic environment and others due to mismanagement and corruption by those in charge.

The story of Trust Bank is one of the classic examples of how some managers used their positions to bring down these institutions.

Trust Bank was placed under statutory management by CBK on September 18, 1998 after a concerted looting spree.

The CBK appointed the Deposit Protection Fund Board (DPFB) as the liquidator of the bank.

The DPFB is a public institution established by Section 36 of the Banking Act as a deposit insurance scheme to provide cover for depositors and act as a liquidator for failed financial institutions. It safeguards depositors against losses they would incur if banks or other financial institutions went under. Section 35(1) of the Banking Act mandates the CBK to appoint the board as the liquidator of a financial institution that becomes insolvent.

Trust Bank had two executive directors, Ajay Shah and Praful Shah and a third director Nitin Chandaria.

On November 10, 1993 Ajay and Praful registered a company by the name Trust Capital Services (TCS). The company started operating three accounts in Trust Bank.

Futile attempt

The two Shahs were the signatories to one of the accounts number 25862-01. There were no account opening documents for it at Trust Bank. It was opened without resolution of the TCS.

Likewise, another account of the same company, number 00059811-0001 was not officially opened in the bank’s books.

By September 9, 1998, the account was overdrawn to the sum of Sh34 million. Within another seven days, some Sh207,385,083 had been withdrawn from the bank through the account. By September 16, 1998, the withdrawals stood at Sh241.4 million. Two days later after the said withdrawal, Trust Bank was placed under statutory management by the CBK.

In 1999, there was a futile attempt to revive it under a Scheme of Arrangement dated May 26, 1999.

The two directors who were party to the scheme signed it acknowledging their liability to the bank and their commitment to pay the money.

They also acknowledged that Trust Capital Services owed the bank Sh246.4 million as at May 26, 1999.

On March 23, 2010, the DPFB filed an application at the High Court in Nairobi seeking a declaration that Ajay and Praful were parties to the bank’s business with intent to defraud the creditors.

The board also sought declaration that both were guilty of breach of trust and duty to the depositors.

It also sought an order that the two were liable to pay it, as liquidator of the bank, Sh1.5 billion being the amount that TCS owed the bank as at February 28, 2010 plus interest from March 1, 2010 till full payment.

Through their lawyer Desterio Oyatsi, the board claimed that in the process of winding up, it was established that the bank’s business had been carried out with intent to defraud creditors, among other frauds.

The two directors opposed the application arguing that the allegations were mere hearsay as the sources had not been disclosed. They claimed some of the documents produced in court had been fabricated.

Presiding judge Erick Ogola ruled he was satisfied that Ajay and Praful Shah were executive directors of Trust Bank and shareholders of Trust Capital Services.

The money was withdrawn from an account which had not been officially opened in the bank’s books. It was withdrawn through the Trust Capital Service without the sanction of the bank and from an account which did not officially exist.

Siphoning money

“The bank did not hold any security for the repayment of the same,” the judge noted.

He added: “What is clear to me however, is that at all times relevant to this action, the respondents stood in a Trust Relationship to the customers of Trust Bank and they were obligated at all times to discharge their duties diligently, transparently and non-fraudulently.

“It’s evident that in a space of seven days there was massive withdrawal of funds from Trust Bank using the said account to the tune of Sh207,385,083.”

The judge ruled: “The two respondents obviously owe an explanation to the depositors of Trust Bank. It’s difficult not to reach the conclusion that the account was used by the respondents who knew that the bank was about to collapse as a way of siphoning money out of the bank.”

The directors had claimed that the withdrawals were a valid loan transaction between Trust Capital Services and the bank.

But the company had never applied for any loan or overdraft from Trust Bank.

The directors had then undertaken to do their best to assist the bank in recovering the debt.

But the court noted there was no evidence that a single coin had been repaid by the two.

“This brings into question their loyalty and trust to the depositors of the bank,” Justice Ogola said.

Their response to the application was based on technical but not on the substantive issues.

“The issues raised concern a period where banks just used to go under and depositors losing their lifelong savings without a soul on earth caring,” the judge quipped.

The judge held that no satisfactory answer or explanation or exculpatory evidence had been given. He allowed the application by the applicant in its entirety.

This means the two Trust Bank director Ajay Shah and Praful Shah are to pay over Sh1.5 billion to the board, the interests from March 1, 2010 and the costs of the case.

The board now intends to use the ruling as the authority to pursue other directors and officials who were liable for the collapse of banks and financial institutions.

The writer is a court reporter with the Standard Group

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