Trust Bank directors ordered to pay depositors Sh1.5bn

The High Court has ordered two directors of the collapsed Trust Bank to pay its depositors Sh1.5 billion. FILE 

By George Ngigi
 

 

In Summary

• Ajay Shah and Praful Shah are now bound to pay the Deposit Protection Fund Board Sh2.3 billion after Justice Eric Ogolla found them liable for loss of Sh241 million that the bank held on behalf of depositors in 2001.
• The Sh1.5 billion penalty includes accrued interest charges at the prevailing commercial bank lending rates up to March 2010 when the case was taken to court.
• Justice Ogolla also ruled that the Sh1.5 billion fine continues to attract interest rate at the prevailing interest rate till it is paid in full.

The High Court’s order that two directors of the collapsed Trust Bank pay its depositors Sh1.5 billion has set a new precedent, establishing the principle of personal liability for corporate malfeasance.

Ajay Shah and Praful Shah are now bound to pay the Deposit Protection Fund Board (DPFB) a total of Sh2.3 billion after Justice Eric Ogolla found them liable for loss of Sh241 million that the bank held on behalf of depositors in 2001.

The Sh1.5 billion penalty includes accrued interest charges at the prevailing commercial bank lending rates up to March 2010 when the case was taken to court.

Ajay and his co-accused were directors of Trust Capital Limited, together with one Nitin Chandaria. It is this vehicle that was used to siphon more than Sh241 million (that ballooned through accruing interest charges to Sh1.5 billion) from the bank in a flurry of activity days before it was put under statutory management on September 18, 2001.

Justice Ogolla also ruled that the Sh1.5 billion fine continues to attract interest rate at the prevailing interest rate till it is paid in full.

At the commercial bank rate of 17 per cent, some Sh760 million have since accumulated in interest charges since March 2010 plus the Sh1.5 billion pushing up the total to Sh2.36 billion.

This is the first time that directors of a collapsed bank have been held personally liable for the loss of public funds, setting a precedent for the DPFB to go after other directors.

“The issues raised concern a period where banks just used to go under and depositors lost their lifelong savings without a soul on Earth caring. The respondents had a responsibility to the depositors and upon their failure to act responsibly, they became liable,” Justice Ogolla said.

The judgment offers a glimpse of hope for depositors, especially in the Asian community, who have waged a long and often frustrating battle to get back the billions of shillings they lost in what was once Kenya’s third largest bank.

They will have a lot to thank the new Judiciary for having met a series of obstacles in their quest for justice under the former president Moi’s regime. At one point, a lawyer withdrew a case he was about to win on their behalf to the amazement of the depositors and a bemused presiding judge.

Last week, a Trust Bank depositor, Mrs Veena Jiwa, sounded surprised by the judgment having resigned to the fact that the culprits were too powerful even for the proverbial long arm of the law.

“That is wonderful! Get me the judgment and then we can celebrate.”

Trust Bank depositors have gone through hard times with businesses collapsing and families falling apart across Kenya. The directors appeared to fare well in court during the Kanu era when one even managed to preside over the opening the Tanzania branch yet his passport was in the custody of the court.

In the current case, the defence had pushed to have the case dismissed on grounds that it was time barred as it should have been filed by 2008.

But the judge refused to find in the defence’s favour on grounds that the liquidation agent served between 2008 and 2010 when investigations established there was fraud.

 

“The respondents are keen to persuade this court to dismiss the application on purely technical grounds without substantively dealing with the facts and the law addressing the mundane issues raised. I refuse to grant the plea,” declared the Judge.

Central Bank of Kenya records show that at the time of liquidation the bank had Sh159 million in deposits of which Sh111 million was insured, but only Sh20 million had been paid by end of June 2011.

Ironically, the bank had Sh13.8 billion outstanding in loans at the time of liquidation of which only Sh968 million has been recovered. But even as there was palpable relief from some of victims others are still sceptical that the main player in the tragic drama, the last executive bank chairman of the Moi era, Ajay Shah, is within the reach of the arm of justice.

“He is mainly based in Dubai and I wonder if you give someone 15 years before making a judgment you will trace any of his assets,” said a businessman entangled in the murky Trust Bank loan web, who cannot be named without compromising his position.

Trust Bank collapsed in 1998 with unspecified amount of deposits as most of the cash was stashed in a parallel system of banking called ‘‘shroff/chopdee,’’ principally used to hide money from the taxman.

It was later revived under the so-called Scheme of Arrangement that converted deposits into shares, which collapsed after the former directors refused to pay back the cash fraudulently skimmed from the institution.

Mrs Jiwa, a depositor and whose husband died while the elderly couple struggled for justice, was once appointed a director to pursue the lost cash in City Finance, an ill-fated Trust Bank subsidiary later bought by investors. She believes the court has barely scratched the surface.

“The money owed to us is much more than that. We are seeking Sh12.5 billion. But I am very, very happy…better late than never.”

When the bank first collapsed, Rose Detho was made the statutory manager but as soon as she had the fraudsters on the crosshairs, she was hounded out of its Trustforte headquarters on Moi Avenue.

She had the last laugh last week when she got one of the most memorable judgments in the banking industry’s history, this time as the director of DPFB.

The Central Bank officials who helped get Ms Detho out of the bank may have given a signal the regulator was soon taking the bank from statutory management to liquidation.

Court documents show that the liquidator appointed by DPFB to help recover depositors’ funds found that on September 9, 1998 Trust Capital had overdrawn Sh34 million from its account.