Chief Financial Officers bear a duty of care to scrutinize financial information of their institutions.

Headnote:      The appellant, a former acting Chief Finance Officer of National Bank of Kenya (NBK), challenged the Capital Markets Authority's (CMA) decision to impose a Ksh 1 million financial penalty for alleged regulatory breaches, including the preparation of financial statements inconsistent with International Financial Reporting Standards (IFRS) and failing to provide timely information to NBK's Board. The Appellant argued his rights to fair administrative action, access to information, and a fair hearing were infringed. CMA defended its decision, citing fiduciary duties owed by the Appellant. The Tribunal upheld CMA's enforcement decision, concluding that the Appellant failed in his fiduciary duties but noted shortcomings in CMA's assistance to secure key documents.

Lindong'a v Capital Markets Authority (Appeal 3 of 2018) [2024] KECMT 776 (KLR) (5 June 2024) (Judgment)

Neutral Citation: [2024] KECMT 776

Capital Markets Tribunal

P Lilan, Chair; G Wangong’u, C Gikonyo, P Wanga, and J Eboko, Members

June 5, 2024

Reported by John Ribia

Banking Law – banking officers – chief financial officer – role and duties – duty of care - whether Chief Financial Officers bore a duty of care to scrutinize financial information, including the figures for loan provisions and income from the sale of assets, before incorporating them into financial statements – Banking Act (cap 488) sections 31(2), 35A(4), and 35A(5); Capital Markets Act (cap 485A) sections 2, 11(3), 13A, 25A, and 34(b); Capital Markets (securities) (Public Offers, Listing and Disclosure) Regulations (2002) Fifth Schedule; regulation B.06

Banking Law – oversight of Banks – oversight by the regulator the Central Bank of Kenya – oversight by the Board of the Bank – whether the Central Bank of Kenya failed in its oversight role to identify and address accounting errors by the National Bank of Kenya - whether the NBK Board and its relevant committees, such as the Audit and Risk Committee, was complicit or negligent in identifying inconsistencies in the application of accounting standards – Banking Act (cap 488) sections 31(2), 35A(4), and 35A(5); Capital Markets Act (cap 485A) sections 2, 11(3), 13A, 25A, and 34(b); Capital Markets (securities) (Public Offers, Listing and Disclosure) Regulations (2002) Fifth Schedule; regulation B.06

Data Protection Law – work emails – owner of such communication - whether the emails in a work provided email were the property of the employer, the employee, or the joint property of the employer and employee - Access to Information Act (cap 7M) section 6(1)(i); Banking Act (cap 488) sections 31(2), 35A(4), and 35A(5); Capital Markets Act (cap 485A) sections 2, 11(3), 13A, 25A, and 34(b); Capital Markets (securities) (Public Offers, Listing and Disclosure) Regulations (2002) Fifth Schedule; regulation B.06

Banking Law – internal bank documents – classification of internal bank documents - powers of regulators to review internal bank documents - whether internal operational records of a bank that provide essential context for the CFO’s actions and responsibilities such as email communications, credit policy, audit reports and board minutes, that were required by the CMA in its investigation, were confidential information and required a court authorized warrant - Banking Act (cap 488) sections 31(2), 35A(4), and 35A(5); Capital Markets Act (cap 485A) sections 2, 11(3), 13A, 25A, and 34(b); Capital Markets (securities) (Public Offers, Listing and Disclosure) Regulations (2002) Fifth Schedule; regulation B.06

Constitutional Law – fundamental rights and freedoms – right to access information – right to fair hearing – investigation in to Bank’s accounts – investigation on Bank’s Chief Financial Officer - whether the right to access information and the right to a fair hearing of the chief financial officer of a bank was violated by the Capital Markets Authority failure to secure access to critical documents for the CFO’s defense - whether the appellant’s rights to fair administrative action, fair hearing, and access to information were violated during the administrative processes conducted by the Capital Markets Authority (CMA) – Constitution of Kenya articles 35 and 47; Fair Administrative Action Act (cap 7L) sections 3(g), and 4(3)(g)

Words and Phrases – fiduciary – definition - someone who was required to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith, loyalty, due care, and disclosure - Black’s Law Dictionary 11th edition page 770.

Words and Phrases – confidential - meant to be kept secret and not told to or shared with other people – information meant to be kept secret; imparted in confidence - Black’s Law Dictionary 11th Edition; Oxford Advanced Learner’s Dictionary

Brief facts

The appellant served as acting Chief Financial Officer of National Bank from April 2015 to April 2016. The Capital Markets Authority (CMA) investigated NBK's financial practices after receiving anonymous reports of misconduct. Key allegations included premature income recognition, irregular loan restructuring, and potential embezzlement. CMA issued a Notice to Show Cause (NTSC) to the appellant, asserting violations of IFRS and corporate governance regulations. The appellant denied culpability, citing limited access to documents required for his defense and claiming the financial irregularities fell outside his direct responsibilities. CMA found him culpable, imposed a fine, and publicized the enforcement action, prompting the appellant’s appeal.

Issues

  1. Whether Chief Financial Officers bore a duty of care to scrutinize financial information, including the figures for loan provisions and income from the sale of assets, before incorporating them into financial statements.
  2. Whether the Central Bank of Kenya failed in its oversight role to identify and address accounting errors by the National Bank of Kenya.
  3. Whether the NBK Board and its relevant committees, such as the Audit and Risk Committee, was complicit or negligent in identifying inconsistencies in the application of accounting standards.
  4. Whether the emails in a work provided email were the property of the employer, the employee, or the joint property of the employer and employee.
  5. Whether internal operational records of a bank that provide essential context for the CFO’s actions and responsibilities such as email communications, credit policy, audit reports and board minutes, that were required by the CMA in its investigation, were confidential information and required a court authorized warrant
  6. Whether the right to access information and the right to a fair hearing of the chief finanacial officer of a bank was violated by the Capital Markets Authority failure to secure access to critical documents for the CFO’s defense.
  7. Whether the appellant’s rights to fair administrative action, fair hearing, and access to information were violated during the administrative processes conducted by the Capital Markets Authority (CMA).

 Held

  1. The Chief Financial Officer (CFO) was the second most important officer of a public company. The CFO reported to the CEO. The CFO was not simply a finance or accounting officer; the CFO worked closely with the Chief Executive Officer (CEO) and was often a key partner to the [CEO] in formulating, evaluating, and implementing strategic choices for the company.
  2. The Financial Control Policy of NBK the CFO was the secondary owner of all accounts and costs centers. The CFO was the second line of defence, for controls over all accounts and costs centers.’  The CFO had an overseer role over all accounts and cost centers.
  3. Just like directors owe fiduciary duties of care and loyalty, so do key officers. Corporate officers and directors stood in a fiduciary relation to the corporation and its stockholders. A fiduciary was someone who was required to act for the benefit of another person on all matters within the scope of their relationship; one who owed to another the duties of good faith, loyalty, due care, and disclosure.
  4. Elements of the fiduciary duty encompassed the following aspects, due care, loyalty, good faith, and disclosure. By extension, the aspect of owing a duty of confidentiality could be implied through the duties of loyalty and good faith.
  5. The duty of care required directors and officers to exercise reasonable care, skill, and diligence in decision-making and actions. They should ensure that they maintain ongoing awareness of operations and supervise company activities. The duty of loyalty related to avoiding conflicts of interest with the company. That required one to disclose potential conflicts and material information to the board and shareholders. One should also abstain from using their position for personal gain or self-dealing ventures.
  6. Duty of obedience mandated one not to blindly follow orders that contravened the law or company documents such as policy documents and board resolutions. It required compliance with applicable laws and regulations related to financial reporting and corporate governance. To raise concerns and refuse to participate in activities that violated fiduciary obligations. As well as working towards providing accurate information and avoid misleading practices.
  7. The duty of good faith called upon directors and officers to act in the best interests of the corporation, prioritizing its well-being over personal gain. The duty of confidentiality asked that directors and officers ensured protection of confidential company information or only disclosing it with proper authorisation. Moreover, not to use confidential information for personal gain. The duty of disclosure fell under multiple categories in that context. Transparent disclosure related to both the duty of loyalty (disclosing conflicts) and the duty of obedience (providing accurate information).
  8. Whereas the NBK, had a segregated approach in handling business. Different departments acted in silos. As the CFO there was a responsibility to look beyond the silos. The CFO was granted the overall responsibility of overseeing the preparation and publication of financial statements. The financial statements being crucial documents to investors as they provide guidance on the health of a company.
  9. The appellant was a skilled accounting professional, hence there was a level of care and diligence that was expected of him. He was expected to utilize his professional knowledge in overseeing the various financial-related aspects of the organisation. The duty of care arose in ensuring that financial information received was thoroughly analysed before inclusion into financial statements. He was expected to maintain an ongoing awareness of operations and supervise/oversee the company’s financial activities including preparation of the financial statements. He also owed the duty of disclosure to ensure that accurate information was provided to the Board for their consideration. The duty of obedience required that as the CFO he ensured compliance with all applicable laws and regulations related to financial reporting and corporate governance.
  10. The appellant failed to apply an enquiring mind, proper care and skill in scrutinizing the information relating to the sale of the sixteen properties. That constituted a significant sale of assets and the amount involved had an impact on the balances of the institutions. Accordingly, as the CFO he should have cast a keener eye on the issue.
  11. Loans were the largest asset for a bank and a key source of revenue. It was also the portfolio that opened a bank to the greatest avenues of risk. Hence, it was important and necessary to closely monitor it. The appellant received figures for loans, provisioning for non-performing loans that were supplied by the credit department and he just incorporated them into the financial statements without cross-checking. That resulted in incorporating the figures indicating that the bank had made a profit from the sale of assets. Yet, that was a premature recognising of income from the sale of assets before the signing of the agreements had occurred. That contrasted with the International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) standards. Specifically, IFRS 5, IAS 16(67), IAS 18. The appellant did not properly fulfill his fiduciary duties.
  12. It was odd that the main regulator of NBK, the Central Bank of Kenya (CBK) had not earlier on, in the process of fulfilling its mandate of overseeing and inspection of banks, picked up these issues that were happening at NBK such as the accounting errors. That was, the accounts were not presented correctly according to the appropriate IFRS standards. CBK fell short in fulfilling its mandate. It was curious that no action was taken against the NBK Board Members. There were the relevant board committees such as the Audit and Risk Committee, that had the duty to oversee the financial management of NBK. They too should have noted the inconsistencies in applying the accounting standards.
  13. A person subjected to an administrative action was entitled to an expeditious, efficient, lawful, reasonable and procedurally fair process. The CMA requested for the for National Bank credit policy applicable in 2015, National Bank procument policy applicable in 2015, Access to my emails up to and including the date of my summary dismissal in April 2016, Board minutes for all meetings held in 2015 and 2016, Special audit report by Deloitte and Touche, Detailed report of file from credit used to compute provisions in 2015. The list of documents did not belong to the respondent in terms of being the creator or having ownership over them. They fully belonged to NBK and the NBK was the originator, these are: National Bank credit policy applicable in 2015, National Bank procurement policy applicable in 2015, Board minutes for all meetings held in 2015 and 2016, Special audit report by Deloitte and Touche, and the detailed report of the file from credit used to compute provisions in 2015.
  14. Regarding emails, in various instances the appellant may have been the originator and hence they belonged to him jointly with the NBK. That was because the emails most likely show the different communications that the appellant initiated or responded to in the course of undertaking his duties. Hence, it would not be appropriate to say that they entirely belonged to NBK and that NBK only was the originator of the emails.
  15. The respondent was by statute entitled to enter, search, investigate and confiscate any documents held by a party. That implied that the respondent should have conducted a search and seizure exercise or any other act to gain access to the documents requested for by the appellant. Section 13A Capital Markets Act was to the effect that the search strictly was undertaken when authorisation by way of gaining a search warrant from court first. Hence the assertation by the appellant that the respondent had a right to enter, search, investigate and confiscate any documents held by a party, was not true.
  16. Confidential was defined as meant to be kept secret and not told to or shared with other people. Essentially, confidential information included data, facts, statistics, figures, particulars etc that were supposed not to be known or should be unseen by others. It could also be termed as information that was not publicly available. The documents requested fell within the scope of internal documents rather than confidential documents. That was so especially considering the context of who was asking for access to the documents.
  17. The appellant had been the acting CFO of the organisation, hence all the documents in the list he would have had access to them. He could not strictly in the circumstances be considered as being a stranger to the documents in terms of not having encountered them.
  18. Despite being internal documents to NBK, those documents were protected under the doctrine of confidentiality. Specifically, through sections 31(2) Banking Act and Guideline 4.2.5 Central Bank of Kenya Prudential Guidelines. The appellant sought to use the documents to help him mount his defence. The allegations in the NTSC may have related to information in these documents. Additionally, the prudential guideline stated that no member of staff or director should during, or upon and after termination of employment with the institution (except in the proper course of his duty and or with the institution’s written consent). That implied that an exception could be made. A former employee could gain access by being granted written permission.
  19. The request for access to information could not be considered a frivolous affair because it related to an individual seeking to prove their innocence against charges that they faced. The information was also not requested in order to gain a financial advantage. That was what was prohibited in the Prudential Guidelines. Therefore, that could be considered one of the appropriate exceptions to grant written consent to access the documents. Moreover, the appellant was not requesting for the documents to share them publicly with others, as envisaged in the Banking act and prudential guidelines, on the contrary they were supposed to help him mount his legal defence. Also, if some of the information requested may have contained details revealing accounts of the institution or its customers, the same could have been redacted before sharing it with the appellant.
  20. The CMA made reasonable efforts to assist the appellant in accessing documents necessary for his defense by writing to the NBK to request the documents. However, the respondent lacked the statutory authority to compel NBK to release confidential records without a court-issued warrant under section 13A of the Capital Markets Act. The CMA improperly pre-judged the relevance of some requested documents in its communication with NBK but acknowledged that the respondent invited the appellant to explain the necessity of the documents in his defense, demonstrating a willingness to consider their relevance.
  21. The appellant had other avenues available, such as invoking the Tribunal’s powers to summon the production of documents under section 35A of the Capital Markets Act, which he did not pursue. The administrative proceedings complied with the principles of fair administrative action under article 47 of the Constitution and the Fair Administrative Action Act, as the appellant was given adequate notice, an opportunity to be heard, and reasons for the enforcement decision. The CMA acted within its legal mandate, the appellant was afforded a fair hearing.

Appeal dismissed.

Orders:

  1. The enforcement decision of the ad hoc committee on April 3, 2018 was upheld. 
  2. Each party was to bear its own costs of the appeal.

Circulars are not statutory instruments

Headnote:      The petition challenged Government Circular OP/CAB.23/1A dated June 26, 2021, issued by the Head of Public Service. The circular directed the centralization of government motor vehicle leasing through the National Treasury. The petitioner, citing violations of the Constitution and statutory provisions, argued that the circular usurped procurement roles of accounting officers, lacked public participation, and contravened the Statutory Instruments Act. The High Court dismissed the petition, holding that the circular was an administrative directive amplifying existing laws and policies, not a statutory instrument requiring public participation under the Statutory Instruments Act. It found no constitutional violations, ruling that central leasing aligns with existing procurement laws. As the petition was brought in the public interest, the Court directed each party to bear its own costs.

Omtatah v Head of Public Service & 2 others (Constitutional Petition E301 of 2021) [2024] KEHC 198 (KLR) (Constitutional and Human Rights) (19 January 2024) (Judgment)

Neutral Citation: [2024] KEHC 198 (KLR)

High Court at Nairobi

LN Mugambi, J

January 19, 2024

Reported by John Ribia

Statutes – statutory instruments – circulars - whether circulars that guided the application for the prevailing policy and laws could be considered as statutory instruments – Statutory Instruments Act (cap 2A) sections 2, 5, 6, 8, 9 10, 11; Public Procurement and Asset Disposal Act (cap 412C) sections 7, 44, 50, 55, and 60(1); Public Finance Management Act (cap 412A) section 11, 128

Constitutional Law – national values and principles – public participation – matters that should be subjected to public participation - circulars - whether circulars guiding the application for the prevailing policy and laws were to be subjected to public participation – Constitution of Kenya article 10

Public Procurement Law – consortium procurement – circular guiding application of consortium procurement - whether a circular that applied and gave directions on existing laws and policies on consortium procurement, contravened statutory provisions and usurped the roles of respective accounting officers - Public Procurement and Asset Disposal Act (cap 412C) sections 7, 44, 50, 55, and 60(1); Public Finance Management Act (cap 412A) section 11, and 128; National Government Coordination Act (cap 127) section 7, and 8

Brief facts

The petition challenged Government Circular OP/CAB.23/1A dated June 26, 2021, issued by the Head of Public Service. The circular directed the centralization of government motor vehicle leasing through the National Treasury. The petitioner, citing violations of the Constitution and statutory provisions, argued that the circular usurped procurement roles of accounting officers, lacked public participation, and contravened the Statutory Instruments Act. The respondents defended the circular as an administrative directive within existing laws, aimed at achieving efficiency and cost-effectiveness.

Issues

  1. Whether a circular that applied and gave directions on existing laws and policies on consortium procurement, contravened statutory provisions and usurped the roles of respective accounting officers.
  2. Whether circulars that guided the application for the prevailing policy and laws could be considered as statutory instruments.
  3. Whether circulars guiding the application for the prevailing policy and laws were to be subjected to public participation.

Held

  1. Article 3(1) of the Constitution provided that every person had an obligation to respect and uphold the Constitution. Further, article 258 (1) stated that that every person had the right to institute court proceedings, claiming that the Constitution had been contravened, or was threatened with contravention. The Constitution therefore allowed anyone to bring a claim alleging violation of its provisions whether or not they were directly affected by the violation or not. The petition fell squarely within the ambit of public interest litigation.
  2. If the purpose of the circular was merely elaboratory and was based on what already existed, then it was a statutory instrument. It was purely an administrative tool issued for purposes of guiding implementation of existing policies.
  3. The Head of Public Service mandate draws from the executive functions of the President. It was an office created under article 132(4)(a) of the Constitution.
  4. The circular in question was giving directions concerning centralized leasing of government vehicles. Under section 50 of the Public Procurement and Asset Disposal Act, 2015; procurement entities could enter into consortium buying. Central leasing was already incorporated in the Procurement and Asset Disposal Act and was described as consortium buying, a scheme where procurement entities could come together and procure jointly to benefit from economies of scale. All that which the circular did was to give guidance concerning that particular procurement item, but the rules did not change. It was not against the existing legal provisions nor was it usurpation of the roles of respective accounting officers. It did not contravene the existing statutory provisions. The circular was executive in nature and meant to guide the application of the prevailing policy. It not be considered a statutory instrument within the meaning of section 2 of the Statutory Instruments Act.
  5. The circular in question was an amplification of what was already in law and policy (consortium procurement). The circular was not a statutory instrument within the scope of section 2 of the Statutory Instruments Act. It did not require public participation.

Petition dismissed, each party was to bear its costs.

A party that claimed ownership of land but had not discharged the burden of proof concerning the validity of his title documents could be deemed to have obtained the title documents fraudulently.

Headnote:      This appeal arose from a land dispute concerning the subdivision of Nyandarua/Mawingo/90, originally owned by Simon Njoroge Munywe. The appellant, Elias Joseph Waburi Wamunyu, claimed ownership of Nyandarua/Mawingo/764 (20 acres), while the respondent’s father claimed Nyandarua/Mawingo/725 (4 acres). The Environment and Land Court (ELC) declared the subdivision creating the appellant’s title fraudulent and upheld the respondent’s title as valid. The appellant argued procedural and evidentiary errors, asserting his title predated the respondent’s. The Court of Appeal upheld the ELC’s decision, finding that the appellant failed to prove the authenticity of his documents and that the respondent’s title was lawfully obtained. The appeal was dismissed with costs.

Kimani v Republic (Criminal Appeal 41 of 2022) [2023] KECA 1390 (KLR) (24 November 2023) (Judgment)

Neutral Citation: [2023] KECA 1390 (KLR)

Court of Appeal at Nakuru

F Sichale, FA Ochieng, and LA Achode, JJA

November 24, 2023

Reported by John Ribia

Law of Evidence – burden of proof – documentary evidence – land ownership documents – validity documentary evidence that had been presented as title/ownership – party whose title documents were not valid - whether a party that claimed ownership of land but had not discharged the burden of proof concerning the validity of his title documents could be deemed to have obtained the title documents fraudulently - Evidence Act (cap 80) sections 109, and 122

Brief facts

The appellant filed an appeal against the judgment of the Environment and Land Court (ELC) at Nakuru, which had declared the subdivision of Nyandarua/Mawingo/90 into Nyandarua/Mawingo/761 and Nyandarua/Mawingo/764 as fraudulent and nullified the appellant’s title. The dispute arose from competing claims to portions of the land purchased from the original owner, Simon Njoroge Munywe. The appellant claimed to have purchased 20 acres in 1982, while the respondent’s father purchased 4 acres in 1987. Both parties alleged rightful ownership and produced conflicting documentation, including titles and survey records.

The trial court found that the respondent’s title to Nyandarua/Mawingo/725 was valid, while the appellant’s title was fraudulent, and awarded costs against the appellant. Aggrieved, the appellant lodged the present appeal.

Issue

Whether a party that claimed ownership of land but had not discharged the burden of proof concerning the validity of his title documents could be deemed to have obtained the title documents fraudulently.

Held

  1. Both the appellant and the respondent had at various times each bought portions of land to be excised from the same parcel. The appellant admitted that he bought the land in 1982 and that at the time, the land was still under the Settlement Fund Trustee and the loan owed to the Settlement Fund Trustees was not cleared. The appellant did not have payment receipts for the mutation or the issuance of the title deed and that he did not have a transfer in respect of the parcel he claimed he owned. He did not have the consent of the Land Control Board either. The omissions casted doubt on how the appellant acquired title to the suit land.
  2. In light of the glaring inconsistencies in the appellant’s evidence and the documents that he produced in support of his claim, the trial court could not be faulted for concluding that it was the appellant who obtained title to the property fraudulently and that the respondent had obtained title to the adjacent property genuinely.
  3. He who asserts must prove. All the documents that were relied upon by the appellant as proof that he had acquired a genuine title to land were full of glaring inconsistencies and there was no plausible explanation from the appellant. It was incumbent upon him to explain these glaring inconsistencies and he did not.
  4. Sections 109 and 122 of the Evidence Act placed the burden of proof on the appellant. The process through which the appellant acquired title to the impugned property was marred with irregularities within his knowledge and the only logical inference that could be made was that the documentation that he relied on were either fraudulent or forged.

Appeal dismissed with costs to the respondent.