[2023] KEHC 23201 (KLR)

Suntra Investment Bank Limited v Kiarie & 2 others (Civil Appeal 427 of 2018) [2023] KEHC 23201 (KLR) (Civ) (5 October 2023) (Judgment)

Neutral citation: [2023] KEHC 23201 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Law Courts)

Civil

Civil Appeal 427 of 2018

AA Visram, J

October 5, 2023

Between

Suntra Investment Bank Limited

Appellant

and

George Mbugua Kiarie

1st Respondent

Custody & Registrar Services Limited

2nd Respondent

Central Depository Settlement Corporation Limited

3rd Respondent

(Being an Appeal from the Judgment delivered on 30th May, 2018 by Hon. E. K. Usui (Mr.) Senior Principal Magistrate in CMCC No. 2227 of 2009)

Judgment

1. This judgment determines that Appellant’s appeal vide its Memorandum of Appeal dated 6th September, 2018. The 1st Respondent (Plaintiff in the lower court) filed a suit in the lower court vide an amended plaint dated 7th August, 2014. He alleged that the Appellant (Defendant in the lower court) fraudulently sold shares belonging to the 1st Respondent and prayed for the sum of Kshs. 859,880. 90/=.

2. In opposition to the above, the Appellant filed an amended Statement of Defence in the lower court on 23rd January, 2015, denying the said allegations. The matter proceeded to a full trial and the lower court delivered judgment in the matter on 30th May, 2018.

3. In the said judgment, the lower court found the Appellant liable and awarded the 1st Respondent the sum of Kshs. 859,880/= together with costs and interest.

4. Aggrieved by the above judgment, the Appellant filed this appeal based on the following grounds:-a.That the Trial Magistrate erred in Law and fact in failing to make a determination on the issue whether the Amended Plaint ought to be struck out as the evidence adduced in court demonstrated that the 1st Respondent did not authorize the filing of the suit before the Chief Magistrate’s Court.b.That the Trial Magistrate erred in Law and fact in failing to make a determination on whether the Power of Attorney dated 6th November 2012 which was relied on in court in prosecuting the 1st Respondent’s case was valid and whether the person who testified in court had authority to adduce evidence on behalf of the 1st Respondent.c.That the Trial Magistrate erred in Law and fact in failing in holding that the Appellant agreed that the person who withdrew the shares was not the 1st Respondent but an impersonator.d.That the Trial Magistrate erred in Law and fact in failing to appreciate that there is no clause in the CDS form to the effect that the Appellant had confirmed the identity of the holder of the CDS account, who applied to immobilize the shares.e.That the Trial Magistrate erred in Law and fact in failing to appreciate that as a central Depository Agent ,the Appellant has no record and/or capacity to authenticate the information provided by the shareholder who comes to the Appellant to immobilize the shares.f.That the Trial Magistrate erred in Law and fact in failing to appreciate that the 2nd Respondent verified and authenticated the documents relating to the Defendant’s client the name George Mbugua Kiarie as submitted per the share register record and confirmed to the 3rd Respondent that indeed the transaction was genuine making the shares available for transacting by the 3rd Respondent and marking the shares available for transacting by the 3rd Respondent and marking them balance free.g.That the Trial Magistrate erred in Law and fact in failing to disregard the contents of the document presented by the 2nd Respondent indicated as search results in the IPRS system for ID No.4880763. ”h.That the Trial Magistrate erred in Law and fact in holding that the Appellant is liable for the fraudulent acts and negligence of its employees notwithstanding that the allegations of fraud were not proved.i.That the Trial Magistrate erred in Law and fact in the evaluation of evidence in discharging the 2nd and 3rd Respondents from liability.j.That the Trial Magistrate erred in Law and fact in entering judgment in favour of the 1st Respondent against the Appellant yet the 1st Respondent’s conduct as well as the evidence adduced in court demonstrated that the 1st Respondent did not lose the EABL shares as alleged.k.That the Trial Magistrate erred in Law and fact in not holding that based on the evidence adduced, the Appellant could not be held liable and hence the suit before the Chief Magistrate’s court ought to have been dismissed.

5. The parties agreed to dispose of the appeal by way of written submissions and the Appellant filed its submissions dated 16th December, 2022 and the 2nd Respondent filed its submissions dated 13th January, 2023.

Appellant’s submissions 6. The Appellant submitted that the amended plaint dated 15th April, 2009 ought to have been struck out because the verifying affidavit sworn by George Mbugua Kiarie on 6th April, 2009, was defective. It submitted that the deponent could not have authored the affidavit because he was, at the time, in the United States of America and not in Kenya, as stated in the affidavit.

7. The Appellant cited Order 4 rule 1 (f) ,2 and 6 of the Civil Procedure Rules in support of the above argument, and further relied on the decisions of the High Court in The Delphis Bank Limited v Asudi (K) Limited & Another, HCCC No.82 of 2003 and Luke Cheruiyot & 37 Others v National Oil Corporation of Kenya (2015) eKLR.

8. Additionally, the Appellant contended that 1st Respondent’s Power of Attorney dated 6th November, 2012 was invalid, and accordingly, the 1st Respondent’s sister had no authority to swear the verifying affidavit on behalf of the 1st Respondent. It relied on the decision of the High Court in Gilbert Mayieka Ogato v Raymond Kiplagat & another (2020) eKLR in support of the above argument.

9. The Appellant argued that the lower court had erred in its finding in relation to fraud. It submitted that the allegations of fraud had not been proved to the required standard of proof. The Magistrate had applied the standard on a balance of probabilities, rather than the higher standard applicable to fraud. In support of the above, the Appellant relied on several decisions of the Court of Appeal, including:- Nyangate Guto alias Watson Mogere Mogoko v Maxwell Okemwa Mogoro & Another (2015) eKLR; Urmilla w/o Mahendra Shah v Barclays Bank International Ltd & another (1979) eKLR; and Demutila Panama Purumu v Salim Mohammed Salim(2021) eKLR.

10. The Appellant submitted that the 2nd Respondent, and not it, had the duty to verify and authenticate the various documents leading to the present dispute. It contended that it ought to be discharged from any liability relating to the authenticity of the documents in question.

11. It submitted that the 2nd and 3rd Respondents had confirmed that the transaction was genuine. It was on the strength of this confirmation by the said parties that the Appellant proceeded to sell the shares in question. It would not have done so had the 2nd and 3rd Respondent raised queries relating to the same.

2nd Respondent’s Submissions 12. The 2nd Respondent submitted that its role in the transaction ceased upon verifying the particulars necessary for immobilization of the shares at the request of the Appellant. Further, it submitted that the process of immobilization does not extend to the sale of the shares.

13. It submitted extensively in relation to the process of immobilization, and contended that pursuant to Section 2 of the Central Depository Act, 2002 (“the CDA”) the 2nd Respondent fell under the category known as “an issuer” pursuant to the CDA. Further, that its mandate as an issuer, regarding its refusal to register a particular transfer was governed by Section 14 of the CDA, the grounds of which were expressly stated and limited.

14. Based on the law as stated above, it contended that the immobilization process involves verification and confirmation of particular details, namely; the shareholders details as provided in the CDS 2 form submitted by the Appellant; the authenticity of the share certificate as compared to the original standard stationary issued to the shareholder; an inquiry relating to the imposition of a lien or legal restraint relating to transfer; and the availability of the shares in the share register.

15. It further submitted that as a Share Register, Section 112 of the Companies Act (repealed) obligated the 2nd Respondent to maintain a register with only the limited details, namely:-a.The name and postal address of the memberb.The date on which a person was entered in the register as a member; andc.The date at which a person ceased to be a member.

16. It submitted that at the time of the transaction in question, all the details relating to the transaction were consistent with the above criteria. It further contended that no evidence was tendered in the lower court to show that the names appearing in the CDS form 2 submitted did not match the name in the register; or to show that the share certificate submitted was not authentic; or that the shares were the subject of a lien or court order; or that the shares were not available.

17. Therefore, in the absence of any evidence to the contrary, it contended that it had carried out its statutory duties and mandate as was required under the law, as set out above.

18. It submitted that the duty to verify the identity of the individual involved in the transaction lay squarely with the Appellant. This position was supported by the fact that the CDS 2 Form contained a declaration requiring the Appellant to declare that it had witnessed the customer’s signature; and verified that the person whose name appears on the share certificate form is the same person appearing in the account opening form. More importantly, the Appellant had a duty to undertake investigations to confirm the identity of the person signing the form.

19. Further to the above, it argued that the law obligates the Appellant through the know your client (KYC) responsibilities to obtain clients’ details. It cited Regulation 80 of the Capital Markets Licensing Requirements General Regulations, 2002, which it submitted require inter alia: that every licensed person shall obtain details from the client with respect to the identity of the client supported by documentary evidence. And further, requires a written declaration by the client confirming the accuracy of all information provided by the client.

20. Additionally, Rule 19 of the Central Depositories Operational Rules, requires the agent opening a client securities account to ensure that it has full particulars of the depositor’s identity. Accordingly, the Appellant had a statutory and regulatory duty, capacity and the records to authenticate and verify the information provided by the client in order to verify the identity of the client.

21. As regards the issue relating whether the court ought to have disregarded the search results in the IPRS system, the 2nd Respondent contended that section 38 of the Evidence Act provides that the same is admissible on the basis that the search result in the IPRS system is a public record, and forms part of the records of the Immigration Department, which is an official body.

Analysis and Determination 22. I have read the record in its entirety and considered the grounds of appeal raised by the Appellant. I have also considered the rival submissions of the parties and the various grounds raised in the Memorandum of Appeal. I have reformulated the issues for determination as follows:-a.Which of the parties is responsible for the withdrawal and transfer of the 1st Respondent’s shares?b.Did the 1st Respondent prove its allegations relating to fraud/ theft against the Appellant to the requisite degree of probability?

23. The issues contained in the Memorandum of Appeal have been reformulated as stated above, based on my finding, that several of the issues raised in the Appellant’s Memorandum of Appeal were never pleaded in the lower court. The record indicates that a number of those issues, namely; relating to the authenticity of the verifying affidavit; and questions relating to the Power of Attorney were raised orally, and for the first time at the hearing before the trial court, even though the same had not been raised in the Appellant’s pleadings. It is trite that parties are bound by their pleadings and may not traverse the same. Accordingly, I do not think that those issues were properly before the trial court, and I do not think the said issues are properly before this court, and as such, I will not deal with them.

24. As this is a first appeal, I have a duty to re-evaluate the evidence before me. This principle as set out in the Court of Appeal decision of Selle and Another v Associated Motor Boat Company Ltd & Others [1968] EA 123, where the court stated that:-“An appeal to this Court from a trial by the High Court is by way of retrial and the principles upon which this Court acts in such an appeal are well settled. Briefly put they are that this court must reconsider the evidence, evaluate it itself and draw its own conclusion. Though it should always bear in mind that it has neither seen nor heard the witnesses and should make due allowance in this respect. In particular, this Court is not bound necessarily to follow the trial Judges findings of fact if it appears either that he has clearly failed in some point to take account of particular circumstances or probabilities materially to estimate the evidence or if the impression based on the demeanour of a witness is inconsistent with the evidence on the case generally.”

25. Based on the record, there are two different versions of events in relation to this issue. The Appellant’s view, broadly speaking, is that it was entitled to, and did rely on the verification by the 2nd and 3rd Respondents in relation to the identity of the person involved in the transaction. Put simply, its position is that it would not have transacted with the shares, had the 2nd and 3rd Respondents raised a red flag. Accordingly, the 2nd and 3rd Respondents ought to be liable for the loss occasioned, and not it.

26. The 2nd Respondent on the other hand, is of the view that the applicable law governing the process of immobilization, relevant duties, and the mandate of the relevant parties in relation to the transaction, places the responsibility of verification squarely on the Appellant, as the agent. Its position is that the Appellant had the duty and the means to verify the identity of the individual transacting, and therefore, it, and not the 2nd or 3rd Respondent, ought to be held liable. Further, it as an issuer, had neither a duty, nor the capacity to carry out such a function under the applicable law at the time.

27. To my mind, the question of which party had the duty to carry out the necessary inquiry and verification, as stated above, is essentially a question of law, rather than fact. Looking at the record, and the submission of the parties, the facts in the present matter are by and large admitted, and need not be reiterated in full here. The point is that the person who transacted on the account was not the owner of that account. Who then ought to have ensured that the person dealing with the account was the correct person?

28. Section 2 of the Central Depositories Act No 4 of 2002 defines immobilized security in the following terms:-“immobilized security" means a security where the underlying physical certificates have been deposited with and are held by a central depository;

29. Based on the definition above, it is evident that immobilization is therefore the process of conversion of the physical share certificate to an electronically held share balance in the CDS account. Thereafter, the Central Depository and Settlement Corporation, the 3rd Respondent herein, has the responsibility of maintenance and issuing of regular account statements.

30. Mr. Christopher Kilonzo, in his witness statement outlined the process relating to immobilization. He expressed the same as essentially a five-stage process which begins with a shareholder opening a CDS account with an agent, in this case, the Appellant herein; followed by signing and completing a security deposit form together with the agent; thereafter, the agent signs and counter signs the same form, before finally lodging the same with the 3rd Respondent.

31. Pursuant to Section 2 of the CDA, the 2nd Respondent has a specific mandate relating to verification process, which mandate is set out in Section 14 (3) of the CDA, expressed as below:-(3)Without prejudice to the right of an issuer to refuse to register a transfer under any written law, the issuer shall refuse registration of the transfer under subsection (2) if—(a)the certificate is not a genuine certificate or is a certificate that was reported lost or destroyed; or(b)in relation to any such security—(i)there has been a duplication in the issuance of the certificate representing that security; or(ii)such certificate is a certificate issued in excess of the issued share capital of the issuer; or(c)it has been served with an order of a court of competent jurisdiction prohibiting any dealing in respect of the security underlying such certificate; or(d)any lawful order exists to the knowledge of the issuer preventing the person who deposited the certificate from dealing with any of his monies, properties or assets.

32. It is therefore evident, that subject to any further applicable law, the above represents the various circumstances under which the 2nd Respondent may refuse to register a transfer. Ms. Keryan, witness for the 2nd Respondent, testified that the criteria as set out above had been considered by the 2nd Respondent, and it had registered the transfer in compliance with the same. She further stated, and I am persuaded, that insufficient evidence has been placed before this court to show that the 2nd Respondent failed to carry out its duties as stated above.

33. Further to the above, the 2nd Respondent submitted that it is the Appellant’s duty to witness the customer’s signature and to verify that the person whose name appears on the share certificate form, is the same person who appears in the opening form. In support of the above, it produced CDS Form 2, which appears in the record of appeal and contains CDA declaration to that effect. I have read the contents of the CDS 2 Form, and I note the contents of the declaration expressed in the following terms:-“I hereby certify that I have verified the above information and that:1. This form has been signed in my presence2. the best of my knowledge and information, the name of the securities account holder as it appears on the account opening form/screen on the share certificate and on the deposit form refer to one and the same person.3. The person signing the deposit form has the proper authority to do so and I have examined the necessary documentary evidence.”

34. Reading the declaration as stated above, it is evident to me that the Appellant had a mandatory duty to identify that the person signing the deposit form had the authority to do so, and more importantly, had a further obligation to examine any necessary documentation to establish this fact. Having signed the above declaration, the Appellant was duty bound to carry out the said inquiry prior to signing off. It did not do so.

35. Finally, the second Respondent submitted, and I am in agreement with it, that the Appellant was further duty-bound to comply with its Know Your Client (KYC) responsibilities during the share immobilization process. The relevant part of Regulation 80, Capital Markets (Licensing Requirements) (General) Regulations, 2002 states as follows:-“80. (1)Every licensed person shall obtain through a client information questionnaire details from a client or a potential client with respect to the following-a.The identity of the client or potential supported by documentary evidence;b.Nature of business activities of the client or potential client;….c.A written declaration by the client or potential client confirming –i.The accuracy of all information given under paragraphs (a) to (c); and..” (emphasis mine)

36. The above regulations expressly mandate the Appellant to have carried out the inquiry as set out above in relation to the identity of the client and further, imposes an express burden to ensure the accuracy of the information provided to it.

37. Further, I am of the view that the Appellant ought to have complied with the Central Depositories (Operational) Rules. The said rules require any agent, to have full particulars of a depositor’s identity. Such particulars include, but are not limited to: identification documents; passports; specimen signatures; among others. Had the Appellant complied with the said rules, it would have been able to cross check the identity of the individual in the bank with the actual account holder. Again, this did not happen.

38. Based on the reasons set out above, I am satisfied that the onus lay on the Appellant to verify the identity of the person in the bank. This verification extends to ensuring that the information was accurate, and towards taking the steps to ensure that the person transacting on the account is the actual account holder. I am further satisfied that the Appellant failed to carry out its duty in this regard. Accordingly, I decline to interfere with the finding of the lower court on this issue.

39. As regards the second issue, it is evident that the lower court applied the wrong standard of proof applicable to fraud. The Appellant relied on the decision of the Court of Appeal in Nyangate Guto alias Watson Mogere Mogoko v Maxwell Okemwa Mogoro & another [2015] eKLR, where the court stated as follows:-“in any case, the Plaintiff was supposed to short and forgery on the part of the first Defendant. The burden and standard of proof lies entirely within the province of the Plaintiff. A standard of proof approaching proof beyond any reasonable doubt is required to establish fraud. And allegations of fraud could be proved. Although the standard of proof may not be so heavy as to require proof beyond reasonable doubt, something more of a mere balance of probabilities is required” (emphasis mine)

40. Further to the above, it is trite that allegations of fraud must be expressly pleaded and proved. I have considered the evidence in the record, and I am of the view that the same is not sufficient to prove fraud on the part of the Appellant or its authorized agents to the requisite degree of probability, as stated above. I find that the lower court erred in this regard, and I set aside its finding on that issue.

41. Having stated the above, I am still of the view that the Appellant failed to carry out its duties, as stated above, and that its failure to exercise the appropriate due diligence made it vulnerable to the fraud. In this regard, I agree with the sentiments of the Magistrate, who stated that “the Defendant has not demonstrated that it took that extra step to ensure that identification was accurate. It was due to its lack of due diligence that it permitted the shares to be immobilized by an impersonator”.

42. Based on the reason set out above, with exception to the finding relating to fraud, I find that the appeal is without merit and the same is accordingly dismissed with costs to the Respondent.

DATED AND DELIVERED VIRTUALLY VIA MICROSOFT TEAMS THIS 5TH DAY OF OCTOBER 2023ALEEM VISRAMJUDGEIn the presence of;...........................for the Appellant..........................for the Respondent