Two former bank directors to pay Sh1.5bn for breach of trust

MILIMANI LAW COURTS: Two former executive directors of Trust Bank Limited have been ordered to pay the bank over Sh1.5 billion for breach of trust. PHOTO/FILE 

By PAUL OGEMBA Daily Nation
 

 

In Summary

• The judge said it was established at the time of winding up of the bank that its business was carried out with intent to defraud the creditors and for other fraudulent purposes and that the two former directors were parties to the scheme.
• He said the directors misrepresented to the creditors and to the court that the withdrawals were made to offset a loan agreement between Trust Capital Services and Trust Bank Limited when they knew all along that the transactions were not sanctioned through a proper channel.

Two former executive directors of Trust Bank Limited have been ordered to pay the bank over Sh1.5 billion for breach of trust.

Justice Eric Ogola found Ajay Shah and Praful Shah guilty of misfeasance, failing to discharge their duties diligently, transparently and non-fraudulently leading to the bank’s closure in 1999.

“The incident happened at a time when banks just used to go under and depositors losing their life long savings without a soul on earth caring. The managers had a responsibility to the depositors and despite being their trustees, they failed to act responsibly and became liable,” said Ogola.

The judge also declared that Mr Ajay and Mr Praful while acting as executive directors of Trust Bank, now in liquidation, breached their “fiduciary duties” to the company by allowing Trust Capital Services Limited in which they had personal interest to withdraw from the bank Sh241.4 million in 1998 without proper security.

Fraudulent actions

The judge said it was established at the time of winding up of the bank that its business was carried out with intent to defraud the creditors and for other fraudulent purposes and that the two former directors were parties to the scheme.

According to the liquidator, Trust Bank lost the sum of Sh241,442,376 within a span of 7 days in September 1998 through an account not registered in the bank but which was being operated by Mr Ajay and Mr Praful.

“It is evident that money was withdrawn from the Bank through Trust Capital Services without sanction of the bank through an account which did not exist in its accounts. What worries most is how the massive withdrawals were done within a space of seven days,” said Ogola.

He ruled that the two directors owe an explanation to depositors of Trust Bank since they participated in the withdrawal and siphoning of millions of shillings when they were aware the bank was about to collapse.

“Despite admitting that Trust Capital Services owed the bank over Sh246.6 million, they have not provided any evidence to show that they have refunded a single coin which brings into question their loyalty and trust to the bank’s depositors,” ruled Ogola.

He said the directors misrepresented to the creditors and to the court that the withdrawals were made to offset a loan agreement between Trust Capital Services and Trust Bank Limited when they knew all along that the transactions were not sanctioned through a proper channel.

Law flouted

He ruled that the directors’ actions offended Section 11 of the Banking Act since they knowingly participated in carrying out their duties with clear intent to defraud customers of Trust Bank Limited.

“After considering all factors, I thus order that Mr Ajay and Mr Praful are liable to make good and pay Deposit Protection Fund Board as Liquidator of Trust Bank Limited Sh1,549,591,424 being the amount due in the account of Trust Capital Services as at February 2010,” ruled Ogola.

Sun N Sand gives way to Sh15bn luxury apartments

The Sh15 billion Ocean Seven project at Kikambala in Kilifi County was officially launched at the weekend. Photo/George Kikami 

By DANIEL NYASSY
 

 

The 600-bed capacity five-star beach resort, Sun N Sand, will be demolished and replaced by seven luxurious apartment blocks over the next five years.

The Sh15 billion project at Kikambala in Kilifi County was officially launched at the weekend. The director, Mahmud Visram, said construction of the apartments under the name Ocean Seven had started.

Mr Visram said the apartments would be completed in 2018, adding that the concept was popular in Dubai and that the company introduced it locally “after thorough market research and study”.

He said the research showed there was rising appetite for luxurious apartments. The seven towers will include two commercial blocks and five residential ones, which upon completion will be sold to investors.

“We realised there is need for a place where the aged, lonely and senior citizens can rest and receive maximum care and attention. This was one of the driving forces in our introducing this concept,” he said during the ceremony.

Chopper services

He said the seven towers will be 17, 19 and 25 storeys each with a direct view of the sea and all within a 17-acre plot owned by the hotel.

“We shall have a biogas plant to recycle garbage, special trees, flowers, and an exercise park and create an environment to attract birds and butterflies. We shall also provide chopper services and landing space ,” he said.

The project will have 325 condominiums (rooms) with the first tower of 58 units already under construction on the spot where the hotel stood.

Mr Visram, who was accompanied by Kilifi Governor Amason Kingi, said the locals would be given priority in employment. When fully operational, it is expected to employ about 10,000 directly and indirectly.

About50 per cent of the two, three and four bedrooms units have been sold to Kenyans.

“The concept of space and luxury in a tranquil beachside setting within reach of amenities and services in Mombasa seems to have really caught on with buyers,” said Mr Visram.

Mr Kingi described the project as a landmark in the county and “a first in luxury” whose choice was an indicator of investor confidence in Kilifi.

“As the first governor of Kilifi I am delighted by such mega investments in my area. This and the Billionaire’s Resort in Malindi will put Kilifi County on top of the list of global tourist attractions,” he said.

Mr Kingi said the county would abide by the 70 per cent local workforce and 30 per cent outsiders employment rule.

 

Friendly taxation

“With the soon to be opened Utalii College branch at Kilifi, there should be no reason to say the local people are not qualified for these jobs,” he said.

He said his government would liaise with the national government to come up with a taxation regime friendly to investors.

“We shall work closely with the national government to avoid double taxation by the county and Nairobi which has been a bone of contention for many visitors,” Mr Kingi said.

Treasury official accuses ministries of preparing unrealistic budgets

The Treasury has accused ministries of getting their priorities wrong and turning to Parliament to seek revision of the national Budget. FILE 

By EDWIN MUTAI
 

 

In Summary

• Budget officer Micah Mariga said ministries were allocated money based on their priorities and expenditure parameters set by the Treasury

The Treasury has accused ministries of getting their priorities wrong and turning to Parliament to seek revision of the national Budget.

Budget officer Micah Mariga said ministries were allocated money based on their priorities and expenditure parameters set by the Treasury.

“Ministries are supposed to prioritise their budget items and if they don’t do that then it is difficult to accommodate new demands or priorities unless they do a trade off. They can tell us which items they want to give in or reprioritise,” said Mr Mariga.

He said that often ministries’ budgets are wish-lists that cannot be met by available funding.

“We prioritise finishing ongoing projects rather than funding new ones. It is up to ministries to get their priorities right,” he said.

Environment and Natural Resources Parliament committee chairperson Amina Abdalla had summoned Treasury officials to explain why funding for completion of projects under regional development authorities was inadequate.

Cabinet Secretary for Environment Judy Wakhungu had told the committee that money for completion of dams had been slashed from Sh6.6 billion this year to Sh4.6 billion in the next financial year.

Ms Abdalla said that Sh1 billion was not provided for in the National Environment Management budget, Sh2 billion for waste management, Sh1 billion for mapping of underground water, Sh2 billion for a water storage facility and Sh1.4 billion for Kenya Wildlife Service activities.

Mr Mariga said donors had by April committed Sh12 billion to fund ministries’ activities through loans and grants.

Macharia unveils county healthcare plan

Health Cabinet Secretary James Macharia. Photo/File 

By EVELYN SITUMA
 

The government has unveiled a master plan to guide counties in delivering healthcare services. The plan details the state of community medical systems and provides manuals to be used in training of health workers.

Dubbed Innovative Community Health Strategy and Economic Stimulus Programme Products, the plan comes with a web-based tool — e-health — for community health workers and promoters

“The 14 documents are important in guiding the counties for effective implementation of community health services,” Health Cabinet Secretary James Macharia said.

The website has names and location of 8,000 healthcare facilities in the country, contacts of officials in charge, and their status. Currently, there are 2,500 community health units. The government expects to increase them to 8,000 in the next five years to boost access to services.

In the North Eastern region, which has the lowest density of health centres, the government intends to use motorcycles and mobile clinics in healthcare outreach programmes.

Under the Constitution, counties are responsible for health services except in the case of policy making and referral hospitals.

Community health workers are involved in preventive, promotion and first line curative services necessary in achieving universal healthcare targets.

The government intends to step up the recruitment of health extension workers from 2,100 presently to 25,000 by 2017. Mr Macharia said that the ministry was waiting for Public Service Commission approval before it starts to enrol community health workers.

The workers are volunteers who are then equipped with skills to tackle the most pressing community health problems, including personal and environmental hygiene which are key in preventing diseases.

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.

NSSF savers lose billions in dubious contracts, land deals

The National Social Security Fund headquarters in Nairobi. An audit report has revealed the loss of more than Sh3 billion. FILE  NMG

By EDWIN MUTAI
 

 

In Summary

• Auditor-General Edward Ouko says contributors to the NSSF may have permanently lost Sh1.13 billion that the agency invested in Karura and Ngong forest land, but cannot access.
• Mr Ouko also casts doubt on the recoverability of Sh1.2 billion that NSSF invested in the purchase of shares at the NSE through the collapsed Discount Securities Limited.
• The NSSF also has in its books a Sh1.94 billion outstanding doubtful debts, including Sh251.51 million it invested in Euro Bank and unremitted rental income of Sh30.68 million.

 

Social security savers have lost more than Sh3 billion in dubious contracts, land and share purchase deals that are unlikely to be recovered, an audit report tabled in Parliament says.

Auditor-General Edward Ouko says contributors to the National Social Security Fund (NSSF) may have permanently lost Sh1.13 billion that the agency invested in Karura and Ngong forest land, but cannot access.

“The properties, being in gazetted areas, cannot be owned, possessed, utilised or accessed and any development on such land would be illegal,” the audit report says.

Mr Ouko also casts doubt on the recoverability of Sh1.2 billion that NSSF invested in the purchase of shares at the Nairobi Securities Exchange (NSE) through the collapsed Discount Securities Limited.

The NSSF also has in its books a Sh1.94 billion outstanding doubtful debts, including Sh251.51 million it invested in Euro Bank and unremitted rental income of Sh30.68 million collected from tenants in Bruce House, Viewpark Towers and Nyayo Estate.

Mr Ouko says, in a qualified NSSF audit report for the year ended June 2011, that the fund also lost Sh64.14 million in the irregular disposal of three plots in Kikambala-Mombasa.

NSSF lost the money by awarding the tender to the lowest bidder who paid Sh633.7 million against the Sh697.8 million deemed as the reasonable price.

The audit report also questions the devaluation of NSSF’s Mavoko plots by Sh900 million in a year and doubts the accuracy of value and existence of three undeveloped plots worth 1.26 billion in the same locality.

NSSF’s Mavoko plots were valued at Sh2.98 billion in 2010, but the agency’s financial statements for 2011 showed that the value had depreciated to Sh2.08 billion – running against a market trend that has seen the value of land rise by double margins annually.

The audit also examined a Sh146.6 million shortfall arising from the non-advertised sale to EPCO Builders of NSSF’s Ojijo Road plot.

EPCO Builders, who were at the time of sale working for the NSSF as a contractor, bought the land valued at Sh450 million for a heavily discounted price of Sh305.37 million.

NSSF has been left in legal quandary after it acquired 18.41 hectares of Karura Forest near New Muthaiga and a piece of Ngong Forest that it has been unable to access or utilise.

Mr Ouko says the NSSF management failed to make provisions for impairment losses in the agency’s financial statements for the two plots that are now worth Sh1.13 billion.

The audit report also questions NSSF’s payment of Sh233.84 million to new consultants for completion of Hazina Trade Centre before the work was completed. Mr Ouko says additional information indicates that the fund intended to construct a 36-storey building against an original plan for 31 floors and that is yet to be done.

(Read: NSSF revives plan to build Nairobi’s tallest office tower)

 

The report, which was tabled in Parliament last week, questions the inclusion of Sh6.5 billion in members contributions, held in a suspense account, in the accumulated members fund of Sh110.35 billion at the time of audit.

“As was observed in the previous year, the fund continues to hold these contributions in a suspense account without indicating how affected members will benefit from them (Sh6.5 billion),” Mr Ouko says in the audit report.

The auditor also casts doubt over the recoverability of Sh911.27 million in tax receivables from the Kenya Revenue Authority. The amount relates to tax overpaid prior to January 1, 1997 when the NSSF was exempted from taxation.

“Information available shows that the balance is under dispute and KRA has indicated that the entire amount had been utilised against unpaid penalties and interest incurred. In the circumstances, it has not been possible to confirm that the receivables balance of Sh911.279 million as at June 30, 2011 represents a realizable asset,” the auditor concludes.

The audit report dated June 18, 2012 also queries the recoverability of some Sh324.35 million that the NSSF advanced to Mugoya Construction and Engineering Limited, a private contractor, for completion of the Nyayo Estate Embakasi project. The money was paid out without collateral, making it impossible to recover.

NSSF’s financial statements had included the money in the Sh1.19 billion debtors and prepayments balance.

Mr Ouko has also raised audit queries on NSSF’s purchase of power generators for its buildings in Nairobi-Social Security Block A and B, Bruce House, Hazina and Viewpark Towers that had not been commissioned at the time of audit.

The fund also irregularly awarded a lifts installation contract for Social Security House block C and the Annex Parking Silo to M/Smits Electrical Co. Limited at a price of Sh18.9 million and the firm sub-contracted EPCO Builders to do the job for Sh13.85 million.

At the time of audit, the lifts had not been delivered and the management did not present an acceptance and inspection report for audit verification.

“In the circumstances, it has not been possible to confirm that the fund got value for money in the transaction,” Mr Ouko concludes.

The audit also indicated that the NSSF lost Sh7.24 million in fraudulent practices at its Westland’s branch in Nairobi which had not been recovered because the matter is pending in court.

Mr Ouko also questions the NSSF’s failure to earn returns on its 8.05 million (4 per cent) cumulative shares and 2.22 million ordinary shares held in Consolidated Bank of Kenya yet the bank had started posting positive returns in the year under review.

emutai@ke.nationmedia.com

US studying risk from online payment providers

(L to R) US Federal Reserve Vice Chair Janet Yellen, Douglas Flint, group chairman of HSBC Holdings plc, Jaime Caruana, general manager of the Bank for International Settlements and Adair Turner, former chairman of Britain's Financial Service Authority, attend an international monetary conference in Shanghai on June 3, 2013. Yellen told the conference that the US is studying potential risk from online payment mechanisms like PayPal and Bitcoin as some bankers have expressed worries that newer players enabled by the Internet could have implications for the financial system. AFP  

By AFP
 

 

SHANGHAI

The United States is studying the potential risk from online payment mechanisms like PayPal and Bitcoin, a top US Federal Reserve official told an international conference on Monday.

Some bankers have expressed worries that newer players in the online marketplace could have negative implications for the financial system.

"We have been talking... with banking organisations over the last year or two, trying more carefully to understand what the concerns are with these new payment mechanisms," Federal Reserve Vice Chair Janet Yellen said.

But she denied the widespread view that such players operate completely unregulated, saying the United States has a stronger regulatory environment than many are aware of, especially in the area of consumer protection.

"In point of fact, at least in the United States, there are regulations that apply to PayPal and other payment providers," she told the annual International Monetary Conference in China's financial hub of Shanghai.

PayPal is the online payments arm of US Internet retail giant eBay.

"But that said, this is very much on our radar screen and we are carefully trying to identify where the risks are," Yellen added.

Last month, US authorities seized the accounts of one Bitcoin digital currency exchange operator, Mutum Sigillum LCC, claiming it was functioning as an "unlicensed money service business".

Bitcoins were launched in 2009 in the wake of the global financial crisis by an anonymous programmer who wanted to create a currency independent of any central bank or financial institution.

Some officials fear the virtual currency can be used by criminals or terrorists, or could be vulnerable to hackers.

The United States last month launched a money laundering probe against a digital currency operator, Costa Rica-based Liberty Reserve, which allegedly handled huge amounts of money outside the control of national governments.