The High Court has quashed a Sh2.5 million penalty imposed on a former director of Chase Bank, Muthoni Kuria, by the Capital Markets Authority (CMA), citing procedural unfairness and bias in the tribunal’s decision-making process.
Justice Julius Ng’arng’ar ruled that the Capital Markets Tribunal erred in upholding the fine against Ms Kuria, who had been accused of misconduct linked to Chase Bank’s Sh10 billion bond issuance in 2015 and its subsequent collapse in 2016.
The judge found that Ms Kuria was denied her constitutional right to a fair hearing, particularly that she was blocked from cross-examining key witnesses, during the proceedings at the regulator, which led to a finding that was culpable of various allegations, such as the preparation of false and misleading financial statements.
Chase Bank’s troubles began in February 2015 when it sought regulatory approval for a Sh10 billion Medium-Term Note (MTN) to fund branch expansion, IT upgrades, and lending operations.
The CMA approved the bond issuance after reviewing the bank’s Information Memorandum (IM), a document detailing financial health and risks for investors.
However, barely a year later, on April 7, 2016, the Central Bank of Kenya (CBK) placed Chase Bank under receivership after discovering financial irregularities, including overstated cash balances and undisclosed insider loans.
The CMA launched investigations and later accused Ms Kuria, then a non-executive director and Audit & Risk Committee member, of failing in her oversight duties.
Among the allegations were misleading financial statements, overstating interest income and cash balances held at CBK, and failure to disclose material information.
She, alongside other directors, was accused of omitting details of related-party loans and executive bonus payments in the Information memorandum.
In August 2022, the CMA imposed a Sh2.5 million fine on Ms Kuria, which she challenged before the Capital Markets Tribunal. When the tribunal dismissed her appeal in July 2024, she escalated the matter to the High Court.
Justice Ng’arng’ar identified several violations in the tribunal’s handling of Kuria’s case, such as denial of cross-examination rights.
Ms Kuria had sought to question the authors of Chase Bank’s financial statements and Deloitte’s forensic audit report—critical witnesses whose testimonies formed the basis of CMA’s case. The tribunal denied her request, a move the judge termed unconstitutional.
“The tribunal erred in denying the appellant (Ms Kuria) the opportunity to cross-examine the authors of the financial reports presented before the tribunal. This did not only render the proceedings a nullity but procedurally unfair and unconstitutional,” said Justice Ng’arng’ar.
He explained that cross-examination is central to testing veracity and ensuring fairness.
The judge also flagged a conflict of interest in the CMA’s Ad Hoc Committee, which heard the case before it proceeded to the tribunal.
The court found that the Ad Hoc Committee was improperly constituted as one of the members, Dr McFie, was a director of SBM Bank, which acquired Chase Bank Kenya Limited assets upon insolvency. The court held that Dr McFie’s participation created apprehended bias.
“His affiliation with SBM Bank compromised impartiality,” said the judge in the judgment, highlighting tensions between corporate accountability and fair administrative processes in Kenya’s financial sector.
“It cannot be gainsaid that Dr McFie will be impartial with such substantial interest in the matter,” said the judge, adding the tribunal erred in upholding the Ad-Hoc committee’s decision.
Another finding concerned the lack of proper voting procedure. CMA tribunal rules require decisions to be made by majority vote and formally documented.
However, Ms Kuria argued, and the court agreed, that no such vote was recorded in her case, making the ruling invalid.
The CMA had defended its decision, insisting the fine was justified to uphold market integrity and investor confidence. It argued that Ms Kuria’s alleged failures contributed to misleading financial disclosures, harming stakeholders.
It further argued that Ms Kuria was found culpable through an in-depth examination of facts and evidence, adhering to capital markets regulations and principles of natural justice.
It said the tribunal upheld the findings of the Ad Hoc Committee based on factual breaches of fiduciary duties by the Appellant, which led to misleading financial statements.
However, the court’s ruling underscores the importance of due process in regulatory actions.
This judgment could set a precedent for how financial misconduct cases are adjudicated, emphasising procedural fairness over punitive measures.
