Economy

Agency puts bank directors on notice over theft of funds

court

Milimani Law Courts in Nairobi. One of the safeguards that justice will be done — but by no means a sure bet — is that judges hate to have their judgments reversed on appeal. FILE PHOTO

The Deposit Protection Fund (DPF) plans to prosecute more directors of collapsed banks following a second court judgment holding imprudent directors personally liable for liquidation of a lender.

The High Court last week ordered three directors of collapsed Prudential Building Society to pay a total of Sh1.2 billion to the fund and attached some of the businesses found to have benefited from the directors’ fraudulent activities.

James Kahumbura and Wilson Kipkoti were ordered to make the payment together with Lucy Kahumbura.

“This is the second one so we are looking at instituting more cases involving former directors,” said a source at the DPF who did not want to be identified because he is not the fund’s official spokesperson.

Our source declined to disclose some of the targeted institutions arguing that the directors are likely to run or plot to block the court process.

A precedent was set last year when directors of Trust Bank were held personally liable for corporate malfeasance resulting in the collapse of the institution.

“These irregular transactions by Mr Kahumbura and Mr Kipkoti caused the collapse of the building society in liquidation, making it impossible for it to pay its depositors and creditors,” reads the affidavit filed by the DPF.

The fund further maintained that the said directors were the direct beneficiaries of most of the irregular transactions.

The list of businesses that were found to have benefited from the actions of Mr Kahumbura and Mr Kipkoti are Standard Assurance (also in receivership), Hazel Promotions, Interstate Commercial Agencies, Pacific Holdings and Pelican Engineering and Construction Company.

Ms Lucy Kahumbura is a director of Le Vogue Hair and Beauty Salon, where Mr Kahumbura is also a director. It is alleged that the salon was used to siphon cash from the building society.

The relationship between the two is not disclosed but Ms Kahumbura disclosed in court documents that they currently have differences with Mr Kahumbura.

The rulings, holding directors personally liable for corporate malfeasance, come at a time when the Judiciary has asserted its independence from the executive that used to frustrate the DPF’s effort to prosecute the cases in the past.

Depositors in Trust Bank had to overcome a series of obstacles in their quest for justice under former president Moi’s regime. At one point a lawyer withdrew a case he was believed to be close to winning on their behalf to the surprise of the depositors and the presiding judge.

The DPF sought the services of international audit firm Deloitte to conduct a forensic investigation in the collapsed lender.

READ: Treasury seeks more power over collapsed banks

Prudential Building Society had Sh2 billion in customer deposits when it was liquidated in 2005 but had loaned out Sh3.2 billion.

The liquidator has been able to recover Sh205 million from the loans book besides the Sh180 million recovered in 2012.

The directors have appealed last week’s ruling, arguing that they were not given adequate time to respond and that the cases should have gone cold with the lapse of time.

“I cannot conceivably answer to the allegations dating back almost 30 years with no documentation save for the self-serving documents presented by the applicant (DPF),” said Mr Kahumbura, a former rally driver.

Trust Bank directors Ajay Shah and Praful Shah were ordered to pay Sh2.3 billion after they were found liable for loss of Sh241 million that the bank held on behalf of depositors in 2001.

Mr Shah and co-accused were directors of Trust Capital Limited, together with one Nitin Chandaria.

The court found that 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.

The DPF said it had already received a decree to collect the money from the High Court and was in the process of executing it. The ability of the fund to recover money from the convicted directors, however, remains to be seen as some directors of Trust Bank are said to have left the country.

More than 20 Kenyan banks are undergoing liquidation, including Prudential Bank.

The 24 banks in liquidation held an estimated Sh22 billion of public savings but had loaned out in excess of Sh41 billion.

The judgment to hold directors liable offers a glimpse of hope for depositors who lost huge sums following collapses in the 1990s and early 2000s.

The Central Bank of Kenya records show that at the time of liquidation Trust 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 in outstanding loans at the time of liquidation of which only Sh968 million has been recovered.