[2016] KECMT 19 (KLR)

A Baumann & Company Limited v Capital Markets Authority (Appeal 1 of 2008) [2016] KECMT 19 (KLR) (5 May 2016) (Ruling)

Neutral citation: [2016] KECMT 19 (KLR)

Republic of Kenya

In the Capital Markets Tribunal

Appeal 1 of 2008

JK Kibet, Chair, L Macharia, K. Kandie, K. Nyamweya & K. Kinyua, Members

May 5, 2016

Between

A Baumann & Company Limited

Appellant

and

The Capital Markets Authority

Respondent

(An Appeal against the decision of the respondent dated 27th May 2008)

Ruling

1. This is the Ruling of the Tribunal on the Appellant’s appeal dated June 9, 2008 and filed on the same date.

2. The Appeal is against the decision of the respondent dated May 27, 2008 said to be contained in the Respondent’s letter of the same date addressed to the Appellant. The Appellant sets out ten grounds of appeal and they are as follows:1. The Authority has fundamentally erred in law making the decision set out in the letters.2. The Authority erred in law in failing to consider the Appellant’s response made by the Appellants letter dated April 8, 2008. 3.The Authority should and ought to have considered the Appellants submissions/ causes contained in the Appellant’s letter dated April 8, 20084. The Authority’s duty and obligation in the circumstances is to exercise its powers and discretion in a judicious manner, which it failed to do in spite of proper explanation being given by the way Appellant.5. The Authority has erred in law and fact by failing to judiciously exercise its discretion by taking the stand it has in making the decision it has.6. The Authority action in making the decision it has is arbitrary and unreasonable and unjustifiable in the circumstances.7. The decision of the Authority is more punitive than regulatory or enforcement and therefore goes against the spirit of the enabling statute.8. The decision of the authority has had the effect of disabling the operations of the Appellant rather than paly the role of a capital market facilitator of the Appellant than play the role of a capital market facilitator and regulator.9. The decision by the Authority goes contrary to the principal objective for the formation of the Authority as set out in the Capital Markets Act, CAP 485A, laws of Kenya.10. A statement signed on behalf of the Appellant together with annextures thereto is annexed in support of this Memorandum of Appeal.

3. The Appellant prays for the following orders:A.This appeal be allowed.B.The decision of Authority to be set aside with cost.C.The cost of this Appeal be awarded to the Appellant.

4. In addition to the memorandum of Appeal the Appellant filed statement of facts and annexed thereto three exhibits marked as AB-1 to AB-3.

5. The appeal is opposed by the Respondent and in opposition thereto the Respondent filed a statement of fact dated July 1, 2008 together with a statement of Defence of even date. The appeal although filed way back in 2008 was heard on February 16, 2015. At the hearing Appellant was represented by Mrs Koech while the Respondent was represented by Ms Janmohamed and Ms Murugi.

6. The delay in fixing the Appeal for hearing was explained by the Appellant’s counsel Mrs Koech by the statement that the parties have been trying to pursue out of court settlement for a long time.

Appellants’ Submissions 7. It was submitted on behalf of the Appellant that the decision contained in the Respondent’s letter dated May 27, 2008 marked as exhibit AB-3 suspended the Appellant from listing at the Nairobi Securities Exchange and at the same time imposed financial penalties against the Appellant for reasons highlighted in the said letter. Counsel for the Appellant submitted further that in suspending the Appellant and imposing upon its financial penalties, the respondent erred for the reason that it did not consider the Appellant’s submissions on the issues brought before it and the suspension did not conform with the provisions of the Capital markets Act.

8. The Appellant also made submissions in respect to the Respondent’s letter dated February 8, 2008 in which the Appellant was invited to show cause why action would not be taken against it. Counsel for the Appellant did admit that on the date of the issue of the said notice to show cause the Appellant’s paid-up capital was an issue ad so was reporting. She also conceded that the management accounting system was malfunctioning but submitted that the same were however rectified subsequently and that the Appellant had undertaken to comply with the requirements of the reporting. The counsel submitted that it was not within the appellant knowledge the matters which the Respondent reported had not been disclosed. It was submitted that the delisting of the company was a surprise to the Appellant and so were the imposition of the penalties. The respondent was criticized for not taking into account the steps the Respondent had taken prior to the suspension. It was submitted that the financial penalties did not take into account the period the Appellant had complied.

Respondent submissions 9. The learned counsel for the Respondent Ms Janmohamed started her submission by stating that the Respondent did not understand what exactly the Appellant was seeking. She submitted that the suspension was for a period of up to October 31, 2008 or such earlier date as the Respondent may decide and that despite that being the case, there is no statement or evidence that the Appellant had complied with the matters raised in the letter complained of by the Appellant.

10. She submitted that despite the Appellant’s submissions that the Respondent did not take into account the representative of the Appellant, it evident from the letter dated April 1, 2008 (exhibit AB-1) that the Respondent Cleary indicated that it had considered the issues. She pointed out that the said letters of April 8, 2008 in which the Appellant clearly Acknowledged the matters set out by Respondent in its letter dated April 1, 2008 (exhibit AB-2) and also acknowledged that there had been breach of the minimum paid -up share capital and that they had a breakdown of their accounting software. She further referred to letters exhibit AB3 and submitted that by May 27, 2008 when the Respondent wrote the letter, The Appellant had not, inter alia, enhanced its paid-up share capital. The said letter, the Appellant had not, inter alia, enhanced its paid-up share capital. The said letter also points that by the said date, management accounts and audited financial statement had not been submitted within the prescribed time. The letter refers at page 2 to a meeting attended by Appellant in which it is said that the breaches were admitted.

11. Counsel for the respondent further submitted on the duty of the respondent to safeguard on public funds. In her view the respondent had a bigger duty. In ensuring that there is discipline in the industry and that despite the lapse of time there was no evidence submit to show the Appellant has complied with any of the requirements set out in the correspondence. She prayed that the appellant appeal be dismissed with cost.

12. In brief response learned Counsel for the Appellant opined that the Appeal was not filed to simply deny the breaches. In her view, the Appellant having committed to remedying the breaches the Respondent ought to have given it time to comply.

13. The Tribunal has considered the Appellant’s appeal the grounds thereof, the statement of fact together with the exhibit and the submissions of the learned counsel Mrs. Koech. We have similarly considered the Respondent statement of facts, the statement of defence and submissions of its counsel Ms. Janmohamed and Ms Mrurugi.

14. The facts of this matter are not highly disputed. The origin of the dispute appears to be a letter dated April 1, 2008 from the Respondent’s then Ag. Chief Executive Officer to the Appellant. The letter refers to various correspondences none of which the parties made available to the Tribunal.

15. In the said letter the Respondent also refers to unheeded repeated request to the Appellant to comply with requirements of Regulations 22(5) (Capital Markets (securities) (Public Offers, Listing and Disclosure) Regulations 2002). The Respondent sets out areas of alleged breach which were in brief the following.1. Failure to maintain minimum paid-up shares capital for eligibility to remain listed to the alternative investment markets segments on the NSE.

2. Failure to comply with continuous reporting obligations imposed by the relevant regulations.

16. The letter then summons the respondent to Appellant to appear before the respondent on April 3, 2008 to address the issues and also show cause why action should not be taken against it.

17. In response to the Respondent’s letter the appellant wrote on April 8, 2008 through its director and in respect to the issue raised on prescribed minimum share capital and continues reporting obligations the respondent states in part: -1. Prescribed minimum paid up share capital. We have appointed Ashu securities Limited to increase the paid-up share capital to the prescribed minimum. Indeed, the process had been previously initiated however as a result of some organizational issues at the company the same has been delayed. The board has now set a target of September 30, 2008 to have the process completed.2. Continuous Reporting obligation

Management accounts and Audited financial Statements. 18. The company has had a breakdown of the accounting software system. This has now been rectified ad we have embarked on bringing the accounts to date and the same should be completed by July 31, 2008.

19. Appellants said the letter continues to assure the respondent that if there may have been any omission its part the same were not deliberate and they were sincerely regretted.

20. On May 27, 2008 having referred to the letters of April 1, April 7, 2008 and meetings held between representatives of the Appellant and representatives of the Respondent, the respondent wrote once again pointing out compliance by the Appellant (see paragraph 1-6 of the letter) proceeds. After pointing out the breaches the Respondent then imposes the sanctions pursuant 25 A to 35 A of the Capital Markets Authority which sanctions now the Appellant complains of.

21. It is instructive to note that there was no response from the Appellant to the said letter and there are no averments in the statements of facts or any affidavit denying the contents of May 27, 2008 in particular in respect to the alleged breaches.

22. We are persuaded both from the correspondence and submission of the learned counsel that the Appellant was in breach of non-compliant in the areas detailed in the Respondent letter dated May 27, 2008. The Appellant was suspended by the respondent from trading and listing on NSE from May 27, 2008 up to October 31, 2008. They were also fined accumulative sum of 3,147,000- to be paid to CMA compensation Fund.

23. The Appellant contends that the Respondent erred in imposing the sanctions considering the steps it was taking to ensure compliance.

24. The preamble to the capital Markets Act states that the Respondent was established for the purpose of promoting, regulating, and facilitating development of orderly, fair, and efficient Capital Markets in Kenya and for connected purposes. The role of the Respondent is set out at section 11 of the CMA Act one of which is the protection of investor interest.

25. The Respondent is empowered, inter alia, to impose sanctions for breaches of the provisions of the Act or regulations made thereunder. Such sanctions may include the levying of financial penalties proportional to the gravity or severity of the breach as may be prescribed. The Respondent imposed sanctions exercise of powers set out in section 11 (3) of the Act.

26. The listing of any securities of any companies imposes upon the company the obligations to operate within the framework as set out in the Act and the guidelines as may be issued by the regulator and any other party involved in the trading including the securities exchange. The relevant regulations in respect to the matter before the tribunal were submitted to the CMA (securities) (Public offers, Listing and disclosure) Regulations 2002.

27. In suspending the Appellant, the Respondent sought to rely on Regulations 22 (5) of capital Markets (securities) (public offers, Listing and Disclosures Regulations) 2002 which inter alia, empowers the Respondent to require the suspension or the delisting of an issuer in circumstances in which, in the opinion of the Respondent, serves to protect the interest of the investors. We are satisfied that given the defaults by the Appellant and the admission of such defaults, the opinion of the respondent was not unreasonable or arbitrary.

28. The tribunal has considered whether or not considering that the suspension was time bound i.e., between May 27, 2008 to October 31, 2008, there is indeed a decision which ought or is capable set aside.

29. Although the Appeal was filed timeously, the time lapse in the prosecution of the same, has rendered the exercise, as far as the suspensions concerned, purely academic. However, the Appeal is also against the imposing of a financial penalty of the sum of Kenya shillings 3,147,808/= against the Respondent. It was submitted before us that there is an issue which ought to be determined in this Appeal.

30. The Respondent letter of May 27, 2008 sets out the Manner in which the sum of Kenya Shillings 3,147,8078 was arrived at. It was submitted for the Appellant that the financial penalty did not take into account the period the Appellant had compiled and that they were calculated up to the date of the enforcement action. There was no evidence however on the date of the enforcement action which is May 27, 2008 the Appellant had remedied the breaches complained of by the Respondent. In the circumstances, we are not satisfied that there was an error in either the calculations or the quantum of the financial penalty. The Appeal is accordingly dismissed with costs.Orders Accordingly

DATED THIS 5TH DAY MAY 2016. ………………………JINARO KIBET -CHAIRMAN…………………………DR LAILA MACHARIA…………………………KAREN KANDIE, MEMBER…………………………KENNEDY NYAMWEYA…………………………KARUMBA KINYUA