Khan & 2 others v Capital Markets Authority (Appeal 2 of 2022) [2024] KECMT 376 (KLR) (2 February 2024) (Judgment)
Neutral citation:
[2024] KECMT 376 (KLR)
Republic of Kenya
Appeal 2 of 2022
Paul Lilan, Chair, P.Wanga & Constance Gikonyo, Members
February 2, 2024
Between
Zafrullah Khan
1st Appellant
James Mwaura
2nd Appellant
Makarios Agumbi
3rd Appellant
and
Capital Markets Authority
Respondent
Judgment
Brief Facts
1.The Appellants instituted this appeal by way of a Memorandum of Appeal dated 1st April 2022, against the ruling of the Ad Hoc Committee of the Capital Markets Authority (CMA), the Respondent, that was delivered on 18 March 2022.
2.The Respondent (Capital Markets Authority) on 8th August 2016 & 4th October 2016 issued notices under sections 13(1) and 13B (2) (a) & (b) of the Capital Markets Act to the Appellants to provide information regarding Chase Banks financial transactions for the year ended 2014.
3.The Appellants responded vide a letter dated 17 August 2016 and was also interrogated by the Office of the Chief Executive officer on 14TH October 2016 providing information into the inquiry. After that there was silence from the Respondents.
4.The Authority after 6 years summoned all the Appellants to face the Ad Hoc Committee under notices to show cause (NTSC) dated 3/11/21, 3/11/21, 5/7/21. The Authority constituted an Ad Hoc committee on 7th January 2022 comprising of 7 members to conduct enforcement hearings in respect of CBKL; to hear the Appellants who are a former director and 2 senior personnel of CBKL and had raised concerns in the Preliminary Objection (PO).
5.The 1st Appellant was issued a NTSC on 5th July 2022 while the 2nd and 3rd Appellants were issued with NTSC on 3rd November 2022 by the respondent herein with respect to alleged contraventions of the regulations of the Capital Markets Authority.
6.The 1st Appellant then wrote to the Respondent vide a letter dated 21 July 2021 pointing out that a similar enquiry was made in 2016 and hence was requesting for a copy of the report from the said enquiry. Additionally, the 1st Appellant stated that they would respond to the NTSC upon receiving the report.
7.The Authority vide a letter dated 12th January 2022 & 15th February 2022 communicated its intention to schedule a NTSC hearing. In response to the letter dated 15 February 2022, the Appellants wrote a letter dated 16 February requesting for a copy of the report for the earlier inquiry to enable them to compile a comprehensive report.
8.Thereafter through another letter dated 22 February 2022, the Appellants wrote to the Respondent and raised preliminary objections (POs).
9.Consequently, the Respondent constituted an Ad Hoc Committee that considered the Pos. The Committee dismissed the POs and, in its ruling, directed the matter proceed to hearing as per the NTSCs. The Appellants are appealing the Ad Hoc Committee’s decision that dismissed the POs raised by the Appellants. They filed a memorandum of appeal dated 1 April 2022.
10.The Appellant seeks the following remedies from the tribunal:1.That the appeal be allowed with costs to the Appellants.2.That the ruling of the Ad Hoc Committee for the enforcement hearings delivered on 18 March 2022 be set aside in its entirety.3.The preliminary objections raised by the Appellants be allowed.
Appellants’ Submissions
11.The Appellant filed submissions dated 16 November 2023.
Whether the instant Ad hoc committee proceedings are criminal in nature
12.The Appellants claim that the respondent’s actions are focussed on imposing criminal sanctions. The Appellants contends that section 34A of the Capital Markets Authority Act (CMA Act) provides for penal consequences of imprisonment or payment of fines in case one is found culpable of an offence. The Appellants further submits that the nature of proceedings proposed by the respondent are centralised on imposing criminal sanctions. Since it is pegged on assessing the Appellants culpability and consequently taking criminal actions to remedy the alleged issues. In determining if a matter is criminal or civil the Appellants relies on the case of Aly Khan Satchu v Capital Markets Authority [2019] eKLR. Moreover, they argue that the nature of notices to show cause illustrate the criminal nature of the proceedings.
Whether sustaining the Ad hoc committee proceedings parallel to existing criminal and civil proceedings against the Appellants will amount to double jeopardy
13.The Appellants submit that there are six (6) ongoing matters covering the same subject matter, in the criminal and civil courts.Consequently, the Appellants contend that, proceeding with the Ad Hoc Committee hearing will result in the Appellants suffering the same offence twice. This will amount to double jeopardy unless the proceedings at the Ad hoc are halted. Similarly, the case relied on, on the issue of double jeopardy is that of Aly Khan Satchu v Capital Markets Authority [2019] eKLR which illustrates the principle of double jeopardy.
Whether participation of Dr. James McFie in the ad hoc committee proceedings will subject the committee to biasness and conflict of interest
14.The Appellants state that including Dr. James McFie in the Ad Hoc Committee proceedings looking into the NTSC will be a demonstration of outright bias. This is because Dr. McFie is a director in SBM bank that acquired the assets of CBKL upon its liquidation. Consequently Dr. McFie is in a position to access information touching on CBKL’s internal affairs. This raises issues of conflict of interest that could bias him when considering the matter of the NTSC. The Appellants rely on the Black’s Law Dictionary (10 ed) definition of conflict of interest as, ‘A real or seeming incompatibility between one’s private interests and one’s public or fiduciary duties’. Thus, the Appellants aver that Dr. McFie owes a fiduciary duty to CBKL (in liquidation) having dealt with its assets as the director of SBM.
Whether the ad hoc committee’s actions of summoning the Appellants instead of the issuer of security that is Chase Bank (in liquidation) amounts to lifting the corporate veil
15.The Appellants argue that issuing of NTSC to them instead of the issuer of the information memorandum (IM), that is CBKL (in liquidation), violates the principle enunciated in Salomon v Salomon & Co Ltd (1896) UKHL and reiterated in the case of Victor Mabachi & Another v Nurturn Bates Ltd Nrb CA Civil Appeal No. 247 of 2005 [2013] eKLR. The principle that a company is a separate legal entity distinct from its shareholders, directors and agents. Further that it is only in exceptional circumstances that this ‘veil’ can be lifted.
16.It is the Appellants contention that the Respondent should have gone for the directors only if they were unable to recover from CBKL itself. To reiterate this, point the Appellants rely on the case of Nkol Risha Ole Ntompo Kenery & 4 Others v Cahirman Larngosua Group Ranch & 9 Others Nairobi HCCC No. 269 of 2011 cited with approval in the case Ndongoro General Contractors v Kenya Episcopal Conference Secretariat [2008] eKLR. Accordingly, by sending NTSC to the directors, the Respondent lifted the veil of incorporation. An action they should not have been done. They should not have usurped the corporate personality of CBKL. In doing so the Respondent perpetuated an illegality, because they did that which the law does not empower them to do. In support of this assertion the Appellants rely on the case of Republic v Betting Control and Licensing Board & Another Ex Parte Outdoor Advertising Association of Kenya [2019] eKLR.
Whether actions of the respondent offend the principal of fair administrative action
17.The Appellants state that fair administration of action is a constitutional right under article 47 of the Constitution which also binds the Respondent. Hence seeking to bring an action against the directors instead of targeting CBKL flies on the face of Article 47 of the Constitution and section 4 of the Fair Administrative Action Act. To support this point the Appellants, rely on the cases of Mohammed Sheria & 2 Others v Simon Kipkoriri Sang & 5 Others [2018] eKLR and Republic v Fazul Mahamed & 3 Others ex-parte Okiya Omtatah Okoiti [2018] eKLR. Essentially, by summoning the directors of CBKL (in liquidation) this action prematurely lifted the corporate veil and thus is an unfair and illegal administrative action.
Respondent’s Submissions
18.The respondents filed submission dated 20 December 2023.
Whether the respondent has jurisdiction to sustain the Enforcement action
19.The Respondent avers that they have acted legally and with the confines of what the law provides. That as stated in the case of Asterisk Limited v Humming Healthecare Ltd [2021] eKLR and cited with approval in Koloba Enterprises Ltd v Shamsudin Hussein Varvani & Another [2014] eKLR the corporate veil can be lifted where the statute or the law provides for it. In this case the Respondent avers that sections 30 (D) (1), 30 GA and 34 (a) and (b) of the CMA act provide that a director is personally liable for contravention of the said provisions and also imposes personal liability on persons responsible for certain things including but not limited to misrepresentations in the Information Memorandum (IM).
20.Therefore, the respondent submits that this touches on their core mandate. Hence, the respondent state that they had jurisdiction over the 1st Appellants by virtue of him being a former director, and also the rest of the Appellants being key personnel relevant to the inquiry into affairs of CBKL. The 2nd Appellant was a General manager corporate assets and the 3rd Appellant was the General manager Finance.
21.Additionally, the Respondents, contend that the Appellants cannot use the case of Salomon v Salomon to claim that they were not the ‘persons’ involved as the issuers of the IM. This is because clause 17 of the Capital Markets (Securities) (Public Offers, Listings and Disclosures) Regulations provides that directors and key personnel are persons responsible for the prospectus and hence aware of any misconduct that happened. Moreover, the NTSC issued touched on matters related to the individual culpability of the Appellants in relation to their respective positions held in CBKL. In support of this point the Respondent relies on the case of Australian Securities and Investments Commission v Healey. The case also highlights the role of directors to ensure they exercise due diligence in performing their roles.
22.The Respondent also highlights that its objects and purposes as stated in section 11(1) CMA act includes protection of investor interests. Accordingly, the NTSC were to facilitate an inquiry for purposes of securing the public interest. As stated in regulation 12 one of the five key areas that potential investors in public securities look into includes assets and liabilities. Accordingly, the Appellants have to be involved in the investigations to ascertain whether there was a lapse on their end since they were directly involved in the administration of the assets and liabilities of CBKL.
23.The Respondents contends that by the Appellants stating the ad hoc committee cannot carry out investigations, they are simply telling this Honourable tribunal to create an accountability firewall so that they are not held accountable.
Whether appointment of Dr, James Mcfie compromises the principle of impartiality
24.The Respondent submits that indeed after CBKL was put under statutory administration, SBM bank took over 75% of its assets and liabilities. Further, Dr. McFie is a director in SBM. However, the Respondent is of the view that the fear that Dr. McFie may have access to information which may be inimical to the Appellants and hence impute reasonable apprehension of bias, does not hold. Additionally, the Respondent avers that the Appellants did not provide evidence showing that Dr. McFie had any access to any such information. Hence diminishing his capacity to be objective. The Respondent states that Dr. McFie clearly stated in the affidavit he swore, dated 1 March 2022, that he had no access to any information that would prove inimical to the Appellants. In the affidavit he confirms that he was not involved in the facts under inquiry in the NTSC and that he became a director of SBM bank three years after the facts in issue.
25.Further the Respondent submits that the available jurisprudence indicates that mere suspicion is not enough, a claim of bias must be clearly substantiated. The Respondents in support of their point rely on the cases of Kaplana H Rawal v Judicial Service Commission & 2 Others, Jasbir Singh Rai & 3 Others v Tarlochan Sing Rai & 4 Others and Aly Khan Satchu v Capital Markets Authority [2019] eKLR. In summary the Respondent cites these cases to highlight the fact that in order to make a finding of bias, it should be considered ‘whether a reasonable, objective and informed person would on the correct facts reasonably apprehend that the decision maker has not or will not bring an impartial mind to bear on the adjudication of the case.’ In their view the Appellants have not provided evidence to support their assertion of bias.
Whether respondent violated the Appellants rights to fair administrative action
26.This part of the Respondent submissions gives out a chronology of events that led to the pace in which investigations by the CMA were handled. Since the Appellants state that there was a delay on investigations that took five (5) years before issuing a NTSC. As a result, leading to an infringement of the right to fair administrative action.
27.The respondent state that the complexities and interactions between different state organs had a significant impact on the pace with which investigations were done and the same needed to be lawful, efficient and reasonable. Hence, the delay was only to safeguard proper procedure. In support of their submission reference is made to the case of Judicial Service Commission v Mbalu Mutava & Another [2015]eKLR.
Whether Appellants will suffer double jeopardy if enforcement proceedings are sustained
28.The respondent states that proceedings before the Ad hoc committee involved concealm Memorandum (IM) relevant to investors making it an administrative issue/process.
29.The respondent submits that double jeopardy applies strictly to criminal offences and not to disciplinary proceedings that are administrative in nature. In support of this view the Respondent relies on the cases of Dry Associates Ltd v Capital Markets Authority & Another Interested Party Crown Berger (K) Ltd [2012] eKLR and Republic v Public Service Commission of Kenya Ex Parte James Nene Gachoka [2013] eKLR.
30.In conclusion, the Respondent states that the Appellants case ought to be dismissed entirely.
Analysis
31.Having carefully considered the pleadings and submissions of the parties, we find the issues for consideration by this Tribunal are as discussed hereunder.
Issue 1 Whether the respondents Ad Hoc Committee acted legally by suing the three Appellants instead of instituting proceedings against CBKL.
32.The Authority is established under the Capital Markets Act CAP 485A, Laws of Kenya (The Act). It is established for the purposes of promoting, regulating and facilitating the development of an orderly, fair and efficient capital market in Kenya 1. It has various roles it plays as provided under section 11(a) of the Act.
33.As a result of the fundamental roles that the Authority plays and in order to achieve the objectives of an orderly, fair and efficient markets in Kenya, it has been given wide powers that ensure it is able to effectively carryout is mandate. It is recognized that it is only through effective corporate management and regulation that a robust capital market which safeguards the interests of both local and international investors can be assured. (Capital Market Authority v Jeremiah Gitau Kiereini & another [2014] eKLR).
34.Additionally, sections 30 (D) (1), 30 GA and 34 (a) and (b) of the CMA act provide that criminal liability of a defective prospectus can apply to both a human person and a body corporate. Section 30 GA uses the terms, ‘An officer or director of an issuer’.
35.The CMA act defines “key personnel” as follows:
36.A director is personally liable for contravention of the said provisions, see section 30E, CMA act and also imposes personal liability on persons responsible for certain things including but not limited to misrepresentations in the Information Memorandum (IM).
37.With regards to the 2nd and 3rd Appellants, by virtue of him being a former director, and also the rest of the Appellants being key personnel relevant to the inquiry into affairs of CBKL. The 2nd Appellants was a General manager corporate assets and the 3rd Appellant was the General manager Finance. These individuals are privy to crucial information that are relevant to the investigation the Respondents are conducting moreover, the investigations touch on matters within the core mandate of the respondent.
38.Additionally, the Respondents, contend that the Appellants cannot use the case of Salomon v Salomon to claim that they were not the ‘persons’ involved as the issuers of the IM. This is because clause 17(1)(g) of the Capital Markets (Securities) (Public Offers, Listings and Disclosures) Regulations states:(g)each person not falling within any of the foregoing paragraphs who has authorised the contents of, or of any part of, the prospectus or supplementary prospectus or a listing statement or a supplementary statement.
39.The implication of this clause is that key personnel are persons responsible for the information contained in the prospectus. This puts them within the ambit of the CMA’s regulatory authority. Accordingly in this case the 2nd and 3rd Appellants were privy to important information that was contained the IM. Consequently, are aware of what happened in relation to the matter under investigation by the Ad Hoc Committee. Moreover, the NTSC issued touched on matters related to the individual culpability of the Appellants in relation to their respective positions held in CBKL. Hence, the provisions of section 30E, CMA act do apply to all the Appellants in this matter.
40.The Appellants had an obligation and were in a position to interrogate and ascertain the true position the financial statements, cash and bank balances as well as other tangible and intangible assets. This is information that would help investors in ascertaining the true financial position of CBKL in terms of its assets and liabilities. This is evident when considers the issues raised in the NTSC that the Appellants were being called upon to respond to. Namely, matters to do with publication of false and misleading financial statements, overstatement of cash balances, non-disclosure of related party loans and failure to monitor/manage arising conflicts of interests.
41.Accordingly, this Tribunal finds that acted legally by suing the three Appellants instead of instituting proceedings against CBKL.
Issue 2: Whether the existence of other criminal and civil cases prejudiced the Appellants.
42.It is instructive to note that courts have over time pronounced themselves and held that the existence of court cases (including civil cases) does not necessarily bar the concurrent proceedings of the Tribunal. This is because the proceedings of the tribunal are administrative, and investigatory in nature. In Dry Associates Limited V Capital Markets Authority & Another Interested Party Crown Berger (K) Ltd [2012] eKLR, the court stated thus:
43.This was the same position taken in Jeremiah Gitau Kiereini v Capital Markets Authority & another [2013] eKLR where the learned judge was of the view that the existence of civil suits in other courts does not disentitle the Authority from carrying out its mandate.
44.Accordingly, this Tribunal finds that the existence of other criminal and civil cases does not prejudice the Appellants.
Issue 3: Whether the respondent violated the Appellants’s constitutional right to a fair, expeditious, efficient and reasonable hearing.
45.The fair Administrative Action Act enacted pursuant to Article 47 of the Constitution empowers a Tribunal to review an administrative action or a decision. As was held in the Court of Appeal case of Capital Markets Authority v Ciano & Another [2023] KECA 581 (KLR), section 4 FAA thereof echoes Article 47 of the Constitution and reiterates the entitlement of every person to an administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.
46.The Authority is still required to act fairly in the performance of its duties as was stated in Alnashir Popat & 7 others v Capital Markets Authority [2020] eKLR where the Supreme Court held that:
47.The duty extends to the fast, expeditious and efficient action. From the explanation given in the pleadings and submissions, it is apparent that the institution of the NTSC proceedings appeared to take a long time. Nevertheless, there is a cogent explanation for this delay. The sequence of events that led to institution of the NTSC proceedings 6 years after the events are explained as follows:i.The Central Bank of Kenya (CBK) appointed the Kenya Deposit Insurance Corporation (KDIC) as the receiver for CBKL on April 7 , 2016 pursuant to sections 43(1), 43(2) and 53(1) of the Kenya Deposit Insurance Act.ii.On 20 April 2016, KDIC appointed Kenya Commercial Bank (KCB) as the Manager of CBKL in liquidation to ensure the operations of CBKL (in liquidation) would continue.iii.On 17 August 2018 SBM bank Kenya acquired 75% of the value assets of CBKL (in liquidation).iv.In September 2018 following the curve out and transfer of SBM, CBK required KDIC to appoint an independent external auditor to carry out a comprehensive audit of CBKL based on terms of reference approved by CBK pursuant to section 24 of the Banking Act. And to provide additional basis for further actions. KDIC contracted the independent external auditor in December 2019.v.The audit report was sent to CBK in September 2020 where several gaps were noted in the report. In February 2021 CBK engaged KDIC to resolve the gaps.
48.Indeed, considering the complexities of the investigations and that various state agencies involved had to cooperate, it is understandable that the Respondent had to wait before issuing the NTSC. Moreover, the investigations undertaken by the other government agencies were important in unearthing the gaps that the Respondent seeks to address.
49.Accordingly, this Tribunal finds that the respondent has not violated the Appellants’ constitutional right to a fair, expeditious, efficient and reasonable hearing.
Issue 4: Whether the Appellants with suffer double jeopardy and be prejudiced by the sustenance of the NTSC proceedings before the Ad Hoc Committee
50.The principle of double jeopardy is anchored in Article 50(2)(o) of the Constitution and Section 138 of the Criminal Procedure Code, CAP 75. Article 50 (2) of the Constitution provides as follows:
51.The wording of Article 50(2) leads one to draw the inference that the principle can only apply in criminal proceedings. Since acquittal or conviction only applies in criminal matters. The same does not apply to civil or administrative proceedings. As stated in Geofrey Gekone v Capital Markets Authority appeal no. 5 of 2018.
52.Moreover, the court in Republic v Public Service Commission of Kenya Ex parte James Nene Gachoka, Nairobi Misc. Application 516 of 2005 [2013] eKLR found that the principle of double jeopardy does not apply to administrative proceedings such as those carried out by the Tribunal.
53.This has been reiterated in other cases. Such as the Jeremiah Kiereni case.
54.Accordingly, this Tribunal finds the Appellants will not suffer double jeopardy if the Respondent proceeds with the NTSC hearing.
Issue 5: Whether Dr. Mcfies appointment to the Ad Hoc Committee compromises its impartiality.
55.In Alnashir Popat & 7 others v Capital Markets Authority [2020] eKLR the Supreme Court was of the view that:
56.Accordingly, the Respondent is bound to ensure that any proceedings it undertakes are impartial. In considering the issue of impartiality, Lord Hewart in the case R v Sussex Justices Ex p McCarthy stated:‘It is not merely of importance but is of fundamental importance that justice should not only be done but should manifestly and undoubtedly be seen to be done.’2
57.It is acknowledged that through this case Lord Hewart established the principle that became known as the rule against bias. ‘The importance of the appearance of impartiality has become increasingly linked to public confidence in the courts and the other forms of decision-making to which the bias rule applies.’ 3
58.Bias can be actual or apprehension bias. The court in the Aly Khan Satchu case at paragraph 169 case distinguished the two forms of bias as follows:
59.Hence, the established legal test for bias, is whether a fair-minded and informed observer, having considered the facts, would conclude that there is a real possibility of bias. This standard focuses on the appearance of bias, not just its actual presence. Nevertheless, courts have also stated that in considering bias the specific circumstances of each case should also be considered. This implies that though the test of bias is looked at from the perspective of a ‘reasonable man’ it also provides that the ‘reasonable man’ would take into account the prevailing circumstances.4 This was restated in Aly Khan Satchu v Capital Markets Authority at paragraph 171.
60.In addition, the courts have stated that it considering the possibility of bias Philip Tonoi & Another Versus Judicial Service Commission 5
61.With reference to the present case, the question then is would a reasonable, objective, and informed person, who considers the correct facts of the case reasonably get the impression that the decision maker will not bring an impartial mind to bear on the adjudication of the case?
62.This is a case of apprehended bias. Considering that Dr. McFie is a board member of SBM bank that took over the assets of CBKL, he may or may not come across information that touches on CBKL (in liquidation). Although he may be competent, have no personal interest or bias, we cannot ignore the fact that there is a possibility, however remote, of him coming across such information. Further considering the statement made at the beginning that ‘It is not merely of importance but is of fundamental importance that justice should not only be done but should manifestly and undoubtedly be seen to be done’ (emphasis ours). In other words, a decision-maker must be free from any personal interest or bias that could affect their judgment, and the appearance of impartiality is just as important as the reality of impartiality.
63.Accordingly, this Tribunal finds that including Dr. McFie as a member of the ad hoc committee can lead to the imputation of lack of impartiality.
Disposition
64.This Tribunal, by unanimous decision ( Hon. G. Wang’ong’u having recused himself and Hon. J. Ebooko abstaining ) concludes that this appeal is partly meritorious and partly not. Accordingly, we grant the following orders: -(a)The appeal is partly allowed and the ruling of the Respondent delivered on the 18 March 2021 dismissing the Appellants’ preliminary objection is hereby partially set aside only with regards to its finding that Dr. James Mcfies’ appointment to the Ad Hoc Committee does not compromise its impartiality.(b)The Respondent shall proceed to conduct a hearing in relation to the notices to show cause (NTSC) dated 3/11/21, 3/11/21, 5/7/21 issued to the Appellants. In its hearing, it shall substitute Dr. James McFie.(c)Each party shall bear its own costs.
DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY 2024.1. HON. PAUL LILAN, MBS - (CHAIRMAN)2. HON. PAUL WANGA - (MEMBER)3. HON. DR. CONSTANCE GIKONYO - (MEMBER)