The Policyholders Compensation Fund (PCF), the statutory manager of the collapsed Resolution Insurance Company Limited, has been ordered to refund the Sh36 million it illegally withdrew from the insurer’s accounts and paid to a law firm.
High Court Judge Alfred Mabeya concurred with the Insurance Regulatory Authority (IRA) that PCF acted illegally when it withdrew the cash from Resolution Health’s accounts and paid Millimo Muthomi & Co Advocates last year.
“The withdrawal of funds from the company’s accounts after the commencement of liquidation was rendered void under Section 429 of the Insolvency Act. While the Court does not dispute that the expenses incurred during the period of statutory management needed to be settled, such payments should have been made under the direction and oversight of the appointed Liquidator” the Judge said.
“By hurriedly effecting the said payments, the Fund acted illegally and in utter contempt of the liquidation order. If the orders had been sought against the officials of the Fund personally, this would have been a proper case to so order” Justice Mabeya added.
Resolution Health was placed under statutory management in 2022 after defaulting on its customers and items at its head office carted away by auctioneers.
The Commissioner of Insurance Godfrey Kiptum then revealed in court papers that in an analysis of the viability option of the insurer and the inadequacy of the shareholders’ revival proposal, the manager recommended liquidation of the company.
It was revealed then that the insurer needed at least Sh3.6 billion to revive the company.
Policyholders Compensation Fund had defended the payments stating that any expenses incurred by the statutory manager in discharge of his duties should be met by the insurance company.
The fund added that at the time of its appointment, there had been ongoing cases and others came up during the pendency of the statutory management.
The court heard that the statutory manager appointed Millimo, Muthomi & Company Advocates to prosecute and defend legal proceedings, which attracted legal fees amounting to Sh57 million and the statutory manager paid Sh36 million leaving a balance of Sh21.3 million.
The fund said there was nothing wrong with the partial payment to the law firm and that being a state corporation under the Insurance Act mandated to act as a statutory manager of insurance companies and the statutory manager took the role of the board of directors of the insurance company.
The insurance regulator said that after the appointment, the interim liquidator made persistent requests to the Fund to transfer the bank mandate to him but the officials of the fund declined.
Unbeknown to him, the fund unlawfully transferred the money from the accounts of the company to unsecured creditors.
The regulator said upon the appointment of an interim liquidator, the Fund had no right or mandate to dispose of any of the company’s property.
The judge agreed saying once there are no viable means of turning around an ailing insurance company and a liquidation order is made and a provisional liquidator is appointed, the role of the fund immediately ceases and passes over to the liquidator.
“At that point, in accordance with section 431 of the Insolvency Act, the liquidation process commences immediately upon the issuance of the order thereby bringing the statutory manager’s role to an end,” said the judge.
Justice Mabeya said the provision means that once a company is placed under liquidation by a court order, any transactions involving its assets, shares, or membership status that occur after such order is automatically considered void unless the court grants specific approval.
The court said the intent behind the restriction is to preserve the company’s assets and prevent any unauthorised dealings that could undermine the rights of creditors and other stakeholders in the liquidation process.
The judge concluded that PCF acted illegally.
“It sought to defeat the provisions of the Insolvency Act by attempting to favor some unsecured creditors over others. That is illegal and must be discouraged. A statutory body acting as such is being rogue. It is conduct that must be discouraged,” the judge said.
The PCF was established to compensate policyholders in fallen insurers put under statutory management.
